TaxTMI 
TaxTMI 
2020 (12) TMI 758
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....e') and declared 'BVN Traders', Respondent No.3, as a 'Financial Creditor' under Sec 5(7) of the Code and 'Debt' as 'Financial Debt' under Sec 5(8)(f) of the Code. The parties are represented by their original status in the Company Petition for the sake of convenience. 2. The brief facts of the case are as follows: The Appellant filed Company Application No.142/2019, under sub-section (5) of Section 60 of the I&B Code, 2016 read with Rule 11 of NCLT Rules, 2016, in Company Petition No.422/ALD/2018, for a declaration that 'BVN Traders' is not a 'Financial Creditor' in connection with the loan extended to the corporate debtor 'Jain Mfg (India) Private Limited'. The Resolution Professional Mr Anupam Tiwari filed its Reply (Annexure A5) to the Company Application No.142 of 2019 on 21st July 2019, with its opinion that the M/s 'BVN Traders' is not a Financial Creditor". After submission of reply by the Resolution Professional, the Adjudicating Authority passed an order dated 19th August 2019 (Annexure A6) stating that: ".....It is brought to our notice that earlier IRP recognised Claim of the BVN Traders as a Financial Creditor, but subsequently after the filing of applic....
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....o eliminate the name of M/s BVN Traders from the list of 'Committee of Creditors'. 7. Thereafter, the 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 (Appeal ground 9(V)). 8. In response to the above the Respondent No 3, M/s BVN Traders, contends that Mr Dilip Kapoor, a partner of the firm, used to infuse funds to the Corporate Debtor M/s Jain Manufacturing (India) Private Limited for its working capital requirement which extended a loan of Rs. 80,00,000/-lacs with interest @ 18% per annum, against the deposit of title deed. A petition was filed against the Corporate Debtor under Section 9 of the Code by one Operational Creditor-Vikas Tiwari which was admitted by order of the Adjudicating Authority dated 22nd February 2019. Mr Manoj Kumar Singh was appointed as 'Interim Resolution Professional' (in short 'IRP') who made a public announcement on 24th December 2019. In response to the public an....
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....cial' to 'Operational Creditor' based on the expert opinion despite that the Adjudicating Authority had taken a contrary view? iii) 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? 14. We have heard the arguments of the Learned Counsel for the parties and perused the records. Before starting a discussion, it is essential to go through the statutory provisions, which are as under: Section 18. Duties of interim Resolution professional 18. Duties of interim Resolution Professional.- (1) The interim Resolution professional shall perform the following duties, namely- (a) collect all information relating to the assets, finances and operations of the corporate debtor for determining the financial position of the corporate debtor, including information relating to- (i) business operations for the previous two years; (ii) financial and operational payments for the previous two years; (iii) list of assets and liabilities as on the initiation date; and (iv) such other matters as may be spe....
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.... contracts on behalf of the corporate debtor or to amend or modify the contracts or transactions which were entered into before the commencement of corporate insolvency resolution process; (c) to raise interim finance provided that no security interest shall be created over any encumbered property of the corporate debtor without the prior consent of the creditors whose debt is secured over such encumbered property: Provided that no prior consent of the Creditor shall be required where the value of such property is not less than the amount equivalent to twice the amount of the debt. (d) to issue instructions to personnel of the corporate debtor as may be necessary for keeping the corporate debtor as a going concern; and (e) to take all such actions as are necessary to keep the corporate debtor as a going concern. Section 21. Committee of creditors 21. Committee of creditors.- (1) The interim Resolution professional shall after collation of all claims received against the corporate debtor and determination of the financial position of the corporate debtor, constitute a committee of creditors. (2) The Committee of....
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.... (c) appoint an insolvency professional (other than the Resolution professional) at his own cost to represent himself in the Committee of creditors to the extent of his voting share; or (d) exercise his right to vote to the extent of his voting share with one or more financial creditors jointly or severally. [(6-A) Where a financial debt- (a) is in the form of securities or deposits and the terms of the financial debt provide for appointment of a trustee or agent to act as authorised representative for all the financial creditors, such trustee or agent shall act on behalf of such financial creditors; (b) is owed to a class of creditors exceeding the number as may be specified, other than the creditors covered under Clause (a) or sub-section (6), the interim Resolution professional shall make an application to the Adjudicating Authority along with the list of all financial creditors, containing the name of an insolvency professional, other than the interim Resolution professional, to act as their authorised representative who shall be appointed by the Adjudicating Authority prior to the first Meeting of the Committee of Creditors; (c)....
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....rtners of the corporate persons, as the case may be; (c) operational creditors or their representatives if the amount of their aggregate dues is not less than ten per cent of the debt. (4) The directors, partners and one representative of operational creditors, as referred to in sub-section (3), may attend the meetings of Committee of creditors, but shall not have any right to vote in such meetings: Provided that the absence of any such director, partner or representative of operational creditors, as the case may be, shall not invalidate proceedings of such meeting. (5) [Subject to sub-sections (6), (6A) and (6B) of Section 21, any creditor] who is a member of the Committee of creditors may appoint an insolvency professional other than the Resolution professional to represent such Creditor in a meeting of the Committee of creditors: Provided that the fees payable to such insolvency professional representing any individual creditor will be borne by such Creditor. (6) Each Creditor shall vote in accordance with the voting share assigned to him based on the financial debts owed to such Creditor. (7) The Resolution professi....
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.... (d) record any change in the ownership interest of the corporate debtor; (e) give instructions to financial institutions maintaining accounts of the corporate debtor for a debit transaction from any such accounts in excess of the amount as may be decided by the Committee of creditors in their meeting; (f) undertake any related party transaction; (g) amend any constitutional documents of the corporate debtor; (h) delegate its authority to any other person; (i) dispose of or permit the disposal of shares of any shareholder of the corporate debtor or their nominees to third parties; (j) make any change in the Management of the corporate debtor or its subsidiary; (k) transfer rights or financial debts or operational debts under material contracts otherwise than in the ordinary course of business; (l) make changes in the appointment or terms of contract of such personnel as specified by the Committee of creditors; or (m) make changes in the appointment or terms of contract of statutory auditors or internal auditors of the corporate debtor. (2) The Resolution professional shall convene a meetin....
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....e purposes of this Clause, it is hereby declared that on and from the date of commencement of the Insolvency and Bankruptcy Code (Amendment) Act, 2019, the provisions of this Clause shall also apply to the corporate insolvency resolution process of a corporate debtor- (i) where a resolution plan has not been approved or rejected by the Adjudicating Authority; (ii) where an appeal has been preferred under Section 61 or Section 62 or such an appeal is not time barred under any provision of law for the time being in force; or (iii) where a legal proceeding has been initiated in any court against the decision of the Adjudicating Authority in respect of a resolution plan;] (c) provides for the Management of the affairs of the corporate debtor after approval of the resolution plan; (d) the implementation and supervision of the resolution plan; (e) does not contravene any of the provisions of the law for the time being in force; (f) conforms to such other requirements as may be specified by the Board. [Explanation.-For the purposes of Clause (e), if any approval of shareholders is required under the Companies Act, 201....
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.... plan of the applicant is considered: Provided that the resolution applicant shall not have a right to vote at the Meeting of the Committee of creditors unless such resolution applicant is also a financial creditor. (6) The Resolution professional shall submit the resolution plan as approved by the Committee of creditors to the Adjudicating Authority. Section 31. Approval of resolution plan 31. Approval of resolution plan.- (1) If the Adjudicating Authority is satisfied that the resolution plan as approved by the Committee of creditors under sub-section (4) of Section 30 meets the requirements as referred to in sub-section (2) of Section 30, it shall by Order approve the resolution plan which shall be binding on the corporate debtor and its employees, members, creditors, 3 [including the Central Government, any State Government or any local authority to whom a debt in respect of the payment of dues arising under any law for the time being in force, such as authorities to whom statutory dues are owed,] guarantors and other stakeholders involved in the resolution plan: [Provided that the Adjudicating Authority shall, before passin....
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....essional submits that the IBBI vide their Circular no. Facilitation/002/2019 dated 1st March 2019, under the charter of responsibilities of IRP/RP and 'Committee of Creditors' in a CIRP, and under Section 25(2)(e) of the Code read with Regulation 13 & 14, it is the duties of Resolution Professional maintain an updated list of claims, including verification and determination. The voting of 'Committee of Creditors' regarding the determination of a Creditor as 'Financial' or 'Operational' is not applicable under law. Therefore, he did not opt 'Committee of Creditors' to vote upon the issue in the 3rd Meeting of 'Committee of Creditors'. 17. On perusal of the statutory provision of the Code, it appears that the Interim Resolution Professional constitutes a Committee of Creditors under Section 18(1)(c) of the Code. Under Section 18(1)(b) the IRP is to receive and collate all the claims submitted by creditors to him, in response to the public announcement. 18. Section 28 of the Code provides the occasions when Resolution Professional requires for approval of the Committee of Creditors for specific actions. It provides that the Resolution Professional during CIRP shall not take spec....
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....laim in Form 'C' as Financial Creditor. (Reply Diary No.21421-Annexure 1) As per Regulation 13 of CIRP Regulations, IRP/RP within 7 days from the last date of filing the claims has to prepare a list of creditors containing the amounts claimed by the Creditor, claims admitted or rejected with or without security interest. The IRP After verification admitted the part of the Claim of 'M/s BVN Traders' as Financial Debt. (See notice dated 10.03.2019 for 1st Meeting of CoC DT. 23.03.2019-Annexure A3-Page 51, 56, 85, 81, 86) 23.03.2019 First Meeting of Committee of Creditors was called by IRP Mr Manoj Kumar Singh. The name of 'M/s BVN Traders' is shown at Sl. No.7 as Member of CoC in Ex. B of Notice, Annexure A3. Ex. C, Page 86, treats BVN as having secured loan with Title Deeds as Security Ground Note below stated that verification of Claim is an undergoing process, and Claim is provisionally admitted by IRP. In this CoC, deliberation took place about the Claim of the Financial Creditor/ Operational Creditor/ Employees/Workman received by the Resolution Professional and verification status thereof. The IRP submitted details of claims....
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.... CoC Members wanted to review their decision based on a legal opinion that 'M/s BVN Traders' should not continue in the category of Financial Creditor and to remove its name from the CoC despite order of Adjudicating Authority. In 7th CoC's meeting, it was resolved that 'M/s BVN Traders' is not a Financial Creditor. (Annexure A8-Page 116) This Resolution was passed contrary to the Order of the Adjudicating Authority dated 23.01.2020 whereby 'M/s BVN Traders' was declared as Financial Creditor. This Resolution was not passed 30.9% voted in favour, and 69.1% voted against the proposal. (Page 126) 'M/s BVN Traders' was vehemently opposing and disapproving the Resolution. On voting, Resolution was passed with a vote share of 69.1%. 'M/s BVN Traders' having 30.9% voted vehemently opposed the Resolution. 18.02.2020 Eight CoC Meeting took place wherein Agenda Item 5 sought Resolution to eliminate BVN Traders from CoC by not considering BVN Traders as Financial Creditor. Agenda Item No.6 was for withdrawal of running CIRP under Section 12A of the Code. CoC adopted the Resolution Annexure A9-page 142 @ 144 to 147) with a vote share of 69.1%. 'M/s BVN ....
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....tion 18 of the Code. 24. Section 18(1)(b) of the Code authorises IRP to receive and collate all the claims submitted by claimants, under the public announcement made under Section 13 and 15 of the Code. Section 18(1)(c) authorises IRP to constitute a 'Committee of Creditors'. Undisputedly, in this case, the IRP after collation of claims admitted the Claim of M/s BVN Traders as a 'Financial Creditor' and debt as a 'Financial Debt'. Up to this stage, M/s BVN Traders being a 'Financial Creditor' was a member of 'Committee of Creditors'. 25. The contention of RP is that after calling the report of two experts, he submitted an Application before the Adjudicating Authority for treating M/s BVN Traders as an 'Operational Creditor' instead of 'Financial Creditor'. The RP represents that he is authorised to 'maintain the updated list of claims' as per Section 25(2)(e) of the Code. The Resolution Professional in the name of "updating list of claims" sat down to review the claims on his own. For this, he called reports from 2 alleged experts. 26. The above contention of the Resolution Professional is not acceptable. The IRP after collation of Claims and formation of 'Committee of ....
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.... 'Resolution Professional' dated 15th April, 2018 for refusing, re-calculating or reducing the Claim in respect of the 'corporate debtor' has not been entertained. Thus, the rejection/reduction of the Claim by 'Resolution Professional' by Order dated 15th April, 2018 reached a finality. The question arises for Consideration in both the appeals is whether the 'Resolution Professional' has jurisdiction to decide or reject the Claim of one or other 'Financial Creditor' or 'Operational Creditor'. 7. Similar issue fell for Consideration before this Appellate Tribunal in 'M/s. Dynepro Private Limited' vs Mr. V. Nagarajan - Company Appeal (AT) (Insolvency) No. 229 of 2018 etc.' The Appellate Tribunal by its judgment dated 30th January, 2019 held that 'Resolution Professional has no jurisdiction to decide the claim of one or other creditor, including 'Financial Creditor', 'Operational Creditor', 'Secured Creditor' or 'unsecured Creditor'. Referring to sub-section (6) of Section 60 of the 'I&B Code', this Appellate Tribunal further observed that after completion of the period of moratorium, a suit or application can be filed against the 'Corporate Debtor'. Relevant portion of Secti....
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....has to consolidate and verify the claims and either admit or reject such claims under Sections 38 to 40 of the Code." Thus Resolution Professional could not adjudicate. What he did was to call alleged reports of experts and changed stand before Adjudicating Authority. When questioned by the Adjudicating Authority, he rushed to CoC, which did not agree to treat 'BVN Traders' as Operational Creditor. This led to the Impugned Order. Still not satisfied he put up to CoC in 7th and 8th Meeting to get decisions changed to treat 'BVN Traders' as not a Financial Creditor. This is high handedness, and unbecoming of Resolution Professional as the following paragraphs will show. 29. The Resolution Professional himself called the report of two experts and changed stand/defence before the Adjudicating Authority when Appellant filed Application. 30. The Resolution Professional has annexed the copy of the Minutes of the 7th 'Committee of Creditors', dated 14th February 2020, by which the Resolution Professional apprised the Members of 'Committee of Creditors' about a rejection of Company Application filed by Appellant Mr Rajnish Jain, Suspended Member of Board of Directors of Corporate D....
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....the Resolution before 'Committee of Creditors' for considering BVN Traders as Operational Creditor and further for the elimination of name of BVN Traders from 'Committee of Creditors'. It is also evident that when Appellant and Resolution Professional could not succeed in getting permission from the Adjudicating Authority to change the status of BVN Traders from Financial Creditor to Operation Creditor, Resolution Professional adopted the route of 'Committee of Creditors' for the elimination of name of BVN Traders from 'Committee of Creditors'. In the last, the Appellant and RP succeeded in getting Resolution passed with 100% of the voting share for withdrawal of Petition under Section 12(A) of I&B Code, in total disregard of the Orders of Adjudicating Authority dated 23rd January 2020, whereby the Adjudicating Authority had not permitted Resolution Professional to change the status of BVN Traders from Financial to Operational Creditor. 32. Thus it appears that the Resolution Professional obtained the expert opinion of an Advocate and CA for removing the name of 'BVN Traders' from 'Financial Creditor' to 'Operational Creditor'. After that, the Appellant moved an application befo....
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.... too, only before the Adjudicating Authority. 36. However, we find 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. 37. 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.....
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....n 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. Issue No 3 43. In the instant case, the alleged loan amount of Rs. 80,00,000/- (Rupees Eighty Lakh Only) @ 18% per annum was advanced to the Appellants Company against the title deed of Plot No. Y of 7/190 (1) Swaroop Nagar, Kanpur, 208002, which was in the name of Appellants Company, and the said title deed is still in possession and custody of Respondent No. 3 BVN Traders. E-mail dated 02nd September 2018 sent by Appellant-Reply (Diary No.21421-Annexure-Sr. No.11@Page 92 of Appeal) to Dilip Kapoor of BVN Traders requesting the return of Original Sale Deed papers of Swaroop Nagar land, claiming that, he had left them in the office of Dilip Kapoor. 44. 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....
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....the Code. This debt may be of any nature but a part of it is always required to be carrying, or corresponding to, or at least having some traces of disbursal against consideration for the time value of money." 45. 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 Rs. 80,00,000/- (Rupees Eighty Lakh Only) @ 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. 46. 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. 47. The Hon'ble Supreme Court, in the case of Pioneer Urban Land Infr....
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....rice associated with the length of time that an investor must wait until an investment matures or the related income is earned. "In both the cases, the inflows and outflows are distanced by time and there is a compensation for time value of money". In the present context, the Appellant Company has assured the Respondent No.3 to repay the loan in One month for which an interest @ 18% per annum has also charged as Consideration for the time value of money. 51. 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. In Swiss Ribbons Ltd. Vs. Union of India, Writ Petition (Civil) No.99 of 2018, the Hon'ble Supreme Court laid down the distinction between "Financial Debt" and 'Operational Debt' in the following terms, "A perusal of the definition of 'Financial Creditor' and 'Financial Debt' makes it clear that a financial debt is a debt together with interest, if any, which is disbursed against the Consideration for time value of money. It may further be mo....
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....rementioned 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. Therefore we are of the considered opinion that the Respondent No.3 BVN Traders is a Financial Creditor within the meaning of Section 5(7) of the Code, and the debt in question is a "financial debt" within the meaning of Section 5(8) of the Code. (54.1) Reply (Diary No. 21421) shows that Dilip Kappor partner of Respondent No. 3 used to infuse funds/advance money in Corporate Debtor for Working Capital Requirements; that on 15.08.2018 Appellant had come to the office of Respondent No. 3 and requested for loan/advance Rs. 1 crore assuring repayment in one month. As per Respondent No. 3, Rs. 80 lakhs were advanced as a loan with interest at the rate of 18 percent per annum. This was not honoured and later Respondent No. 3, concluded that there was deceit and filed FIR on 21.10.18 (Which is before Section 9 Application was admitted. Respondent NO. 3 has filed Annexure 1, Form C, with Annexures which included Documents like its ledger; Copies of Title Deed; Screen Shots of Whatsapp....
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....er wish to continue M/s BVN Traders in the category of the "Financial Creditor" in the CoC and want to review their decision in this regard." "No Longer wish"? This is strange. This is the danger due to which collating is not left to CoC. As mentioned, this was taken up, and resolutions were passed in the 7th Meeting and also 8th Meeting dated 18.2.2020 (Annexure A9) to resolve and oust BVN from CoC. Thus CoC sat in Appeal over Impugned Order and passed resolutions to the contrary, which cannot be said to be legal. 55. We hold and direct that all these decisions discussed above, of CoC in the 4th, 7th, and 8th Meetings of CoC to be beyond their jurisdiction and powers and duties. Commercial decision and wisdom mainly relate to evaluating Resolution Plan and duties as mostly seen in Section 28 of IBC. 56. For same reasons we direct that 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. 57. We uphold the Impugned Order for its declaration that BVN Traders is Fin....