2020 (9) TMI 598 - Tri - Insolvency and Bankruptcy

Tribunal voids Creditors Committee, stays Insolvency Process, emphasizes resolution over liquidation

The Tribunal declared the Committee of Creditors (COC) constituted by the Resolution Professional void ab initio due to the sole Financial Creditor not ... Financial Creditor - Financial Debt - time value of money - Committee of Creditors constitution void ab initio - arbitration agreement - withdrawal of application under Section 12A - objective of the Insolvency and Bankruptcy Code - resolution and maximisation of valueFinancial Creditor - Financial Debt - time value of money - arbitration agreement - Status of Respondent No. 2 (Mr. Mukeshbhai Nanubhai Desai) as a Financial Creditor and validity of his claim - HELD THAT: - On construction of the MOU executed between the parties, Respondent No. 2 is shown as entitled to 25% of net profit of the project and the MOU provides for resolution of disputes by arbitration. The Notes to Accounts reflect an entry described as a term loan, but there is no contemporaneous record of any time value of money or interest payable to Respondent No. 2. The material before the Tribunal therefore indicates that the amounts paid by Respondent No. 2 were towards development/construction and entitle him to a share of profit rather than a debt repayable with interest; reliance on precedent (Saregama India Ltd. v. Home Movie Makers Pvt. Ltd.) supports the conclusion that amounts not disbursed against consideration for the time value of money do not qualify as a 'Financial Debt'. Even on the assumption of a loan, the payment alleged dates back to 2014 and would be barred by limitation. For these reasons Respondent No. 2 cannot be treated as a Financial Creditor for constitution of the COC. [Paras 12, 13, 14, 23, 25]Respondent No. 2 is not a Financial Creditor; his claim does not constitute a Financial Debt and cannot be the basis for constituting the Committee of Creditors.Committee of Creditors constitution void ab initio - withdrawal of application under Section 12A - objective of the Insolvency and Bankruptcy Code - resolution and maximisation of value - Consequences for the validity of the COC and direction regarding withdrawal of the CIRP application - HELD THAT: - Because the sole member of the COC was held not to be a Financial Creditor, the COC constituted by the Resolution Professional is void ab initio. The Tribunal recorded that no other claimants came forward following the public announcement and observed the policy objective of the Code favouring resolution and maximisation of value where the corporate debtor appears to be a going concern. The Operational Creditor is granted liberty to seek withdrawal of its application; the Resolution Professional is directed to endeavour to file Form FA to process the Operational Creditor's withdrawal application before the Adjudicating Authority as may be appropriate. [Paras 16, 18, 19, 25]The COC so constituted is void ab initio; Operational Creditor may apply for withdrawal and the RP shall endeavour to file Form FA to seek withdrawal before the Adjudicating Authority.Final Conclusion: Application allowed: Respondent No. 2 is not a Financial Creditor and the Committee of Creditors constituted by the Resolution Professional is void ab initio; Operational Creditor has liberty to seek withdrawal of CIRP and the RP is directed to make efforts to file the requisite Form FA for withdrawal before the Adjudicating Authority. Issues Involved:1. Validity of the Financial Creditor's claim and the constitution of the Committee of Creditors (COC).2. Request for stay on the Corporate Insolvency Resolution Process (CIRP).3. Allegations against the Interim Resolution Professional (IRP) for misconduct.4. Request for withdrawal of the CIRP application by the Operational Creditor.Issue-wise Detailed Analysis:1. Validity of the Financial Creditor's claim and the constitution of the Committee of Creditors (COC):The Applicant argued that Mr. Mukesh Desai, who was constituted as the sole Financial Creditor in the COC, is actually a partner in the project and not a Financial Creditor. The Applicant provided evidence, including an MOU and public notices, showing that Mr. Desai had a 25% ownership in the project and was entitled to 25% of the net profit, not a financial debt with time value of money. The Tribunal found that the amount paid by Mr. Desai did not qualify as a 'Financial Debt' under Section 5(8) of the IB Code, as it lacked the time value of money and was not repayable with interest. Consequently, the Tribunal declared the COC constituted by the RP as void ab initio.2. Request for stay on the Corporate Insolvency Resolution Process (CIRP):The Applicant requested a stay on the CIRP, arguing that the company had enough liquidity to pay the original applicant and that no other creditors had claims. The Tribunal noted that no other claims were received, indicating that the Corporate Debtor was a going concern and financially sound. Given this context, the Tribunal found it unnecessary to continue the CIRP and allowed the application to stay the process.3. Allegations against the Interim Resolution Professional (IRP) for misconduct:The Applicant accused the IRP of convening meetings in Ahmedabad instead of Surat, causing inconvenience and charging exorbitant travel expenses. The IRP was also accused of conspiring with Mr. Desai and acting suspiciously. The Tribunal noted inconsistencies in the claim amounts presented by the IRP in different meetings and found that the IRP had not adequately justified these actions. The Tribunal directed the IRP to justify his expenses and actions as required.4. Request for withdrawal of the CIRP application by the Operational Creditor:The Operational Creditor had requested to withdraw the CIRP application under Section 12A of the IB Code, which requires the consent of 90% of the COC members. The Tribunal noted that despite the request, the sole Financial Creditor (Mr. Desai) did not consent to the withdrawal, and the IRP did not inform the Adjudicating Authority of this fact. The Tribunal found this lack of communication unacceptable and directed the IRP to facilitate the withdrawal process as per the Operational Creditor's request.Conclusion:The Tribunal concluded that Mr. Mukesh Desai could not be considered a Financial Creditor, rendering the COC's constitution invalid. The Tribunal allowed the application, staying the CIRP and directing the IRP to assist in the withdrawal of the CIRP application by the Operational Creditor. The Tribunal emphasized the importance of resolution over liquidation, aligning with the objectives of the IB Code.