2022 (12) TMI 144 - AT - Insolvency and Bankruptcy

Tribunal Upholds Decision on Financial Creditor Status & Related Party Classification

The Tribunal dismissed the appeals, upholding the impugned order dated 30.05.2022, finding it legally valid, just, and proper. The appellants' claims were ... Financial Debt or not - related parties - Appellant claim denied on the ground that the amounts were only for Equity, when admittedly, no shares were Transferred, Allotted or the Appellants were recognized as Equity Holders - Whether the debt claimed by appellants can be considered as financial debt u/s 5(8) of the I & B Code 2016? - HELD THAT:- The financial debt is an inclusive and non-exhaustive definition given under Section 5(8) of the I & B Code to mean a debt alongwith interest, if any, which is disbursed against the consideration for time value of money. Financial creditors have relationship with the entity as financial contract, like loan or security etc. Whereas, an operational debt as defined under section 5(21) of I & B Code, 2016 signifies a claim in respect of the provisions of goods or services. We are not in position to treat the money brought it as Financial Debt. The basic element of the Financial Debt that such disbursement should be for consideration of Time Value of Money is not directly evident here. Admittedly, the Appellants have brought in more than Rs. 17 Crore, however it will not automatically fall in the definition of debt and more so of financial debt in relation to the Corporate Debtor. Since it cannot be classified as financial debts, the Appellants cannot be treated as financial creditor - the Resolution Professional’s reason are directed to not include claims of the Appellants in the Resolution Plan as Financial Debt and also due to the fact that the Appellant being related party which has been confirmed by the Adjudicating Authority in the impugned order is found to be correct. Whether the impugned order passed by the Adjudicating Authority was incorrect holding the Appellants as related parties keeping in view provisions on I & B Code 2016 and IBBI rules and regulations? - HELD THAT:- In the present Appeal, it is clear that the Appellants have been handling day-to-day operations of the corporate debtor. The Appellant No. 2 was working as Key Managerial Personnel of the Corporate Debtor, the Appellants were also relative of one of the Director in Board of Directors (albeitly for a short period and further not on the date of Corporate Insolvency Resolution Process) - The Appellant also falls in provision of Section 5(24)(h), 5(24)(m)(i)&5(24)(m)(iv) as mentioned herein above due to their day to day involvement in operation of the Corporate Debtor. The Interim Resolution Professional was right in holding the Appellant as Related party which was upheld by the Adjudicating Authority. There are no error in the ‘impugned order’. Whether the Resolution Plan was approved correctly when no provision had been made for the claims of the Appellants? - HELD THAT:- The term claim is defined under section 3(6) of the code. A claim, according to this clause, is a right to payment as well as a right to redress. So basically, a claim only exists if there is a right to payment, and if there is no right to payment, there is no claim at all. Thus, the right to payment will emphasize the concept of a claim whether or not the right is fixed, disputed, undisputed, legal, equitable, secured, or unsecured and similarly, the right to redress falls within the claim category - If the Resolution plan is approved by CoC, then it stands binding for all. This Tribunal does not find any error in the impugned order as regards the Approval of the Resolution Plan - this Tribunal consciously notes the fact that the I & B Code, 2016 is commercial beneficial legislation with sole intent for earlier Resolution in Insolvency Cases and facilitate environment for putting back the Corporate Debtor on its legs. The I & B Code, 2016 is consciously not meant for recovery mechanism for Debt Enforcement Procedure which other remedies are available as per law and in the manner known to law. Appeal dismissed. Issues Involved:1. Whether the debt claimed by appellants can be considered as financial debt under Section 5(8) of the I & B Code 2016Rs.2. Whether the impugned order passed by the Adjudicating Authority was incorrect in holding the Appellants as related parties under the provisions of the I & B Code 2016 and IBBI rules and regulationsRs.3. Whether the Resolution Plan was approved correctly when no provision had been made for the claims of the AppellantsRs.Issue-wise Detailed Analysis:Issue No. (I): Whether the debt claimed by appellants can be considered as financial debt under Section 5(8) of the I & B Code 2016Rs.The appellants claimed that their investment of more than Rs. 17 Crores should be considered as a financial debt, thus qualifying them as financial creditors. The debt, as defined under Section 3(11) of IBC, includes financial debt and operational debt. Financial debt, under Section 5(8) of the I & B Code, 2016, is defined as a debt disbursed against the consideration for the time value of money. The Tribunal referred to the judgment in Phoenix Arc Pvt. Ltd. vs Ketulbhai Ramubhai Patel, which emphasized that the debt must carry the essential elements of disbursal against the consideration for the time value of money. The Tribunal found that the appellants' investment did not meet this criterion as it lacked the direct element of time value of money. Therefore, the investment could not be classified as financial debt, and the appellants could not be treated as financial creditors.Issue No. (II): Whether the impugned order passed by the Adjudicating Authority was incorrect in holding the Appellants as related parties under the provisions of the I & B Code 2016 and IBBI rules and regulationsRs.The term 'Related Party' under Section 5(24) of the I & B Code, 2016, includes various relationships that signify control or significant influence over the corporate debtor. The Tribunal found that the appellants were involved in the day-to-day operations of the corporate debtor, with Appellant No. 2 serving as a key managerial personnel and being a relative of a director on the Board of Directors. The appellants also fell within the provisions of Section 5(24)(h), 5(24)(m)(i), and 5(24)(m)(iv) due to their involvement in policy-making processes and provision of essential technical information. Thus, the Tribunal upheld the decision of the Interim Resolution Professional and the Adjudicating Authority in classifying the appellants as related parties.Issue No. (III): Whether the Resolution Plan was approved correctly when no provision had been made for the claims of the AppellantsRs.A resolution plan, as defined under Section 5(26) of the I & B Code, 2016, must comply with mandatory requirements and be approved by the Committee of Creditors (CoC). The Tribunal noted that the Resolution Professional's role is administrative, not quasi-judicial, and that the CoC's approval is binding. The CoC, which included only Pegasus Assets Reconstruction Pvt. Ltd., rejected the appellants' claims. The Tribunal found that the Resolution Professional and the Adjudicating Authority were justified in approving the Resolution Plan as the appellants' claims were not admitted as financial debt. The Tribunal emphasized that the I & B Code, 2016, is intended for the resolution of insolvency cases and not for debt recovery, suggesting that the appellants could seek remedies through other legal avenues.Conclusion:The Tribunal dismissed the appeals, upholding the impugned order dated 30.05.2022, and found it legally valid, tenable, just, and proper. The connected pending Interlocutory Applications, if any, were also closed.