2017 (7) TMI 1364 - Tri - Insolvency and Bankruptcy

Director's investment not a financial debt under Insolvency Code

Vir Vikram Vaid Versus Offshore Testing & Inspection Services (I) Private Limited

The Petition was dismissed by the Tribunal as the Director's investment in his own company did not meet the criteria of a financial debt under the ... Maintainability of application - initiation of CIRP - Corporate Debtor failed to make repayment of its dues - Financial Creditor - whether a Director who had invested money in his own Company can move a Petition seeking insolvency as 'Financial Creditor'? - whether Father as an investor has an alternate remedy under any other provisions of Law? - HELD THAT:- The Act itself is not allowing the related party to participate in the meeting of Committee of Creditors. This Proviso to sub-section (2) of Section 21 has drawn a line of distinction between Creditor and the related party as a Creditor. Naturally, it is very obvious that if the related parties are allowed to vote in a meeting of the Committee of Creditors then the democratic pattern of majority view shall make a mockery of the provision of This Code because the related parties shall not allow to proceed with the insolvency resolution. This distinction has, therefore, buttressed that a Director, although advanced money, is not a 'Creditor' in the strict sense as conveyed in this Code. This case is a befitting examples that if presumably the Petition is allowed, then the consequential insolvency commencement shall not take place because the Committee of Creditors having only two Creditors i.e. Father and Son, shall not approve the commencement of the Insolvency Resolution. The exception as carved out in the First Proviso is therefore logical hence to be adhered strictly. In the given situation we are not inclined to expand the scope of this Proviso by holding that a Director can be treated as a 'Financial Creditor' so as to be allowed to participate in Committee of Creditors in that capacity. Without going into other allegation of the Respondent Company challenging the signatures of the Petitioner, authority given by the Petitioner to his younger Son, hospitalization of the Petitioner, etc., we are of the conscientious view that on technical ground itself the Petition is not allowed to be admitted - Petition dismissed. Issues Involved:1. Whether a Director who invested money in his own company can initiate insolvency proceedings as a 'Financial Creditor'.2. Whether the Petitioner has an alternative remedy under any other provisions of law.3. The validity of the Special Power of Attorney executed by the Petitioner.4. The health condition of the Petitioner and its impact on the proceedings.Issue-Wise Detailed Analysis:1. Whether a Director who invested money in his own company can initiate insolvency proceedings as a 'Financial Creditor':The Tribunal examined whether the Petitioner, a Director who invested money in his own company, qualifies as a 'Financial Creditor' under the Insolvency & Bankruptcy Code, 2016. The Petitioner claimed a financial debt of Rs. 38,00,000, supported by cheques and bank transfers. The Tribunal noted that the term 'Long Term Borrowing' was used in the company's balance sheets. However, there was no evidence of any formal documentation or agreed interest rate to classify the investment as a financial debt. The Tribunal emphasized that a financial debt must include an interest component disbursed against the consideration for the time value of money. The Tribunal concluded that the Petitioner's investment did not meet the criteria of a financial debt, thus the Petitioner could not be considered a 'Financial Creditor'.2. Whether the Petitioner has an alternative remedy under any other provisions of law:The Tribunal briefly touched upon the possibility of alternative remedies for the Petitioner but did not delve deeply into this issue. The focus remained on whether the Petitioner could be classified as a 'Financial Creditor' under the Insolvency & Bankruptcy Code, 2016.3. The validity of the Special Power of Attorney executed by the Petitioner:The Respondent challenged the validity of the Special Power of Attorney executed by the Petitioner, citing his deteriorating health condition. They argued that the Petitioner was in a vegetative state and could not have understood or executed the document. The Tribunal did not make a definitive ruling on this issue, as the Petition was dismissed on other grounds.4. The health condition of the Petitioner and its impact on the proceedings:The Respondent raised concerns about the Petitioner's health, claiming he was in a vegetative state and unable to recognize people around him. The Tribunal acknowledged the Petitioner's critical health condition but did not base its decision on this factor. Instead, the Tribunal focused on the technical grounds related to the definition of a 'Financial Creditor'.Findings:The Tribunal found that the Petitioner's investment did not qualify as a financial debt under the Insolvency & Bankruptcy Code, 2016. The Tribunal emphasized the need for strict interpretation of the Code, noting that the consequences of insolvency proceedings are severe. The Tribunal also highlighted that related parties, such as Directors, are not allowed to participate in the Committee of Creditors under Section 21 of the Code. Allowing related parties to vote would undermine the democratic process intended by the Code. Consequently, the Tribunal dismissed the Petition on technical grounds, without addressing the allegations about the Petitioner's signatures or the authority given to his son.Conclusion:The Petition was dismissed, with no order as to costs, and the case was consigned to records. The Tribunal's decision was based on the technical interpretation of the Insolvency & Bankruptcy Code, 2016, specifically the definition of a 'Financial Creditor' and the exclusion of related parties from the Committee of Creditors.