Avantha Holdings Ltd. Vs. Mr. Abhilash Lal, RP for Jhabua Power Ltd. - The date on which NPA classification is declared is relevant for the purpose of 29A(c).

 NCLAT (04.07.2022) in Avantha Holdings Ltd. Vs. Mr. Abhilash Lal, RP for Jhabua Power Ltd.  [Company Appeal (AT) (Insolvency) No. 304 of 2022] held that;

• As explained above, the stages of submitting a resolution plan, selling assets of a company in liquidation and selling the company as a going concern during liquidation, all indicate that the promoter or those in the management of the company must not be allowed a back-door entry in the company and are hence, ineligible to participate during these stages. 

• Proposing a scheme of compromise or arrangement under Section 230 of the 2013 Act, while the company is undergoing liquidation under the provisions of the IBC lies in a similar continuum. Thus, the prohibitions that apply in the former situations must naturally also attach to the latter to ensure that like situations are treated equally.

• Section 12A proposal cannot be forced upon the lenders. The Promoters, who led to insolvency process of Corporate Debtor cannot claim to submit a Resolution Plan indirectly by way of proposal under Section 12A and ask the lenders to evaluate their Resolution Plan.

• The legislature has not endowed the adjudicating authority (NCLT) with the jurisdiction or authority to analyse or evaluate the commercial decision of CoC much less to enquire into the justness of the rejection of the resolution plan by the dissenting financial creditors.

• The legislature, consciously, has not provided any ground to challenge the “commercial wisdom” of the individual financial creditors or their collective decision before the adjudicating authority. That is made nonjusticiable.

• The statutory provision under Section 29A, sub-clause (c) is plain and clear that grace period of one year has been given and if after expiry of grace period, Resolution Applicant is unable to pay the dues and the NPA continues, the Resolution Applicant becomes ineligible.

• We, thus, are of the view that date of NPA classification by the Canara bank shall be treated as 21.05.2018 and it cannot be taken as on 01.04.2009, which is the backdate, as has been given by the Canara Bank, with effect from which date NPA is declared.

 

Excerpts of the order;

This Appeal has been filed against order dated 08.03.2022 passed by the National Company Law Tribunal, Kolkata Bench, Kolkata rejecting the IA (IB) No.537/KB/2021 filed by the Appellant seeking disqualification of the Successful Resolution Applicant under Section 29A of the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as the “Code”) and further praying to set-aside decision of the Committee of Creditors (“CoC”) rejecting the proposal of the Appellant.

 

# 2. The Appellant No.1 Avantha Holdings Limited, is the Promoter and Shareholder of Avanta Power and Infrastructure Limited, which in turn hold 17.9% shares of Corporate Debtor (Jhabua Power Limited). The Appellants, Promoter of Corporate Debtor aggrieved by the order dated 08.03.2022 have come up in this Appeal. Brief facts of the case and sequence of events necessary to be noted for deciding this Appeal are:

(i) On an Application filed by FLSmidth Private Limited under Section 9 of the Code, Adjudicating Authority vide its order dated 27.03.2019 initiated Corporate Insolvency Resolution Process (“CIRP”) of Jhabua Power Limited. Mr. Abhilash Lal was appointed as Resolution Professional.

(ii) The Appellant on 03.06.2019 submitted a One Time Settlement (“OTS”) offer to the Resolution Professional, which was considered by CoC and was not found prudent and commercially viable. Resolution Professional invited Expression of Interest (“EOI”) from prospective Resolution Applicants for submission of Resolution Plan vide advertisement dated 19.08.2019. The process document was issued on 01.10.2019 to the prospective Resolution Applicants, inviting Resolution Plans. Last date for submission of Resolution Plans was 31.12.2019.

(iii) An affidavit certifying its eligibility under Section 29A was submitted by NTPC on 22.10.2019. On 06.12.2019, NTPC has informed Resolution Professional that Ratnagiri Gas and Power Private Limited (hereinafter referred as the “RGPPL”) and Konkan LNG Private Limited (hereinafter referred as the “KLL”), which were joint ventures of NTPC, have been declared Non-profitable Asset (“NPA”). The NTPC submitted Resolution Plan on 30.12.2019. The other Resolution Applicant, that is, Adani Power Limited (“Adani”) had also submitted its Resolution Plan.

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(xviii) Replies were filed to the disqualification application filed by the Appellant before the Adjudicating Authority and Adjudicating Authority vide its order dated 08.03.2021 rejected the I.A. No.537 of 2021 filed by the Appellant and held that the NTPC is not disqualified under Section 29A of the Code.

 

Aggrieved by the order passed by the Adjudicating Authority, this Appeal has been filed.

# 8. We have considered the submission of learned Counsel for the parties and have perused the record.

 

# 9. We may first consider the submission of the Appellant regarding Restructuring Settlement Plan claimed to be submitted under Section 12A.

 

# 10. The Appellant submitted Restructuring/ Settlement offer on 25.01.2021 by way of letter dated 25.01.2021 to the RP, requesting him to place the proposal before the CoC. The Restructuring Settlement Plan of the Appellant is claimed to be submitted under Section 12A. We may first notice at this stage that Section 12A is a provision in Code, which permits withdrawal of Application under Section 7, 9 and 10, on an Application made by the Appellant with the approval of 90% voting share of the Committee of Creditors. Section 12A is as follows:

• “12A. Withdrawal of application admitted under section 7, 9 or 10. – The Adjudicating Authority may allow the withdrawal of application admitted under section 7 or section 9 or section 10, on an application made by the applicant with the approval of ninety per cent. voting share of the committee of creditors, in such manner as may be specified.”

 

# 11. Section 12A does not entitle Promoters of the Corporate Debtor to submit a Settlement Plan as is claimed by the Appellant. The Appellant has claimed before the Adjudicating Authority that the Settlement Plan submitted by the Appellant had not been considered by the CoC by any application of mind and it has been arbitrarily rejected. The pre-condition of accepting any withdrawal Application under Section 12A is on approval by CoC by 90% of its voting shares. CoC having never granted its approval, Section 12A route was never open for withdrawal of CIRP. Furthermore, Section 12A proposal submitted by the Appellant was examined by the CoC in its meeting dated 05.03.2021. It is useful to notice the Minutes of the 12th Meeting of the CoC, where it did not agree with the withdrawal Application under Section 12A and following observations have been noted by the CoC:

• “RP requested comments from the CoC members in the matter of the proposal forwarded by Mr. B. Hariharan, Director of Avantha Holdings Limited to the RP and some members of CoC (circulated to all members by RP upon receipt). The representatives of PFC submitted that the proposal submitted by the promoters does not conform with Sec 12A of the IBC and the same should be noted in the hearing on the next date of hearing. This was agreed to by other members of the CoC who voiced a unanimous view that they do not want to pursue any withdrawal under Section 12A or go ahead with the proposal submitted by the promoters. The same was take on record.”

 

# 12. Further, in 14th CoC Meeting held on 21.04.2021 the CoC again examined the proposal of Settlement Plan submitted by Promoters in Agenda Item No.7. Following observations have been made by the CoC:

• “Agenda A7: To discuss the proposal submitted by the promoters of the corporate debtor RP team presented the contours of the restructuring proposal submitted by the promoters M/s Avantha Holdings Ltd.

• This proposal submitted by the promoters was discussed pursuant to NCLT directions, and after due consideration, the CoC members from PFC, SBI, Axis Bank, PNB and REC stated that they do not consider the plan submitted by promoters to be commercially viable as the upfront payment is only INR 100 Cr, which is significantly lower than NTPC’s offer. Majority of the sustainable debt payment is over a long period of 19 years and unsustainable portion of the debt is at negligible rate of interest and payable after 15 years over 5 yearly instalments. Having considered the commercials of NTPC offer and promoter proposal, it was noted that the offer from NTPC is better than the promoter proposal. Some of the CoC members also noted that some other accounts held by the promoters are under examination by various Govt. authorities/ commissions. The CoC counsel clarified that if the promoter plan is a resolution plan under the IBC, then it has potential section 29A issues and if it is a plan under 12A of IBC, then it is not in prescribed form and does not meet the requirements of 12A. RP counsel agreed that it is neither in the prescribed format nor routed through the lenders along with BG. In any event, CoC considered the commercials aspects of the proposal and have found it to unacceptable.

• CoC members also informed RP that lenders have not received any formal request from Promoters under Section 12A for withdrawal of application and moreover lenders are not keen on withdrawal from the CIRP in case the plan is offered by the Promoters to the lenders to consider under Section 12a. Based on these points, the CoC unanimously decided not to pursue the restructuring plan further.”

 

# 13. The above consideration by CoC clearly indicates that CoC has duly considered the proposal submitted by the Appellants, that is, Promoters of the Corporate Debtor and declined its consent to such proposal on high threshold, that is, 90% of CoC members rejected through vote.

 

# 14. The Hon’ble Supreme Court in Arun Kumar Jagatramka vs. Jindal Steel & Power Ltd. – (2021) 7 SCC 474, laid down the following:-

• “An argument has also been advanced by the appellants and the petitioners that attaching the ineligibilities under Section 29-A and Section 35(1)(f) IBC to a scheme of compromise and arrangement under Section 230 of the 2013 Act would be violative of Article 14 of the Constitution as the appellant would be “deemed ineligible” to submit a proposal under Section 230 of the 2013 Act. We find no merit in this contention. As explained above, the stages of submitting a resolution plan, selling assets of a company in liquidation and selling the company as a going concern during liquidation, all indicate that the promoter or those in the management of the company must not be allowed a back-door entry in the company and are hence, ineligible to participate during these stages. Proposing a scheme of compromise or arrangement under Section 230 of the 2013 Act, while the company is undergoing liquidation under the provisions of the IBC lies in a similar continuum. Thus, the prohibitions that apply in the former situations must naturally also attach to the latter to ensure that like situations are treated equally.”

 

# 15. We are of the considered opinion that Section 12A proposal cannot be forced upon the lenders. The Promoters, who led to insolvency process of Corporate Debtor cannot claim to submit a Resolution Plan indirectly by way of proposal under Section 12A and ask the lenders to evaluate their Resolution Plan. Something which is not permissible directly by virtue of prohibition under Section 29A for submitting Resolution Plan by the Promoters, cannot be permitted to be done indirectly. Further, the commercial wisdom of the CoC, which is reflected in its Meeting dated 05.03.2021 and 21.04.2021 is not liable to be judicially reviewed.

 

# 16. We may also refer to the judgment of the Hon’ble Supreme Court in K. Sashidhar vs. Indian Overseas Bank & Ors. – (2019) 12 SCC 150 where following has been laid down

• “52. As aforesaid, upon receipt of a “rejected” resolution plan the adjudicating authority (NCLT) is not expected to do anything more; but is obligated to initiate liquidation process under Section 33(1) of the I&B Code. The legislature has not endowed the adjudicating authority (NCLT) with the jurisdiction or authority to analyse or evaluate the commercial decision of CoC much less to enquire into the justness of the rejection of the resolution plan by the dissenting financial creditors. From the legislative history and the background in which the I&B Code has been enacted, it is noticed that a completely new approach has been adopted for speeding up the recovery of the debt due from the defaulting companies. In the new approach, there is a calm period followed by a swift resolution process to be completed within 270 days (outer limit) failing which, initiation of liquidation process has been made inevitable and mandatory. In the earlier regime, the corporate debtor could indefinitely continue to enjoy the protection given under Section 22 of the Sick Industrial Companies Act, 1985 or under other such enactments which has now been forsaken. Besides, the commercial wisdom of CoC has been given paramount status without any judicial intervention, for ensuring completion of the stated processes within the timelines prescribed by the I&B Code. There is an intrinsic assumption that financial creditors are fully informed about the viability of the corporate debtor and feasibility of the proposed resolution plan. They act on the basis of thorough examination of the proposed resolution plan and assessment made by their team of experts. The opinion on the subject-matter expressed by them after due deliberations in CoC meetings through voting, as per voting shares, is a collective business decision. The legislature, consciously, has not provided any ground to challenge the “commercial wisdom” of the individual financial creditors or their collective decision before the adjudicating authority. That is made nonjusticiable.”

 

# 17. We, thus, are of the view that there is no error in rejection of the proposal submitted by the Appellant claimed to be under Section 12A by the CoC, after due consideration and the Adjudicating Authority has rightly refused to interfere with the commercial decision of the CoC in I.A. No.537 of 2021 filed by the Appellants praying for setting aside the decision of the CoC rejecting their proposal.

 

# 18. Now we come to the submission of the parties regarding ineligibility of the NTPC to submit the Resolution Plan. As noted above, the submission, which has been advanced by Dr. Singhvi attracting the eligibility of NTPC is that eligibility of the Resolution Applicant has to be looked into at the time of submission of Resolution Plan on 30.12.2019, which is called as a First Plan. It is submitted that a Resolution Applicant, who is ineligible on the date, when he submits the Resolution Plan, all subsequent process regarding consideration of the Plan is vitiated and cannot enure to the benefit of Resolution Applicant. Shri Ramji Srinivasan, learned Senior Counsel appearing for Resolution Applicant has emphatically submitted that on the day when Resolution Applicant submitted the Resolution Plan, that is, on 30.12.2019, it was not ineligible under Section 29A, sub-clause (c). We, thus, proceed to examine the submission as to whether the Resolution Applicant was eligible on 30.12.2019 when it submitted the first Resolution Plan.

 

# 19. As noted above, the Resolution Applicant as per the invitation of submission of Resolution Plan was by 31.12.2019 and process documents was issued on 01.10.2019, the Resolution Applicant, that is, NTPC as well as another Resolution Applicant Adani Power Limited have submitted their Resolution Plans by 30.12.2019. The ineligibility of the Resolution Applicant is sought to be questioned on the strength of Section 29A(c) and (j), Explanation (1). The relevant provisions of Section 29A are as follows: 

“29A. Persons not eligible to be resolution applicant. – A person shall not be eligible to submit a resolution plan, if such person, or any other person acting jointly or in concert with such person—

(c) at the time of submission of the resolution plan has an account, or an account of a corporate debtor under the management or control of such person or of whom such person is a promoter, classified as non-performing asset in accordance with the guidelines of the Reserve Bank of India issued under the Banking Regulation Act, 1949 (10 of 1949) or the guidelines of a financial sector regulator issued under any other law for the time being in force, and at least a period of one year has lapsed from the date of such classification till the date of commencement of the corporate insolvency resolution process of the corporate debtor:

Provided that the person shall be eligible to submit a resolution plan if such person makes payment of all overdue amounts with interest thereon and charges relating to nonperforming asset accounts before submission of resolution plan:

Provided further that nothing in this clause shall apply to a resolution applicant where such applicant is a financial entity and is not a related party to the corporate debtor.

Explanation I.- For the purposes of this proviso, the expression “related party” shall not include a financial entity, regulated by a financial sector regulator, if it is a financial creditor of the corporate debtor and is a 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.

Explanation II.— For the purposes of this clause, where a resolution applicant has an account, or an account of a corporate debtor under the management or control of such person or of whom such person is a promoter, classified as non-performing asset and such account was acquired pursuant to a prior resolution plan approved under this Code, then, the provisions of this clause shall not apply to such resolution applicant for a period of three years from the date of approval of such resolution plan by the Adjudicating Authority under this Code;

(j) has a connected person not eligible under clauses (a) to (i).

Explanation[I]. — For the purposes of this clause, the expression “connected person” means—

(i) any person who is the promoter or in the management or control of the resolution applicant; or

(ii) any person who shall be the promoter or in management or control of the business of the corporate debtor during the implementation of the resolution plan; or

(iii) the holding company, subsidiary company, associate company or related party of a person referred to in clauses (i) and (ii):

Provided that nothing in clause (iii) of Explanation I shall apply to a resolution applicant where such applicant is a financial entity and is not a related party of the corporate debtor:

 

# 23. From the date of the NPA classification, as noted above in Tabular Form, it is clear that classification of NPA of RGPPL and KLL by SBI and IDBI were on 21.05.2018. The first classification of NPA by the Canara Bank on 21.05.2018 was with effect from 01.04.2009. The submission, which has been pressed by Shri Ramaji Srinivasan is that classification date being 21.05.2018 and from that classification date the period of one year has not elapsed on 27.03.2019, when the CIRP of the Corporate Debtor commenced, hence, there is no disqualification under Section 29A(c). If we take the date 21.05.2018 as the date declared for classification of NPA, one year period has not elapsed on 27.03.2019, but the submission of Appellant is that the classification although declared on 21.05.2018, it was with effect from 01.04.2009 and more than one year period had elapsed, thus, the submission of Resolution Applicant (NTPC) that it was eligible under Section 29A(c) is to be rejected.

 

# 24. What is the purpose and object of expression in the statute that at least a period of one year has elapsed from the date of such classification, as appearing in Section 29A, sub-clause (c) falls for consideration and interpretation in this Appeal.

 

# 25. The Hon’ble Supreme Court in Swiss Ribbons Private Limited and another vs. Union of India and Others – (2019) 4 SCC 17 in paragraph 105 has noticed:

• “105. …..As a matter of legislative policy, therefore, quite apart from malfeasance, if a person is unable to repay a loan taken, in whole or in part, within this period of one year and three months (which, in any case, is after an earlier period where the corporate debtor and its financial creditors sit together to resolve defaults that continue), it is stated to be ineligible to become a resolution applicant. The reason is not far to see. A person who cannot service a debt for the aforesaid period is obviously a person who is ailing itself. The saying of Jesus comes to mind — “if the blind lead the blind, both shall fall into the ditch.” The legislative policy, therefore, is that a person who is unable to service its own debt beyond the grace period referred to above, is unfit to be eligible to become a resolution applicant. This policy cannot be found fault with. Neither can the period of one year be found fault with, as this is a policy matter decided by RBI and which emerges from its Master Circular, as during this period, an NPA is classified as a substandard asset. The ineligibility attaches only after this one year period is over as the NPA now gets classified as a doubtful asset.”

 

# 26. The statutory provision under Section 29A, sub-clause (c) is plain and clear that grace period of one year has been given and if after expiry of grace period, Resolution Applicant is unable to pay the dues and the NPA continues, the Resolution Applicant becomes ineligible. The question to be answered in the present case is as to what shall be the date of classification of NPA by Canara Bank, whether it is 21.05.2018 or 01.04.2009. From the materials on record, it is clear that classification was declared on 21.05.2018, although with effect from 01.04.2009. So, the date on which classification is declared is relevant or the date with effect from such classification is made to be effective is relevant for the purpose of 29A(c), is the straight question to be answered. The purpose of date of “such classification” is that from the date of such classification, within grace period, that is, one year, if one year period has expired and NPA still continues, the Resolution Applicant is ineligible. From reverting to the facts of the present case, the NPA classification was declared on 21.05.2018 with effect from 01.04.2009. So, 01.04.2009 is the backdate which has been given by Canara Bank, but actual date of classification is 21.05.2018. If we take the backdate as the date of classification, the purpose and object for giving the grace period will not be fulfilled. If date of classification is declared as a date which is nine years ago, there is no question of a Resolution Applicant to take any benefit of the grace period of one year. The purpose for statutory requirement that at least one year has elapsed from the date of such classification is to see that within a period of one year from classification, if the Resolution Applicant did not get away from NPA, it should be declared as NPA. But in case where the Resolution Applicant does not actually get the grace period whether by a backdate, which is of nine years ago, it can be denied the benefit of the expression statutory requirement of “at least period of one year has elapsed from the date of such classification”. We, thus, are of the view that date of NPA classification by the Canara bank shall be treated as 21.05.2018 and it cannot be taken as on 01.04.2009, which is the backdate, as has been given by the Canara Bank, with effect from which date NPA is declared. If the interpretation as put by learned Counsel for the Appellant is accepted, the purpose of statutory prescription under Section 29A(c) can be defeated by the Financial Institutions by declaring NPA on particular date and making it effective from back date, so that no Resolution Applicant can take the benefit of statutory provision as provided under Section 29A(c). We, thus, have to take the date of 21.05.2018, as the date of NPA classification by the Canara Bank. Similarly, the NPA classification by SBI and IDBI Bank are all subsequent to 21.05.2018, that is, in the year 2019. We, thus, have to take date of classification as 21.05.2018 on which date the Resolution Applicant was classified as NPA and the period of one year had not elapsed till 27.03.2019, when CIRP commenced. Since on the date of commencement of CIRP, period of one year has not elapsed, the disqualification under Section 29A(c) shall not attach to the NTPC, who was Resolution Applicant. We, thus, accept the submission of learned Senior Counsel for the Resolution Applicant that Resolution Applicant was eligible on 30.12.2019 when it submitted the Resolution Plan. When Resolution Applicant was eligible on 30.12.2019, it continued to be eligible in entire process of the CIRP. The CoC, which is statutorily authorised to conduct the CIRP with the object of reviving the Corporate Debtor is fully competent to ask the Resolution Applicant to revise its Plan, improve its Plan and submit the revised Resolution Plan.

 

# 27. The Hon’ble Supreme Court in Kalpraj Dharamshi & Anr vs. Kotak Investment Advisors (2021) SCC OnLine SC 204 has held that CoC is competent to suggest modification to the prospective Resolution Applicant. Following observations has been made by the Hon’ble Supreme Court in the judgment:

• “This Court held, that what is left to the majority decision of CoC is the “feasibility and viability” of a resolution plan, which is required to take into account all aspects of the plan, including the manner of distribution of funds among the various classes of creditors. It has further been held, that CoC is entitled to suggest a modification to the prospective resolution applicant, so that carrying on the business of the corporate debtor does not become impossible, which suggestion may, in turn, be accepted by the resolution applicant with a consequent modification as to distribution of funds, etc. It has been held, that what is important is, the commercial wisdom of the majority of creditors, which is to determine, through negotiation with the prospective resolution applicant, as to how and in what manner the corporate resolution process is to take place.”

 

# 28. When we have found that the Resolution Applicant was eligible on 30.11.2019 when it submitted the first Resolution Plan, we see no necessity to enter into other submission raised by learned Counsel for the parties including the submission regarding applicability of the proviso to Section 29A(c). The Resolution Applicant being eligible, was entitled to submit Resolution Plan and was also entitled to revise its Plan from time to time as per the Scheme of the Code. The Plan having approved by 100% vote of CoC, we do not find any error in the decision of the Adjudicating Authority rejecting the I.A. No.537 of 2021 filed by the Appellant.

 

# 29. For the reasons as indicated above, we thus, are of the view that Adjudicating Authority has rightly rejected the I.A. No.537 of 2021 seeking disqualification of the Resolution Applicant as well as praying for setting aside the decision of CoC rejecting the proposal of Appellant under Section 12A. Decision of the Adjudicating Authority on both the counts finds our approval. We, thus, do not find any merit in the Appeal. The Appeal is dismissed. No order as to costs.

 

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IDBI Trusteeship Services Limited Vs. Mr. Abhinav Mukherji & Ors. - When the ‘Corporate Debtor’ is a ‘Guarantor’ and when the ‘Corporate Guarantee’ has never been invoked prior to the commencement of the CIRP, as on the date of filing of the Claims, the ‘Right to Payment’ has not accrued.

NCLAT (12.07.2022) in IDBI Trusteeship Services Limited Vs. Mr. Abhinav Mukherji & Ors.  [Company Appeal (AT) (Insolvency) No. 356 & 358 of 2022] held that;

• The Authorised Representative under the statutory scheme as noticed above is to represent the Financial Creditors i.e., Homebuyers in a class for a limited purpose i.e., for attending meetings of the CoC and voting on behalf of the Financial Creditors in a class. It cannot be said that since the Authorised Representative has not came up before the Adjudicating Authority for filing the impleadment application, the Appellants who themselves are Homebuyers have no right to participate in the adjudication initiated by filing applications by Respondent No. 2 and 3.”

• Once the moratorium was imposed, it could not invoke the corporate guarantee. NCLT therefore found that there is no illegality or irregularity in not admitting the claim of EARC.

• The fact remains that the Principle that a Corporate Guarantee cannot be invoked once the CIRP has commenced and that an uninvoked Corporate Guarantee as on date of filing of the Claim, cannot be considered as ‘Matured Claim’

• This Tribunal is of the earnest view that the Appellants cannot Claim the amounts in the CIRP of the ‘Corporate Debtor’ who is a ‘Corporate Guarantor’ on the basis of the Deed of Guarantee which was never invoked as on the date of filing of the Claims.

• We are of the considered view that when the ‘Corporate Debtor’ is a ‘Guarantor’ and when the ‘Corporate Guarantee’ has never been invoked prior to the commencement of the CIRP, as on the date of filing of the Claims, the ‘Right to Payment’ has not accrued.

• Control is the direct or indirect power to direct the management and policies of a person or entity, whether through ownership of voting securities, by contract, or otherwise. The power or authority to manage, direct or oversee.’

• The first part of the term ‘Control’ refers to ‘de jure’ control, which includes the right to appoint directors of the Company. The second part of the expression ‘Control’ refers to ‘de facto’ control, whereby, person/body corporate directly or indirectly can positively influence in any manner, the management or policy decisions.

 

Excerpts of the order;

# 1. The present Appeals filed under Section 61(1) of the Insolvency and Bankruptcy Code, 2016, (hereinafter referred to as ‘The Code’) challenge the Impugned Order dated 14/03/2022 passed by the Learned Adjudicating Authority (National Company Law Tribunal, New Delhi Bench – II) in I.A. No. 1610/2020 and in I.A. No. 4130/2020 filed in C.P. (IB) No. 894/ND/2019, whereby, the Adjudicating Authority, on an Application filed by a Homebuyer/Mr. Abhinav Mukherji has allowed the Application and held that ‘IDBI Trusteeship Services Limited’ and ‘ECL Finance Ltd.’/the Appellants are not ‘Financial Creditors’ and also observed that the Appellants are ‘Related Parties’ to the ‘Corporate Debtor’. ECL Limited is arrayed as Appellant No. 1 and ‘Assets Care & Reconstruction Enterprises Ltd.’ as Appellant No. 2 in Comp. App. (AT) (Ins.) No. 358 of 2022. Since both these Appeals deal with common facts and challenge a common Impugned Order, they are being disposed of by this Common Order.

 

# 2. Facts in brief are that the Appellant/IDBI was appointed as a Debenture Trustee for the benefit of the Holders of certain Debentures issued by M/s. Saha Infratech Pvt. Limited (Issuer/Principal Borrower) vide Debenture Trustee Agreement dated 18/05/2016. The first Respondent Mr. Abhinav Mukherjee is the Homebuyer of the ‘Corporate Debtor’ having Claim of Rs.2,94,43,634/-; the second Respondent Mr. Krit Narayan Mishra is the RP of the ‘Corporate Debtor’, appointed vide letter dated 13/07/2021 in I.A. 1742/2021 replacing the erstwhile IRP, Mr. Manoj Kumar Singh. Appellant/M/s. ECL Finance Limited is the original Debenture Holder which has executed the Assignment Agreement dated 27/03/2020 whereby all rights in regard to the Financial Assistance were assigned in favour of Assets Care and Reconstruction Enterprise Limited (‘ACRE’). While so, in June 2016, Saha Infratech with a view to augment their resources issued 110 Non-Convertible Debentures having a face value of Rs.1 Crore/- each for an aggregate amount of Rs.110 Crores/- and appointed the Appellant/IDBI to act as a Trustee for the Holders of the Debentures. At the request of the Issuer/‘Palm Developers Private Limited’ (hereinafter referred to as the ‘Corporate Debtor’) and their Promoters, Debenture Holders agreed to subscribe to the Debentures and a Debenture Trust Deed dated 01/07/2016 was executed amongst the Principal Borrower, the ‘Corporate Debtor’ (Corporate Guarantor) and the Appellant (Debenture Trustee) including the promoters. As per the terms of the Trust Deed a part of the Debenture Subscription amount was to be used for funding the construction of the ‘Project Encore’, being developed by the ‘Corporate Debtor’. The Debenture Holder as on date has made a subscription of the first tranche of the Debentures i.e., 110 amounting to Rs.110 Crores/-. The second tranche has not been subscribed yet. Under the terms of the Debenture Trust Deed, payment of interest and all other accounts on the respective due dates was secured by an irrevocable Corporate Guarantee of the ‘Corporate Debtor’, executed vide Guarantee Agreement dated 02/07/2016.

 

# 3. Additionally, the ‘Corporate Debtor’ executed and delivered a Demand Promissory Note, a Deed of Hypothecation, Mortgage Agreement on the properties of ‘Project Encore’, and Revenue Escrow Agreement in respect of the entire receivables of the ‘Project Encore’ all dated 02/07/2016 in favour of the Appellants to secure the due performance of the terms and conditions of the Trust Deed. It was averred that the Principal Borrower and the Obligors committed defaults in performance of the terms of the Debenture Trust Deed, but the Appellants in utmost good faith continued with the Debentures with the hope that the Issuers/Obligors shall rectify the default in a timely manner. Despite repeated requests, as the defaults continued, the Appellants vide Letters dated 30/10/2018, 08/01/2019, 02/04/2019 exchanged communication with the Issuer and the Obligors and the Corporate Guarantor highlighting the defaults and asking them to rectify the same.

 

# 4. On 27/01/2020, CIRP against the ‘Corporate Debtor’ was initiated and Moratorium was issued. On 31/01/2020, the IRP made Public Announcement and on 10/02/2020 within the stipulated time frame, the Appellant submitted its ‘Form C’ showing default from the Year 2017 and claiming an amount of Rs.1,26,96,88,698/- as against the Principal and Interest ‘due and payable’ as on 27/01/2020. It was averred that on 20/02/2020, the IRP constituted the CoC and the Appellant was made a member thereof; that subsequently, on 25/02/2020, the first Respondent filed I.A. 1610/2020 praying inter alia the following reliefs:

• (a) Rejections of the claim of the Appellants as accepted by the IRP of the ‘Corporate Debtor’.

• (b) Reconstituting of the CoC after exclusion of the Appellants.

• (c) Restraining the Appellants from exercising any voting right in the CoC of the ‘Corporate Debtor’.

While issuing Notice in I.A. 1610/2020, the Adjudicating Authority vide Order dated 28/02/2020 directed the erstwhile IRP to restrain from holding any Meeting of CoC till the constitution of CoC was ascertained.

 

# 5. The erstwhile IRP in his Reply to the Application I.A. 1610/2020 denied the allegation made by the first Respondent and challenge the said Application on maintainability and submitted that on seeking legal opinion from his Counsel M/s. Dua Associates, the Claims of the Appellants and the third Respondent were admitted in accordance with Section 21(1) of the Code. The Adjudicating Authority vide Order dated 07/09/2020 modified the earlier Order dated 28/02/2020 to the extent that the erstwhile IRP was allowed to proceed in the matter in accordance with the provisions of the Code but was restrained from declaring the status of the Appellants until further Orders.

 

# 6. While so, on an Application, filed by IDBI, bearing IA No. 1742/2021, the Adjudicating Authority appointed Mr. Krit Narayan Mishra new IRP on 13/07/2021. Based on the Reply filed by the new IRP, the Articles of Association (AoA) of the ‘Corporate Debtor’, the terms of the Guarantee Deed, the Adjudicating Authority observed as follows:

• “39. On perusal of the Articles of Association (AOA) of the corporate debtor, we observe the part II of the Articles have overriding effect over the part 1 Articles and in case of conflict between the two, part II shall prevail over the part 1. And the clause referred to supra shows that the corporate debtor shall not take any decision without prior written approval of the debenture holders. We further observe that as per clause 7.1 of AOA, in the event of default both the debenture holders and lender have right to appoint their Nominee Director on the Board of the Company.

• 40. The Respondent No. 2 and 3 in their written submissions have contended that though there is a provision but the respondents have not appointed their nominee Director, which would be evident from the MCA data. As it is seen that part II of the Article of Association of the corporate debtor clearly says that in case of conflict between the two, part II shall prevail over the part I, which shows that Director, or Manager of the corporate debtor cannot take any decision without the written approval of the debenture holders. In other words, the debenture holder will actively participate in the policy making process of the corporate debtor. Therefore, we have not even an iota of doubt that the Respondents no. 2 and 3 are not in a position to have control over the policy decisions of the corporate debtor and on the composition of the board of directors. As per the definition of related party, what is required to be established is, whether a person is in a position to control the composition of the Board of Directors and it is not necessary that he/they is/are the director(s) of the corporate debtor or not. Hence, we are unable to accept the contention of the Respondent no. 2 and 3 that they have not nominated any Director as yet and they are not in a position to take part in the policy making process.

• 41. For the reasons discussed above, we are of the considered view that in terms of the AOA, since the Respondents no. 2 and 3 are in a position to have control over the policy decisions of the corporate debtor and on the composition of the board of directors, hence they are related parties in terms of Section 5(24) of the IBC, 2016.

• 42. At this juncture, we would also like to refer to the arguments advances on behalf of the Ld. Counsels appearing for the Respondent no. 2 and 3 that the verification of the claims can be made by the IRP only and Adjudicating Authority is not required to interfere.

• 43. We are unable to accept this contention of the Respondent no. 2 and 3 as the duty of the IRP is only to verify the claims and in case, if any error has been committed by the IRP, the Adjudicating Authority is empowered under Section 60(5) of the IBC, 2016 to rectify such an error.

• 44. Apart from that, it is also an admitted fact that the Guarantee was invoked on 07.04.2020 i.e., after the initiation of the CIRP on 27.01.2020.

• 45. Therefore, the Ld. Counsel appearing for the Applicant has rightly submitted that the deed of guarantee was invoked after the initiation of CIRP. Therefore, in terms of the moratorium declared under Section 14 of the IBC, 2016, the amount claimed by the Respondent No. 3 is not liable to be admitted.

• 46. At this juncture, we would also like to refer to the contention of Respondent No. 2 and 3 that the Applicant has no locus standi to raise this issue. As we have also referred to the additionally reply filed by the IRP, therefore, on the request of IRP, this Adjudicating Authority is empowered to invoke section 60(5) IBC 2016 and consider whether the Respondent No. 2 and 3 are the Financial Creditor or not?

• 47. Hence, we find, no force in the contentions raised on behalf of the Ld. Counsels appearing for the Respondent No. 2 and 3, that the application is not maintainable.

• 48. In sequel to the above, we are of the considered view that the Respondents No. 2 and 3 can be treated as ‘creditors’ but they shall not be treated as ‘Financial Creditors’ under Chapter II, Section 5(7) of the IBC, 2016. Hence, we have no option but to hold that the Respondents no. 2 and 3 are not the Financial Creditors and the admission of claims of the Respondents no. 2 and 3 as ‘Financial Creditor’ is contrary to the provisions of law. Accordingly, in terms of this order, the IRP/RP is directed to revise the claims of Respondents no. 2 and 3 and reconstitute the CoC.

• 49. So far as the prayer of the applicant regarding the acceptance of interest is concerned, the IRP/RP is directed to examine the same on merit and in accordance with the provisions of law.

• 50. Accordingly, in terms of aforenoted order, the IA 1610/2020 stands disposed of.”

(Emphasis Supplied)

Assessment:

# 10. The main issues which arise in these Appeals are:

• (a) Whether the Adjudicating Authority was right in applying the ratio of ‘Anuj Jain (IRP of Jaypee Infratech Ltd.)’ (Supra) to the facts of the attendant case and holding that the Appellants are not ‘Financial Creditors’ in view of the fact that there was no ‘direct disbursal’ of amount to the ‘Corporate Debtor’/Guarantor.

• (b) Whether an individual Homebuyer has the locus to challenge the admission of a Claim of another Creditor/‘Financial Creditor’. Whether the filing of the said Application had to be done through the ‘Authorized Representative’ (AR) only.

• (c) Whether the Appellant can make a ‘Claim’ on the basis of the ‘Guarantee Deed’ which was never invoked pre-commencement of the CIRP, and remained uninvoked even as on the date of filing of the ‘Claim’, thereby meaning that ‘Right to Payment’ has not yet accrued.

• (d) Whether the Appellants are ‘Related Parties’ of the ‘Corporate Debtor’. Whether the Appellants were in a ‘position’ to ‘control’ the affairs of the ‘Corporate Debtor’, to fall within the ambit of the definition of ‘Related Party’ as defined under Section 5(24) of the Code.

 

11. At the outset, we address ourselves to the first issue raised by the Appellants that the Adjudicating Authority has erroneously relied on the Judgement of the Hon’ble Supreme Court in ‘Anuj Jain’ Case and held that there was no direct disbursal of amount by ECL to the ‘Corporate Debtor’ and hence the amount involved is not a ‘Financial Debt’ as defined under Section 5(8) of the Code. This Tribunal is of the considered view that ECL, being the original lender had disbursed the amount in terms of the Facility Agreement entered into and the disbursement of ‘debt’ is essentially to the Issuer/Borrower and not to the ‘Corporate Guarantor’ i.e., ‘Palm Developers’. By providing Corporate Guarantee, ‘Palm Developers’ has agreed to incur the ‘debt’, if ‘due and payable’. A Guarantee is included as one of the illustrations which specifies the definition of ‘Financial Debt’ under Section 5(8)(i) of the Code. This Tribunal in ‘Ascot Realty Private Limited’ (Supra) has held that for initiation of Insolvency Proceedings against the Corporate Guarantor, the element of disbursal for ‘Time Value of Money’ is not required. We are of the considered view that despite the fact that there was no direct disbursal of amount to the Corporate Guarantor, any amounts released to the Issuer/Principal Borrower and not to the Corporate Guarantor does constitute ‘Financial Debt’ as defined under Section 5(8) of the Code and it cannot be said that such amounts do not have consideration for ‘Time Value of Money’. In the facts of the attendant case, it has to be only seen whether there was a ‘default’ and the amounts are ‘due and payable’ as on the date of filing of the ‘Claim’.

 

# 12. Therefore, we hold that the ratio of ‘Anuj Jain’ (Supra) is not applicable to the facts of the attendant case on hand.

 

Locus of the ‘Individual Homebuyer’/‘Financial Creditor’ to challenge the constitution of the CoC:

# 13. Learned Sr. Counsel Mr. Gourav Mitra argued that a single Homebuyer cannot challenge whether the Appellants can be treated as ‘Financial Creditors’ or not. It was submitted that reliance cannot be placed on ‘Phoenix Arc Pvt. Ltd.’ Vs. ‘Spade Financial Services Ltd. & Ors.’ (2021) 3 SCC 475, as the Hon’ble Supreme Court in that judgement has held that AAA & Spade are backdoor entrants and are to be removed from the CoC. That ratio cannot be applied in this case as the Appellants are not related parties and did not contemplate any backdoor entry. Mr. Mitra argued that a lone Homebuyer cannot challenge the constitution of the CoC and placed reliance on Sections 25(a) and 21(6)(a)(b) in support of his contention that only an ‘Authorized Representative’ should represent the Homebuyer. Merely because the inclusion of the Appellants would reduce the voting percent, a single Homebuyer cannot decide the status of the CoC. It is argued that this would constitute a serious conflict of interest and that any such challenge by a single Homebuyer would open the Pandora’s Box. Learned Sr. Counsel for IDBI, Dr. Singhvi also submitted that a single Homebuyer constituting miniscule voting share filed I.A. 1610/2020 and the Adjudicating Authority has ordered that the Appellant IDBI is not a ‘Financial Creditor’ and cannot be a member of the CoC. Learned Sr. Counsel Mr. Ramji Srinivasan appearing for ECL further contended that a single Homebuyer does not have the locus to challenge the constitution of the CoC.

 

14. Recently this Tribunal in ‘Aashray Social Welfare Society & Ors.’ Vs. ‘Saha Infratech Pvt. Ltd. & Ors.’, Comp. (AT) (Ins) No. 904 of 2021 has discussed in detail the role of ‘Authorized Representative’ (‘AR’) and whether the Homebuyers/Welfare Society representing the Homebuyers have a right to be heard/impleaded and observed as follows:

• “12. The statutory scheme as is reflected from Section 21(6-A) and Section 25-A of the Code indicates that the Authorised Representative is chosen to represent the creditor in a class in the CoC. The Authorised Representative needs to attend the meeting of the CoC and vote on behalf of the Financial Creditor to the extent of voting share of the Financial Creditor. The Adjudicating Authority in its order has referred to Regulation 16A Subregulation (5) of the CIRP Regulations, 2016. Regulation 16A deals with the Authorised Representative. Regulation 16A provides for procedure of choosing an Authorised Representative of creditors of the respective class. The Sub-regulation 16A(5) contains a clarifications, which is to the following effect:-

• “16A(5). The interim resolution professional or the resolution professional, as the case may be, shall provide an updated list of creditors in each class to the respective authorised representative as and when the list is updated. Clarification: The authorised representative shall have no role in receipt or verification of claims of creditors of the class he represents.”

• 15. The present is a case where the question for consideration is the right of impleadment of Appellants in Applications filed by Respondent No. 2 and 3 challenging the rejection of their claim as Financial Creditors. The Appellants are also Financial Creditors in a class and they represent majority of the Homebuyers in class, as has been pleaded by the Appellants. The Financial Creditors in a class, who at present consist of 99.85% of CoC, have every right to be heard in the Applications filed by Respondent No. 2 and 3 whose claim has been partly and fully rejected, respectively by the IRP. The Authorised Representative under the statutory scheme as noticed above is to represent the Financial Creditors i.e., Homebuyers in a class for a limited purpose i.e., for attending meetings of the CoC and voting on behalf of the Financial Creditors in a class. It cannot be said that since the Authorised Representative has not came up before the Adjudicating Authority for filing the impleadment application, the Appellants who themselves are Homebuyers have no right to participate in the adjudication initiated by filing applications by Respondent No. 2 and 3.”

(Emphasis Supplied)

15. Having regard to the aforenoted observations, the contention of the Appellants that the first Respondent/Homebuyer has only 4.43% of the Voting Share in the CoC and not represented through the Authorised Representative and hence has no locus to challenge the claim of the Appellants, is untenable. The Hon’ble Supreme Court in ‘Phoenix Arc Pvt. Ltd.’ Vs. ‘Spade Financial Services Ltd. & Ors.’ (2021) 3 SCC 475 has held that ‘Financial Creditors’ forming part of the CoC must be heard during proceedings which would establish the status of other ‘Financial Creditors’. Keeping in view the principle laid down in ‘Phoenix ARC Pvt. Ltd. (Supra) and in ‘Aashray Social Welfare Society & Ors.’ (Supra) we are of the considered view that the first Respondent/Homebuyer has every right to be heard and has the locus to challenge the Claim of the Appellants.

 

# 16. Having held so, now we address ourselves to the contention of the first Respondent/Homebuyer that there is no ‘default’ as on the date of initiation of CIRP as the Corporate Guarantee was not invoked as on the date of commencement of CIRP, as on the date of filing of the ‘Claim’.

 

# 23. However, at this juncture, the moot question which falls for consideration is whether the ‘Claims’ of the Appellants can be admitted keeping in view that the Corporate Guarantee was never invoked pre-commencement of CIRP, or as on the date of filing of the Claim, especially having regard to the fact that the ‘Corporate Debtor’ is the ‘Corporate Guarantor’. The fact which is to be kept in mind is that the Appellants have not preferred any Section 7 Applications, but have filed ‘Claims’ in the ongoing CIRP Proceedings of the Principal Borrower/Saha and the Corporate Guarantor/Palm Developers.

 

# 24. A few dates are also relevant here. Briefly put, the Section 9 Application preferred by an ‘Operational Creditor’ was admitted on 02/01/2020. The actual recall Notice was admittedly issued on 25/03/2020. The Public announcement was made on 31/01/2020. On 03/02/2020, a reminder letter was sent to Saha for payment of Rs.9,16,66,666/- against the NCDs. On 10/02/2020 ITSL and ECL submitted Form C Claiming Rs.126,96,88,698/-, the debt incurred shown was when the NCDs were issued to Saha. The amount mentioned in the letter dated 16/12/2019 to ‘Corporate Debtor’ was Rs.9,16,66,666/-. On 17/02/2020, subsequent to CIRP commencement, Notice was issued by ECL and ITSL to Saha that as per RBI guidelines all accounts where loan repayment is overdue for more than 60 days, Appellants are required to disclose the same to RBI as ‘Special Mention Account 2’. In their Reply dated 18/09/2020 to I.A. 1610/2020, ITSL and ECL took a stand that defaults were being committed since 2017 itself but that debentures were continued in good faith. On 16/05/2021 RP of Saha rejected the Appellants’ claims and demanded that the Appellants owed Rs.12,60,77,970/- to Saha, the Principal Borrower. On 13/07/2021, on an Application filed by IBBI, I.A. 1742/2021, Adjudicating Authority has appointed Mr. Mishra as the new IRP who published the Forensic Audit Report on 12/03/2022.

 

# 25. Learned Counsel Dr. Singhvi has placed reliance on the Judgement of this Tribunal in ‘Axis Bank Limited’ Vs. ‘Edu Smart Services Pvt. Ltd.’, Comp. App. (AT) (Ins) No. 302 of 2017, wherein this Tribunal has held as follows:

• “54. Therefore, stand taken by the respondents that the claim has not been matured cannot be ground to reject the claim.

• 55. Section 25 provides the duties of Resolution Professional. As per Section 25(2)(e), the Resolution Professional is required to maintain an updated list of all the claims. Aforesaid fact also suggests that the maturity of a claim or default of debt are not the guiding factors to be noticed for collating or updating the claims. The 111atter can be looked from another angle. It is only in case of ‘debt’ and ‘default’, a ‘Financial Creditor’ or ‘Operational Creditor’, may file applications under Section 7 or 9. The ‘Corporate Applicant’ has also right to file application under Section 10 for initiation of Corporate Insolvency Resolution Process against itself if it has defaulted to pay the ‘debt’. It does not mean that the persons whose debt has not been matured cannot file claim. The ‘Financial Creditors’ or ‘Operational Creditors’ or ‘secured or unsecured creditors’ all are entitled to file claim.

• 56. Therefore, we hold that maturity of claim or default of claim or invocation of guarantee for claiming the amount has no nexus with filing of claim pursuant to public announcement made under Section13(1)(b) r/w Section15(1)(c) or for collating the claim under Section 18(1)(b) or for updating claim under Section 25(2)(e). For the purpose of collating information relating to assets, finances and operations of Corporate Debtor or financial position of the Corporate Debtor, including the liabilities as on the date of initiation of the Resolution Process as per Section 18(1), it is the duty of the Resolution Professional to collate all the claims and to verify the same from the records of assets and liabilities maintained by the Corporate Debtor.”

 

26. It is pertinent to mention that the aforenoted Judgement ‘Axis Bank Limited’ (Supra) relied heavily upon by the Appellants has been overruled by this Tribunal in the subsequent decision in the case of ‘Edelweiss Asset Reconstruction Company Limited’ Vs. ‘Orissa Manganese and Minerals Ltd.’, 2019 SCC OnLine NCLAT 764. Even ‘Andhra Bank Vs. M/s. F.M. Hammerle Textiles Ltd.’, (Supra) is not applicable in view of the subsequent decision. The Hon’ble Supreme Court in ‘Ghanshyam Mishra and Sons Private Limited’ Vs. ‘Edelweiss Asset Reconstruction Company Limited’, (2021) 9 SCC 657, (Supra), has addressed to this issue. It is pertinent to reproduce the relevant paras with respect to invocation of Corporate Guarantee as hereunder:

• “102. NCLT found that by email dated 6-1-2018 EARC had submitted its claim in Form “C’ for an amount of Rs 648,89,62,395. In response to the said email, RP sought a clarification as to whether the corporate guarantee had been invoked by the applicant. RP had not received any response till 21-2-2018 from EARC. Despite repeated requests made by RP, EARC did not respond to the query made by RP. From the record placed before NCLT, it was clear that EARC had not invoked the corporate guarantee. NCLT therefore posed a question to itself, as to whether an uninvoked corporate guarantee could be considered as matured claim of the applicant. NCLT found that once the moratorium was applied under Section 14 of the I&B Code, EARC was prevented from invoking the corporate guarantee. NCLT further found that the OMML’s guarantee had not been invoked by EARC till the date of completion of CIRP process and once the moratorium was imposed, it could not invoke the corporate guarantee. NCLT therefore found that there is no illegality or irregularity in not admitting the claim of EARC.

• XXXXXX

• 119. It is to be noted that in the appeal before NCLAT, EXIM Bank as well as Axis Bank had taken steps immediately after the claim of the said Banks on the basis of corporate guarantee came to be rejected by RP/CoC. After rejection of the claim, the said Banks had filed an application under Section 60(5) before NCLT. On NCLT rejecting the said claim, those Banks had approached NCLAT in appeals which were allowed and the order, as stated hereinabove, was passed.

• XXXXX

• 125. We are therefore of the considered view that the appeal deserves to be allowed by expunging paragraphs 28, 42, 43, 51 and 52 from the judgement of NCLAT dated 23-4-2019. It is ordered accordingly. The judgement and order passed by NCLT dated 22-6-2018 is upheld. No costs.”       (Emphasis Supplied)

 

# 27. It is seen from the aforenoted Judgement that an uninvoked Corporate Guarantee cannot be considered as a ‘Matured Claim’. In para 133 of the aforenoted Judgement the Hon’ble Supreme Court has upheld the finding of the Adjudicating Authority that once the moratorium was applied under Section 14 of the Code, a Corporate Guarantee cannot be invoked. Though this is a case where the Resolution Plan has been approved, the fact remains that the Principle that a Corporate Guarantee cannot be invoked once the CIRP has commenced and that an uninvoked Corporate Guarantee as on date of filing of the Claim, cannot be considered as ‘Matured Claim’ has been laid down by the Hon’ble Supreme Court.

 

# 28. We also place reliance on the observations of the Hon’ble Supreme Court in para 38 of ‘Swiss Ribbons Pvt. Ltd. & Anr.’ Vs. ‘Union of India & Ors.’, (2019) 4 SCC 17, in which it is stated as follows:

• “38. In this context, it is important to differentiate between “claim”, “debt» and default». Each of these terms is separately defined as follows:-

• 3. Definitions- in this Code, unless the context otherwise requires- xxx

• (6) “claim” means –

• (a) a right to payment, whether or not such right is reduced to judgment, fixed, disputed, undisputed, legal, equitable, secured or unsecured;

• (b) right to remedy for breach of contract under any law for the time being in force, if such breach gives rise to a right to payment, whether or not such right is reduced to judgment, fixed, matured, unmatured, disputed, undisputed, secured or unsecured; xxxxxxx

• (11) “debt” means a liability or obligation in respect of a claim which is due from any person and includes a financial debt and operational debt:

• (12) “default” means non-payment of debt when whole or any part or instalment of the amount of debt has become due and payable and is not paid by the debtor or the corporate debtor, as the case may be; xxxxx

 

Whereas a “claim” gives rise to a “debt” only when it becomes “due”, a “default” occurs only when a “debt” becomes “due and payable” and is not paid by the debtor. It is for the reason that a financial creditor has to prove “default” as opposed to an operational creditor who merely “claims” a right to payment of a liability or obligation in respect of a debt which may be due. When this aspect is borne in mind, the differentiation in the triggering of insolvency resolution process by financial creditors Under Section 7 and by operational creditors Under Sections 8 and 9 of the Code becomes clear.”     (Emphasis Supplied)

 

# 29. It is clear from the observations made by the Hon’ble Supreme Court in the aforenoted Judgement ‘Swiss Ribbons Pvt. Ltd. & Anr.’ (Supra) that a ‘Claim’ gives rise to a debt only when it becomes due. A ‘Claim’ is wider in its scope then debt. A claim may be due or may not be due, but a debt must be a claim which is due. A complete mechanism has been provided in IBC, 2016 as to how and when claims become ‘due and payable’ and debt owed. In the instant case, the CIRP commencement date of the ‘Corporate Debtor’ is 27/01/2020 and the Appellant had recalled the entire redemption amount with respect to debentures on 25/03/2020 subsequent to the initiation of CIRP. The Adjudicating Authority recorded that the Corporate Guarantee was invoked on 07/04/2020. The claims were filed by the Appellants on 10/02/2020. This Tribunal is of the earnest view that the Appellants cannot Claim the amounts in the CIRP of the ‘Corporate Debtor’ who is a ‘Corporate Guarantor’ on the basis of the Deed of Guarantee which was never invoked as on the date of filing of the Claims. The record also does not show that any Notice in terms of Clause 2.1(ii) of the Deed of Guarantee was ever issued to the ‘Corporate Debtor’. We do not find any substance in the argument of the Appellant Counsel that no such Notice is required to be issued as invocation of Guarantee is not a pre-condition to file a ‘Claim’. The Deed of Guarantee stipulates such a notice to be issued which was never sent as the Deed was never invoked prior to CIRP filing of Form C.

 

# 30. In ‘SBI’ Vs. ‘Orrisa Manganese & Minerals Ltd.’ dated 22/06/2018, EARC (Edelweiss Asset Reconstruction Co. Ltd.) filed an Application before the Adjudicating Authority, (NCLT) Kolkata in CA(IB) 470/KB/2018 in CP (IB) No. 371/KB/2017 challenging the decision of the RP in not admitting the claim of the Applicant. In this case, the ‘Corporate Debtor’ had executed a guarantee securing loan received by APNRL which has been given by India Infrastructure Finance Company Ltd. (IIFCL). The Corporate Guarantee executed by the ‘Corporate Debtor’ was in favour of IIFCL, which assigned its rights to the Applicant, who filed their Form C but have not invoked the Corporate Guarantee. The Adjudicating Authority has categorically held that the Applicant was prevented from invoking Corporate Guarantee during Moratorium and that RP has rightly rejected the Claim as the Corporate Guarantee was not invoked. In an Appeal preferred by Edelweiss Asset Reconstruction Company Ltd. (EARC), NCLAT reversed its decision passed in ‘Axis Bank’ (Supra) and has held that on declaration of moratorium, it was not open to EARC to invoke the Corporate Guarantee and held that the IRP has rightly not accepted the claim of the Appellant/EARC. As the Resolution Plan was already approved in that case, the Hon’ble Supreme Court in ‘Ghanshyam Mishra and Sons Private Limited’ (Supra) in paragraph 133 has also closed the right of EARC in terms of taking any further action. Therefore, we are of the view that the ratio of the Hon’ble Supreme Court in ‘Ghanshyam Mishra and Sons Private Limited’ (Supra), is squarely applicable to the facts of this case and hence we are of the considered view that when the ‘Corporate Debtor’ is a ‘Guarantor’ and when the ‘Corporate Guarantee’ has never been invoked prior to the commencement of the CIRP, as on the date of filing of the Claims, the ‘Right to Payment’ has not accrued.

 

# 31. Additionally, IBBI vide Order dated 08/04/2022, in the matter of Erstwhile IRP, suspended his services for two years and made observations in its ‘Analysis & Findings’ in paras 4.10 and 4.13 and finally held that the IRP failed to conduct the CIRP as per the provisions of the Code. It was observed that 

• ‘since the Corporate Guarantees were not invoked yet and the two Corporate Guarantors were not eligible to join the CoC, a CoC could have been constituted with the remaining members and claims of homebuyers verified, but the IRP took advantage of his own mistake wrongly including the two Corporate Guarantor in the CoC and delayed the CIRP by 309 days’.

 

# 32. It is the further case of the first Respondent that the RP of the Principal Borrower has not admitted the claims of the Appellants. A perusal of the email dated 16/05/2021 addressed by the IRP of the Principal Borrower to IDBI shows rejection of the Claim of IDBI on the ground of being a ‘Related Party’ and that an amount of Rs.12,60,77,970/- is recoverable from them. When the Appellants’ Claim has been rejected in the CIRP of the Principal Borrower, the onus is on the Appellants to substantiate how their claims can be ‘admitted’ in the CIRP of the ‘Corporate Guarantor’ when they have not even invoked the Guarantee prior to CIRP commencement, or as on the date of filing of Form C, which they have failed to discharge.

 

Issue of ‘Related Party’:

# 33. Now we address to the contention raised by the Learned Counsel Mr. Sinha that the Appellants are ‘related Parties’ of the ‘Corporate Debtor’ as defined under Section 5(24) of the Code.

 

# 42. On the touchstone of the aforenoted observations of the Hon’ble Supreme Court and the definition of ‘Related Party’ as defined under Section 5(24) of the Code, this Tribunal finds it relevant to peruse the Clauses of the ‘Sanction letter’, the ‘Articles of Association’, the ‘Facility Agreement’ and that of the ‘Builder Buyer Agreement’ to assess the true nature of relationship between the parties and if there was any ‘positive control’ by the Appellants over the affairs of the ‘Corporate Debtor’.

 

# 55. Being in charge of the Escrow Accounts, empowered under Clause 1.1 of AoA whereby and whereunder, the Revenue Escrow Account shall be operated with the instructions of the Debenture Trustee (acting on the instructions of the Debenture Holders) and having executed an irrevocable Power of Attorney to deal with all Banks etc., it cannot be said that the Appellants were neither in the knowledge of the transfers nor were they exercising any ‘control’. Viewed from any angle, the AoA and the aforenoted powers conferred under Clause 4.1 of the AoA, cannot be only ‘Restrictive Powers’. The Hon’ble Supreme Court in ‘Arcelor Mittal India Pvt. Ltd.’ (Supra), has referred to the definitions of ‘Control’ as defined in Black’ Law Dictionary – ‘Control is the direct or indirect power to direct the management and policies of a person or entity, whether through ownership of voting securities, by contract, or otherwise. The power or authority to manage, direct or oversee.’

 

# 56. The first part of the term ‘Control’ refers to ‘de jure’ control, which includes the right to appoint directors of the Company. The second part of the expression ‘Control’ refers to ‘de facto’ control, whereby, person/body corporate directly or indirectly can positively influence in any manner, the management or policy decisions. Any decision which has a long term effect, for formulation of Business Plans, comes within the purview of policy making. The argument that the Clauses with respect to ‘Business Plans’ and any substantial/important charges requiring the approval of the Debenture Holders, is only ‘restrictive’ and does not construe ‘positive control’ is untenable. We are of the view that the irrevocable PoA executed in favour of the Debenture Holders suggests Positive and proactive control as the Appellants are in a position to take proactive decisions regarding the rights of the ‘Corporate Debtor’.

 

# 60. We are of the view that the Articles of Association point out that decisions regarding important matters ought to be taken only by the affirmative role of the Appellants. The Adjudicating Authority has gone through the Articles of Association as well as the conduct of the management of the ‘Corporate Debtor’ and held that the ECL and IDBI are related parties of the ‘Corporate Debtor’ by virtue of their inter se management participation. Examining the influence and inter-relationship between the parties, we are of the considered view that the Appellants have the trappings of ‘Related Party’ on account of the various clauses of the Agreements and AoA, which gives them a participatory role in the Corporate Debtor’s policies. The purpose of excluding a related party of a ‘Corporate Debtor’ from the CoC is to obviate conflicts of interest which are likely to arise in the event that a related party is allowed to become a part of the CoC. The Hon’ble Supreme Court has held in a catena of Judgements that exclusion under the first proviso to Section 21(2) of the Code was related not to the debt itself, but to the relationship existing between the related party ‘Financial Creditor’ & ‘Corporate Debtor’. The contention of Dr. Singhvi that the Appellants constitute more than 80% Voting Share of the CoC and hence injustice would be done, if they are not included has to be decided within the framework of the provisions of the Code and the material on record evidences that the Appellant falls within the ambit of the definition of ‘Related Party’ and according to Section 21(2) of the Code, a Related Party even if it is a ‘Financial Creditor’ of the ‘Corporate Debtor’, will have no right of representation, participation or voting in a meeting of CoC. Further, the question of ‘Voting Share’ arises only when the Appellants are declared ‘Financial Creditors’ and made part of the CoC.

 

# 62. Keeping in view the Clauses of the Sanction Letter, the Facility Agreement, the amended Debenture Trust Deed, the AoA, this Tribunal is of the earnest view that the ratio of the Hon’ble Supreme Court in in ‘Arcelor Mittal India Pvt. Ltd.’ (Supra), regarding ‘Control’ is squarely applicable to the facts of this case, as we hold that the Appellants do have ‘Positive Powers’ and are in a position to directly and indirectly Control the management and the policy decisions of the ‘Corporate Debtor’ and hence we do not find any illegality in the Impugned Order passed by the Adjudicating Authority affirming the decision of the RP in deleting the Appellants from being part of the CoC as stipulated for under Section 21(2) of the Code.

 

# 63. Though we do not agree with the Learned Adjudicating Authority regarding the applicability of the ratio of ‘Anuj Jain’ (Supra) to the facts of this case, for all the other aforenoted reasons, these Appeals are dismissed. No order as to costs.

 

# 64. I.A. No. 1118 of 2022 in Comp. App. (AT) (Ins) No. 356 of 2022, preferred by three allottees in the Project ‘Meghdutam Encore’ developed by the ‘Corporate Debtor’, seeking impleadment in the subject Appeals, is dismissed accordingly.

 

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