2020 (12) TMI 758 - AT - Insolvency and Bankruptcy

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 ... Jurisdiction - power of Committee of Creditors to decided on Financial or Operational Creditor - Appellant has challenged the impugned Order on the ground that the Adjudicating Authority has erred in facts and law in holding that ‘M/s BVN Traders is a ‘Financial Creditor’, which is mainly based on decision of the Committee of Creditors, though it was not empowered to decide that ‘BVN Traders is a Financial or Operational Creditor. Whether the Committee of Creditors constituted under Section21 of the I&B Code, 2016, could determine that M/s BVN Traders’ is a ‘Financial’ or ‘Operational’ Creditor? - Whether the Resolution Professional could reclassify the status of a creditor from ‘Financial’ to ‘Operational Creditor’ based on the expert opinion despite that the Adjudicating Authority had taken a contrary view? - HELD THAT:- The Order of the Adjudicating Authority that ‘BVN Trader is a Financial Creditor’ is not totally based on the decision of the ‘Committee of Creditors’. The Adjudicating Authority has determined the status of ‘BVN Traders’ as a Financial Creditor “in view of provisions and the fact situation”. It would have been ideal and rather expected that Adjudicating Authority should have recorded reasons also, instead of taking a short cut by taking the support of Resolution of CoC. This was perhaps the reason CoC appears to have got emboldened that it can take such decisions in favour or against its own constituents - It is essential to note that on the initiation of Appellant Mr Rajnish Rai the Resolution Professional and the Members of the ‘Committee of Creditors’, excluding Respondent No. 3 BVN Traders, made deliberate attempt to eliminate the name of BVN Traders from the Committee of Creditors. It also appears that the Claim of Respondent No. 3 BVN Trader was illegally rejected as ‘Financial Creditor’, so that they could pass the Resolution to withdraw the CIRP with the required percentage of voting share, i.e., 90%. Since Respondent No. 3, which had 30.9% voting share in the CoC, the Resolution for withdrawal u/s 12A could not have materialised, therefore in their effort to defeat the valuable rights of the Respondent No. 3 BVN Traders, the RP ignored the Order of the Adjudicating Authority dated 23rd January 2020 and was successful in his deliberate attempt to change the status of BVN Traders from Financial Creditor to the Operational Creditor and then eliminate its name from the ‘Committee of Creditors’. The IBBI Circular No. I.P./003/2018 dated 3rd January 2018 provides ‘that an Insolvency Resolution Professional shall not outsource any of his duties and responsibilities under the Code’ - it appears that the Resolution Professional has failed to perform his obligation/duty to observe the Code, the Rules and Regulations as enumerated in the Code and CIRP Regulations while conducting CIRP for the reason of taking up such an Agenda of Meeting and leading to illegal Resolution of ousting the BVN Traders from the ‘Committee of Creditors’. The Committee of Creditors was not empowered to adjudicate the issue that has cropped up in the present case, i.e. M/s BVN Traders’ is a ‘Financial’ or ‘Operational’ Creditor. Such adjudication is beyond the scope of consideration of the Committee of Creditors. Further, the Resolution Professional erred to reclassifying the status of a creditor from ‘Financial’ to ‘Operational Creditor’, based on the alleged expert opinion despite that the Adjudicating Authority took a contrary view. Whether the Order of the Adjudicating Authority in upholding that ‘ BVN Traders’ is a Financial Creditor based on the majority decision of Committee of Creditors is valid? - HELD THAT:- The Appellant has not disputed the amount due. In the instant Appeal, the Appellant is seeking a declaration that ‘BVN Traders’ is not a ‘Financial Creditors.’ As per Section 5(7) of the Code, only such Creditor could be the ‘Financial Creditor’ of the ‘Corporate Debtor’ to whom a financial debt is owed by the ‘Corporate Debtor’, and as per Section 5(8) of the Code, the critical requirement of the financial debt is disbursal against the ‘Consideration for the time value of money, which included the events and modes of disbursement and enumerated in sub-clauses. In the present case, undisputedly Appellant’s company has deposited its title deed of Plot No. Y of 7/130(1), Swaroop Nagar, Kanpur-208002 against the loan amount of ₹ 80,00,000/- @ 18% per annum. The record shows, the Appellant Company is a borrower, and the loan amount was directly disbursed to Appellant’s Company for which the title deed was deposited with the Respondent No. 3. In the said transaction time value of money is unambiguously involved, and the Appellant Company’s liability is regarding the debt owed by it - In the present case, Respondent No. 3 disbursed the debt against the Consideration for the time value of money. It is reiterated that the Appellant Company had raised the said amount from the Respondent No.3 to meet its working Capital Requirement. Hence the Respondent No. 3 is a Financial Creditor within the meaning of 5(7) and 5(8) of the Code. In the present context, it is clear that the expression ‘disburse’ would refer to the fund transfer made by the Respondent No.3 to the Corporate Debtor for the particular purpose of funding, i.e. working capital. The expression ‘disburse’ refers to money, which has been paid against consideration for the time value of money. In short, the disbursal must be money and must be against Consideration for the time value of money, meaning thereby, the fact that such money is now no longer with the lender, but is with the borrower, who then utilises the money for the working capital requirement or any other purpose of the company. Thus, it is clear that the Respondent No.3 disbursed money in the form of fund transfer made towards the purpose of working capital of funding. The term financial debt has been defined in section 5(8) of Code “to mean a debt, along with interest, if any, which is disbursed against the consideration for the time value of money.” An illustrative list of transactions that would fall under this definition has also been included - it can be safely concluded that to qualify as a ‘Financial Creditor’ a basic element of disbursal to the Corporate Debtor, of amount against the Consideration of time value of money, needs to be found in the genesis of any debt being claimed as ‘financial debt’ before it could be treated so, under Section 5(8) of the IBC”. Similarly, the transaction involved in the present case meets the root ingredients/basic element of ‘financial debt’ within the meaning of the Code. The Resolution taken in 8th CoC (Annexure A9), in Agenda Item 6, approving withdrawal under Section 12 A of IBC would also require to be ignored as it was taken after the illegal Resolution in Agenda Item 5 to eliminate BVN Traders and illegal reconstitution of CoC. During CIRP, the IRP is authorised to collate the claims, and based on that he is empowered to constitute the Committee of Creditors. We hold that the Resolution Professional may add to existing claims of claimants already received, or admit or reject further Claims and update list of Creditors. But after categorisation of a claim by the IRP/Resolution Professional we hold that they cannot change the status of a Creditor. For example, if the Resolution Professional has accepted a claim as a Financial Debt and Creditor as a Financial Creditor, then he cannot review or change that position in the name of updation of Claim. It is also to be clarified that while updating list of Claims the Resolution Professional, can accept or reject claims which are further received and update list - the decision of the Adjudicating Authority to treat BVN Traders as a ‘Financial Creditor’ needs no interference. Appeal disposed off. 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.