NCLAT (18.12.2020) in Mr Rajnish Jain vs Anupam Tiwari Resolution Professional for M/s Jain Mfg (India) Private Limited & Ors. [Company Appeal (AT) (Insolvency) No. 519 of 2020 ] held that;.
Therefore we are of the considered opinion that the Committee of Creditors was not empowered to adjudicate the issue that has cropped up in the present case, i.e. M/s BVN Traders’ is a ‘Financial’ or ‘Operational’ Creditor. Such adjudication is beyond the scope of consideration of the Committee of Creditors.
Based on the above discussion, we clarify and hold that during CIRP, the IRP is authorised to collate the claims, and based on that he is empowered to constitute the Committee of Creditors. We hold that the Resolution Professional may add to existing claims of claimants already received, or admit or reject further Claims and update list of Creditors. But after categorisation of a claim by the IRP/Resolution Professional we hold that they cannot change the status of a Creditor. For example, if the Resolution Professional has accepted a claim as a Financial Debt and Creditor as a Financial Creditor, then he cannot review or change that position in the name of updation of Claim. It is also to be clarified that while updating list of Claims the Resolution Professional, can accept or reject claims which are further received and update list.
Excerpts of the order;
# 2. The brief facts of the case are as follows:
The Appellant filed Company Application No.142/2019, under sub-section (5) of Section 60 of the I&B Code, 2016 read with Rule 11 of NCLT Rules, 2016, in Company Petition No.422/ALD/2018, for a declaration that ‘BVN Traders’ is not a ‘Financial Creditor’ in connection with the loan extended to the corporate debtor ‘Jain Mfg (India) Private Limited’. The Resolution Professional Mr Anupam Tiwari filed its Reply (Annexure A5) to the Company Application No.142 of 2019 on 21st July 2019, with its opinion that the M/s ‘BVN Traders’ is not a Financial Creditor”. After submission of reply by the Resolution Professional, the Adjudicating Authority passed an order dated 19th August 2019 (Annexure A6) stating that:
“…..It is brought to our notice that earlier IRP recognised Claim of the BVN Traders as a Financial Creditor, but subsequently after the filing of application by the MD of suspended Board of Director of the Corporate Debtor, RP has sought advice from two professionals on the Claim, but that advice was not placed before the COC and the RP has changed his view without informing to the COC. Under such circumstances, let the RP explain why the matter has not been placed before the COC when he received such an advice and come directly to Adjudicating Authority seeking approval of COC.”
# 3. Purporting to act in view of Order of the Adjudicating Authority, the Resolution Professional called the Meeting of ‘Committee of Creditors’ the Corporate Debtor M/s Jain Mfg. (India) Private Limited. The ‘Committee of Creditors’ (in short ‘CoC’) in its fourth meeting held on 30th August 2019 passed the Resolution (Annexure A7-page 99) ‘that M/s BVN Traders be treated as ‘Financial Creditor’.
# 4. After that, the Adjudicating Authority by its Order dated 23rd January 2020 (Annexure A1-Page 40) rejected the Company Application No. 142/ALD/2019. The relevant part of the Order of the Adjudicating Authority is as under:
“Para 11. In view of provisions and the fact stated, this adjudicating Authority is of the view that as the COC has voted in majority in favour of BVN Traders as “financial creditor” and thus Suspended Management as well as Resolution Professional has no locus to challenge the commercial wisdom and decision of Committee of Creditors with regard to determination of Respondent as financial Creditor.
Para 12. Therefore, this adjudicating Authority declares “BVN Traders” as “financial creditor” as per Sec 5(7) of IBC, 2016 and the loan amount given by BVN Traders to Corporate Debtor is declared as “financial debt” under Sec 5(7)(f) of the IBC, 2016.
Para 13. Accordingly, CA No. 142/ALD/2019 is rejected and hereby dismissed.”
(verbatim copy with emphasis supplied)
# 5. Surprisingly, the ‘CoC’ in its 7th meeting held on 14th February 2020 again discussed the proposed Resolution of RP, for not considering M/s BVN Traders as a ‘Financial Creditor’. The Committee of Creditors accepted the proposed Resolution (Annexure A8-Page 116 r/w Page 125) and passed with its majority that ‘M/s BVN Traders is not a ‘Financial Creditor’.
# 6. After that The ‘Committee of Creditors’ in its 8th meeting held on 18th February 2020 further passed a Resolution (Annexure A9-Page 142) ‘to eliminate the name of M/s BVN Traders from the list of ‘Committee of Creditors’.
# 7. Thereafter, the Appellant has challenged the impugned Order on the ground that the Adjudicating Authority has erred in facts and law in holding that ‘M/s BVN Traders is a ‘Financial Creditor’, which is mainly based on decision of the Committee of Creditors, though it was not empowered to decide that ‘BVN Traders is a Financial or Operational Creditor (Appeal ground 9(V)).
# 9. The Respondent No 3 further contends that IRP Mr Manoj Kumar Singh admitted the Claim of Respondent No.3 as ‘Financial Creditor’ and included the Respondent No.3’s name in the list of ‘Committee of Creditors’. But the Appellant in connivance and collusion with RP and certain other ‘Financial Creditor’s hatched a conspiracy to oust ‘BVN Traders’, Respondent No.3, from ‘CoC’. After that, at the instance of the Appellant, the ‘BVN Traders’ status was changed from ‘Financial Creditor’ to ‘Operational Creditor’.
# 10. It is contended by the Respondent No 3 that the IRP had earlier recognised the Claim of the ‘BVN Traders’ as a ‘Financial Creditor’ and resolved that M/S BVN Traders is a ‘Financial Creditor’. But ignoring the earlier action and even Order of the Adjudicating Authority, dated 23rd January 2020, the Resolution Professional conducted the seventh and eighth Meeting of ‘Committee of Creditors’ with the ulterior motive to oust ‘M/s BVN Traders’ from the ‘Committee of Creditors’.
# 13. The issues that arise for our Consideration are as under:
i) Whether the Committee of Creditors constituted under Section21 of the I&B Code, 2016, could determine that M/s BVN Traders’ is a ‘Financial’ or ‘Operational’ Creditor?
ii) Whether the Resolution Professional could reclassify the status of a creditor from ‘Financial’ to ‘Operational Creditor’ based on the expert opinion despite that the Adjudicating Authority had taken a contrary view?
iii) Whether the Order of the Adjudicating Authority in upholding that ‘ BVN Traders’ is a Financial Creditor based on the majority decision of Committee of Creditors is valid?
Issue No 1&2;
# 17. On perusal of the statutory provision of the Code, it appears that the Interim Resolution Professional constitutes a Committee of Creditors under Section 18(1)(c) of the Code. Under Section 18(1)(b) the IRP is to receive and collate all the claims submitted by creditors to him, in response to the public announcement.
# 20. It is pertinent to mention that Clauses (a) to (m) of sub-section (1) of Section 28 deals with the stages where the Resolution Professional has to obtain approval of the Committee of Creditors during Corporate Insolvency Resolution Process. The action of the Resolution Professional for referring the matter to the Committee of Creditors to determine whether the claim of ‘M/s BVN Traders’ falls in the category ‘Operational Debt’ or ‘Financial Debt’ is not covered under clauses (a) to (m) of sub-section (1) of Section 28 of the Code.
# 23. Sub-clause (e) of Section 25 of the I&B Code, 2016 deals with the duties of the Resolution Professional, which mandates RP to maintain an updated list of claims’. The question that arises for our consideration is whether the Resolution Professional was under the obligations to maintain an updated list of claims, was entitled to overturn its earlier decision of declaring BVN Traders as ‘Operational Creditor’ instead of ‘Financial Creditor’. For this, it is essential to understand the responsibilities and duties of Interim Resolution Professional/Resolution Professional as defined under Section 18 of the Code.
25. The contention of RP is that after calling the report of two experts, he submitted an Application before the Adjudicating Authority for treating M/s BVN Traders as an ‘Operational Creditor’ instead of ‘Financial Creditor’. The RP represents that he is authorised to ‘maintain the updated list of claims’ as per Section 25(2)(e) of the Code.
The Resolution Professional in the name of “updating list of claims” sat down to review the claims on his own. For this, he called reports from 2 alleged experts.
# 31. It is apparent that every action of Resolution Professional, either about the change of status of ‘BVN Traders’ from financial to Operational Creditor or regarding the elimination of name of ‘BVN Traders’ from the ‘Committee ofCreditors’ was being done in collusion with erstwhile Member of suspended Board of Directors, Promoter and Managing Director Mr Rajnish Jain. It is pertinent to mention that, the Resolution Professional even in disregard of the orders of the Adjudicating Authority dated 23rd January 2020, subsequently proposed the Resolution before ‘Committee of Creditors’ for considering BVN Traders as Operational Creditor and further for the elimination of name of BVN Traders from ‘Committee of Creditors’. It is also evident that when Appellant and Resolution Professional could not succeed in getting permission from the Adjudicating Authority to change the status of BVN Traders from Financial Creditor to Operation Creditor, Resolution Professional adopted the route of ‘Committee of Creditors’ for the elimination of name of BVN Traders from ‘Committee of Creditors’. In the last, the Appellant and RP succeeded in getting Resolution passed with 100% of the voting share for withdrawal of Petition under Section 12(A) of I&B Code, in total disregard of the Orders of Adjudicating Authority dated 23rd January 2020, whereby the Adjudicating Authority had not permitted Resolution Professional to change the status of BVN Traders from Financial to Operational Creditor.
# 35. The above observation of the Adjudicating Authority in its Order dated 23rd January 2020 is incorrect because the ‘Committee of Creditors’ had no role in deciding the status of a creditor either as ‘Financial’ or ‘Operational’ Creditor and such a decision of ‘Committee of Creditors’ can never be treated as an exercise under its Commercial wisdom. It is a matter of applying the law of I&B Code, and if such factor is left to CoC, there would be a serious conflict of interest, as the present matter itself shows. Whether a person or entity is “Financial Creditor” as defined in Section 5(7) or Operational Creditor as defined in Section 5(20) is a matter of applying the law to facts. It cannot be a matter of voting, and choice as discretion is not relevant. During the CIRP, the IRP collates the Claim, and after that, the ‘Committee of Creditors’ is formed under Section 18 of the Code. After the formation of the ‘Committee of Creditors’, only the aggrieved person can agitate the same and that too, only before the Adjudicating Authority.
# 38. It is also necessary to mention that core duty of IRP is to receive, collate and verify claims which cannot be further delegated to ‘Committee of Creditors’, who in turn cannot be allowed to do the same in purported exercise of Commercial Wisdom.
# 39. Recently, Hon’ble Supreme Court in the matter of Committee of Creditors of Essar Steel India Ltd. V/s Satish Kumar Gupta Civil Appeal No. 8766 and 8767 of 2019 has specified the role of Resolution Professional in the revival of the ‘Corporate Debtor’. Hon’ble Supreme Court has held that;
“Under CIRP Regulation 13, “The interim resolution professional or the resolution professional, as the case may be, shall verify every claim, as on the insolvency commencement date, within seven days from the last date of the receipt of the claims, and thereupon maintain a list of creditors containing names of creditors along with the amount claimed by them, the amount of their claims admitted and the security interest, if any, in respect of such claims, and update it.”
# 40. Furthermore, the IBBI Circular No. I.P./003/2018 dated 3rd January 2018 provides ‘that an Insolvency Resolution Professional shall not outsource any of his duties and responsibilities under the Code’.
# 42. Therefore we are of the considered opinion that the Committee of Creditors was not empowered to adjudicate the issue that has cropped up in the present case, i.e. M/s BVN Traders’ is a ‘Financial’ or ‘Operational’ Creditor. Such adjudication is beyond the scope of consideration of the Committee of Creditors. Further, the Resolution Professional erred to reclassifying the status of a creditor from ‘Financial’ to ‘Operational Creditor’, based on the alleged expert opinion despite that the Adjudicating Authority took a contrary view.
Isuue No 3
# 53. Thus the Appellant Company is a borrower, and Reply of Respondent No.3 and its Form C submitted shows that loan amount was directly disbursed to Appellant’s Company for its working capital requirement to smoothly run the business for which the aforementioned title deed was deposited with the Respondent No.3. In the said transaction time value of money is unambiguously involved. And the Appellant Company’s liability is regarding the debt owed by it. Therefore we are of the considered opinion that the Respondent No.3 BVN Traders is a Financial Creditor within the meaning of Section 5(7) of the Code, and the debt in question is a “financial debt” within the meaning of Section 5(8) of the Code.
# 55. We hold and direct that all these decisions discussed above, of CoC in the 4th, 7th, and 8th Meetings of CoC to be beyond their jurisdiction and powers and duties. Commercial decision and wisdom mainly relate to evaluating Resolution Plan and duties as mostly seen in Section 28 of IBC.
# 57. We uphold the Impugned Order for its declaration that BVN Traders is Financial Creditor for Reasons we have recorded.
# 58. Thus, we hold that the Order of the Adjudicating Authority rejecting CA No.142/2019 is correct and needs no interference. However, we set aside the reasoning relying on the decision of CoC for holding BVN Traders to be Financial Creditor. We find that the Committee of Creditors has no adjudicatory power to decide as such whether a creditor who files its Claim is a ‘Financial’ or ‘Operational’ Creditor.
# 59. Based on the above discussion, we clarify and hold that during CIRP, the IRP is authorised to collate the claims, and based on that he is empowered to constitute the Committee of Creditors. We hold that the Resolution Professional may add to existing claims of claimants already received, or admit or reject further Claims and update list of Creditors. But after categorisation of a claim by the IRP/Resolution Professional we hold that they cannot change the status of a Creditor. For example, if the Resolution Professional has accepted a claim as a Financial Debt and Creditor as a Financial Creditor, then he cannot review or change that position in the name of updation of Claim. It is also to be clarified that while updating list of Claims the Resolution Professional, can accept or reject claims which are further received and update list.
# 60. Based on the above discussion, we are of the considered opinion that the decision of the Adjudicating Authority to treat BVN Traders as a ‘Financial Creditor’ needs no interference, and thus, Appeal is disposed of with Reasons, Findings and Directions as recorded in this judgment. No orders as to costs.
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