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TMI Blog2021 (9) TMI 1121X X X X Extracts X X X X X X X X Extracts X X X X ..... solvency 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 over by Dec. 2018. However, there were substantial d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt 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, civil / electricals /PHE subcontractors, etc., who would be invo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Promoter-Directors and the Respondent No.1/ Applicant, it initiated Arbitrati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 relatives, more than two per cent of its share capital; (e) a public company in which a director, partner or manager of the corporate Debtor is a director and holds along with relatives, more than two pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the corporate Debtor, and shall be included in the committee of creditors, with voting share proportionate to the extent of financial debts owed to such creditor; (b) such person shall be considered to be an operational creditor to the extent of the operational debt owed by the corporate Debtor to such creditor. (5) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vant 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 creditors shall have the right to require the Resolution professional to furnish any financial information in relation to the corporate Debtor at any time during the corporate insolvency resolution process. (10) The Resolution professional shall make available any financial information so required by the committee of creditors under sub-section (9) within a period of seven days of such requisition. Discussion and Finding ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 circumvent the exclusion under the 1st proviso to Section 21 (2) of the Code, should also be considered as being covered by the exclusion thereunder. Suppose this interpretation is not given to the 1st proviso Section 21 (2) Code; in that case, a related party Financial Creditor can devise a mechanism to remove its level of a 'related party' before the Corporate Debtor undergoes CIRP to enable to enter the COC and influence his decision making at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 effectively holding 89.9% of the company's equity shares. 23. The above contentions prove the claim of ASK as the owners of the company and not as Financial Creditors. They have a substantial interest in the day-to-day operations of the company and are insiders of the company. 24. The Learned Counsel for the Appellant further proceeds to highlight that the Directors appointed by ASK have signed legally binding documents with ICICI Bank, which includes the following: I. Credit Arrangement Letter (C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng 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 effect, an insider of the Corporate Debtor having substantial interest in the ownership of the Corporate Debtor. Hence 'ASK' being a related party, and their claim with the IRP/RP concerning the above mentioned CIRP should be rejected, as they are not entitled to participate in the CoC. 26. In order to determine whether a party is a related party in terms of Section 5 (24) and Section 21 (2) of the Insolvency and Bankruptcy Code, 2016, it is imperative to know the nature of the transactions entered into between the said party and the Corporate Debtor, and ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rd 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 the original meeting or such other date as agreed by at least one Investor Director ("Adjourned Meeting"). At such Adjourned Meeting, if the Quorum is not present within 30 (thirty) minutes of the time appointed for the meeting, then the Director present shall be deemed as quorum provided that no matter which is an Affirmative Vote Item shall be deemed to have been passed by any meeting of the Board, including any adjourned meeting, unless either the consent of the Investor Representative or in the absence of such consent, the consent of at least one of the Investor Directors for the particular matter has been obtained ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 thereof) in all advertisements, including hoardings, newspaper advertisements, other marketing material for the Project and indicate clearly that ASK as a Joint Venture partner. All such advertisements shall be issued only with the prior written consent of the Investor Representative. 11. BUSINESS PLAN AND BUDGETS 11.1 The Company and the Promoters agree that they shall conduct the business and operations of the company and undertake development of the Project as per the Business Plan of the Company. 11.2 Without prejudice to the obligations of the Promoters and/or the Company under this Agreement, the Company and the Promoters agree to finalise ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 in any manner. 4. Miscellaneous 4.1 BENEFIT OF THE EXIT AGREEMENT AND SSHA This Exit Agreement and the respective rights and obligations for the Parties under this Exit Agreement shall ensure to the benefit of and be binding on their respective successors, heirs, executors, administrators and permitted assigns, as the case may be. The Promoters and the Company agree that the rights and benefits under the SSHA shall continue to apply for and be for the benefit of the investors and the investor Representative till such time that the entire sums of the interest and the Sale Consideration, has been, paid to the Investors." 27. The Learned Counsel for the Respondent No.1 submits that Respondent No. 1 does not fall under the ambit of Section 5 (24) (h)or Section 5 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 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 the Corporate Debtor had not been utilised in the best interest as originally envisaged, Respondent No. 1 could exercise its affirmative voting rights to prevent any harm to such investments. 33. Respondent No.1 further submits that the related party of the Corporate Debtor means any person who can control the composition of the Board of directors or corresponding governing body of the Corporate Debtor. Respondent No. 1 could not control the composition of the Board of Directors of the Corporate Debtor but was only entitled to nominate and appoint 50% of the Board so that the nominee Directors of Respondent No. 1 could protect the interest of Respondent No. 1 and its investors. Power to prevent the change in the composition of the Board can not, in any situation, be deemed to be in control of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ders 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 Sector Regulator. 2) This class of Creditors will become exempted provided they become related parties solely on the ground of conversion of debt into equity prior to insolvency commencement date. Over this point, the Resolution Professional counsel has vehemently argued that it shall be exempted only in the cases where the debt of this class of Financial Creditors is converted into equity before the commencement of CIRP." (verbatim copy) 37. However, the relevant provision of Sec 21, along with its proviso, is reiterated below for ready reference. Sec 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 committe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 participatory role in the Corporate Debtor's policies. Hence, the Respondent's related party status arises not on account of any conversion of debt into equity or prescribed transaction. As the learned Adjudicating Authority has noted that this is a case where no conversion of debt into equity has happened. Therefore, there can be no question of the benefit of the 2nd proviso of section 21 (2) of the IBC accruing to the Respondent. 42. Considering the facts of the case, we find that Respondent No. 1 had a share in the profits of the Corporate Debtor Company and cannot be said to be a person acting solely on account of the conversion of debt. In the instant case, the Corporate Debtor had issued non-convertible debentures to Respondent No. 1, which SEBI does not regulate. The SEBI only regulates the issue of debentures relating to "convertible securities". In the present case, it was ..... X X X X Extracts X X X X X X X X Extracts X X X X
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