TMI Blog2020 (1) TMI 1518X X X X Extracts X X X X X X X X Extracts X X X X ..... tated that this Related Party Rule should not be fastened upon the Financial Creditors such as Banks and ARCs and the Financial Creditors regulated by the Financial Creditor Regulators for taking them as CoC members because Financial Creditors holding large portion of financial debt in Corporate Debtor Companies for fixed returns are unable to participate in the restructuring of the company by way of Corporate Insolvency Resolution - in order to avoid that predicament, the legislature has inserted this amendment stating that though debt has been converted into equity, if the company is regulated by the financial sector regulator, first proviso to Sec. 21(2) of the Code shall not be applied. In this case, this Applicant has not even converted its debt into equity and it has not been holding 20% shareholding in the company - this Applicant already initiated Arbitration Proceedings against this Corporate Debtor, and the Arbitrator has also passed an award with respect to the debentures the Applicant has in the Corporate Debtor directing the Corporate Debtor to pay a decretal amount of ₹ 155,32,56,626 to the Applicant. This Applicant/Financial Creditor shall be permitted to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ward being passed based on the debentures issued to the Applicant herein, today it could not be said that this Applicant voting share in the Company is as before, therefore, this Applicant should not be treated as related party under the Clauses mentioned in Sec. 5(24)(h) 5(24)(m)(i) of the Code. 4. Against these submissions, the Resolution Professional counsel, IRP counsel and Homebuyers counsel, who filed an application for impleadment of them in these Applications, stated that the Applicant had its nominee Directors on the Board of the Corporate Debtor until before admission of main petition, and also continued in the Monitoring Committee constituted as per 9.13 of the Share Subscription Agreement. Besides this, these nominee Directors had remained as signatories to the loan availed by the Corporate Debtor from ICICI Bank on 11.09.2013. 5. In the back drop of these facts, I had earlier orally dictated the order that had this Applicant not been interested to continue as Directors of the Company, its nominee Directors should have resigned from the company and they should have stopped exercising their rights percolated to the Applicant under the Share Purchase Agreement, fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uld be taken in the perspective reflecting in the statute. 9. For we are of the view, so long as orally dictated order, either in chambers or in open court, is found incorrect, since the order/judgement will not be considered as pronounced unless it is signed and delivered, when dictated order is incorrect, we firmly believe, as per Order 20 Rule 3 of CPC, we can correct the same, because court will not be functus officio just by dictation of the order, it has to be signed and delivered, as to this order, it is not being signed and not delivered, the judicial principle evolved under Order 20 Rule 3 could be applied to ensure justice is diligently delivered. 10. Within the factual situation involved in this issue, to declare that this Applicant/Financial Creditor is not eligible to become a CoC member, it must have minimum 20% shareholding in the Company, or there should be at least two Directors on the Board of the Corporate Debtor or must be in a position to participate in the policy making process of the Corporate Debtor. 11. Within these parameters, no doubt it is true that this Applicant has its two nominee Directors on the Board of the Corporate Debtor, by virtue of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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.] '. 17. 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. 18. Over this point, the Resolution Professional counsel has vehemently argued that it shall be exempted only in the cases where debt of this class of Financial Creditors is converted into equity before commencement of CIRP. 19. As against this provision, Insolvency Law Committee at the time of recommending second proviso to Section 21 (2) of the Code, it has been stated that this Related Party Rule should not be faste ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the company, save and except to the extent of the returns they agreed upon to receive from the company over the investment they made in the debtor company. Therefore, the objective of this qualification exempting the financial service providers from being eliminated from participating in CIRP, cannot be closed out against this Applicant on the ground this Applicant/Financial Creditor has a seat on the Board and affirmative vote over the affairs of the company. If these Financial Service Providers, acting as trustees to some other funds, are eliminated from participating in CoC, then the very objective bringing debtor companies under financial creditors will be put to nullification. That apart, valuable right of the financial creditor who has come into the company solely for the returns on the investment as per the agreements, will be unreasonably curtailed. 23. In any event, this Applicant already initiated Arbitration Proceedings against this Corporate Debtor, and the Arbitrator has also passed an award with respect to the debentures the Applicant has in the Corporate Debtor directing the Corporate Debtor to pay a decretal amount of ₹ 155,32,56,626 to the Applicant. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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