Tribunal modifies order on Extortionate Credit Transactions, deems certain loans illegal. Committee of Creditors meetings nullified.

The Tribunal modified the Adjudicating Authority's order in the case, determining that certain loans were Extortionate Credit Transactions and deemed illegal and void. Other loans were classified as unsecured debts for the principal amount only, without entitlement to excessive interest. Additionally, Committee of Creditors meetings involving the Appellants were declared null and void, with corresponding resolutions invalidated. The Tribunal affirmed the order dated 29.07.2019 and made no ruling on costs.

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Issues Involved:

1. Status of Appellants as Financial Creditors.
2. Classification of loans as Extortionate Credit Transactions.
3. Legality of the loans advanced by the Appellants.
4. Validity of CoC meetings and resolutions.

Issue-wise Detailed Analysis:

1. Status of Appellants as Financial Creditors:

The Appellants challenged the order declaring them not as Financial Creditors but as unsecured creditors. They argued that the loans they advanced to the Corporate Debtor should be considered as Financial Debt under Section 5(8) of the Insolvency and Bankruptcy Code (IBC). The Adjudicating Authority, however, held that the Appellants do not fall under the category of Financial Creditors but may avail other remedies to recover their debts.

2. Classification of Loans as Extortionate Credit Transactions:

The Adjudicating Authority found the interest rates on the loans (ranging from 3.3% to 5% per month) to be exorbitant, thus classifying them as Extortionate Credit Transactions under Section 50 of IBC. The Appellants contended that only transactions within two years preceding the insolvency commencement date (01.06.2018) could be declared extortionate. Transactions of Appellants No. 1, 5, and 8 occurred before this period and thus should not be considered extortionate. However, the Tribunal held that despite the timing, the exorbitant interest rates rendered these transactions unconscionable.

3. Legality of the Loans Advanced by the Appellants:

The Tribunal noted that the loans were advanced at exorbitant interest rates without proper loan agreements or Board Resolutions from the Corporate Debtor. The transactions appeared collusive and not in the normal course of business. The Tribunal upheld the Adjudicating Authority's finding that these were Extortionate Credit Transactions and thus illegal.

4. Validity of CoC Meetings and Resolutions:

The inclusion of the Appellants as Financial Creditors in the Committee of Creditors (CoC) led to the reconstitution of the CoC and reduction of the voting rights of Respondent No. 1. The Adjudicating Authority declared the 2nd to 5th CoC meetings and the resolutions passed therein as null and void due to the illegal inclusion of the Appellants as Financial Creditors. The Tribunal affirmed this decision.

Conclusion:

The Tribunal disposed of the Appeal by modifying the order of the Adjudicating Authority:

a) Transactions of Appellants No. 2, 3, 4, 6, 7, and 9 were held to be Extortionate Credit Transactions and thus illegal and void.
b) Appellants No. 1, 5, and 8, though not falling under Section 50(1) of IBC, were deemed unsecured creditors for the principal amount only, without entitlement to the exorbitant interest.
c) The CoC meetings held on 13.06.2018, 29.08.2018, 12.09.2018, and 29.09.2018 were declared nonest, and any resolutions passed therein were nullified.
d) The order dated 29.07.2019 was affirmed.
e) No orders as to costs.

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