TMI Blog2021 (9) TMI 1121X X X X Extracts X X X X X X X X Extracts X X X X ..... ed prior to the insolvency commencement date. Therefore, 2nd proviso to Section 21(2) is not applicable in the present case and does not enure the benefit to Respondent No 1 ASK . It is evident that ASK has a substantial interest in the operations of the Corporate Debtor. Moreover, the intent is to increase the same is clear from their stake to claim a considerable ownership interest in the Corporate Debtor Company, i.e. 89.9%. Their significant involvement in the operations and day-to-day decision-making of the Corporate Debtor is substantiated - '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 concerning the mentioned CIRP should be rejected, and they are not entitled to participate in the CoC. The Hon ble Supreme Court, in Municipal Corporation of Greater Mumbai v Abhilash Lal [2019 (11) TMI 844 - SUPREME COURT] , has affirmed the principles that if any statute requires a thing to be done in a particular manner, it should be done in that in that manner or not at all and that there can be no estoppel against the ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e completed and handed over by Dec. 2018. However, there were substantial delays, and the Corporate Debtor defaulted in making payment as per the terms of the Agreement. As a result, a member of the Appellate Association filed claims before RP, as Operational Creditor had triggered the CIRP and AA/NCLT, Chennai had admitted Application u/s 9 of IBC, 2016. 3. The members of the Appellant association filed their claims before the Resolution Professional. The object of the Homebuyers as claimants in the CIRP is for a Successful Resolution of the CD and completion of the Project. The third Respondent was appointed as IRP of the CD. Then, the Appellant made various representations to Respondent No. 3 to show that Respondent No. 1 is a related party of the CD. Accepting the contention of the Appellant, the RP communicated its decision, holding that Respondent No. 1 is a related party of the CD. Submission of Appellant in Civil Appeal No.315 of 2020 4. Appellant of Civil Appeal No. 315 of 2020 is Mr V S Suresh, the Corporate Debtor's Promoter and Shareholder. The Appellant, along with his Companies, i.e. 'Real Value Promoters Private Limited' and certain landowner ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... key appointments like architects, civil / electricals /PHE subcontractors, etc., who would be involved in the development of the Project. Further, it is submitted that the affirmative vote items include several matters about the underlying conduct of business itself, such as selling units in the real estate project, making budgets, marketing, etc. It is pertinent to note that the directors appointed by the investors were authorised to act on behalf of the Corporate Debtor and enjoyed cheque signing authority in the Corporate Debtor. 8. The Appellant submits that the investors, represented by the 1st Respondent, were participating in the policies and the effective management of the Corporate Debtor. As such, they had substantial control over the management of the Corporate Debtor. In other words, the investors represented by their investor representative were competent to control the Board's composition entirely and consequently would fall within the ambit of Section 5 (24) (I) of the Insolvency and Bankruptcy Code 2016. Further, Section 5 (24) (m) (iv) states that any person, who is entitled to obtain essential technical information to and from the company, shall be deeme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e differences arose between the Promoter-Directors and the Respondent No.1/ Applicant, it initiated Arbitration Proceedings against the Promoters and the Corporate Debtor, wherein an award was passed on 31.01.2018 for an amount of ₹ 143 Crores plus interest. Accordingly, based on the debentures issued to the Applicant/ Respondent No.1, the Arbitral Award was passed, which was to be paid jointly and severally by the Corporate Debtor and the Promoter-Directors. 13. The Adjudicating Authority disposed of the applications by allowing MA/1360/2019 MA/1263/2019 in CP/938/IB/2018 with the following directions:- Therefore for the reasons aforementioned, we are of the view that this Applicant/Financial Creditor shall be permitted to become member of CoC so as to participate in considering the functioning of the Corporate Debtor and examining the Resolution Plan, if any, that may come up before the Committee of Creditors. Accordingly, we hereby dispose of MA/1360/2019 MA/1263/2019, directing the Resolution Professional to make this Applicant as member of the CoC with voting rights proportionate to its claim against the Corporate Debtor. (verbatim copy) The St ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent 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 per cent of its paid-up share capital; (f) anybody corporate whose Board of directors, managing director or manager, in the ordinary course of business, acts on the advice, directions or instructions of a director, partner or manager of the corporate Debtor; (g) any limited liability partnership or a partnership firm whose partners or employees in the ordinary course of business, acts on the advice, directions or instructions of a director, partner or manager of the corporate Debtor; (h) any person on whose advice, directions or instructions, a director, partner or manager of the corporate Debtor is accustomed to act; (i) a body corporate which is a holding, subsidiary or an associate company of the corporate Debtor, or a subsidiary of a holding company to which the corporate Debtor is a subsidiary; (j) any person who controls more than twenty per cent of voting rights in the corporate Debtor on account of ownership or a voting agreement; (k) any person in whom the corporate Debtor co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roportionate 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) Where an operational creditor has assigned or legally transferred any operational debt to a financial creditor, the assignee or transferee shall be considered as an operational creditor to the extent of such assignment or legal transfer. (6) Where the terms of the financial debt extended as part of a consortium arrangement or syndicated facility [* * *] provide for a single trustee or agent to act for all financial creditors, each financial creditor may- (a) authorise the trustee or agent to act on his behalf in the committee of creditors to the extent of his voting share; (b) represent himself in the committee of creditors to the extent of his voting share; (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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny 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 Whether Applicant/Respondent No.1 (M/s ASK Investment Managers Limited) is a related party in terms of Section 5 (24) (h), 5 (24) (m) and (i) of the I B Code, 2016? 14. Admittedly Applicant held an eight per cent shareholding in the Corporate Debtor, apart from ₹ 49.50 crores funded to the Corporate Debtor through debentures. Therefore, the RP stated that though the Applicant was the Financial Creditor, but not eligible to be made part of the COC as it was a related party to the Corporate Debtor. 15. The Adjudicating Authority held that the company's management and affirmative vote in the company might be used to protect their investment in the company and to have their say in the proper usage of funds. They may have become nominee directors or they may have their nominee directors on the Board. At times they may have an affirmative vote in the debtor company. These incide ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ppose 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 the cost of other Financial Creditors. 17. In the instant case, Corporate Insolvency Resolution Process (CIRP) is initiated against the Corporate Debtor, M/s Ambojini Property Developers Pvt Ltd, Company vide order passed in CP/938/18/2018 issued by National Company Law Tribunal (NCLT) under Insolvency and Bankruptcy Code, 2016. 18. Applicant/ASK Investment Managers Pvt Ltd (ASK), being portfolio manager of ASK PMS Real Estate Special Opportunities Portfolio I , filed their claim with the IRP regarding the CIRP mentioned above and has approached the NCLT to seek participation in the meeting of the CoC. 19. The Financial Creditor ICICI bank informed the Resolution Professional that Mr Deepak Ishwardas Rathi, Mr Chatan Suresh Shah and Mr Raman Hariharan Iyer having DIN Nos. 02096135, 03255921 and 03271000 respectively were appointed as directors of the Corporate Debtor on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 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 (CAL) dated 10 September 2013, having reference no.34/CRFCHN/59997 entered into between ICICI Bank Limited and signed by authorised signatories of the Corporate Debtor Mr Chetan Suresh Shah and Mr V.S Suresh. II. Facility Agreement dated 04 October 2013, concerning the above CAL entered between the Corporate Debtor and ICICI Bank Limited and signed by authorised signatories of the Corporate Debtor Mr Chetan Suresh Shah and Mr V.S Suresh. III. Declaration of mortgage executed by Corporate Debtor dated 18 October 2013, signed by authorised signatories of the Corporate Debtor Mr Chetan Suresh Shah and Mr V.S. Suresh. IV. Board Resolution dated 24 July 2013, authorising either one of 1. Mr V.S. Suresh (or) 2. Ramaswamy Damodaran representing the Promoter Group - Real Value and either one of Mr Deepak Ishwardas Rathi (or) Mr Chetan Sures ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve 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 examine the influence and inter-relationship between the parties. Undisputedly there was a Subscription and Shareholders Agreement dated 23 March 2011 ( SSHA ) entered into between ASK Investment Managers Private Limited (R1), Ambojini Property Developers Private Limited (Corporate Debtor), Real Value Promoters Private Limited, V S Suresh, (directed in real Value) and R. Damodaran (directed in Real Value) on 23 March 2011. The following clauses of the SSHA are relevant to refer; 8. The company shall have reconstituted the Board by appointing all the nominees of the Investor Representative on the Board such that half of the Board comprises of nominees of the Investor Representative. 12. The Company shall have constituted a monitoring committee ( Monitoring Committee ) comprising of 4 (Four) members, 2 (Two) e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, in each case in writing. e. The quorum for a Board Meeting shall be one-third of its total strength (any fraction contained in that one third being rounded off to the next higher number) of two Directors, whichever is higher, provided that no quorum shall be deemed to be present unless at least 1(one) Investor Director PROMOTER DIRECTOR is present at the start of and throughout the meeting ( Quorum ). 7. AFFIRMATIVE VOTE ITEMS 7.1 The Company shall not take any action in relation to an Affirmative Item. Unless such action has prior to being undertaken been consented to by the Investor Representative, or if the action has been presented for consideration of the Board, and the Investor Representative has not responded with as consent or rejection of such action prior to the Board Mee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 budgets for such Financial Year and undertake its business and operations in accordance with such budgets ( Annual Budget ). All such Annual Budgets shall require the consent of the Investor Representative prior to it being considered finalised and applicable to the company. If the Company and the Investor Representative are unable to agree to any Annual Budget then in relation to the specific item on which disagreement exists, the company shall be bound to the Business Plan and operate accordingly. Schedule 8 (Promoters Activities) a. Advising/guiding/assisting/supervising/monitoring/managing the development of the Project. b. Ensuring due and proper execution of all contracts, including registration and stamping thereof, by the company, including the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tted 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 (24) (m) (i) of the Code because Respondent No. 1 is registered with SEBI and is governed by the SEBI Portfolio Management Regulations, 1993 (Section 3, 3 A, 5 and 6). Further, Respondent No. 1 is regulated by the financial sector regulator, i.e. SEBI (as defined under Section 3 (18) of the Code and is a financial service provider in terms of Section 3 (17), read with Section 3 (16) of the Code. The same is rightly recorded in the impugned order dated 3 January 2020. 28. Respondent No.1 further contends that investment in Corporate Debtor under the SSHA is not taken in the right context. Respondent No. 1 invested a total sum of ₹ 50 crores by subscribing five lakhs class B equity shares of ₹ ten each ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntrol 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 composition of the Board. There is no material on record to show that all decisions of the Corporate Debtor were taken by the nominee directors of Respondent No.1. The Corporate Debtor's Suspended Directors, Mr V Suresh, drove the Project, including applying for and obtaining all sanctions and approvals. Admittedly, till 2015 the approvals of the Project were not obtained and since the Corporate Debtor was set up as the SPV. Therefore, the question of R1 being in control cannot and does not arise. 34. Respondent No. 1 further argued that Section 5 (24) (m) (i) provides that any person who is associated with the Corporate Debtor on account of participation in the policy-making p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es 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 committee of creditors shall comprise all financial creditors of the corporate Debtor: Provided that a [financial creditor or the authorised representative of the financial 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 not a case of a convertible security. Appellant has annexed the xerox copy of the debenture certificate, which states that debentures is not convertible but redeemable on maturity . Respondent No. 1 has pleaded that it is a financial service provider regulated by the financial regulator SEBI. It is also evident that 2nd proviso to Section 21 (2) of the Code applies where instruments convertible into equity shares were converted prior to the insolvency commencement date. Therefore, 2nd proviso to Section 21(2) is not applicable in the present case and does not enure the benefit to Respondent No 1 ASK . 43. Considering the above facts ..... X X X X Extracts X X X X X X X X Extracts X X X X
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