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TMI Blog2024 (9) TMI 1304X X X X Extracts X X X X X X X X Extracts X X X X ..... on plain reading of Section 53(1), it is clear that financial debts owed to unsecured creditors ranked higher than debt of operational creditor. The submission which has been advanced by the Counsel for the Appellant to support the appeal is that the Respondent No.2 being related party, he need not be treated under sub-clause (d) rather he has to fall under sub-clause (h) as equity shareholder. The submission of the Appellant is that admittedly Respondent No.2 was ex-director and being related party of the corporate debtor, he cannot claim any preference over the operational creditor who have given services to the corporate debtor and who are entitled for priority in payment. The Hon ble Supreme Court in Swiss Ribbon [ 2019 (1) TMI 1508 - SUPREME COURT ] held that there is intelligible differentia between the financial debts and operational debts. The reason for differentiating between financial debt and operational debt was noticed and differentiation was upheld. The BLRC Report has also been quoted by the Hon ble Supreme Court in paragraph 118 of the judgment. The BLRC Report also highlighted the importance of financial debt and dues of unsecured financial creditor were kept hig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... No.2382 of 2021. The Adjudicating Authority by the impugned order rejected the IA filed by the Appellant, aggrieved by which order this Appeal has been filed. 2. Brief facts of the case necessary to be noticed for deciding the Appeal are : - 2.1. On an application filed under Section 9, Corporate Insolvency Resolution Process (CIRP) against the Corporate Debtor- Brand Connect Communications (India) Pvt. Ltd. commenced vide order dated 27.03.2018. By an order dated 28.01.2019, the Adjudicating Authority directed for liquidation of the Corporate Debtor. In the CIRP of the Corporate Debtor, Appellant as well as the Respondent No.2 who was ex-Director of the Corporate Debtor before the liquidator had filed their claims. In the Liquidation Proceedings, an IA No.2382 of 2021 was filed by the Appellant, the Operational Creditor where following prayers were made:- a. Be pleased to set aside order dated 03.09.2021 passed by the Learned Liquidator; b. Be pleased to direct the Liquidator to disburse the amount derived from liquidation process by giving priority to the Operational Creditor over the Financial Creditor when the Financial Creditor is a related party to the Corporate Debtor, c. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bmission has placed reliance on the judgment of the NCLT in J.R. Agro Industries P. Limited v. Swadisht Oils P. Ltd.- 2018 SCC OnLine NCLT 22990 and the judgment of the Hon ble Supreme Court in Arun Kumar Jagatramka v. Jindal Steel and Power Limited Anr.- (2021) 7 SCC 474 as well as judgment of the Hon ble Supreme Court in M.K. Rajgopalan v. Dr. Periasamy Palani Gounder Anr.- (2024) 1 SCC 42 . It is submitted that a related unsecured debtor has to be treated differently in the waterfall mechanism from the unrelated unsecured creditors and the Operational Creditor. Operational Creditor debt has to be given priority over debt of related party unsecured creditor. 5. Counsel for the liquidator opposing the submissions of the Appellant submits that in the present Appeal there is no issue regarding admission of claim of Respondent No.2 as unsecured financial creditor. Inclusion of Respondent No.2 as unsecured financial creditor in the list of stakeholders was never challenged and had become final. Appellant raised objection only after SCC meeting dated 07.06.2019 conducted by liquidator wherein it was discussed that in terms of Section 53, the Respondent No.2 would get preference over th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unsecured creditor, Respondent No.2 is entitled for distribution as per Section 53 and the Appellant who was the only operational creditor cannot claim any priority. Counsel for the Respondent No.2 has also placed reliance on several judgments. Counsel for the Respondent No.2 submitted that Respondent No.2 is not a related party of the corporate debtor. It had resigned on 01.10.2013 and more than 5 years have elapsed when CIRP commenced against the corporate debtor. 7. We have heard Counsel for the parties and perused the record. 8. From the facts as brought on the record, following facts are undisputed:- (i) In the CIRP of the corporate debtor, the claim of the Appellant as operational debt of Rs.2,57,24,248/- was admitted. (ii) The claim of Respondent No.2 ex-director as unsecured financial debt was admitted of Rs.50,56,051/-. In the liquidation process, objection was raised by the Appellant claiming priority in payment of its operational debt over the payment to Respondent No.2 who was unsecured financial creditor which objection was rejected by liquidator on 03.09.2021. 9. The limited issue which has arisen for consideration in this Appeal is as to whether Appellant who is an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions of the parties in paragraph 20 of the judgment held that Section 53 does not envisage any difference between unsecured debtors and related party unsecured financial creditors. Paragraph 20 of the judgment is as follows:- 20. Having thoughtfully considered the contentions raised by the Counsel for the parties and after going through the case laws relied upon by them, we are of the considered view that in the matter of Swiss Ribbons Private Limited vs. Union of India (Supra), the Hon'ble Supreme Court has unequivocally held that the rationale for differentiating between financial debts, which are secured, and operational debts which are unsecured, creates an intelligible differentia between financial debts and operational debts which are unsecured, is directly related to the objects sought to be achieved by the IB Code. The Hon'ble Supreme Court has further held that it can be seen that unsecured debts of various kinds and so long as there is some legitimate interest sought to be protected, having relations to the objects sought to be achieved by the statute in question, Article 14 does not get infracted and, therefore, the challenge to Section 53 of the IB Code, 2016 mu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any preference over the operational creditor who have given services to the corporate debtor and who are entitled for priority in payment. 14. The Hon ble Supreme Court in Swiss Ribbon (supra) had occasion to consider Section 53 of the IBC. In the case before the Hon ble Supreme Court, challenge to the provisions of the IBC. In the writ petition, certain provisions of the IBC including Section 53 were challenged. In the above context, the Hon ble Supreme Court had occasion to consider the scheme of distribution as contained in Section 53 and while upholding the provision of Section 53, in paragraphs 116 to 119 laid down following:- Section 53 of the Code does not violate Article 14 116 . An argument has been made by the counsel appearing on behalf of the petitioners that in the event of liquidation, operational creditors will never get anything as they rank below all other creditors, including other unsecured creditors who happen to be financial creditors. This, according to them, would render Section 53 and in particular, Section 53(1)(f) discriminatory and manifestly arbitrary and thus, violative of Article 14 of the Constitution of India. 117. Section 53(1) reads as follows: 53. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oposed insolvency regime will bring in additional gains to both the economy and the exchequer. For the remaining creditors who participate in the collective action of liquidation, the Committee debated on the waterfall of liabilities that should hold in liquidation in the new Code. Across different jurisdictions, the observation is that secured creditors have first priority on the realisations, and that these are typically paid out net of the costs of insolvency resolution and liquidation. In order to bring the practices in India in line with the global practice, and to ensure that the objectives of this proposed Code is met, the Committee recommends that the waterfall in liquidation should be as follows: 1. Costs of IRP and liquidation. 2. Secured creditors and workmen dues capped up to three months from the start of IRP. 3. Employees capped up to three months. 4. Dues to unsecured financial creditors, debts payable to workmen in respect of the period beginning twelve months before the liquidation commencement date and ending three months before the liquidation commencement date. 5. Any amount due to the State Government and the Central Government in respect of the whole or any pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was regarding question of priority in the distribution. Thus, we need to proceed on the premise that debt of Respondent No.2 is unsecured financial debt. 17. Although Learned Counsel for the Respondent No.2 has contended that Respondent No.2 is not related party since Respondent No.2 has resigned from the director on 01.10.2013 i.e. about five years prior to initiation of the CIRP but for the purposes of this case, we need to examine the question on the premise that the claim of Respondent No.2 was admitted as related party financial creditor. Financial debt has been defined in Section 5(8). Definition of financial debt as contained in Section 5(8) does not indicate any exclusion of financial debt which is reflected by any transaction with the corporate debtor by related party. When a financial debt is extended by related party the consequence for such creditor is captured in Section 21. As per Section 21(2), a financial creditor if it is related party of the corporate debtor shall not have any right of representation, participation or voting in a meeting of the CoC. Further by virtue of Section 29A, related party may incur any of the disqualifications under Section 29A. With respe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uor Ltd.' sought time to submit modified resolution plan and by our order dated 20th September, 2018 we allowed the 3rd Respondent to modify the same. 5. The Resolution Professional has filed a report enclosing a copy of the modified resolution plan submitted by the 3rd Respondent. It is informed that all the Financial Creditors have been treated equally. Similarly, all the Operational Creditors have also been treated equally. No discrimination has been made between one or other Financial Creditor. Similarly, No discrimination has been made between one or other Operational Creditor. 20. The Appeal by this Tribunal having been disposed of and there was no expression of opinion in the judgment of this Tribunal regarding the direction which was issued by the Adjudicating Authority. In any view of the matter as observed by the Adjudicating Authority, the said direction is with regard to Resolution Plan and the Court was not considering the distribution in the liquidation, hence, the above judgment cannot come to the aid of the Appellant in the present case. 21. Another judgment which has been relied by Counsel for the Appellant is judgment of this Tribunal in Shailesh Sangani vs. J ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owings. Once it is so, it cannot be said that the debt has not been disbursed against the consideration for the time value of the money. The interests of such stakeholders cannot be said to be in conflict with the interests of the Company. Enhancement of assets, increase in production and the growth in profits, share value or equity enures to the benefit of such stakeholders and that is the time value of the money constituting the consideration for disbursement of such amount raised as debt with obligation on the part of Company to discharge the same. Viewed thus, it can be said without any amount of contradiction that in such cases the amount taken by the Company is in the nature of a financial debt . 22. The above judgment support the submission of Respondent No.2 that loan given by Respondent No.2 to the Corporate Debtor is a financial debt which claim has already been admitted in liquidation process. 23. Counsel for the Appellant has thereafter relied on the judgement of the Hon ble Supreme Court in Arun Kumar Jagatramka vs. Jindal Steel and Power Limited and Anr- (2021) 7 SCC 474 . In the above case, the question which came for consideration before the Hon ble Supreme Court wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 13 Act is wider in its ambit in the sense that it is not confined only to a company in liquidation or to corporate debtor which is being wound up under Chapter III IBC. Obviously, therefore, the rigours of the IBC will not apply to proceedings under Section 230 of the 2013 Act where the scheme of compromise or arrangement proposed is in relation to an entity which is not the subject of a proceeding under the IBC. But, when, as in the present case, the process of invoking the provisions of Section 230 of the 2013 Act traces its origin or, as it may be described, the trigger to the liquidation proceedings which have been initiated under the IBC, it becomes necessary to read both sets of provisions in harmony. A harmonious construction between the two statutes [ G.P. Singh, Principles of Statutory Interpretation (1st Edn., Lexis Nexis 2015) which notes that: Further, these principles [referring to the principle of harmonious construction] have also been applied in resolving a conflict between two different Acts and providing the following examples Jogendra Lal Saha v. State of Bihar, 1991 Supp (2) SCC 654 (Sections 82 and 83 of the Forest Act, 1927 are special provisions which prevail ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sed. 25. The above judgment does not come to any aid to the Appellant in the present case. The Hon ble Supreme Court was not considering a scheme of arrangement given by a related party and Section 29A came for consideration in the above context. The Hon ble Supreme Court was not considering the distribution under Section 53 in reference to related party unsecured financial creditor. The said judgment, thus, in no manner help the Appellant in the present case. 26. Counsel for the Appellant has also referred to M.K. Rajagopalan vs. Dr. Periasamy Palani Gounder and Anr- (2024) 1 SCC 42 in which judgment the Hon ble Supreme Court in paragraphs 177 and 178 laid down following:- 177. After taking note of the fact that related party is prohibited to be a part of CoC and is further prohibited to be a resolution applicant or an authorised representative, etc. the Appellate Tribunal has rightly observed that involvement of a related party in CIRP in any capacity was seen as giving unfair benefit to the corporate debtor; and that the statutory recognition of related party as a different class would apply even to resolution plan when CoC would decide whether in its commercial wisdom it should ..... X X X X Extracts X X X X X X X X Extracts X X X X
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