Tribunal Upholds Adjudicating Authority's Decision on Creditor Classification

The Tribunal held that the Committee of Creditors (CoC) lacked the authority to determine a creditor's status as 'Financial' or 'Operational'. The Resolution Professional (RP) was found to have erred in reclassifying the creditor based on expert opinion against the Adjudicating Authority's view. The Adjudicating Authority's decision declaring the creditor as 'Financial' was upheld due to the loan advanced against the title deed involving the time value of money. The Tribunal emphasized that the CoC's decision did not constitute commercial wisdom. The RP's actions were deemed arbitrary, and the CoC's decisions to reclassify the creditor were deemed beyond their powers.

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Issues Involved:
1. Whether the Committee of Creditors (CoC) could determine the status of M/s BVN Traders as a ‘Financial’ or ‘Operational’ Creditor.
2. Whether the Resolution Professional could reclassify the status of a creditor from ‘Financial’ to ‘Operational Creditor’ based on expert opinion despite a contrary view by the Adjudicating Authority.
3. Whether the Order of the Adjudicating Authority upholding BVN Traders as a Financial Creditor based on the majority decision of the CoC is valid.

Issue 1: Determination of Creditor Status by CoC:
The Adjudicating Authority passed an order on 19th August 2019 questioning the Resolution Professional (RP) for changing the status of BVN Traders without informing the CoC. The RP argued that under the IBBI Circular dated 1st March 2019, it is the RP’s duty to maintain an updated list of claims, and the voting of the CoC regarding the determination of a creditor as ‘Financial’ or ‘Operational’ is not applicable under law. The Tribunal noted that the IRP is authorized to receive and collate claims and constitute the CoC. Section 28 of the Code specifies certain actions requiring CoC approval, but the determination of a creditor’s status is not one of them. The Tribunal concluded that the CoC does not have the authority to determine whether a creditor is ‘Financial’ or ‘Operational’, as this is a matter of applying the law, not commercial wisdom.

Issue 2: Reclassification by Resolution Professional:
The RP reclassified BVN Traders from a Financial Creditor to an Operational Creditor based on expert opinions, despite the Adjudicating Authority’s contrary view. The Tribunal held that the RP, after constituting the CoC, cannot suo-moto review or change the status of a creditor. The RP’s duty to maintain an updated list of claims does not include changing the status of an existing creditor. The Tribunal cited previous judgments, including Mahal Hotel Pvt. Ltd. vs. Asset Reconstruction Company (India) Ltd., which emphasized that the RP does not have adjudicatory powers to decide or reject claims. The Tribunal found the RP’s actions to be arbitrary and beyond his jurisdiction.

Issue 3: Validity of Adjudicating Authority’s Order:
The Adjudicating Authority’s order declaring BVN Traders as a Financial Creditor was challenged on the grounds that it was based on the CoC’s decision, which was not empowered to determine the issue. The Tribunal agreed that the CoC’s decision could not be treated as an exercise of commercial wisdom. However, the Tribunal upheld the Adjudicating Authority’s decision on the grounds that the loan amount of Rs. 80,00,000/- was advanced to the corporate debtor against the title deed, involving the time value of money, making BVN Traders a Financial Creditor under Sections 5(7) and 5(8) of the Code. The Tribunal emphasized that the essential element of disbursal against the consideration for the time value of money was present in the transaction.

Conclusion:
The Tribunal concluded that:
1. The CoC was not empowered to determine the status of a creditor as ‘Financial’ or ‘Operational’.
2. The RP erred in reclassifying the creditor’s status based on expert opinion despite the Adjudicating Authority’s contrary view.
3. The Adjudicating Authority’s order declaring BVN Traders as a Financial Creditor was valid, but the reasoning based on the CoC’s decision was incorrect.

The Tribunal directed that the decisions of the CoC in its 4th, 7th, and 8th meetings to reclassify BVN Traders and eliminate its name from the CoC were beyond their jurisdiction and powers. The Tribunal upheld the Adjudicating Authority’s order and clarified that the RP cannot change the status of a creditor after categorization. The appeal was disposed of with no orders as to costs, and the judgment was directed to be sent to the Chairperson, Insolvency and Bankruptcy Board of India, for appropriate action.

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