2019 (10) TMI 1359 - Tri - Insolvency and Bankruptcy

Tribunal upholds Creditors' Committee constitution, rejects Applicant's plan

The Tribunal dismissed the Applicant's Miscellaneous Application, upholding the legality of the Committee of Creditors (CoC)'s constitution and the ... Rejection of Resolution Plan - Valid Constitution of CoC - major contention of the Applicant is that the rejection of the Final Resolution Plan by the CoC is unsustainable in the eyes of law as the constitution of CoC itself is violative of the I&B Code - the major argument of the Applicant is that the rejection of its resolution plan by CoC is wrong in law because the majority stakeholder in CoC is the related-party of the Corporate Debtor - HELD THAT:- It is an unassailable contention that the CoC cannot consist of related-parties as financial creditors. It is also undisputed that as on CIRP commencement of the Corporate Debtor i.e. 01.08.2017, the Respondent No. 2 was a related-party of the Corporate Debtor. But this is also true that as on 01.08.2017, Respondent No. 2 was not a part of CoC. The Respondent No. 2 divested its shareholding in the Corporate Debtor. Whether the 'related-party' status of the Respondent No. 2 has to be seen on insolvency commencement date or the date when it became part of the CoC? - HELD THAT:- The matrix to decide whether the Respondent No. 2 is a related party of the Corporate Debtor or not is that what is its position or status as on the date when it stepped into the shoes of the creditor or when it was made a part of CoC. As on the date of Respondent No. 2 paying off the dues of the Corporate Debtor, it had already divested its shareholding in the Corporate Debtor. As on the date of it becoming a part of the CoC, Respondent No. 2 was purely a financial creditor of the Corporate Debtor and hence, it cannot be said that because it was a related party of the Corporate Debtor some one year prior to it becoming a CoC member, it is still a related party and cannot be a part of CoC. The Respondent No. 2 is a financial creditor of the Corporate Debtor and there is no illegality in constitution of CoC. Application dismissed. Issues Involved:1. Legality of the Committee of Creditors (CoC) constitution.2. Rejection of the Applicant’s Resolution Plan by the CoC.3. Eligibility of Respondent No. 2 as a financial creditor and its participation in the CoC.Detailed Analysis:1. Legality of the Committee of Creditors (CoC) Constitution:The Applicant contended that the CoC was illegally constituted as Respondent No. 2, Arcelor Mittal India Private Limited, was a 'related-party' to the Corporate Debtor at the insolvency commencement date (01.08.2017). According to Section 21(2) of the Insolvency & Bankruptcy Code, 2016 (I&B Code), a related party of the corporate debtor shall not have any right of representation, participation, or voting in a CoC meeting. The Applicant argued that Respondent No. 2, through its promoter Mr. L.N. Mittal, exercised control over KSS Global BV, which held 100% shareholding in the Corporate Debtor.However, the Tribunal found that Respondent No. 2 was not part of the CoC on 01.08.2017 and had divested its shareholding in the Corporate Debtor before acquiring the debts of other creditors and stepping into the CoC. The Tribunal held that the related-party status must be assessed as on the date when Respondent No. 2 became a part of the CoC, not the insolvency commencement date. As of the date Respondent No. 2 paid off the debts and joined the CoC, it was purely a financial creditor, thus making the CoC's constitution lawful.2. Rejection of the Applicant’s Resolution Plan by the CoC:The Applicant's resolution plan was rejected by the CoC, leading to the Corporate Debtor's liquidation. The Applicant claimed that its plan was the only one submitted and that the CoC's rejection was contrary to the intent of the I&B Code. The Applicant argued that the rejection was unjustified, especially since the CoC was allegedly improperly constituted.The Tribunal noted that the Applicant’s major contention was the CoC's rejection due to the involvement of a related-party. However, the Tribunal found that the CoC's constitution was valid and that the CoC had the right to approve or reject a resolution plan. The Tribunal also referenced the CoC's discussions, which highlighted concerns about the feasibility and viability of the Applicant's plan, including the lack of detailed business projections and turnaround strategies.3. Eligibility of Respondent No. 2 as a Financial Creditor and its Participation in the CoC:The Tribunal examined whether Respondent No. 2 was eligible to be part of the CoC. The Applicant cited the Supreme Court's judgment in the Arcelor Mittal case, arguing that Respondent No. 2's past control over the Corporate Debtor disqualified it from participating in the CoC. However, the Tribunal distinguished this case from the Arcelor Mittal case, noting that Respondent No. 2 was not submitting a resolution plan but acting as a financial creditor after acquiring debts from other creditors.The Tribunal concluded that the relevant date for determining related-party status was when Respondent No. 2 became a financial creditor and joined the CoC. As Respondent No. 2 had divested its shareholding and was not a related party at that time, its inclusion in the CoC was lawful. The Tribunal emphasized that disqualification under Section 29A(c) of the I&B Code for submitting a resolution plan does not automatically render a party ineligible to be a financial creditor.Conclusion:The Tribunal dismissed the Applicant's Miscellaneous Application, upholding the legality of the CoC's constitution and the rejection of the Applicant's resolution plan. The Tribunal affirmed that Respondent No. 2 was a valid financial creditor and its participation in the CoC was lawful. The order emphasized that the CoC's decision-making rights, including the approval or rejection of resolution plans, could not be interfered with based on the Applicant's contentions.