Civil Procedure Code (CPC)

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JUDGEMENT DATE: 18th DECEMBER, 2020

Mr Rajnish Jain - The promoter, Stakeholder and Managing, Director of Suspended Board of Directors Vs.
1. (Manoj Kumar Singh - I.R.P.) Struck off as per Order dated 24.06.2020
2. Anupam Tiwari Resolution Professional for M/s Jain Mfg (India) Private Limited
3. BVN Traders

This article is based on the recent Hon'ble NCLAT Judgment in Company Appeal (AT) (Insolvency) No. 519 of 2020 in the matter of M/s Jain Mfg (India) Private Limited the Corporate Debtor in Company Petition (IB.) No. 422/ALD/2018. In this article I am providing the entire details of the parties as it would enable the my friends to download and read the full judgement from the IBBI site

The present Appeal is against the Order dated 23rd January 2020 passed by the Adjudicating Authority/National Company Law Tribunal, Allahabad Bench, Allahabad in Company Application No.142/ALD/2019.

In this order the Hon'ble NCLAT had gone through in detail the duties and powers of the Interim Resolution Professional/Resolution Professional as well as the scope of the Corporate Wisdom in taking decisions of the Corporate under the provisions of the IBC and further reiterated that the Resolution Professional shall not outsource the duties conferred on him under the Provisions to any third parties. In previous occasions although Supreme Court decided several cases on the powers of the Resolution Professional in deciding certain issues in rendering the process of Corporate insolvency resolution against the Corporate debtor. The Appellant Tribunal in the present Order has reminded the same on the reviewing authority of the Resolution Professional

The present Appeal is filed by the Appellant-Promotor of the Corporate Debtor was against the order the dated 23rd January 2020 wherein it was declared that the one '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 based on the provisions of the Code.

Facts of the case

The Appellant, the promoter of the Corporate Debtor filed Company Application No.142/2019, under subsection (5) of Section 60 of the I&B Code, 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 with its opinion that the M/s 'BVN Traders' is not a Financial Creditor". The Petition filed by the Appellant was rejected stating that "as the COC has voted in majority in favour of BVN Traders as "financial creditor" and thus Suspended Management as well as Resolution Professional has no locus to challenge the commercial wisdom and decision of Committee of Creditors with regard to determination of Respondent as financial Creditor."

After the pronouncement of the Order, the COC members in its 7th meeting held on 14th February 2020 passed the resolution with its majority that 'M/s BVN Traders is not a 'Financial Creditor' and further passed the resolution in the subsequent COC meeting and eliminated M/s BVN Traders from the list of Committee of Creditors.

After the above resolutions, The Appellant filed the present appeal against the order in CP No.142/2019 on the ground that Adjudicating Authority erred in facts and law and based his ground on the decision of the CoC members.

The issues dealt in the present Appeal are as under:

i) 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?

ii) 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?

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?

In order to decide the above issues, the Hon'ble Appellate Tribunal had referred in detail of the duties and responsibilities of an Interim Resolution Professional/Resolution Professional at length under Section 18. Duties of interim Resolution Professional.- Section 20. Management of operations of corporate debtor as going concern, Section 21 Committee of Creditors, Section 24 Meeting of Committee of creditors.- Section 27 and Section 28 of IBC, 2016.

By referring the above provisions, the Appellate Tribunal observed that

Clauses (a) to (m) of sub-section (1) of Section 28 deals with the stages where the Resolution Professional has to obtain approval of the Committee of Creditors during Corporate Insolvency Resolution Process.

Therefore, the action of the Resolution Professional for referring the matter to the Committee of Creditors to determine whether the claim of 'M/s BVN Traders' falls in the category 'Operational Debt' or 'Financial Debt' is not covered under clauses (a) to (m) of sub-section (1) of Section 28 of the Code

The question that arises for consideration is whether the Resolution Professional was under the obligations to maintain an updated list of claims, was entitled to overturn its earlier decision of declaring BVN Traders as 'Operational Creditor' instead of 'Financial Creditor'.

By referring the Section 18(1)(b) of the Code which 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, and 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'.

The RP represents that he is authorised to 'maintain the updated list of claims' as per Section 25(2)(e) of the Code. The Hon'ble Appellate Tribunal however rejected the contention of the RP and further held that "IRP after collation of Claims and formation of 'Committee of Creditors' was not entitled to suo-moto review or change the status of a creditor from Financial to Operational Creditor. Updating list and review are different acts.

The Authority held further that if Resolution Professional was aggrieved, he should have moved the Adjudicating Authority. The aggrieved person can challenge either constitution of 'Committee of Creditors' or for any grievance against rejection, incorrect acceptance or categorisation of creditors before the Adjudicating Authority. But the Resolution Professional cannot arbitrarily on its own overturn earlier decision, to change the status of a creditor from Financial Creditor to Operational Creditor. In this context The Hon'ble Appellate Tribunal relied on Mahal Hotel Private Limited Vs. Asset Reconstruction Company (India) Limited and Others, M/s. Prasad Gempex Vs Star Agro Marine Exports Pvt. Ltd. & Ors, M/s. Dynepro Private Limited' vs Mr. V. Nagarajan which reiterated 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'."

The Authority has cited another landmark judgment in the context of duties of the Resolution Professional and made remark as follows: "It is notable that the power of 'Resolution Professional' also fell for consideration before the Hon'ble Supreme Court in 'Swiss Ribbons Pvt. Ltd. & Anr. vs Union of India & Ors. – Writ Petition (Civil) No. 99 of 2018', in which it was held that "'Resolution Professional' has no adjudicatory power. The 'Resolution Professional' has to vet and verify the claims made and ultimately determine the amount of each Claim. As opposed to this, the 'Liquidator' in the Liquidation proceedings under the I&B Code has to consolidate and verify the claims and either admit or reject such claims under Sections 38 to 40 of the Code.""

On looking into the facts of the present case, the Hon'ble NCLAT had observed that every action of Resolution Professional, either about the change of status of 'BVN Traders' from financial to Operational Creditor or regarding the elimination of name of 'BVN Traders' from the 'Committee of Creditors. 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 before the Adjudicating Authority for seeking permission for the same. But when permission was not granted, and explanation was called from 'Resolution Professional' then he adopted the route of Committee of Creditors.

After that, the Resolution Professional moved a resolution before Committee of Creditors for the elimination of name of BVN Traders from the list of 'Financial Creditors' and when Resolution was passed, and BVN Traders was eliminated from the list of Committee of Creditors, the Resolution for withdrawal of Petition was proposed and passed with 100% vote share

Further, a point of incorrectness regard to the Order of the Adjudicating Authority was raised where it was held that "as the COC has voted in majority in favour of BVN Traders as "financial creditor" and thus Suspended Management as well as Resolution Professional has no locus to challenge the commercial wisdom and decision of Committee of Creditors with regard to determination of Respondent as financial Creditor.

But the Appellete Authority referring the above observed of the Adjudicating Authority and stated why the observation of the Adjudicating Authority as incorrect by holding that "because the 'Committee of Creditors' had no role in deciding the status of a creditor either as 'Financial' or 'Operational' Creditor and such a decision of 'Committee of Creditors' can never be treated as an exercise under its Commercial wisdom. It is a matter of applying the law of I&B Code, and if such factor is left to CoC, there would be a serious conflict of interest, as the present matter itself shows. Whether a person or entity is "Financial Creditor" as defined in Section 5(7) or Operational Creditor as defined in Section 5(20) is a matter of applying the law to facts. It cannot be a matter of voting, and choice as discretion is not relevant. During the CIRP, the IRP collates the Claim, and after that, the 'Committee of Creditors' is formed under Section 18 of the Code. After the formation of the 'Committee of Creditors', only the aggrieved person can agitate the same and that too, only before the Adjudicating Authority.

Further The Hon'ble Appellate Tribunal noted 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'.

In context of the duties of the Interim professional, The Hon'ble Appellate Tribunal had cited the decision of the Hon'ble Supreme Court in the matter of Committee of Creditors of Essar Steel India Ltd. V/s Satish Kumar Gupta Civil Appeal No. 8766 and 8767 of 2019, in which a brief note on the role of the interim Resolution Professional is made

"Under CIRP Regulation 13,

"The interim resolution professional or the resolution professional, as the case may be, shall verify every claim, as on the insolvency commencement date, within seven days from the last date of the receipt of the claims, and thereupon maintain a list of creditors containing names of creditors along with the amount claimed by them, the amount of their claims admitted and the security interest, if any, in respect of such claims, and update it."

Further The Hon'ble Appellate Tribunal also referred the recent circular 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'.

From the above analysis, The Hon'ble Appellate Tribunal concluded issues 1 and 2 together that "

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. "

With respect to the issue no. 3, it is concluded from the facts that since 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. The said decision is based upon

Pioneer Urban Land Infrastructure Vs. Union of India 2019 SCC Online Page 1055

Referring the definition of the "Financial Debt" under the provisions of the Code in Section Section 5(8) which qualifies the financial debt when basic element of disbursal to the Corporate Debtor, of amount against the Consideration of time value of money is identified in the given debt. The Hon'ble Appellate Tribunal derived the meanings for the time value of money from different sources like NASDAQ Glossary of Financial Terms and precedents as the Code has not defined it. Precedents in context to time value of money referred are

Nikhil Mehta and Sons Vs. AMR Infrastructure Ltd which defined the "time value of the money" as follows:

"The key feature of financial transaction as postulated by section 5(8) is its Consideration for time value of money. In other words, the legislature has included such financial transactions in the definition of 'Financial debt' which are usually for a sum of money received today to be paid for over a period of time in a single or series of payments in future. It may also be a sum of money invested today to be repaid over a period of time in a single or series of instalments to be paid in future. In Black's Law Dictionary (9th edition) the expression Time Value' has been defined to mean "the price 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".

The Hon'ble Appellate Tribunal made critical observation how the COC and Resolution professional that "despite the Order passed by Hon'ble NCLT Allahabad the CoC is of the view that they no longer 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.

Further The Hon'ble Appellate Tribunal declared that 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.

The Hon'ble Appellate Tribunal by this Judgement had upheld the Impugned Order for its declaration that BVN Traders is Financial Creditor for the reasons stated above and set aside the reasons based on which the Adjudicating Authority came to such conclusion.

The Judgement has provided the following ratio decidendi :

  1. The Committee of Creditors has no adjudicatory power to decide as such whether a creditor who files its Claim is a 'Financial' or 'Operational' Creditor
  2. During CIRP, the IRP is authorised to collate the claims, and based on that he is empowered to constitute the Committee of Creditors. 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 cannot change the status of a Creditor.
  3. While updating list of Claims the Resolution Professional, can accept or reject claims which are further received and update list.

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