TaxTMI 
TaxTMI 
2021 (9) TMI 1121
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....38/IB/2018, under Section 60(5) of the Insolvency and Bankruptcy Code, 2016 (in short 'I&B Code'), whereby the Adjudicating Authority has directed the Resolution Professional to make the Applicant /Respondent No.1 (ASK Investment Managers Limited), a member of CoC with voting rights proportionate to its claim against the Corporate Debtor. The original status of the Parties in the Company Petition represents them in these appeals for the sake of convenience. Brief Facts 1. The Application MA/1360/2019 and MA/1263/2019 in CP/938/IB/2018 was filed u/s 60(5) IBC, 2016 by Respondent No. 1 assailing the decision of IRP/RP holding that the claimant/ Applicant is a Financial Creditor but is not eligible to be a part of CoC for the reason that the Respondent is a related party in terms of Sec. 5(24)(m) & 5(24) (i) of the Insolvency and Bankruptcy Code 2016. Accordingly, the Tribunal disposed of the Application & directed RP to make Respondent No. 1 a member of 'CoC' with voting rights. 2. All members of the Appellant Association in Appeal No 252 of 2020 are home buyers, and the Project which the Corporate Debtor floated was supposed to be completed and handed ove....
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....r representative, i.e. the 1st Respondent. Hence, the instant lis is against the 1st Respondent, in his capacity as the investors representative and not against it per se. Thus, it is evident that the 1st Respondent is the agent, and the investors are the principal. 7. The Appellant submits that as per the SSA, it was agreed between the investors represented by the 1st Respondent, the Appellant and the Corporate Debtor, that the investors, through the 1st Respondent, would invest a sum of Rs.50 Lacs in the Corporate Debtor, in the form of equity by subscription to the share capital of the Corporate Debtor and the sum of Rs. 49.50 crores, would be invested, by way of debentures. As per the tenets of the 'SSHA', the investors were entitled to nominate three directors, constituting 50% of the Board of Directors, which right was duly exercised by the investors. It is admitted even during the arbitral proceedings by the investors through their investor representative. The investors herein were involved in the policy-making decisions of the Corporate Debtor and several other decisions arising in due course of business, such as decisions on key appointments like architects, civ....
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.... Appellant submits that for the reasons above, the investors would squarely fall within the definition of the term related party, under Section 5 (24) of the Code. 11. MA/1360/2019 & MA/1263/2019 in CP/938/IB/2018 were filed by the Applicant/Respondent No.1 (M/s ASK Investment Managers Limited) before the Adjudicating Authority, on being aggrieved that despite its claim being accepted as Financial Creditor, it was not made part of the CoC. Accordingly, considering the Applicant/ Respondent No.1 as a related party to the Corporate Debtor, under Sec. 5(24)(h) & 5(24) (m)(i) of Insolvency and Bankruptcy Code, 2016 (the Code) being ineligible, not made part of CoC. 12. The Respondent No.1/Applicant's holds 8% shareholding in the Corporate Debtor, apart from 49.50 Crores funded to the Corporate Debtor through Debentures. By this stake, the Respondent No.1 Company had two nominee Directors on the Board of the Corporate Debtor with affirmative voting rights in the Corporate Debtor proportionate to the equity plus debentures as per Schedule VII, Sub-Schedule 5 of the Subscription and Shareholders Agreement dated 23.03.2011. However, since some differences arose between the Promot....
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....ms of authorisation issued or registration granted by a financial sector regulator; (18) "financial sector regulator" means an authority or body constituted under any law for the time being in force to regulate services or transactions of financial sector and includes the Reserve Bank of India, the Securities and Exchange Board of India, the Insurance Regulatory and Development Authority of India, the Pension Fund Regulatory Authority and such other regulatory authorities as may be notified by the Central Government; Sec 5(24) of the I&B Code, 2016 provides that "related party", in relation to a corporate debtor, means- (a) a director or partner of the corporate Debtor or a relative of a director or partner of the corporate Debtor; (b) a key managerial personnel of the corporate Debtor or a relative of a key managerial personnel of the corporate Debtor; (c) a limited liability partnership or a partnership firm in which a director, partner, or manager of the corporate Debtor or his relative is a partner; (d) a private company in which a director, partner or manager of the corporate Debtor is a director and holds along with his re....
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....l creditor referred to in sub-section (6) or sub-section (6-A) or sub-section (5) of Section 24, if it is a related party of the corporate Debtor,] shall not have any right of representation, participation or voting in a meeting of the committee of creditors: [Provided further that the first proviso shall not apply to a financial creditor, regulated by a financial sector regulator, if it is a related party of the corporate Debtor solely on account of conversion or substitution of debt into equity shares or instruments convertible into equity shares [or completion of such transactions as may be prescribed,] prior to the insolvency commencement date.] (3) [Subject to sub-sections (6) and (6-A), where] the corporate Debtor owes financial debts to two or more financial creditors as part of a consortium or Agreement, each such financial creditor shall be part of the committee of creditors and their voting share shall be determined on the basis of the financial debts owed to them. (4) Where any person is a financial creditor as well as an operational creditor,- (a) such person shall be a financial creditor to the extent of the financial debt owed by th....
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....representative under clause (a) or clause (b) or clause (c) shall attend the meetings of the committee of creditors, and vote on behalf of each financial creditor to the extent of his voting share. (6-B) The remuneration payable to the authorised representative- (i) under clauses (a) and (c) of sub-section (6-A), if any, shall be as per the terms of the financial debt or the relevant documentation; and (ii) under clause (b) of sub-section (6-A) shall be as specified which shall form part of the insolvency resolution process costs.] [(7) The Board may specify the manner of voting and the determining of the voting share in respect of financial debts covered under sub-sections (6) and (6-A). (8) Save as otherwise provided in this Code, all decisions of the committee of creditors shall be taken by a vote of not less than fifty-one per cent of voting share of the financial creditors: Provided that where a corporate debtor does not have any financial creditors, the committee of creditors shall be constituted and shall comprise of such persons to exercise such functions in such manner as may be specified.] (9) The committee of....
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....he first proviso to Section 21 (2) of the Code, which disqualifies a Financial Creditor or the authorised representative of the Financial Creditor under Sub-section (6A) or Sub-section (5) of Section 24 of the Code, if it is a related party of the Corporate Debtor, from having any right of representation, participation or voting in a meeting of COC. The purpose of excluding a related party of the Corporate Debtor from the COC is to obviate conflicts of interests that are likely to arise if the Related Party is allowed to become a part of the COC. The Insolvency Law Committee Report of 2020 has clarified that the exclusion under the 1st proviso to Section 21 (2) under the Code is related not to the debt itself, but the relationship between a related party Financial Creditor and the Corporate Debtor. As such, the Financial Creditor, who in praesenti is not a related party, would not be debarred from being a member of the COC. While the default rule under the 1st proviso to Section 21 (2) of the Code is that only those Financial Creditors that are related parties in praesenti would be debarred from the COC, those related party Financial Creditors that cease to be related parties to ci....
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....e Corporate Debtor on the following grounds; I. As per Clause 2.3 of the Subscription and Shareholders Agreement entered into between ASK and its Authorised Representatives and Real Value Promoters Private Limited and its Authorised Representatives, an investment ratio of 51:49 was envisaged. In addition to the same, ASK also had the claim over residual surplus of the company in the ratio of 51:49. III. As per Schedule 7 of the Subscription and Shareholders Agreement, under sub-heading no.5 -' Voting rights', it is clearly stated that the company's voting rights are determined based on the share capital and debenture capital of the company and not merely by the share capital. As a consequence, ASK were de facto influencing the company's decision-making, operations, and management. IV. ASK had exercised its right to convert the 49,50,000 optionally convertible debentures into equity shares under notice dated 05 February 2016, issued to the Corporate Debtor. IV. ASK had sought the Bombay High Court to rule in their favour by passing an order declaring ASK has the ownership of 49,500,000 equity shares of the Corporate Debtor, thereby....
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....oup) and Mr V.S Suresh (Promoter Group). The MODT has been registered via document no. 2941/2013 at the Adyar - Sub-registrar office. VI. The Appellants counsel further contends that the ASK control in the management of the affairs of the Corporate Debtor is further proved by being signatory authorities in the following undertakings 'Non-Disposal undertaking dated 04 October 2013, signed on behalf of the Corporate Debtor by Mr Chetan Suresh Shah stating that the shares of the Corporate Debtor shall not be disposed of'. Shortfall undertaking dated 04 October 2013 and signed on behalf of the Corporate Debtor by Mr Chetan Suresh Shah. 25. The Ld Counsel for the Appellants argued that considering the above facts and circumstances, it is evident that ASK has a substantial interest in the operations of the Corporate Debtor. The same is clear from their stake to claim a considerable ownership interest in the company, i.e. 89.9%, and their significant involvement in the operations and day-to-day decision-making of the Corporate Debtor, as substantiated above. Therefore, given the above facts and statutory provisions, it can be stated that 'ASK' is, in ....
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....and the Promoter 1 shall be entitled to nominate the remaining 3 (three) Directors on the Board of the Company (the "Promoter Directors") and which persons shall unless otherwise agreed to by the Investor Representative be the two Land Owners and Suresh. Subject to the aforesaid, each party entitled to nominate Directors shall be entitled, from time to time, to remove any or all of such Directors and to appoint another nominee or nominees instead and in the event of any vacancy being caused in the office of a Director nominated by any Party, such vacancy shall be filled by appointment thereto by the Board of a new nominee of such party. The investor Directors shall be non-retiring directors. Without prejudice to the aforesaid it is clarified that the Investor Representative shall always be entitled to nominate half of the directors on the Board. 5.2 PROCEEDINGS OF THE BOARD; QUORUM d. If at a Board Meeting, no Quorum is present (unless the requirement of Quorum has been waived by the Investor Representative for any particular meeting) then the meeting shall stand adjourned to the same time or the day which is the 7th (seventh) Business Day following the date of th....
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....eby confirm and represent that "Real Value" is a registered and proprietary trademark and tradename of the Promoters and the Promoters are the sole owner and user of such mark and tradename and any other person using such mark or name uses it under authority of the Promoters. The Promoters further confirm that their ownership, rights and/or usage of aforesaid mark and tradename is not subject to any disputes and/or third-party claims. The Promoters hereby grant to the company a royalty-free, perpetual right to use the said mark and tradename in relation to the Project, the Project Land, the buildings in the Project, including without limitation in any marketing material and as part of the name of the company and the promoters agree to make such things with governmental authorities as are required in relation thereto. The Promoters further agree and undertake that in their general group and/or business advertisements and marketing, they shall prominently display the Project and its specifications and represent that the Project has been promoted by the Promoters. The Promoters and the Company further agree that it shall prominently display the ["ASK"] name or logo (or any derivative ....
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....roposed residents) thereof h. Ensure compliance by the company of any covenants executed by the company with any lenders from which it has borrowed monies. i. Prepare periodic reports for the lenders and/or the investor Representative detailing the development of the Project and identifying any bottlenecks or concerns in such development and suggesting remedies for mitigating such bottlenecks and concerns. j. Deputation of Promoters' Head Office staff for the aforesaid services k. Corporate marketing and branding 3. Warranties and Acknowledgements. 3.6 The Promoters and Company acknowledge and agree that this Exit Agreement is without prejudice to the rights and powers of the Investors and Investor Representative under the SSHA and other applicable Law and which rights and powers shall only terminate and be foregone upon due receipt of entire sums of the interest and the Sale Consideration by the investors as per the terms of this Exit Agreement read with the SSHA and that such rights and powers include the right and powers following the occurrence of an Event of Default, all of which shall continue and not be deemed as waived i....
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.... amount along with an IRR of 30% on the total investment amount. Respondent No. 1 does not have any share in the profits of the Corporate Debtor, and the debentures were to be redeemed. All the key managerial/policy-making decisions are to be taken by the promoters of the Corporate Debtor. Schedule 8 of the SSHA read with Clause 9.3 of the SSHA shows that the Corporate Debtor's promoters are, in fact, in charge of the day-to-day management and policy-making of the Corporate Debtor. 31. Further, with the passing of the arbitral award, the rights and obligations of the parties culminated and fructified. As a result, the SSHA has come to an end. Thus the rights of the nominee directors of Respondent No. 1 also ended in January 2018, much before the Corporate Insolvency commencement date, i.e. 10 September 2019. 32. Respondent No.1 contends that the impugned order recognises and correctly holds that Respondent No. 1 was an investor in the Corporate Debtor and had nothing to do with the day-to-day running of the corporate Debtor's business or policy-making or decision-making. Consequently, only in situations where it appeared that the investments made by the investors in t....
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....der of technical information. Accordingly, this provision has no application. Any reliance on Clause 3.1.A.12 Monitoring Committee Meetings is misplaced since the role of Respondent No. 1 was limited to advise and recommend. Moreover, no meetings were held after 2014. 36. It is important to mention that the Adjudicating Authority has made observations in the impugned judgement in para 16 that; "Since this was an unqualified elimination of Financial Service Providers from becoming members of CoC, this situation has been remedied by inserting Proviso 2 to Section 21 (2) of the Code through IBC (2nd Amendment) Act, 2018, and now the Government has come out with an Ordinance dated 28 December 2019 including the bold words in the proviso mentioned widening the scope of exemption of financial Service providers from elimination from participating in СоC." 2. On closely reading this provision in the light of the Insolvency and Law Committee Report, it is evident that - 1) Elimination of financial creditors under first proviso to Section 21(2) of the Code is not applicable to a financial creditor (Financial Service Provider) regulated by Financial S....
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....nto equity shares or completion of such transactions as may be prescribed. 40. Respondent No. 1 has sought to obfuscate the clear and plain meaning of the 2nd proviso by making much of the positioning of the commas in the proviso. The Respondent's interpretation seeks to completely dissociate the part of the proviso which reads "provided further that the 1st the provision shall not apply to a financial creditor, regulated by a financial sector regulator" from the part "if it is a related party of the corporate debtor solely on account of conversion or substitution of debt into equity shares or instruments convertible into equity shares or completion of such transactions as may be prescribed, prior to the insolvency commencement date". Moreover, this reading is also contrary to the legislative intent discernible from the Reports of The Insolvency Law Committee. 41. It is also important to point out that the learned Adjudicating Authority's findings in the impugned order are that the Respondent has all the trappings of being a "related party" of the Corporate Debtor on account of the various provisions of the SSHA, which give its nominee directors on the Board and participa....