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TMI Blog2020 (1) TMI 1518X X X X Extracts X X X X X X X X Extracts X X X X ..... he open court dismissing it on the ground this Applicant though declared as Financial Creditor, the Applicant not entitled to become member of the CoC for this PP cant happened to be related party on the following reasons. 3. As to factual aspect, this Applicant holds 8% shareholding in Corporate Debtor, apart from Rs. 49.50 Crores funded to the Corporate Debtor through Debentures. By virtue of this stake, this Applicant 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 Sub-Schedule 5 of the Subscription and Shareholders Agreement dated 23.03.2011. Since some differences arose between the Promoter-Directors and this Applicant, the Applicant counsel says, it initiated Arbitration Proceedings against the Promoters and the Corporate Debtor, wherein an award was passed on 31.01.2018 for an amount of Rs. 143 Crores plus interest as stated in the Arbitral Award to be jointly and severally paid by the Corporate Debtor as well as the promoter-Directors, for such an award being passed based on the debentures issued to the Applicant herein, today it could n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntioned in oral dictation that simply because loan given to the Company, it cannot be construed that the Applicant did not participate in the policy decisions of the Company through its nominee directors and affirmative voting rights, therefore, having charge over the property of the Corporate Debtor through an arbitral award cannot be taken as a measurement to say that this Applicant is not a related party. 8. At the time of correction of orally dictated order, when this Bench noticed that it had mistakenly considered the Applicant as related party by ignoring the fact that this Applicant is a Financial Creditor regulated by SEBI which is a Financial Sector Regulator of this Applicant/Financial Creditor, we changed our mind with regard to the above dictated order, and disposed of the applications as mentioned below. I must mention that this financial servicer point was only put out as an additional point, perhaps because of it, or by my mistake, this point was initially not considered, but at the time of correcting the order, upon rereading the exemption clause, we felt that it should be taken in the perspective reflecting in the statute. 9. For we are of the view, so long as or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... larly this Company being listed under SEBI for doing Portfolio Management, this company shall necessarily be construed as Financial Service Provider regulated by Financial Service Regulator, in this case, the Financial Service Regulator is SEBI. 15. At the time of enactment of IBC, whichever Company falling under the definition of related party, such company shall not have any right of representation, participation or voting in a meeting of the Committee of Creditors. 16. 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 28th December 2019 including the bold words in the proviso mentioned widening the scope of exemption of financial Service providers from elimination from participating in CoC. "[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 in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompany and to have their say in the proper usage of funds, they may have become nominee Directors, they may have their nominee Directors on the Board and at times they may have affirmative vote in the Debtor company. These are all incidental actions to the main action of protecting their investment in a debtor company. These incidental rights to protect their investment cannot be magnified to an extent to say that they are not entitled to become members of CoC, where crucial decisions are taken to realize their share to their best out of the Resolution i.e. scheduled to happen in a debtor company. These investment Companies undoubtedly will not get profits on par with equity shareholders, but if they could control the shareholders or management from removing resources from the company without accountability by participating in the management, there is every possibility not to let the management to get into diversion of funds. These Financial Service Providers, by taking part in the management, will not get any share in the profits of the shareholders of the company, save and except to the extent of the returns they agreed upon to receive from the company over the investment they ma ..... X X X X Extracts X X X X X X X X Extracts X X X X
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