Home » Between The Lines » NCLAT: Neither the committee of creditors has the power to determine, nor the resolution professional has the power to reclassify the status of a creditor from financial creditor to operational creditor

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The National Company Law Appellate Tribunal (“NCLAT”) has in its judgement dated December 18, 2020 (“Judgement”) in the matter of Mr Rajnish Jain v. BVN Traders and Others [Company Appeal (Insolvency) No. 519 of 2020], held that neither the Committee of Creditors (“CoC”) has the power to determine, nor the resolution professional has the power to reclassify, the status of a creditor from a financial creditor to an operational creditor under the Insolvency and Bankruptcy Code, 2016 (“IBC”).

Facts

The National Company Law Tribunal, Allahabad (“NCLT”), by its order dated January 23, 2020 (“Impugned Order”), had rejected the application filed by Mr. Rajnish Jain, the promoter, stakeholder and managing director of suspended board of directors (“Appellant”) under Section 60(5) of the IBC and declared M/s BVN Traders (“Respondent”), as a financial creditor under Section 5(7) of the IBC and the debt in connection with the loan extended to Jain Manufacturing (India) Private Limited (“Corporate Debtor”) as financial debt under Section 5(8)(f) of the IBC.

Previously, Mr Anupam Tiwari (“Resolution Professional”) had filed a reply before the NCLT and stated that the Respondent is not a financial creditor. However, by an interim order dated August 19, 2019, the NCLT noted that (i) Manoj Kumar Singh, the Interim Resolution Professional (“IRP”) had recognised the claim of the Respondent as a financial creditor; and (ii) the Resolution Professional, on the basis of the advice of two experts and without informing the CoC, had reclassified the status of the Respondent as an operational creditor. Therefore, the Resolution Professional was questioned by NCLT regarding his action to approach the NCLT directly without placing the matter before the CoC.

Purporting to act in view of the order of the NCLT, the Resolution Professional had convened a meeting of CoC. The CoC in its 4thmeeting resolved that the Respondent should be treated as a financial creditor. Subsequently, the NCLT in its Impugned Order observed that the CoC voted in favour of Respondent to be treated as a financial creditor. Further that, the Appellant and Resolution Professional had no locus to challenge the commercial wisdom of CoC. Hence, the NCLT in its Impugned Order relied on the decision of the CoC and declared Respondent as a financial creditor.

Thereafter, the Resolution Professional convened the 7th CoC meeting wherein it was resolved that the Respondent is not a financial creditor. Subsequently, in the 8th CoC meeting it was resolved to eliminate the name of the Respondent from the list of CoC. Thereafter, the Appellant filed the instant appeal to challenge the Impugned Order.

Issues

  • Whether the CoC has the power to determine or the Resolution Professional has the power to re-classify the status of the Respondent as a financial creditor or an operational creditor.
  • Whether declaration of the Respondent as financial creditorin the Impugned Order based on the majority decision of CoC was valid.

Arguments

Contentions raised by the Appellant:

The NCLT had erred in facts and law. The NCLT in the Impugned Order held that the Respondent is a financial creditor based on the decision of the CoC. The classification of one creditor as operational creditor or financial creditor cannot be determined and voted upon by the CoC. Hence, he had not approached the CoC to vote upon this issue before filing the reply with NCLT.

As per the Insolvency and Bankruptcy Board of India (“IBBI”) circular dated March 01, 2019 (“Circular”) and Section 25(2)(e) of the IBC, Regulation 13 and Regulation 14 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (“CIRP Regulations”), it is the duty of the IRP and Resolution Professional to maintain an updated list of claims including its verification and determination. The Resolution Professional had re-verified the claim submitted in ‘Form-C’ by the Respondent and on the basis of the opinion of experts received, concluded that the Respondent should be reclassified as an operational creditor.

Contentions raised by the Respondent:

The Respondent, through its partner, had transferred INR 80,00,000/- (Indian Rupees Eighty Lacs) with interest at the rate of 18% per annum to the Corporate Debtor, as a loan for the working capital requirements. The debt was secured against a title deed of an immovable property. On admission of an application filed for initiation of corporate insolvency resolution process (“CIRP”) against the Corporate Debtor by the NCLT, an IRP was appointed. Respondent had submitted its claim in ‘Form-C’ as a financial creditor to the IRP. The IRP had admitted the claim of Respondent as a financial creditor and consequently, included the Respondent’s name in the list of CoC. However, the Appellant in collusion with Resolution Professional and some financial creditors conspired to oust the Respondent from the CoC. Hence, at the instance of the Appellant, the status of the Respondent was reclassified from financial creditor to operational creditor. Further, in defiance of the Impugned Order, the Resolution Professional conducted the 7th and the 8th meeting of CoC with an ulterior motive to oust the Respondent from the CoC. The act of the Resolution Professional is in ignorance of the Impugned Order.

Observations of the NCLAT

Powers of the CoC and the Resolution Professional

The NCLAT noted that IBC is a complete code in itself. Further, the powers and duties of the CoC are specifically laid down. Clauses (a) to (m) of Section 28(1)of the IBC specify the stages where the Resolution Professional had to obtain prior approval from the CoC. The NCLAT observed that the act of the Resolution Professional to refer the matter to CoC to determine whether the claim of Respondent falls in the category of operational debt or financial debt is beyond the subject matters listed under Clauses (a) to (m) of Section 28(1) of the IBC. The NCLAT further noted that the circular No. I.P./003/2018 by IBBI dated January 03, 2018, provided that a Resolution Professional shall not outsource any of his duties and responsibilities. The NCLAT observed that it was the primary duty of the Resolution Professional to receive, collate and verify claims which could not be further delegated to CoC.

The NCLAT analysed whether the Resolution Professional while under the obligation to maintain an updated list of claims, had the power to reclassify the status of the Respondent from financial creditor to operational creditor. The scope of powers and duties of IRP and Resolution Professional are defined under the provisions of the IBC. The IRP as per Section 18(1)(c) of the IBC constituted the CoC. The NCLAT noted that the IRP had convened the 1st CoC meeting on March 23, 2019 wherein Respondent was included as a member of the CoC and claim admitted by IRP amounted to INR 80 Lacs. Hence, Respondent had a corresponding voting share of 30.6%. The NCLAT noted that undisputedly, the IRP after collation of claims had admitted the claim of Respondent as a financial creditor and debt as a financial debt.

The NCLAT relied upon the precedents of M/s. Dynepro Private Limited v. Mr. V. Nagarajan [Company Appeal (Insolvency) No. 229 of 2018], wherein it was held that a resolution professional did not have the jurisdiction to decide the claim of one or other creditor or its categorization and Swiss Ribbons Private Limited and Another v. Union of India and Others [Writ Petition (Civil) No. 99 of 2018], wherein the Hon’ble Supreme Court held that a resolution professional has no adjudicatory power.

The NCLAT rejected the contention of the Appellant that on a comprehensive reading of the Circular, provisions of the IBC read with the CIRP Regulations, verification and determination of claims was required to be carried out by the Resolution Professional, while maintaining an updated list of claims.

The NCLAT noted that, the limited authority the Resolution Professional had, while maintaining or updating the list of claims, included admitting or rejecting further claims and updating the list of creditors accordingly. The NCLAT observed that updating and reviewing of list of claims are two different acts. Further, the Resolution Professional in the name of updating the list of claims, reviewed the claims.

The NCLAT noted that an aggrieved person can challenge either the constitution of CoC or any grievance including rejection, incorrect acceptance of claim or categorisation of creditors before the NCLT. Therefore, the NCLAT observed that the Resolution Professional and CoC did not have the authority to arbitrarily reclassify the status of a creditor from financial creditor to operational creditor.

Lifting the veil

The NCLAT observed the high headedness and the unbecoming of the Resolution Professional, as to how subsequent to the Impugned Order, the Resolution Professional in 7th CoC meeting interestingly recorded 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.”

Further, the minutes of the 8th CoC meeting reflected that the Resolution Professional had proposed the following resolution for consideration: “Resolve that the CoC be and is hereby not considering M/s BVN Traders as the Financial Creditors……and approved to elimination of M/s BVS Traders from Committee of Creditors, in the light of Hon’ble NCLT, Allahabad, Order…… as well as with adoption of Reconstituted Committee of Creditors.”. The said resolution was passed with a majority of 69.1% of the vote share. Further, in this meeting, the following second resolution was also passed with 100% vote share: “It was resolved unanimously that an application of withdrawal of running Corporate Insolvency Resolution Process shall make by the Applicant with approval of 90% voting share … and shall be submitted to ‘Resolution Professional.” (“Second Resolution”). The NCLAT highlighted the defiance of the Impugned Order by the stakeholders and marked it as strange and dangerous.

The NCLAT observed that the Second Resolution was passed with 100% vote share by a reconstituted CoC, wherein the Respondent’s name was eliminated. Therefore, the Respondent could not participate and vote in the CoC meeting. The NCLAT noted that the Respondent had at an earlier instance, before being eliminated from CoC, rejected the proposal of withdrawal of application under Section 12A of the IBC.

The NCLAT observed that every action of the Resolution Professional, from re-classification of status of the Respondent from financial creditor to operational creditor, to elimination of name of Respondent from the CoC, was done with an ulterior motive, in collusion with the Appellant so as to pass a resolution for withdrawal of the application under Section 12A of the IBC, since the Respondent held 30.9% of voting share in the CoC. The Second Resolution could not have materialised without eliminating the Respondent from the CoC. The NCLAT noted that it was necessary to oust the Respondent from CoC so as to pass the Second Resolution with the required percentage of voting share, that is, 90%.

The NCLAT noted that even if Appellant and Resolution Professional succeeded to pass the Second Resolution with 100% of voting share, it was in defiance to the Impugned Order, wherein NCLT had not permitted Resolution Professional to change the status of Respondent from financial creditor to operational creditor.

Correcting the reasoning

The NCLAT observed that the reasoning of NCLT in the Impugned Order was incorrect as the CoC had no jurisdiction to determine the status of a creditor either as financial creditor or operational creditor. The NCLAT further observed that such a decision of the CoC can never be treated as an exercise under its commercial wisdom. It was noted that if the CoC is permitted to determine such subject matter, there would be a serious conflict of interest. The NCLAT noted that determination of a creditor as financial creditor or operational creditor as per the provisions of the IBC is a matter of applying the law to facts. Therefore, such subject matters cannot be decided by casting of votes but have to be adjudicated upon by the NCLT.

The NCLAT observed that the Impugned Order to declare the Respondent as a financial creditor was based upon the decision of the CoC, and was in view of the provisions of the IBC and the fact situation. However, in absence of reasons and the reference made solely to the resolution of CoC, it was mistakenly implied that CoC got emboldened to have the powers to make such decisions in favour or against its own constituents. The NCLAT analysed the facts and provided the correct reasoning. The NCLAT noted that the loan was advanced to the Appellant against the title deed. The said title deed was in possession of the Respondent and not even a single civil/criminal action had been initiated by Appellant to recover the same. Further, the Appellant had not disputed the amount due. As per Section 5(8) of the IBC, for a debt to be categorized as financial debt, the critical requirement was disbursal of debt against the consideration for the time value of money. As per Section 5(7) of the IBC, only such creditor could be the financial creditor of the Corporate Debtor to whom a financial debt is owed by the Corporate Debtor.

The NCLAT observed that the expression disburse in the provision would refer to the fund transfer made by the Respondent to the Corporate Debtor. Further, 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. Further, the inflows and outflows are distanced by time and there is a compensation for time value of money. The NCLAT observed that in the transaction between the Appellant and the Respondent, time value of money was unambiguously involved. Therefore, the Respondent was a financial creditor within the meaning of Section 5(7) of the IBC, and the debt in question was a financial debt within the meaning of Section 5(8) of the IBC. The NCLAT observed that the Resolution Professional failed to perform his obligations to adhere to the provisions of the IBC, the CIRP Regulations and the rules.

Decision of the NCLAT

The NCLAT held that all the resolutions passed by the CoC in the 4th, 7th and 8th meetings of the CoC were beyond their jurisdiction, powers and duties. Further, the act of the CoC to sit in appeal over Impugned Order and pass resolutions to the contrary was held to be illegal. It was further held that the Second Resolution passed by the CoC was bad in law since it primarily was based on an illegal reconstitution of CoC.

The Impugned Order to the extent it declared Respondent as financial creditor was upheld. However, the NCLAT set aside the reasoning of the NCLT provided in the Impugned Order. The NCLAT held that the Respondent is a financial creditor based on reasons, findings and directions as recorded in this Judgement.

Vaish Associates Advocates View:

The serious conflict of interest that arose in the facts of the instant case were apparent. Various stakeholders, under the guise of commercial wisdom, tried to act beyond the powers ushered upon them under the IBC. The NCLAT lifted the veil and exposed the ulterior motives behind their acts as it delved into the misdemeanor by the parties. The NCLAT rightly remarked that the defiance by the parties was not only strange but also dangerous. The NCLAT, though upheld the Impugned Order, cautiously corrected the reasoning of the NCLT, wherein it was mistakenly implied that the CoC had the authority to adjudicate upon its own constituents.

By this Judgement, the NCLAT reiterated the position on the limited nature of the specific powers and jurisdiction ushered on the CoC and the Resolution Professional. The NCLAT clarified that during CIRP, after categorization of a claim by the IRP, the Resolution Professional did not have the suo-moto power to determine and reclassify the status of the Respondent. The NCLAT also reiterated that as per the definition of financial debt, it is a pre-requisite that the debt must be ‘disbursed’ against the consideration for the time value of money for it to be considered as a financial debt.


For more information please write to Mr. Bomi Daruwala at [email protected]

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