National Company Law Appellate Tribunal
Union Bank Of India vs M/S. Rajdeep Clothing And Advisory Pvt. ... on 5 December, 2022
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NATIONAL COMPANY LAW APPELLATE TRIBUNAL
PRINCIPAL BENCH
NEW DELHI
COMPANY APPEAL (AT)(INSOLVENCY) NO.399 OF 2021
(Arising out of judgement and order dated 06.04.2021 passed
by the Adjudicating Authority, National Company Law
Tribunal, Mumbai Bench, Mumbai in IA No.953/2020 and IA
No.13/2021 in CP(IB) No.294/MB/C-II/2018).
In the matter of:
Union Bank of India,
Stressed Asset Management Vertical,
104, Bharat House, Ground Floor,
Mumbai Samachar Marg,
Mumbai 400023 Appellant
Vs
01. M/s Rajdeep Clothing & Advisory Pvt Ltd.
R M-81, Sudarshan Nagar,
MIDC-Phase II, Dombivali (E)
Thane 421 201
02. M/s Ritu Multitrade Services Pvt Ltd,
Kamat Industrial Estate,
396, Veer Savarkar Marg,
Prabhadevi,
Mumbai 400025
03. M/s Eloquent Traders Pvt Ltd,
Chamunda Darshan Bldg,
Near Yogi Hospital,
Kilwani Road,
Silvasa, DNH 396230
04. M/s Wellworth Apparels Pvt Ltd,
R M-81, Sudarshan Nagar,
MIDC -Phase II, dombivali €
Thane 421 201
Company Appeal (AT)(Ins) No.399/2021
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05. M/s Hikal Pro Estate Pvt Ltd,
Gala No.108, Everest Industrial Estate,
Near 66 KVA, Power Sub-Station,
Amli,
Silvassa, DNH 396230
06. M/s Tanvish Trading Pvt Ltd,
Unit 3, 1st Floor,
Kamat Industrial Estate,
396, Veer Savarkar Marg,
Prabhadevi, Mumbai 400025
07. M/s Vignaharta Corrugators Pvt Ltd,
R M -81, Sudarshan Nagar,
MIDC, Phase II, Dombivali €
Thane 421 201
08. M/s Abhinandan Multitrade Pvt Ltd,
24 Mezzanine Floor,
Swadeshi Mill Compound,
Opera House,
Girgaon,
Mumbai 400004
09. M/s Kaushal Logistics Pvt Ltd,
R M-81, Sudarshan Nagar,
MIDC Phase II, Dombivali (E)
Thane 421201
10. M/s Express Suitings Pvt Ltd,
Office No.24, Mezanine Floor,
Swadesh Mill Compound,
Opera House, girgaon,
Mumbai 400004
11. M/s Heavy Steel Pvt Ltd,
RM-81, Sudarshan Nagar,
MIDC-Phase II, Dombivali (E)
Thane 421201
Company Appeal (AT)(Ins) No.399/2021
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12. M/s Bridge Infra Pvt Ltd,
Gala No.106, Everest Industrial Estate,
Near 66 KVA, Power Sub-Station,
Amli, Silvassa, DNH 396230
13. M/s Devika Trading Pvt LTd,
Office No.24, Mezzanine Floor,
Swadeshi Mill Compound,
Opera House, Girgaon,
Mumbai 400004
14. Mr. Brijesh Kumar Mishra,
Erstwhile Resolution Professional of
Krishna Knitwear Technology Ltd,
Flat No.202, Bhoj Bhavan,
Plot No.18-D, Sion-Trombay Road,
Chembur,
Mumbai 400071
15. Mr Ravi Kapoor,
Proposed Resolution Professional of
Krishna Knotwear Technology Ltd,
402, Shaival Plaza, Nr. Gujarat College,
Ellisbridge, Ahmedabad 380006
For Appellant: Mr Abhijeet Sinha, Mr Aayush Agarwala, Advocates.
For Respondent: Mr P. Nagesh, Sr. Advocatge with Mr. Prateek
Gupta, Mr Akshay Sharma, advocates for R1 to 5 and 7.
Mr. Arvind Nayar, Sr. Advocate with Mr. Lokesh Malik, Advocate
for R6, 8 to 13.
Ms Honey Satpal, Advocate for R15.
Company Appeal (AT)(Ins) No.399/2021
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JUDGEMENT
(5th December, 2022) JUSTICE RAKESH KUMAR, MEMBER (JUDICIAL) The present appeal has been preferred by the Union Bank of India (on behalf of Committee of Creditors of Krishna Knitwear Technology Ltd) against an order dated 06.04.2021 passed by National Company Law Tribunal, Ahmedabad Bench (hereinafter referred to as the NCLT) in I.A. No.953/2020 in CP(IB) No.279/2018 with I.A. No.13 of 2021. The final conclusion of the order dated 06.04.2021 passed by the Adjudicating Authority is quoted hereinbelow:
a) None of the parties i.e. applicant financial creditors in both IAs are a related party of the Corporate Debtor.
b) Claim amounts of all applicants in IA 953 of 2020 have wrongly been reduced having regard to the material on record and, therefore, such claims are to be re-verified after considering all source documents produced by applicants including Form-26AS for respective financial years.
c) Since they are not a related party, they are entitled to be a member of COC. COC be re-constituted Company Appeal (AT)(Ins) No.399/2021 5 forthwith. Voting rights of each applicant would be determined in accordance with the provisions of Section 24(6) of CODE. If the amount of their claims changes on account of implementation of our directions in para (b) above.
d) The claims of all applicants in IA 13 of 2021 are to be re-verified having regard to all source documents.
Further information/details, if any, required may be obtained. Applicants will provide the same for this purpose.
e) Considering the facts and circumstances of the both IAs as mentioned and considered by us while disposing of these applications, we have reached to a conclusion that for smooth conduct of CIRP, RP needs to be replaced. Accordingly, we remove present RP and appoint Mr Ravi Kapoor, having Registration No.IBBI/IPA-002/IP-N00121/2017-18/10290, email id [email protected] as new RP. The present RP shall hand over all documents and materials to new RP within three (3) days from the date of taking over the position of RP by the new RP Mr. Ravi Kapoor.
Company Appeal (AT)(Ins) No.399/2021 6
f) We direct the Registry to provide copy of this order to new RP through email and by Speed Post forthwith on pronouncement of this order so that new RP can take over the charge within three days thereafter.
g) We also direct the Registry to send a copy of this order to IBBI within seven days of our order so that appropriate action against the outgoing RP Mr. Brijendra Kumar Mishra can be taken by IBBI as per prescribed mechanism, if considered necessary. In the present appeal, the appellant has prayed for the following reliefs:-
a) That this Hon'ble Tribunal be pleased to set aside/quash the impugned order dated 6th April, 2021 passed by the Ld. NCLT, Ahmedabad Bench I.A. No.953 of 2020 and I.A. No.13 of 2021 in CP(IB) No.279 of 2018 titled Rajdeep Clothing and Advisory Pvt Ltd & Ors Vs Brijesh Kumar Mishra, RP of Krishna Knitwear Technology Ltd and Abhinandan Multitrade Pvt Ltd & Ors Vs Brijesh Kumar Mishra RP of Krishna Knitwear Technology Ltd respectively to the extent it directs suo motu replacement of the Company Appeal (AT)(Ins) No.399/2021 7 RP and makes certain adverse remarks against the CoC.
b) That this Hon'ble Tribunal be pleased to expunge the adverse remarks made by the Ld. Adjudicating Authority against the CoC members in the impugned order dated 6th April, 2021.
c) Pass any other and further orders as this Hon'ble Tribunal may deem fit in the facts and circumstances of the present matter.
The short facts of the case is that in the years 2018 Andhra Bank (now Union Bank of India) filed an application under Section 7 of the Insolvency & Bankruptcy Code, 2016 (hereinafter referred to as the 'Code') against the Corporate Debtor namely Krishna Knitwear Technology Ltd which was numbered as CP(IB) 279/2018 and on 13.1.2020 the petition under Section 7 of the Code was admitted and CIRP was initiated against the Corporate Debtor. While initiating Corporate Insolvency Resolution Process (hereinafter referred to as "CIRP") one Mr. Brijesh Kumar Mishra was appointed as Interim Resolution Professional. Subsequently he was confirmed as Resolution Professional (hereinafter referred to as the 'RP'). Thereafter the RP published Form A inviting claim Company Appeal (AT)(Ins) No.399/2021 8 from the financial creditors by 13.02.2020 whereafter respondents herein submitted their claims. It is the case of the appellant that Respondent No.8 to 13 on 14.02.2020 lodged their claim with the RP. However, Respondent No. 5,6 and 7 subsequently received emails from the RP wherein RP had raised certain querries with respect to their claims. On 29.02.2020, RP invited Respondent No.1 to 4 to attend 1st Committee of Creditors (hereinafter referred to as 'CoC') Meeting in which Respondent No.8 to 13 were also invited to attend the 1st CoC Meeting. Again on 9th August, 2020, RP sought certain clarifications and details from the Respondents with respect to their submitted claims. On 29th August, 2020 the CoC approved for appointment of Transactional Auditor which was appointed by RP who submitted its report in the month of August, 2020 itself. CoC approved appointment wherein it was concluded that the said Respondents were related parties to the Corporate Debtor.
It is further case of the appellant that on 14th October, 2020 RP informed the Respondents that their claims have been rejected and they are accordingly removed from the CoC since they are related parties of the Corporate Debtor. This was done on the basis of the findings of the Transactional Audit Report and also order of Company Appeal (AT)(Ins) No.399/2021 9 Securities Appellate Tribunal (SAT) dated 11.2.2014 passed in the matter of Sanjay Kumar Tayal Vs SEBI in Appeal No.68 of 2013. As per appellant the Respondent No.1 to 7 replied to the contentions raised by the RP. Thereafter the Respondents filed an IA seeking direction from the Adjudicating Authority to the Resolution Professional to reconstitute CoC by including applicants (respondents herein) and assign voting rights to them in respect of CIRP of the Corporate Debtor namely M/s Krishna Knitwear Technology Ltd.
From the materials available on record as well as reply filed by the Respondents it is evident that the Respondents herein prior to filing of application under Section 7 of the Code by the appellants herein had already filed an application under Section 7 of the Code for initiation of CIRP against the Corporate Debtor/Company namely Krishna Knitwear Technology Ltd. The Adjudicating Authority after hearing all the parties by a detailed order allowed the application for including Respondents herein in the CoC i.e. direction for reconstitution of the CoC. Besides allowing the relief sought for by the Respondents herein before the Adjudicating Authority, the Adjudicating Authority while examining the matter in detail noticed that the RP had proceeded Company Appeal (AT)(Ins) No.399/2021 10 completely erroneously and exceeded its jurisdiction and as such the Adjudicating Authority by the impugned order also directed to replace the RP and in his place one Mr. Ravi Kapoor was appointed as RP of the Corporate Debtor. While passing impugned order the learned Adjudicating Authority has also passed certain comments against earlier CoC also.
Aggrieved with the impugned order the appellants has preferred the present appeal which was registered as Company Appeal (AT)(Ins) No.399 of 2021. At the time of hearing of the present appeal Mr. Abhijeet Sinha, learned counsel for the appellant while referring to certain paragraphs of the impugned order tried to persuade this Tribunal that the Learned Tribunal has seriously committed error in passing an order for including Respondents in the CoC of the Corporate Debtors. He emphasised that if the impugned order is not interfered with there is every possibility that considering the huge claims raised by the Respondents the appellant may not get its appropriate claim. Certainly if it is not interfered with considering the huge claims of the Respondents there is likelihood of reduction of the claim of appellants as Nil. He emphasised that under the Code it is the only CoC who is competent to appoint IRP or RP and in any event Company Appeal (AT)(Ins) No.399/2021 11 removal of the RP by the Adjudicating Authority was beyond its jurisdiction and competence.
Mr. Abhijeet Sinha, learned counsel submitted that in the Transactional Audit Report it was found that Respondents were related parties and as such in view of proviso to Section 21(2) of the Code Respondents were not required to be included in the CoC. The Adjudicating Authority by allowing the application filed by the Respondents to include them in CoC has committed serious error and same is contrary to the statutory provision of the Code and as such on this ground alone order is fit to be set aside. He has also referred to para 24 A and 25 of the impugned order to substantiate his submissions that such direction is contrary to Section 21(2) of the Code. By way of referring to various paragraphs of the impugned order particularly para 26, 27, 28,30,31,32,33 and 36 of the impugned order he emphasised that the Learned Adjudicating Authority has completely abused its jurisdiction and allowed the IAs filed by the Respondents regarding reconstitution of the CoC and including them in the CoC. He has also referred to running Page 365 in Volume II of the Memo of Appeal i.e. letter dated 29th August, 2020 sent by the Chartered Accountant containing its report to show that the Respondents Company Appeal (AT)(Ins) No.399/2021 12 were related parties to the corporate debtor. According to Mr. Sinha since Respondents were related party which has been substantiated in the Report of the Chartered Accountant the Learned Adjudicating Authority has committed serious error in allowing them to include in the CoC.
Learned counsel for the Appellant has referred to Regulation 13 and 17 of Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations 2013 to substantiate as to how IRP or RP is required to verify the claim and deal with the CoC. In the argument in sum and substance it was submitted that the reconstitution of the CoC and inclusion of Respondents in CoC by the Adjudicating Authority was completely erroneous and liable to be set aside.
After filing of the present appeal firstly on 11.06.2021 considering the submission of Learned Counsel for the appellant that Adjudicating Authority had exceeded jurisdiction while passing suo motu order of replacement of the IRP and erroneously gave a finding that the creditors were not related and also directed to induct them by reconstitution of CoC and also submissions by the Learned Counsel for the appellant that reconstituted CoC may take decisions which may create further complications, the CIRP Company Appeal (AT)(Ins) No.399/2021 13 may be stayed, a division bench of this Tribunal by its order dated 11.6.2021, while directing to list the appeal for admission on the next date directed that "in the meanwhile the impugned order dated 06.04.2021 and 08.04.2021 shall remain stayed till next day of hearing." Learned counsel appearing on behalf of the replaced RP was also directed not to proceed with CIRP till next date of hearing. The interim order passed earlier was further directed to continue till further orders by order dated 24.08.2022. Meaning thereby that the interim order till date is continuing.
We partly heard the appeal on 1.11.2022 on which date learned counsel for the Appellants concluded his argument and on request of learned counsel for the Respondents hearing was deferred to 3rd November, 2022 on which date after hearing all the parties judgment was reserved.
While giving reply Mr. P. Nagesh, learned senior counsel appearing on behalf of Respondent No.1 raised serious objection on the arguments of learned counsel for the appellant. He has drawn our attention to the relief sought for in the Memo of Appeal. He submitted that despite the fact that in the Memo of Appeal the appellant has mainly prayed to set aside the impugned order to the extent of suo motu replacement of RP and certain adverse remarks Company Appeal (AT)(Ins) No.399/2021 14 against the CoC and also for expunging adverse remarks made by the Adjudicating Authority against the CoC Members, during hearing learned counsel for the Appellant beyond the pleading and relief sought for in the Memo of Appeal has advanced argument assailing even the reconstitution of CoC and induction of Respondents as Members as CoC. It has been argued that it is settled that no relief can be granted which has not been sought for by a specific pleading. According to learned senior counsel, Mr Nagesh for the Respondent there is no reason to interfere with the order of the Adjudicating Authority to the extent of reconstitution of the CoC as well as inclusion of the respondents in the CoC. So far as relief sought for in the Memo of Appeal i.e. replacing of RP and some adverse comments against the CoC is concerned he submits that the situation which was created by the CoC as well as RP was sufficient enough for the Adjudicating Authority to take stringent action of replacement of RP. He submits that from the impugned order which discusses each and every fact it is evident that the RP was proceeding beyond his brief and as such it was emergent situation for the Adjudicating Authority to take step for passing order of replacement of the RP.
Company Appeal (AT)(Ins) No.399/2021 15 In the reply filed on behalf of the Respondent No.1 preliminary objection has been raised regarding suppression of fact by the appellant. It is appropriate to reproduce the written preliminary objections which are as follows:-
"1. At the outset, it is submitted that the Appellant is guilty of suppressionveri and suggestion falsi. The appellant has filed the present appeal malafidely and has approached this Hon'ble Tribunal with unclean hands. The Appellant has suppressed material facts from this Hon'ble Tribunal. The present appeal is liable to be dismissed.
2. The present appeal has been preferred by the Union Bank of India who is the member of Committee of Creditors (hereinafter referred to as the 'CoC') of the Corporate Debtor, limited to the extent of Suo-motu replacement of the Resolution Professional (hereinafter referred to as the 'RP0 by the Learned Adjudicating Authority (hereinafter referred to the NCLT) and to expunge the remarks made in the impugned order against the CoC. The Appellant is neither aggrieved nor challenged the findings of the Hon'ble NCLT, inter alia, that answering respondent is not a related party of the corporate debtor, thus, having right to participate, attend and vote in the meetings of the CoC of the Corporate Debtor.
Company Appeal (AT)(Ins) No.399/2021 16
3.It is submitted that it has been held in catena of cases now that the Hon'ble NCLT has power to replace the RP of the corporate debtor where the Hon'ble NCLT is of the opinion that the RP has failed to conduct the CIRP of the corporate debtor as per the provisions of the IBC or where the Hon'ble NCLT is not satisfied with the performance or conduct of the RP or where there is a dereliction of duties on the part of the RP. In the instant case, the Hon'ble NCLT vide its detailed order dated 06.04.2021, has taken into account the manner in which the CIRP of the corporate debtor was conducted by the RP and found it just and proper to replace the RP for smooth conduct of the CIRP. Therefore, the instant appeal filed by the appellant being a CoC member and on behalf of the CoC, is baseless and without any merits. Nor the CoC has any locus to challenge the decisions of the Hon'ble NCLT replacing the RP with any other RP.
4. As stated hereinabove, the scope of the present appeal is limited to the extent of Suo-motu replacement of the Resolution Professional by the Hon'ble NCLT and to expunge the remarks made in the impugned order against the CoC, however, when the instant appeal was listed on 11.06.2021, the Appellant travelled beyond its pleadings in appeal and an attempt has been made to challenge the all Company Appeal (AT)(Ins) No.399/2021 17 the findings of the Hon'ble NCLT in the impugned order dated 06.04.2021. It is well settled law that a party cannot travel beyond its pleadings and the Appellant cannot be allowed to argue the case on the findings which are not even challenged by him."
5. That the appeal filed by the Appellant is liable to be dismissed on following grounds:
Suppression of material facts and documents by the appellant:
a. The appellant herein has suppressed material facts and documents from this Hon'ble Tribunal. b. The Appellant has not placed on record the complete copy of IA No. 953/2020 filed by the answering respondent alongwith other respondents before the Hon'ble NCLT. The Appellant has not filed the supporting annexures to the I.A. No.953/2020 which were crucial in deciding the IA No.953/2020 and on the basis of which the impugned order dated 06.04.2021 is passed.
c. It is pertinent to note here that along with the IA No.953/2020, the answering respondent has filed the claim form filed by the respondents with the RP and also the emails as well as the Reply dated 29.10.2020 issued by the respondents in response to the RP's email dated Company Appeal (AT)(Ins) No.399/2021 18 14.10.2020 alongwith the due-diligence report of the independent professional to the effect that the answering respondent alongwith other respondents is not a related party of the corporate debtor.
d. The Appellant has also suppressed with this Hon'ble Tribunal that the instant appeal filed by the Appellant is limited to the extent of Suo-motu replacement of the Resolution Professional by the Hon'ble NCLT and to expunge the remarks made in the impugned order against the CoC. On the basis of this suppression, the Appellant travelled beyond its pleadings and an attempt has been made to challenge the findings of the impugned order against which no appeal has been preferred. This is against the principles of law and natural justice. The object and purpose of the pleading is to enable the adversary party to know the case it has to meet. The appellant has conveniently suppressed the above material fact from this Hon'ble Tribunal. Therefore the Appellant cannot be heard and challenge the findings of the Hon'ble NCLT in the order impugned dated 06.04.2021 against which no appeal has been preferred.
By way of referring to fact disclosed in the reply it was submitted by Learned senior counsel for the Respondent No.1 that Company Appeal (AT)(Ins) No.399/2021 19 the Respondent No.1 alongwith Respondent No.2 to 7 had earlier filed an application under Section 7 of the Code against the Corporate Debtor i.e. Company which was numbered as CP(IB)No.281/7/NCLT/AHM/2018 on 1.6.2018 before the NCLT Ahmedabad Bench. According to him the said application was registered on 23.08.2019 and after hearing order was reserved. However, prior to the pronouncement of the order the appellant herein i.e. Andhra Bank filed an application under Section 7 of the Code against the same Corporate Debtor which was admitted on 13.01.2020 and Mr. Brijendra Kumar Mishra was appointed as IRP of the Corporate Debtor who was subsequently confirmed as RP. After IRP issued public announcement through publication in newspaper inviting claims from the creditors which was published on 31.01.2020, the Respondent No.1 filed its claim against the corporate debtor on 10.02.2020 in Form C within the stipulated period alongwith all supporting documents. Thereafter Respondent No.1 was invited in the 1st CoC which was held on 29.2.2020. In the 1st Meeting, it is alleged that the claim of Respondent No.1 was substantially reduced by the RP and the claim was reduced by admitting only principal amount. In the second CoC Meeting an issue regarding appointment of Expert for Company Appeal (AT)(Ins) No.399/2021 20 the purpose of verification of claims was raised by one of the CoC Members i.e. Indian Bank, it was objected on the plea that it was the duty of the RP to verify the claim and RP cannot delegate the same. However, despite objections raised, the CoC proceeded to appoint a Transactional Auditor. In the third CoC Meeting despite objections pertaining to conflict of interest of M/s R. Chaudhury & associates being appointed as Transactional Auditor, were raised by the suspended directors of the Corporate debtor as well as representatives of Bank of Maharashtra, the RP as well as other secured creditors proceeded to appoint Transactional Auditor for the purpose of verification of the claims of the creditors.
Mr. Nagesh, learned senior counsel for the Respondent submits that in view of Section 18 of the IBC it was duty of the RP to receive and collate all the claims submitted by the creditors pursuant to the public announcement. The Circular of IBBI No.IP/033/2018 dated 3.1.2018 prohibits RP from outsourcing any dispute. The RP preferred to appoint M/s R. Chaudury & Associates as Transactional Auditors. It has been argued that since very inception the RP was proceeding contrary to the statutory provisions and committing several errors, this was the reason that the Learned Adjudicating Authority has finally took a Company Appeal (AT)(Ins) No.399/2021 21 decision to replace the RP. He further submits that while passing order certain insignificant comments were also made by the Adjudicating Authority against the RP and CoC, which is not required to be looked into by this Tribunal.
Mr. P. Nagesh, learned senior counsel appearing on behalf of Respondent No.1 has further raised objections to an Interlocutory Application which was filed on behalf of the appellant for amendment of the main appeal. He submits that the amendment which was sought for in the IA i.e. IA No.1809 and 1810/2021, of course at the time of hearing has not been pressed, is not required to be taken note of. He submits that order impugned was passed on 06.04.2021. Thereafter the present appeal i.e. Company Appeal (AT)(Ins) No.399/2021 was filed on 2.6.2021 wherein the appellant sought relief only against the removal of the RP and also for expunging remarks against RP as well as against CoC. Since the IA in the garb of amendment petition was filed much beyond the statutory period of limitation, the said IA may not be entertained at this juncture. He submits that as per Code against an order appeal can be preferred under Section 61 of the Code. But Section 61(2) prescribes a period of limitation of 30 days before NCLAT. However, under proviso to Section 61(2) within further 15 days if Company Appeal (AT)(Ins) No.399/2021 22 appellant is in a position to satisfy sufficient cause for not filing appeal within time, it can be condoned. He submits that after expiry of total 45 days this Tribunal may not entertain such application. According to Learned Counsel for the Respondent by way of filing IA in the garb of amendment the appellant may not be allowed to avoid period of limitation in assailing the said order. According to him the amendment petition is fit to be rejected on the ground of limitation itself. He further submits that even amendment petition i.e. IA has been filed only after reply was filed by the Respondent No.1 wherein a specific pleading was made that in the Memo of Appeal the appellant has not sought for any relief regarding reconstitution of CoC or induction of Respondents in CoC.
Similarly in furtherance of arguments advanced by Mr. Nagesh, Learned counsel for Respondent No.1, Mr. Arvind Nayar, learned senior counsel appearing on behalf of Respondent No.6, 8 and 13, Mr. Parteek Gupta, learned counsel for Respondent No.5 and 7 while replying have argued that the learned Adjudicating Authority has dealt with the issue in detail and assigned detailed reasons in the impugned order which requires no interference. They further submitted that it was beyond competence of RP to Company Appeal (AT)(Ins) No.399/2021 23 remove Member of CoC without prior approval of the Adjudicating Authority. Similarly Ms Honey Satpal, learned counsel for other Respondent No.15 has supported impugned order.
Besides hearing learned counsel for the parties we have minutely examined the impugned order as well as materials available on record. Since in the main appeal the appellant has confined his relief to the extent of assailing order of removal of RP and also for expunging remarks against CoC as well as RP, we are of the considered opinion that other issues are not required to be dealt with in the present appeal. It is true that IA was filed for amendment of the relief in the Memo of Appeal but fact remain that said IA was filed much after the expiry of the period of limitation as prescribed under Section 61 of the Code. Besides this it is admitted fact that such IA was filed after filing of the reply by the Respondent No.1. In reply filed by the Respondent No.1 as preliminary objection it has been stated that without assailing the order on the point of reconstitution of CoC and induction of Respondents in CoC, the appellant was not authorised to assail the order in entirety even then it was earlier also argued on behalf of the appellant which is evident from the order dated 11.06.2021 Company Appeal (AT)(Ins) No.399/2021 24 passed by this Tribunal. We consider it appropriate to reproduce order dated 11.06.2021 in the present appeal as follows:
"11.06.2021: Heard Learned Counsel for the Appellant Shri Abhijeet Sinha in Company Appeal (AT)(Ins.) No. 399 of 2021. He submits that the Learned Adjudicating Authority exceeded his jurisdiction while passing suo motu order of replacing the 'Resolution Professional' (RP) and erroneously gave a finding that some of the Creditors are not related party and also directed to induct them in CoC by reconstitution of the CoC. He further submits that reconstituted CoC may take decision, which will create further complications, therefore, the CIRP may be stayed.
We also heard Ld. Sr. Counsel Mr. Jayant Mehta in CA (AT) (Ins) No. 402-403 of 2021 for the Appellant. He submits that Ld. Adjudicating Authority passed some baseless stricture against the RP (Appellant) and without affording opportunity of hearing before IBBI directed to take action against the Appellant. He further submits that Appellant has also challenged the order dated 08.04.2021 whereby Learned Adjudicating Authority had given directions to the 'Corporate Debtor' (Kaushal Textiles Pvt. Ltd.) (R-15) Issue notice in both the Appeals.
Company Appeal (AT)(Ins) No.399/2021 25 Learned Counsels Mr. Prateek Gupta and Mr. Vishal accept notice on behalf of R-1 & 15.
Issue notice to other Respondents through Speed Post as well as email (both mode). Requisites alongwith process fee, be filed, if not filed within two days. If the Appellant provides the e-mail Address of the Respondents, let notice be also issued through e-mail. Learned Counsel for Respondent Nos. 1 & 15 seek and are granted ten days' time to file the 'Reply Affidavit'. Rejoinder, if any, may be filed within one week thereafter. In the meanwhile, the impugned order dated 06.04.2021 and 08.04.2021 shall remain stayed till next date of hearing. Ld. Counsel appearing on behalf of the replaced RP is directed not to proceed with CIRP till next date of hearing. Let the matter be fixed 'For Admission (After Notice)' on 01st July, 2021 However, after the preliminary objections were raised by the Respondents, the appellant has come out with filing of IA for amendment. On both the point the IA may not be entertained. Firstly the amendment petition has been filed after filing of the reply by the Respondent No.1 raising preliminary objection and secondly the relief sought for in the amendment petition is much Company Appeal (AT)(Ins) No.399/2021 26 beyond outer limit 45 days and as such being a statutory authority we are unable to entertain such application.
For deciding as to whether the Adjudicating Authority has committed any error in replacing the RP and also passing some comments against RP and CoC, it would be appropriate to reproduce certain relevant portion of the order of the Adjudicating Authority, which are reproduced hereinbelow:
"18. Now, we will deal with these questions in the following manner: (i)Whether Resolution Professional, after including Financial Creditors in Committee of Creditors, can remove them from COC for the reason that they are related parties, without prior approval of Adjudicating Authority?
(ii)Whether Financial Creditors, though they may be a related party remain entitled to be a part of COC without having any voting rights or right to participate or represent in the COC meetings?
In IA No. 953 of 2021, there are 7 applicants. Claims of applicant no. 1 to 7 have been admitted at principal amount. Applicants no. 1 to 4 have participated in first four COC meetings whereas applicants no 5 to 7 were never informed about COC meeting nor any communication was made by RP as regard to status of claims submitted by them. It is further claimed that RP issued certain Company Appeal (AT)(Ins) No.399/2021 27 queries, which according to the applicants were of arbitrary nature and the sole object was to not to invite applicants no 5 to 7 for participation in COC meetings. In IA 13 of 2021, the claims pertain to amount of corporate guarantees which were invoked and such amount includes interest also. It is further noted that all supporting documents as required were attached with Form-C submitted by all applicants in both the applications. It is noteworthy that the basis for treating all the applicants as a related party is based upon the order of SAT dated 11.02.2014 and a report submitted by Transaction Auditor appointed by RP.
19. In this factual background, now, we have to look at the relevant provisions of the CODE as far as issue of admission, reduction or rejection of claims submitted by the Financial Creditors is concerned and their exclusion from COC, if they are found to be a related party of the Corporate Debtor within the meaning of the provision of Section 5(24) of CODE initially or subsequently. The commencement of Corporate Insolvency Resolution Process (CIRP) happens with the admission of Corporate Debtor into CIRP by the order of Adjudicating Authority to that effect. IRP is also appointed from this date only as there is amendment in law which earlier provided for an appointment of IRP within fourteen (14) days from the date of commencement of CIRP. The public announcement of the initiation of CIRP and request for submissions of claims is made as per the provision of Company Appeal (AT)(Ins) No.399/2021 28 Section 13(1)(b) of CODE. Such public announcement contains the information as provided in provisions of Section 15 of CODE. Such public announcement, as per the provisions of Section 15({1)(c), must contain the last date for submissions of claims. Section 15{
1)(d) of CODE provides that IRP shall be responsible for receiving claims. As per the provision of Section 15(1){e) public announcement must specify the penalties which can be levied for false or misleading claims. At this stage itself, we point out that no penalties have been imposed or recommended for false or misleading claims, though, the claims have been reduced substantially in respect of unsecured loans and claims relating to corporate guarantees have been rejected in toto. This factual position contradicts the claim of Resolution Professional as well as Transaction Auditor that claims were neither genuine nor supported by the documentary evidence to the extent required as per their opinion.
It is an established position of law that management of affairs of the Corporate Debtor gets vested in IRP from the date of appointment of IRP. The IRP has got twin role to play i.e., to run the affairs of the Corporate Debtor as a going concern as well as to conduct the CIRP as per the provisions of CODE r.w. IBBI (Insolvency Resolution Process for Corporate Person) Regulations, 2016. As per the provision of Section 17(2)(d) of CODE, IRP has Company Appeal (AT)(Ins) No.399/2021 29 authority to access books of account, records and other relevant documents of corporate debtor available with other government authorities, statutory auditors, accountants and such other persons as may be specified. Thus, IRP can have access or obtain information/details from various sources other than the corporate debtor itself. After stating out basic framework relating to the scope of functions to be discharged by the IRP, we reach to Section 18 of the CODE which provides for the duties of the IRP. As per Section 18{a)(iii) of CODE, it is the duty of the IRP to collect all information regarding list of assets and liabilities as on the initiation date which is in addition to the general power contained in main clause(a) which provides for determining the financial position of the corporate debtor. The term "financial position" has been defined in clause 5(9) of CODE so as to mean that financial information of a person as on a certain date. It is pertinent to note that under Section 19 of CODE, personnel of the corporate debtor or its promoters or any other person associated with the management of the corporate debtor have been assigned with the responsibility to extend the cooperation to IRP failing which under Section 19(2) of CODE, IRP can approach this Adjudicating Authority for appropriate direction/relief.
20. After having this over view, we come to the provisions of Section18(b) of CODE which provides that IRP shall receive and collate all claims submitted by creditors to him pursuant to the Company Appeal (AT)(Ins) No.399/2021 30 public announcement made under Section 13 and section 15 of CODE. Section 18({c) provides that IRP has to constitute a Committee of Creditors. Section 21(1) also provides for the same. In fact, Section 21(1) is the consolidated version of Section 18(a), 18(b) and 18(c) of the CODE. Under Section 25(2)(e) maintain an updated list of claims. Now, coming to CIRP Regulations in relation to claims of all kinds of creditors, Regulation 7, 8, 8A, 9 and 9A provide the procedure of filing of claims by such creditors. Under Regulation 10, the IRP or RP is authorised to call for such other evidence or clarification as he deems fit for substantiation of whole or part of its claim. The cost of proving the debt due to a creditor is to be borne by such creditor. Regulation 12(1) provides procedure for compliance of Section 13(1)(b) rw. Section 15(1)(c) of the CODE. Regulation 12(2) gives further period of 90 days from the insolvency commencement date to a creditor who fails to submit claim with proof within the time stipulated in the public announcement made in pursuance to Section 13(1)(b) r.w. Section 15(1)(c) of the CODE. Thus, Regulation 12(2) extends the period of filing of claim beyond the period specified in the public announcement. Regulation 12(3) provides that in case a creditor files a claim in terms of Regulation 12(2) happens to be a financial creditor under Regulation 8, then, it shall be included in COC from the date of admission of his claim. However, as per proviso to said Regulation 12(3), any decisions taken by COC prior to such inclusion would remain valid. As per Regulation 13(1), it is the Company Appeal (AT)(Ins) No.399/2021 31 duty of the IRP/RP to verify every claim as on insolvency commencement date within seven days from the last date of receipt of claims and maintain a list of creditors containing names of creditors along with amount claimed, amount admitted and security interest, if any, in respect of such claims and update such list. This Regulation, thus, implements the mandate of Section 18(b) and Section 25(2)(e) of the CODE. Clause {a), (b), (c) and (ca) of Regulation 13(2) provide for availability and display of such list to various category of persons. Clause (d) of Regulation 13(2) provides for filing of list of creditors with the Adjudicating Authority. Clause 13(2){e) provides that such list of creditors be presented at the first meeting of COC. Regulation 14{1) and 14(2) provide for best estimation of the amount claimed by RP on the basis of information available with him and such estimate can also be revised when RP comes across additional information warranting such revision.
21.We need to look into some more aspects relating to role and powers of IRP/RP to give findings on the issues involved. AS per Section 22 of CODE, first meeting of COC is to be held within seven {7) days of the constitution of COC. In such meeting, as per the provisions of Section 22(2) to 22(5) of CODE, the COC may approve the IRP to function as RP or may replace such IRP by another Insolvency Professional. The procedure for replacement of IRP, if it is so resolved by COC, is prescribed under Section 27 of CODE. Company Appeal (AT)(Ins) No.399/2021 32 It is needless to mention that term "Resolution Professional" as defined in Section 5(27) of CODE provides that it includes IRP. Hence, where the term "Resolution Professional" has been used in a context indicated otherwise, it would include both IRP as well as RP. Now, the CIRP starts with speed and momentum. In this process meetings of COC are crucial as certain decisions can be taken by RP only with the approval of COC as provided in Section 28 of CODE. Section 24(2) provides that all meetings of COC shall be conducted by the Resolution Professional. As per Section 24(3)(a), it is provided that the Resolution Professional shall give notice of each meeting of COC to the members of COC including authorised representative. Further, as per Section 24(3)(b}, notice is also to be given to the members of suspended Board of Directors or the partners of the corporate persons, as the case may be. Section 24(3)(c) provides that notice is to be given to Operational Creditors or their representative, if their aggregate dues is not less than ten per cent (10%) of the total outstanding debt. Thus, it is evident that all the stakeholders have been given an opportunity to participate in COC meetings subject to other statutory limitations created on their rights. Section 24(4) of CODE, accordingly provides that directors, partners and Operational Creditors will not have any right to vote in such meeting and their absence shall not invalidate the proceedings of any meeting as well. Section 24(6) and Section 24(7) of CODE provide regarding the manner in which voting share shall be assigned by RP to each Company Appeal (AT)(Ins) No.399/2021 33 creditor and how each creditor shall vote. Section 24(8) of CODE provides how the meeting shall be conducted. The relevance of the above discussion is to show that RP has been endowed with the responsibilities as facilitator and administrator for the smooth conduct of CIRP. If we look at the main provision of Section 21(2) of CODE, it is noted that such provision, in unambiguous terms, states that COC shall comprise of (all) Financial Creditors of the Corporate Debtor. The proviso thereto provides that if such Financial Creditor is a related party of the Corporate Debtor then it shall not have any right of representation, participation or voting in a meeting of COC. Thus, if Section 21(2) of CODE is read as a whole then it clearly emerges that even if a Financial Creditor is found to be a related party it shall remain constituent of COC but it shall not have any voting right. This position of law further gets substantiated from the contents of Form-C whereby Financial Creditors submit proof of claim. This Form-C has been revised two times Le. firstly w.e.f. 01.04.2018 and secondly w.e-t. 03.07.2018. The same are reproduced in the chronological order i.e., 30.11.2016, 01.04.2018 and 03.07.2018. For our purposes, the relevant part is affidavit to be made by a Financial Creditor as the concluding part of this form. Form-C introduced originally is reproduced as under. Thereafter, we would reproduce, for our purposes, the relevant part only as amended from time to time.
FORM C Company Appeal (AT)(Ins) No.399/2021 34 PROOF OF CLAIM BY FINANCIAL CREDITORS (Under Regulation 8 of the insolvency and Bankruptcy Board of India (insolvency Resolution Process for Corporate Persons) Regulations, 2016) [Date] To The Interim Resolution Professional / Resolution Professional, [Name of the Insolvency Resolution Professional / Resolution Professional] [Address as set out in public announcement] From [Name and address of the registered office and principal office of the financial creditor] Subject: Submission of proof of claim Madam/ Sir, [Name of the financial creditor], hereby submits this proof of claim in respect of the corporate insolvency resolution process in the case of (name of corporate debtor], The details for the same are set out below: ~~ PARTICULARS NAME OF FINANCIAL CREDITOR"
IDENTIFICATION NUMBER OF FINANCIAL CREDITOR Company Appeal (AT)(Ins) No.399/2021 35 (IF AN INCORPORATED BODY, PROVIDE IDENTIFICATION NUMBER AND PROOF OF INCORPORATION. IF A PARTNERSHIP OR INDIVIDUAL PROVIDE IDENTIFICATION RECORDS* OF ALL THE PARTNERS OR THE INDIVIDUAL) ADDRESS AND EMAIL ADDRESS OF FINANCIAL CREDITOR FOR
-- CORRESPONDENCE.
PARTICULARS
TOTAL AMOUNT OF CLAIM
INCLUDING ANY INTEREST AS AT THE INSOLVENCY
COMMENCEMENT DATE)
DETAILS OF DOCUMENTS BY REFERENCE TO WHICH THE DEBT, CAN BE SUBSTANTIATED DETAILS OF HOW AND WHEN DEBT INCURRED DETAILS OF ANY MUTUAL CREDIT, MUTUAL DEBTS, OR OTHER MUTUAL DEALINGS BETWEEN THE CORPORATE DEBTOR AND THE CREDITOR WHICH MAY BE SETOFF AGAINST THE CLAIM DETAILS OF ANY SECURITY HELD, THE VALUE OF THE SECURITY, AND THE DATE IT WAS GIVEN DETAILS OF THE BANK ACCOUNT TO WHICH THE AMOUNT OF THE CLAIM OR ANY PART THEREOF CAN BE TRANSFERRED PURSUANT TO A RESOLUTION PLAN Company Appeal (AT)(Ins) No.399/2021 36 LIST OF DOCUMENTS ATTACHED TO THIS PROOF OF CLAIM IN ORDER TO PROVE THE EXISTENCE AND NON-PAYMENT OF CLAIM DUE} TO THE OPERATIONAL CREDITOR Signature of financial creditor or person authorised to act on his behalf [Please enclose the authority if this is being submitted on behalf of an operational creditor] Name in BLOCK LETTERS Position with or in relation to creditor Address of person signing *PAN number, passport, AADHAAR Card or the identity card issued by the Election Commission of India.
AFFIDAVIT I, (name of deponent}, currently residing at [insert address}, do solemnly affirm and state as follows:
1. {Name of corporate debtor], the corporate debtor was, at the insolvency commencement date, being the______ day of__20 , justly and truly indebted to me in the sum of Rs. [insert amount of claim.
2. In respect of my claim of the said sum or any part thereof, I have relied on the documents specified below: {Please list the documents relied on as evidence of claim] Company Appeal (AT)(Ins) No.399/2021 37 3 The said documents are true, valid and genuine to the best of my knowledge, information and belief.
4. In respect of the said sum or any part thereof, I have not nor has any person, by my order, to my knowledge or belief, for my use, had or received any manner of satisfaction or security whatsoever, save and except the following:
{Please state details of any mutual credit, mutual debts, or other mutual dealings between the corporate debtor and the creditor which may be set-off against the claim.) Amended part of Form-C w.e.f 01.04.2018 is reproduced as under: [DECLARATION] I, [Name of claimant], currently residing at [insert address}, do hereby declare and state as follows: -
I [Name of corporate debtor], the corporate debtor was, at the insolvency commencement date, being the... day OF______ 20....... , actually indebted to me in the sum of Rs. [insert amount of claim. 2 In respect of my claim of the said sum or any part thereof, I have relied on the documents specified below: [Please list the documents relied on as evidence of claim].
i The said documents are true, valid and genuine to the best of my knowledge, information and belief and no material facts have been concealed therefrom.
Company Appeal (AT)(Ins) No.399/2021 38 i In respect of the said sum or any part thereof, neither I, nor any person, by my order, to my knowledge or belief, for my use, had or received any manner of satisfaction or security whatsoever, save and except the following:
[Please state details of any mutual credit, mutual debts, or other mutual dealings between the corporate debtor and the creditor which may be set-off against the claim].
I am not a related party in relation to the corporate debtor, as defined under section 5 (24) of the Code.
It can be seen from the contents of revised Form-C, the word "Affidavit" has been substituted by word "Declaration". Note below clause-4 has been deleted. New Clause-5 has been added. This part (declaration) was again amended with w.ef. 03.07.2018 and a new Clause-6 was added. This amended part of Form-C is reproduced as under:
DECLARATION I, [Name of claimant], currently residing at [insert address], do hereby declare and state as follows:
- i [Name of corporate debtor], the corporate debtor was, at the insolvency commencement date, being the..........DAY OF ______20... , actually indebted to me for a sum of Rs. (insert amount of claim].
Company Appeal (AT)(Ins) No.399/2021 39 2 In respect of my claim of the said sum or any part thereof, I have relied on the documents specified below: [Please list the documents relied on as evidence of claim. 3 The said documents are true, valid and genuine to the best of my knowledge, information and belief and no material facts have been concealed therefrom.
4 In respect of the said sum or any part thereof, neither I, nor any person, by my order, to my knowledge or belief, for my use, had or received any manner of satisfaction or security whatsoever, save and except the following:
[Please state details of any mutual credit, mutual debts, or other mutual dealings between the corporate debtor and the creditor which may be setoff against the claim).
5. l am/ I am not a related party of the corporate debtor, as defined under section 5 (24) of the Code.
6. I am eligible to join committee of creditors by virtue of proviso to section 21 (2) of the Code even though I am a related party of the corporate debtor.
As can be seen from the changes made from time to time, Clause- 4 is amended by deleting the requirements of details as regard to mutual set-off as such information/details are to be given in column-7 of Form-C itself. It is important to note that w.e.f. 01.04.20218 a new clause (5) has been inserted to the effect that Company Appeal (AT)(Ins) No.399/2021 40 the creditor has to give a declaration that he is not a related party in relation to the Corporate Debtor as defined under Section 5(24) of the CODE. In this regard, it is important to note that Section 29A regarding ineligibility of a person to be a Resolution Applicant had been brought on statute w.r.e.f. 23.11.2017 by Insolvency and Bankruptcy Code (Amendment) Act, 2018 dated 18.01.2018. The definition of related party in Section 5(24) was always there in the CODE. Further, provisions of Section 5(24A) defining a related party in relation to an individual were brought in w.e.f. 06.06.2018. Thus, such changes in Form-C were necessitated because of incorporation of provisions of Section 29A in the CODE. Thereafter, a significant and notable insertion comes into force w.e.f. 03.07.2018 in the form of Clause-6 of the declaration part of Form-C which is most relevant for deciding the issue on hand as regard to whether a related party can be a member of COC. Clause-6 of this declaration makes clear, in no uncertain terms, the scope of proviso to Section 21(2) and its implications which have already expressed that even a related financial creditor will remain part of COC which gets further fortified from this clause that financial creditor, even though being a related party, cannot be ousted from COC.
22. We further think it pertinent to mention that IBC is a complete CODE in itself and unless IBC, 2016 incorporates the provisions Company Appeal (AT)(Ins) No.399/2021 41 of other Acts, provisions of other Acts cannot be applied to IBC, 2016 as such although some assistance can be taken there-from in a given set of circumstances. As noted earlier, provisions of Section 5(24) of the CODE have been part of the statute since beginning which define who could be a related party in relation to a Corporate Debtor. This clause, in fact, uses the word "means" which further indicates the - legislative intent as to how to determine the nature relationship of related party in relation to a Corporate Debtor to find an answer to such issue which crops up during the course of CIRP of a Corporate Debtor. Provisions of Section 3(37) of the CODE also provide that "words and expression" used in the CODE and not defined in this CODE but defined in certain statutes shall have the meanings respectively assigned to them in those Acts. os, In the list of Acts mentioned in Section 3(37) of the CODE, the Securities and Exchange Board of India (SEBD Act, 1992 is included. The term "person acting in a concert" is not mentioned in any of the clauses of Section 5(24) of CODE, hence, there is no occasion to refer to definition of this term for the purposes of interpreting provisions of Section 5(24) meaning thereby that one needs to confine itself to the provisions of Section 5(24) of the CODE as this specific provision defines that who could be a related party to Corporate Debtor. As against this, if we look at the provisions of Section 29A r.w. Clause {f) thereof, it is noted that the main provision itself mentions that a person shall not be eligible to submit a Resolution Plan, if such person, or Company Appeal (AT)(Ins) No.399/2021 42 any other person acting jointly or in concert with such person prohibited by SEBI from trading the securities or accessing the securities markets whereas provisions similar to main clause of Section 29A or clause(f) to Section 29A do not exist in Section 5(24) of the CODE for determining of status of a financial creditor as a related party. It is also to be noted that in Section 29A not only related but other categories of persons have also been made ineligible to submit Resolution Plan, ™ hence, in that section wider definition has been given in respect of an ineligible person and in that context person acting in concert, in certain situations provided therein, have been barred from submitting Resolution Plan and for this purpose, the definition of such term as given in SEBI Act can be used in view of provisions of Section 3(37) of the CODE as the same has not been defined in the CODE. Thus, for the purpose of Section 29A, both persons acting jointly or in concert and a related party would be treated as "connected person" as defined in Explanation I of clause (j) of Section 29A of CODE. However, for the purpose of Section 29A also, in our view, the provisions of Section 5(24) or 5(29A) of CODE will also have to be applied to find out the meaning of the term "related party" as these terms have not defined in Section 29A separately. Thus, for different purposes, the legislature has provided distinct provisions i.e., Section 21(2) for constitution of COC and Section 29A as regards to ineligibility of certain persons including a related party to submit a Resolution Plan and this mechanism further confirms our Company Appeal (AT)(Ins) No.399/2021 43 view that related party even though it may not be eligible to submit a Resolution Plan but it would remain a member of COC having no voting rights.
23. Now, having discussed the broad features of relevant provisions of CODE, we also consider it pertinent to mention that we are conscious of the fact that errant promoters/management need not to be given an opportunity to derail the process of CIRP in any manner. We are also conscious of the fact that the legislature has provided statutory mechanism for achieving this purpose. However, at the same time, such provisions cannot be used in a manner so as to give unbridled or unfettered rights to RP /COC as well. Though, the structure of IBC gives the most crucial role to the COC but there is an apparent conflict of interests viz-a-viz their interests and the resolution of Corporate Debtor, in a sense, being a secured creditor if COC members prefer an opportunity to realize their amount if they have security interest without going through the process of resolution and in that situation they generally prefer liquidation as seen from the brief history of happenings under IBC. It is for this reason, number of instances of liquidation are more as compared to the resolutions. Thus, some check and balances have been provided in the CODE so that other stakeholders, either directly or indirectly, can approach appropriate Authority i.e. Adjudicating Authority or Appellate Authority, if need arises subject to condition that they Company Appeal (AT)(Ins) No.399/2021 44 fulfill the criteria prescribed in Section 60(5) of the CODE. For this reason also, in our view, proviso to Section 21(2) provides that they will-not have a right on representation or voting but they will certainly be entitled to join/attend the meetings of Committee of Creditors. Provisions of Section 24(6) of CODE also provide so by making its obligatory on the part of RP to give notice of each meeting to the suspended management or Operational Creditor. 23A.We have, thus, gone through the legal framework governing the process of admission, rejection or revision of claims submitted by creditors of the Corporate Debtors, determination of status of a creditor as a related party, voting rights Financial Creditors, constitution of COC and reporting compliance related thereto. Few important questions arise for our consideration. It has been observed that IRP/RP are primarily responsible for preparation and updating of list of creditors. First and foremost question which needs to be asked is whether in the garb of exercise of such duty IRP/RP can review the status of a creditor i.e., from Financial Creditor to Operational Creditor or vice-versa or a non-related Financial Creditor can be treated as related party without prior approval of Adjudicating Authority. From the perusal of all provisions as well as as regulations it is apparent that no such power exists either with RP or COC. As far as powers of COC, in this regard, are concerned, this scheme has been intentionally designed by legislature so that the Financial Creditors who only Company Appeal (AT)(Ins) No.399/2021 45 have voting rights cannot usurp the CIRP because a number of decisions cannot be taken without approval of COC with minimum percentage of vote required for approval or rejection of such actions. Thus, if the COC is given any power, which is certainly prone to misuse of abuse due to apparent conflict of interest. Now, coming to the powers of IRP/RP, it is apparent that they are responsible for collating the claims, revising the claims from time to time based upon information coming to their possession or being provided by the creditors. We have found no provision in the CODE or Regulations which permit for review of status of a creditor as all provisions focus only on the amount of claim. Thus, IRP /RP cannot, on its own, review and reverse his own earlier decision without approval of Adjudicating Authority. When we apply this general legal position to the facts of the case, it is noted that in the first meeting of COC itself the aspect of some of the Financial Creditors being a related party was raised in that meeting by some of the members and in spite of that the RP treated applicants no 1 to 4 as an unrelated party and allowed them to participate in first four meetings of the COC. Applicants no 5 to 6 did not participate as their claims had not been accepted itself and not because of the reason that they were a related party. This factual position also leads to a logical inference that there were sufficient documentary evidences as far as applicants no. 1 to 4 are concerned which were attached with Form-C. It is also noted that all such documentary evidences were also provided by applicants Company Appeal (AT)(Ins) No.399/2021 46 no 5 to 7 but no material on record is produced by RP to justify its decision in not admitting their claims which were subsequently admitted at the principal amount. Thus, arbitrariness in the approach of RP is clearly reflected. We are further of the view that scope of updating exercise is limited and confine to the determination of quantum of claim and, by no stretch of imagination it gives any power to the IRP /RP to review the status of a creditor. This position does not mean that once a creditor is categorized, this category cannot be changed. For this purpose, the right approach would be to file an application before the Adjudicating Authority with the relevant material for appropriate directions and the decision of the Adjudicating Authority would resolve that issue. This position will not change even if report of some External Expert has been taken by RP on its own or with the approval of COC. It may not be out of place to mention that this decision of the Adjudicating Authority cannot be challenged by RP though COC or the creditor can challenge the same before the Appellate Authority as they may be an aggrieved party. 23B.The other important question is whether constitution of COC can be changed by RP and if so, under what circumstances and to what extent. It is an admitted position of law that IRP is required to constitute COC in terms of provisions of Section 21(1) of the CODE. The RP is also entitled to determine the voting share to be assigned to each Financial Creditor, being a member of COC and Company Appeal (AT)(Ins) No.399/2021 47 who is not a related party as per the provisions of Section 24(6), 24(7) r.w. first proviso to Section 21(2) of the CODE. As per Regulation 12(3), if a claim of a Financial Creditor is admitted under Regulation 13(2), such Financial Creditor shall be included in COC from the date of admission of such claim. It is specifically provided in proviso to Regulation 12(3) that any decision taken prior to such inclusion would remain valid in spite of change of constitution of COC because of such re-constitution of COC. Thus, the only situation which has been prescribed in the CODE r.w. Regulation 12 (3) is this one. This re-constitution happens only because of admission of a claim of a Financial Creditor subsequently meaning thereby the Financial Creditors who have already been included cannot be excluded from COC by RP for any reason of whatsoever nature. We are, however, of the view that this legal situation is subject to decision of the Adjudicating Authority which can correct or modify the constitution of COC, if facts and circumstances of case demand so and an appropriate application is made by RP to this effect. We again state that decision of the Adjudicating Authority in this regard cannot be challenged by RP though it may be challenged by any member of COC who is aggrieved by such decision. Before leaving this issue we also consider it pertinent to mention that the power to constitute COC, as such, cannot include a power to re-constitute COC except as provided in the CODE or CIRP Regulations. Thus, Company Appeal (AT)(Ins) No.399/2021 48 the Financial Creditor who is a part of COC, cannot be removed by RP without prior approval of the Adjudicating Authority.
24. Although, we have already reached to a conclusion but we also consider it relevant to discuss the role and responsibilities of RP so that CIRP can be conducted in an efficient manner and desired results are obtained within the timelines prescribed under the CODE/Regulations made thereunder and _ that would not only guide the RP in the present case but would also be of great help to all Insolvency Professionals acting as IRP/RP. From the perusal of all substantive provisions of law as contained in the CODE itself, it is abundantly clear that Resolution Professional is only an Administrator and Facilitator and does not have any adjudicatory powers. This position of law has been established through number of judicial pronouncements including the leading one, being the decision of Hon'ble Supreme Court in the case of Swiss Ribbons. The position of liquidator stands on a different footing as the liquidator has been given adjudicatory powers as far as determination of claims is concerned and as per Section 42 of the CODE, Adjudicating Authority acts as an Appellate Authority against the decisions of liquidator while accepting or rejecting or reducing the claims of creditors. This is so because there is no Committee of Creditors in the liquidation process of Corporate Debtor. Further, even during CIRP there exists no provision in law that Committee of Creditors can take a final Company Appeal (AT)(Ins) No.399/2021 49 decision on the aspect of admission or rejection or reduction of claims of Financial Creditor or its status. It is not at all in dispute that Adjudicating Authority is the supervisory body for IRP/Resolution Professional. Though, Committee of Creditors is not under its superintendence, nevertheless, Committee of Creditors has been given final powers only as regard to approval of Resolution Plan or liquidation of Corporate Debtor and matters specified under Section 28 of the CODE or replacement of a Resolution Professional under Section 27 of CODE. Therefore, any irregularity or violation of principles of natural justice in other areas of CIRP can certainly be looked into by the Adjudicating Authority and if it is found that the actions/decisions of Committee of Creditors are also not in accordance with the provisions of law, then, in our considered view, the same can be reviewed for both violations and reversed by Adjudicating Authority. 24A.Hence, we hold that final determination of claims of Financial Creditors lies with the Adjudicating Authority and actions of RP are subject to this determination by the Adjudicating Authority. Accordingly, in our opinion, for this reason also action of Resolution Professional in reducing the claimed amount deserves to be reversed and cancelled.
25.Having stated so, similar position of law is applicable as regard to determination of status of a financial creditor i.e., whether such financial creditor is a related party or not. In the Company Appeal (AT)(Ins) No.399/2021 50 present case, RP has initially inducted such financial creditors as members of COC and then without prior approval of this Authority, removed them from COC, hence, we direct RP to reconstitute the COC by including them in COC irrespective of the fact that whether they are a related party or not subject to limitation as contained in proviso to Section 21(2) of the CODE.
25A.Our views expressed hereinbefore also find support on some aspects involved in these application from the order of Hon'ble NCLAT in the case of Mr. Rajnish Jain vs Manoj Kumar Singh and Ors in Company Appeal (AT) (Insolvency) No. 519 of 2020 dated 18.12.2020.
26.Now, we have to decide question no 3 i.e. whether such financial creditors, in view of evidence brought on record, are a related party of the corporate debtor or not. In this regard, it is an admitted position that the source of such classification is the order of SAT dated 11.02.2014 which was passed under provisions of SEBI Act, 1992 based upon the definition of person acting in concert and that too for the purposes of prohibiting such persons from trading in securities markets. It is to be noted that even the Transaction Auditor has relied on such order in a substantial manner. Said order was admittedly passed in the year 2014. It is not in dispute that applicants no. 1 to 4 submitted the requisite forms along with supporting documents to prove their claim and made requisite declaration that they were Company Appeal (AT)(Ins) No.399/2021 51 not a related party as they were included in COC and also attended first four meetings. Applicants no. 5 to7 also submitted their claims and made statement in similar fashion but since there claims were not admitted initially and only principal amount has been admitted subsequently. They were declared as a related party simultaneously. Hence, they have not been included in COC at any point of time. At this stage, it may not be out of place to mention that none of the provisions which relate to admission or rejection or reduction of claims submitted by financial creditor except the declaration in Form C by such financial creditors itself, provide for determination of their status as a related party. Thus, the legislature has cast primarily obligation on the claimants to state that they are not a related party of Corporate Debtor. Thereafter, verification of their claims starts and list is updated by Resolution Professional on the basis of further information provided by such creditors. If RP during CIRP comes to know that such persons are related parties though this fact has not been disclosed by such persons, then, in our view, RP should, firstly, bring this material to the notice of such persons directly as well as in COC meeting where such persons are still members so that their position on this material can be obtained and matter can be decided. However, it has not been done so in the present case.
27.In the present case, report of external expert has been taken; hence, it becomes imperative for us to see whether such action of Company Appeal (AT)(Ins) No.399/2021 52 RP is justified as per the provisions of CODE. Before proceeding further, we may mention that as per the provision of Section 23 (2) of CODE all the powers and duties vested or conferred on IRP are also available to the Resolution Professional. Now, we come to Section 20 of CODE. subsection (1) thereof makes it obligatory on the part of Interim Resolution Professional to make every endeavour to protect and preserve the value of the property of the corporate debtor and manage the operations of the corporate debtor as a going concern. Section 20(2)(a) of CODE provides that for the purposes of sub-section (1), the Interim Resolution Professional shall have the authority to appoint accountants, legal or other professionals as may be necessary. In other clause of Section 20(2) of CODE, reference has been made to keep the corporate debtor as a going concern. Similar provisions have been made in Section 25 of CODE. However, as per Section 25(2}(d) of CODE, the Resolution Professional can appoint accountants, legal or other professionals in the manner as specified by the Board. The word "specified" has been defined in Section 3(82) of CODE which refers to regulations made by the Board under this CODE. The IBBI has specified CIRP Regulations. However, in such regulations, it has not been provided whether for the purpose of verification of claims submitted by the financial creditors or other creditors, under what circumstances an external agencies can be appointed by the RP. Having stated so, Regulation 10 of CIRP Regulation, 2016, however, cast duty only on IRP to call for such Company Appeal (AT)(Ins) No.399/2021 53 other evidence or clarification as it deems fit from a creditor for substantiating the whole or parts of its claim. As per Regulation 11 of CIRP Regulations, 2016, the creditor is liable to bear the cost of proving the debt due to such creditor. However, in case of rejection of all such claims, in our view, having regard to the language of Regulation 11 of CIRP Regulations, 2016, cost of outside agency cannot be recovered from the creditor, in case of rejection of claim as this has not been done at the instance of the Resolution Professional/COC. IBBI has issued a Circular No. IP/003/2018 dated 03.01.2018. The subject matter of this Circular is Insolvency Professional and his responsibilities. A specific reference has been made with respect to obtaining or certification as regard to eligibility of Resolution Applicant to submit Resolution Plan and it has been directed that he shall not require any certificate from another person certifying eligibility of a Resolution Applicant. In the said Circular, it has been specifically directed that an Insolvency Professional! shall not outsource any of his duties and responsibilities under the CODE. Thus, the ultimate conclusion which appears to us by reading of such Circular that the action of RP in appointing External Transaction Auditor, though, it may be with the approval of COC is in violation of such directions given by IBBI in general and more particularly in the present case having regard to such report which we would consider in the later part of the order. Having stated so, we also took note of the Circulation No. Company Appeal (AT)(Ins) No.399/2021 54 IBBI/IP/013/2018 dated 12.06.2018 which relates to fee, other expenses to be incurred for CIRP. In the opening para of this Circular, IBBI has stated that the Insolvency Professional conducts the entire CIRP and such responsibility of an IRP require highest level of professional excellence, dexterity and integrity. It has also been mentioned that Insolvency Professional may pay the fee for the services obtained for conducting CIRP. It has also been mentioned that Insolvency Professional is obliged under Section 208(2)(a) of CODE to take reasonable care and diligence while performing his duties including incurring expenses which should be necessarily reasonable though such criteria is context specific and cannot be defied in a precise manner. Thereafter, in the said Circular regulatory framework has been outlined. In Annexure-B, it has been provided that what would constitute reasonable cost and reasonable fee. A reference to statement of best practices has also been made in this regard. Thus, the focus of IBBI is absolutely clear that Insolvency Professional cannot outsource his responsibilities at the first stage in a liberal manner and if need arises then it can do so but that should be very prudent and reasonable. From the minutes of meetings of COC, contents of appointment letter appears that main object of such appointment was to obtain Forensic Audit Report to ascertain the transactions of the nature as specified in Section 43,45,50 or 66 of the CODE and verification of claims and status of such applicants as a related party was an additional job. However, as Company Appeal (AT)(Ins) No.399/2021 55 noted from the minute of 6t meeting of COC held on 21.12.2020, no report on the preferential, undervalued, extortionate and fraudulent transactions has been given by Transaction Auditor. Further, no application, in this regard, appears to have been filed with this Authority as yet. No material has been brought on record to show that time for submission of such report had been extended. Thus, such appointment, in our opinion, has not served the main purpose. Accordingly, we are of the view that such appointment is not in accordance with the provisions of CODE, CIRP Regulations and aforesaid Circulars particularly when Transaction Auditor has relied on the documents which were in public domain and provided to him by RP himself. In fact, the Transaction Auditor's report is inconclusive, as stated earlier and is also based on Financial Statements ignoring the source documents altogether. As regard to outsourcing of responsibility or certification of certain matters by RP and scope thereof, the observations of Hon'ble Supreme Court in the case of ArcelorMittal (India) {(P) Ltd. Vs. Satish Kumar Gupta & Ors as reported in (2019) 2 SCC can also be referred to. The relevant findings of Hon'ble Supreme Court in 80 and 81 are reproduced as under:
80. However, it must not be forgotten that a Resolution Professional is only to "examine" and "confirm" that each resolution plan conforms to what is provided by Section 30(2). Under Section 25(2)(J, the Resolution Professional Company Appeal (AT)(Ins) No.399/2021 56 shall undertake to presert ail resolution plans at the meetings of the Committee of Creditors. This is followed by Section 30(3), which states that the Resolution Professional shall present to the Committee of Creditors, for its approval, such resolution plans which confirm the conditions referred to in sub-section (2). This provision has to be read in conjunction with Section 25(2)(), and with the second proviso to Section 30(4), which provides that where a resolution applicant is found to be ineligible under Section 29-A(c), the resolution applicant shall be allowed by the Committee of Creditors such period, not exceeding 30 days, to make payment of overdue amounts in accordance with the proviso to Section 29-A{c). A conspectus of all these provisions would show that the Resolution Professional is required to examine that the resolution plan submitted by various applicants is complete in all respects, before submitting it to the Committee of Creditors. The Resolution Professional is not required to take any decision, but merely to ensure that the resolution plans submitted are complete in all respects before they are placed before the Committee of Creditors, who may or may not approve it. The fact that the Resolution Professional is also to confirm that a resolution plan does not contravene any of the provisions of law for the time being in force, including Section 29-A of the Code, only means that his prima facie opinion is to be given Company Appeal (AT)(Ins) No.399/2021 57 to the Committee of Creditors that a law has or has not been contravened. Section 30(2}(e) does not empower the Resolution Professional to "decide" whether the resolution plan does or does not contravene the provisions of law.
Regulation 36-A of the CIRP Regulations specifically provides as follows:-
"36-A(8) The resolution professional shall conduct due diligence based on the material on record in order to satisfy that the prospective resolution applicant complies with-
(a) the provisions of clause (h) of sub-section (2) of section 25; (b) the applicable provisions of section 29A, and (c} other requirements, as specified in the invitation for expression of interest.
(9) The resolution professional may seek any clarification or additional information or document from the prospective resolution applicant for conducting due diligence under subregulation (8). (10)The resolution professional shall issue a provisional list of eligible prospective resolution applicants within ten days of the last date for submission of expression of interest to the committee Company Appeal (AT)(Ins) No.399/2021 58 and to all prospective resolution applicants who submitted the expression of interest. (11) Any objection to inclusion or exclusion of a prospective resolution applicant in the provisional list referred to in subreguiation (10) may be made with supporting documents within five days from the date of issue of the provisional list. (12) On considering the objections received under subregulation (11), the resolution professional shall issue the final list of prospective resolution applicants within ten days of the last date for receipt of objections, to the committee."
81. Thus, the importance of the Resolution Professional is to ensure that a resolution plan is complete in all respects, and to conduct a due diligence in order to report to the Committee of Creditors whether or not it is in order. Even though it is not necessary for the Resolution Professional to give reasons while submitting a resolution plan to the Committee of Creditors, it would be in the fitness of things if he appends the due diligence report carried out by him with respect to each of the resolution plans under consideration, and to state briefly as to why it does or does not conform to the law.
Company Appeal (AT)(Ins) No.399/2021 59 The above observations strongly support the view taken by us that RP should not or rather cannot outsource or delegate his responsibilities or functions in a casual manner or otherwise to draw support from such report for its arbitrary and unreasonable approach.
28.Further, no material has been brought on record by the Resolution Professional as to what prompted him to treat such applicant/financial creditor as a related party on the basis of the order of SAT by the RP as well as Transactional Auditor at a later stage although this order was already available in public domain including at the time of initiation of CIRP and submission of claims by applicants.
29.These facts have been taken into consideration in the peculiar circumstances of the case having regard to declaration made by the applicants in Form-C and if, before taking any decision, these facts would have been disclosed to them and _ their comments would have been taken then matter could have been resolved in either way on that stage only without going into the further process such as appointment of External Consultant ete. RP could have focused on main objects i.e., insolvency resolution of Corporate Debtor and managing the affairs of the Corporate Debtor as a going concern.
30.Now, proceeding further, we have to analyze the proceedings as regard to how and for what purpose the External Expert has Company Appeal (AT)(Ins) No.399/2021 60 been appointed. The issue of appointment of Transactional Auditor firstly arose in first COC meeting held on 29.02.2020. From discussion on agenda item no. 10, it is noted that some lenders opined that some claims received belonged to related parties so it was advisable to have a clear opinion on the same. However, the basis for such view has not been disclosed in the minutes. It was also specifically submitted that such Transaction Auditor should be independent and should not have any strings connected with Corporate Debtor or any other interested party. It was also discussed that as per Regulation 35A of CIRP Regulations, 2016, RP was obliged to form an opinion whether corporate debtor had been subjected to any transaction covered under Section 43,45,50 or 66 and for that purpose also it was imperative to determine whether any of such transactions were with related parties. In second meeting of Committee of Creditors held on 02.06.2020 firstly the minutes of first COC held on 29.02.2020 were taken note of and, thereafter, discussions were held to the issue relating to the verification of claims as well as appointment of Transactional Auditor. It was informed by RP that certain quotations had been received from same professional for the purpose of assisting the RP in determination of preferential, undervalued, extortionate credit and fraudulent transactions. After discussion, for the purpose of meeting requirement of Regulation 35A, M/s R. Choudhary and Associates was appointed as the Transaction Auditor for this purpose. However, Company Appeal (AT)(Ins) No.399/2021 61 in the resolution passed for that purpose it was also mentioned that such professional should also give an opinion on the claim, interest, and admissibility thereof etc. This view if duly supported by the fact that the nomenclature of external expert has been given as Transaction Auditor which essentially leads to the purpose of verification of preferential, undervalued, extortionate and fraudulent transactions where any related party other than the applicants could also be involved. 31.Third meeting of COC was held on 03.07.2020. The discussion was held on the appointment of said firm as Transaction Auditor. Suspended Management specifically pointed out that Mr. R. D. Choudhary was engaged as RP who was already associated with CIRP of M/s K Life Style and Industries Ltd, a group company, hence, appointment of Mr. R. D. Choudhary would affect the independent working and confidentiality of information relating to the Corporate Debtor, hence, his appointment may be re-considered. Even one of the institutional financial creditors i.e., Bank of Maharashtra expressed same view and stated that there was a situation of conflict of interest in his appointment. However, their views were rejected but such discussion certainly raises the question as to why only this professional was appointed and no other independent professional entity could be appointed. According to us, cost factor, in such situation, is of secondary nature particularly when necessity of such appointment is in question itself. In this meeting, an update on the list of creditors was also Company Appeal (AT)(Ins) No.399/2021 62 made and it was stated by RP that process of up-dation of list of creditors was in progress and on availability of relevant information and transaction Auditor's Report, the updated List of creditors shall be provided to the COC in the fourth meeting of COC. The fourth meeting of COC was held on 19.08.2020 wherein progress made so far in this regard was discussed in a summary manner.
32.Fifth meeting of COC held on 27.10.2020. It is worthwhile to mention that in earlier meetings applicants financial creditors were present but in this meeting none of the applicants was present because after 4th meeting held on 19.08.2020, the RP excluded them from COC and mail had been sent to them to that effect on 14.10.2020. It is worthwhile to mention that in the 4"
meeting of COC no discussion happened as to what would happen if financial creditors were considered as related party and in that situation what action should be taken by RP/COC. Further, no material has been brought on record to show that any communication apart from discussion in COC mneeting was exchanged between RP and COC members to that effect. In this meeting only discussion on this aspect happened in item no. 7 and COC took note of these facts. In item no 16, the issue of identification of immovable properties belonging to the Corporate Debtor arose. It was requested by RP to COC members to provide details if they had anything in their possession. Indian Bank, one Company Appeal (AT)(Ins) No.399/2021 63 the financial creditors and member of COC informed that Indian Bank was also member of COC of another group company i.e. K Life Style Ltd and the Resolution Professional of that corporate debtor informed to them that he had identified certain properties which belonged to this corporate debtor. We are mentioning these facts to show that RP in that proceeding had filed an appeal before Hon'ble NCLAT in that case whereby he was aggrieved by the decision of this Authority for an order passed in respect of an application filed under Section 19(2) of CODE and even the Hon'ble NCLAT directed both RPs to cooperate with each other. It is also to be noted that such RP only was appointed External Transactional Auditor in spite of reservations expressed by certain members of COC. This meeting of COC was held on 21.12.2020 wherein it has been mentioned in item no. 6 as regard to transaction audit and matters incidental thereto that the Resolution Professional wrote an email to the Transaction Auditor on 08.12.2020 to provide the report on the basis of documents and information supplied to them for the time being which can be updated on the receipt of availability of desired information/documents. However, no updated repot as a consequence of this request or statement of fact that the report which had already been submitted by Transactional Auditor on 29.08.2020 was final, has been brought on record. Thus, this situation shows that report submitted by Transactional Auditor was based upon incomplete information and details available as on that date and even in that report, the Company Appeal (AT)(Ins) No.399/2021 64 Transaction Auditor has itself admitted this situation. Therefore, in our considered opinion, such report cannot be a proper basis to consider the applicants as related party and to reject or reduce their claims.
33. Generally, we do not go into the detail but facts of the present case demand that a proper analysis as regard to conduct of CIRP by RP. The appointment Transaction Auditor was made on 17.07.2020. The Scope of work is defined as under:
SCOPE OF WORK .
1.In accordance with the provisions of Regulation 35A of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulation, 2016, the Resolution Professional shall be required to form an opinion on whether the Corporate Debtor has been subjected to any transaction falling under the purview of the following sections of the Insolvency & Bankruptcy Code, 2016;
a. Section 43: Preferential Transactions b. Section 45: Undervalued Transactions c. Section 50: Extortionate Credit Transactions d. Section 66: Fraudulent trading or wrongful trading
2. A detailed report and professional opinion on the amount, security interest and admissibility of claims received or to Company Appeal (AT)(Ins) No.399/2021 65 be received from various creditors including but not limited to giving professional advice on the re-constitution of the Committee of Creditors pursuant to such claim verification or re-verification upon analyzing the relevant provisions of the Code and the Regulations made thereunder, From the perusal of above para, it is noted that transaction audit has to be completed by Transactional Auditor as per the time-line given in the appointment letter which is thirty (30) working days from the receipt of this letter which could be extended mutually, if required. Thus, prima facie the facts are on two things. However, even as on date, no application under Section 43, 45, 50 and 66 has been filed or from progress reports up to 21.12.2020 nothing is mentioned therein as far as this part of scope of work is concerned.
34.Now, we come to the covering letter of the report given by the Transactional Auditor on 29.08.2020. As per subject of this letter, this is their final report. In this letter, it is mentioned that additional scope of work was to verify the claims and giving a professional advice as regard to reconstitution of committee as per the provisions of Section 21 of CODE. Other two paras are reproduced so as to appreciate whether such reporters have any validity in the eye of law because so many qualifications/exceptions have been made.
Company Appeal (AT)(Ins) No.399/2021 66 We have been provided detail of claims along with proof of claims submitted by various financial creditors vide email dated 23rd July, 2020. Based on preliminary verification of documents, we observed that certain documents are missing and are pending to be provided by claimants. The same has been conveyed to you vide email dated 25% July, 2020.
AS per you request, we hereby providing the detailed final report on committee to be re-constituted based on information provided along with the claim, information provided by Resolution Professional and based on information gathered from public domains. We hereby provide the report containing the Jinancial creditors who shall be form part of the Committee of Creditors along with the amount of their claims admitted based on information available and their voting share in the committee of creditors and list of financial creditors who will not be form part of Committee of Creditors and amount of claims admitted/ not admitted based on records provided by RP along with the detailed Findings.
The Transaction Audit report has been given in two parts. One parts relates to non-admission of claims pertaining to corporate guarantees which are subject matter of IA 13 of 2021, hence, will Company Appeal (AT)(Ins) No.399/2021 67 be dealt while disposing of that application in the later part of this order.
In IA 953 of 2020 the claims of applicants/financial creditors who had given loans have been dealt in second part of such report. Out of nine (9) financial creditors mentioned therein, two financial creditors, namely, Capman Compro Pvt. Ltd. and Chams Holding Pvt. Ltd. are not part of any of these two applications, hence, not of any relevance. One reason for nonadmission of aforesaid members in COC has been that name of M/s. Hikal Pro-Estate Pvt. Ltd. appeared in the impugned order of SAT. Second reason which is given in the report is that there were common directors of six (6) applicants companies and the Corporate Debtor. However, these six (6) applicant companies do not include the name of M/s Hikal Pro-Estate Pvt. Ltd., hence, for this reason; the link between Corporate Debtor and directors of this company is not established. We have also gone through the details enclosed in Annexure-II of the report showing common directorship of individuals but on careful perusal of such details which are placed in the paper book from page no. 45 to 72, we have not found any director which is or was director of the corporate debtor though there is a common directorship between applicants themselves. Thus, the conclusions arrived by the External Transaction Auditor are without any basis and, therefore, required to be reversed. Further, the report is in explicit contravention of the provisions of Section Company Appeal (AT)(Ins) No.399/2021 68 21 r.w. the contents of Form-C which shows lack of understanding of law on the part of the External Transactional Auditor as well as a determined approach to exclude the applicants from COC. Further, merely if some person's name or entities names have appeared in the said order of SAT, in our opinion, one more issue which arise for our consideration is whether relationship at any point of time prior to two years period from the commencement of CIRP, can declare them as a related party for all times to come. In the present case, SAT order of 2014 which is more than six year prior to commencement of CIRP and alleged transaction pertain to year 2007 to 2009, hence, in our considered opinion; the same cannot be a proper basis to form such opinion. Hon'ble Supreme Court in the case of Phoenix Arc Private Limited has also expressed such concern in para 92 of their order.
35.As contrast to this view of Transaction Auditor, the applicants have filed affidavit as per directions of this Authority to the effect that they were never a related party in addition to the report of independent Practicing Company Secretary which was filed by them along with their letter dated 29.10.2020 in case of all applicants. In this reply, it was also claimed that there are not a related party. We have also perused the contents of report submitted by the independent Practicing Company Secretary that reports have been given after taking into consideration of relevant provisions of the CODE, Companies Act, 2013 and Accounting Company Appeal (AT)(Ins) No.399/2021 69 Standards 18. As stated earlier, as the Transactional Auditor has relied only on the said order for examination of claims of unsecured financial creditors who granted loans and no other material has been brought on record. This fact also raises a question as to what was the necessity of appointing such Transactional Auditor as this information could not have been found by the RP itself with little efforts and perhaps in that situation the approach of RP could have been more reasonable because the Transactional Auditor has given a wrong finding of fact as regard to common directorship. Further, from the material on record, it is seen that no reply has been given RP to the letter of applicants dated 29.10.2020. From the minutes of meetings COC, it appears that this issue has never been considered and reviewed by COC also in this manner.
36.One more reason on the basis of which the report of the Transactional Auditor is liable to be rejected is that a blanket claim has been made in respect of all applicants that they were a related party in terms of provisions of Clause (f), (h), (l)" and (m) of sub- section 24 of Section 5 of CODE. For the sake of read reference these clauses are reproduces as under:
5(24) "related party", in relation to a corporate debtor, means--
(f) anybody corporate whose board of directors, managing director or manager, in the ordinary course of business, acts Company Appeal (AT)(Ins) No.399/2021 70 on the advice, directions or instructions of a director, partner or manager of the corporate debtor:
(h) any person on whose advice, directions or instructions, a director, partner or manager of the corporate debtor is accustomed to act:
(l) any person who can control the composition of the board of directors or corresponding governing body of the corporate debtor; (m) any person who is associated with the corporate debtor on account of--~ (
i) participation in policy making processes of the corporate debtor; or
(ii) having more than two directors in common between the corporate debtor and such person; or
(iii) interchange of managerial personnel between the corporate debtor and such person: or
(iv) provision of essential technical information to, or from, the corporate debtor;
From the perusal of above Clauses, it is apparent that these clauses deal with different situations for deciding the issue where a party is a related party or not. Hence, without meeting the specific requirements of these clauses a party cannot be declared as a related party by applying all clauses in an arbitrary manner like this. Further, no material has been brought on record to Company Appeal (AT)(Ins) No.399/2021 71 support such findings except the working which has been given for this purpose and on that basis also, in our view, these clauses cannot be made applicable in the present case.
37.Thus, considering all facts and specific legal position, we hold that the action of RP is not only against the provisions of law, both in respect of declaring such party as a related party and also excluding them from COC on one hand but it is also arbitrary, unreasonable and biased on the other hand.
38.To further support that the principles of natural justice have crossly violated, we also draw support from the provisions of section 30(4) and Section 30(5) of the CODE that in the event of a person who has filed Resolution Plan is found to be ineligible under Section 29A(c) and opportunity of hearing for rectifying the disability would be given for a limited period, hence, legislature has not intended that even a related party, if found to be violative of provisions of Section 29A of the CODE, can submit a Resolution Plan after removing such disability. Once it is so, it is highly desired that related party of the Corporate Debtor, if has got claims against the Corporate Debtor, should not be given such treatment and that too without giving an opportunity of hearing. Having stated so, we again reiterate that we do not wish to give leeway to errant and fraudulent managements in any way as far as their fake or fraudulent claims are concerned but in the present case this does not appear to be a fact situation. Further, where Company Appeal (AT)(Ins) No.399/2021 72 the Corporate Debtor has been subjected to any transaction as specified in Section 43, 45, 50 and 66 of CODE separate mechanism exists which can be invoked in that situation even in case of related parties.
39.It is also noted that even in case of applicants who had given unsecured loans, where ever Form-26 AS were required by the RP, the same have been provided which fact further creates a question mark as to why the claims as regard to interest, in such cases, have been rejected. In this regard, we also consider it pertinent to mention that even loan agreements and other documents exist which provide for interest as well. No mention of these facts have been made in the report of Transactional Auditor except one observation that claims of aforesaid creditors have been admitted to the extent of principal amount based upon the Books of Account which reflects adversely on the approach of the Transaction Auditor in cases where Form-26 AS had been submitted and which fact has not been taken into consideration by the Transaction Auditor.
40.Now, coming to IA 13 of 2021, it is noted that in this case amounts relating to corporate guarantees are only involved and there is no unsecured loan. RP initially rejected its claims for the reason that these corporate guarantees remained unsubstantiated. Transaction Auditor in its report held that the provisions of Section 186 of Companies Act, 2013 and Section Company Appeal (AT)(Ins) No.399/2021 73 372(A) of Companies Act, 2013 were violated. It is also noted that in the said report that as per provision of Section 186{(4) of the Companies Act, 2013, the company was liable to be disclose the details of guarantee given by the company in the financial statements and it was also to be disclosed that for what purposes such guarantee had been given. There is a categorical finding that in Financial Statements commencing from 2013 till Financial Year 2016-2017 such details have not been given. The reference to the notes given in the financial statements on these points has also been made. From the perusal of said disclosure, it is noted that the company had not given any guaranties for loans taken by others from Bank or financial institutions. It is also claimed that the account of Corporate Debtor before SBI had been classified as NPA on 30.03.2011 by SBI and thereafter by Banks as well and whereas so-called corporate guarantee was executed by Corporate Debtor on 29.11.2012. Hence, there was a violation of provisions of Section 372(A) of the Companies Act, 1956 as prior approval of public financial institutions was not obtained. Other ground which has been taken is that authenticity of the signature on corporate guarantee agreement was also under cloud. At this stage, as far as this aspect is concerned, we are unable to understand how this report could be given by a person who is not handwriting expert, and therefore, it does not have any validity in law. Apart from that it has been alleged that guarantees were back dated because in case of M/s. Bridge Infra Pvt. Ltd. the Company Appeal (AT)(Ins) No.399/2021 74 registered office mentioned in the corporate guarantee deed was not the registered office as the same had been changed in the year 2015. It has also been stated that the stamp papers for loan agreements as well as corporate guarantee were having serial no in a sequence, hence, both agreements were executed at the same time. Thus, on these grounds, legitimacy and authenticity of the documents have been challenged and it has been concluded that legitimacy of such documents needed a further investigation and substantiation. As far as ground of non-disclosure is concerned, it is noted that the disclosure made is with reference to loan guarantees given in respect of loan taken from public financial institutions or from other Banks, hence, it does not relate to unsecured financial creditors which are not a pubic financial institutions. As far as the legitimacy and authenticity of documents of corporate guarantee and loan agreement is concerned, it has been stated by the Transactional Auditor itself that further investigation and substantiation were required which means that no final conclusion could be given without such process being completed.
41.The other reasons are similar to the reasons given in respect of unsecured financial creditors which had already been dealt with while disposing of IA 953 of 2020, hence, not discussed separately. It is to be noted that substantial documents were submitted by the applicants while claim was made in requisite Company Appeal (AT)(Ins) No.399/2021 75 Form-C, The applicants have also filed affidavits that they were not a related party or connected with the Corporate Debtor at any point of time in terms of provisions of Section 5(24) of CODE and Section 2(76), Section 2 (77) of the Corporate Debtor. Specific claim has been made in such affidavit that clauses i.e., (f), (h) () and (m) of Section 5(24) of CODE were also not applicable.
42.The applicant has also made contention that the financial creditors were not a public financial institutions, hence, such observation of Transactional Auditor were not having any strength. This aspect has already been dealt with by us. The applicants have also raised a legal contention that related party should be in present and for this proposition, reliance has been placed on the decision of Hon'ble Supreme Court in the case of Phonix Arc Private Limited vs. Spade Financial Services Limited & Ors dated 01.02.2021. However, in Para 91 it has been held that the definition of related party could be applied at the time when debt was created. Further, in Para 92, it has been held that if this view was taken as a standard rule then an absurd conclusion may arise because entities which had legitimately taken over the debt of the related party or where related party entity had stopped being a related party long ago, would be treated as related party. In Para 94 the Hon'ble Supreme Court has culled out an exception by keeping into consideration the object and purpose of first proviso to Section 21(2) of CODE and has held that where a Company Appeal (AT)(Ins) No.399/2021 76 financial creditor divests itself of its shareholding or ceases to become a related party in a business capacity with a sole intention of participating in COC and sabotage the CIRP, in that situation a former related party would be considered as one falling under the first proviso. Accordingly, when we apply this ratio of the decision, we have to see whether a device has been used by the so-called related parties to cease as related party to sabotage CIRP. No material has been brought on record by the RP to this effect. Further, no material has also been brought on record even to conclude that whatever material was there on that basis these parties could be considered as a related party at any stage for the purposes of Section 5(24) or Section 21(2) of the CODE.
43.Whether opportunity of hearing to the affected parties is to be given before taking such action?
It is a legitimate expectation, both in equity and in law that person who is going to be punished or again whom some adverse action is being taken or his rights are prejudiced or adversely impacted because of some action of the other person, such affected person should get an opportunity to present his case. This principle is called 'Audi Altrem Partem' which requires hearing the view point of a person before taking a decision against such person. In the present case, this principle has grossly been violated as evident from the facts and sequence of events narrated hereinbefore and for the sake of brevity, we do not repeat the same. Company Appeal (AT)(Ins) No.399/2021 77 43A.We have also gone through the communication made by Resolution Professional and it is noted that after initial communication as regard to submission of information and some details, no communication has been made with them as regard to the aspect of related party. Hence, we do not find any merit in the contention of the RP that it conducted the CIRP in most transparent and fair manner rather having regard to the facts stated hereinbefore the picture is otherwise. This aspect has already been considered by us in earlier part of our order and it has been established that the conduct of CIRP is not in accordance with the object and scheme of CODE, Regulations made thereunder. We also find that the news item taken in support by the RP appeared on a web platform on 23.12.2020 much after the exclusion of these parties from COC, hence, such item, on the face of it, does not support the approach of the RP. Further, RP has to conduct CIRP as per provisions of law and is not supposed to form an opinion based upon such news item. Even otherwise, the contents of this news item indicate that it is an instance of sponsored news. Thus, we hold that principles of natural justice have been violated both by RP as well as COC.
44.In the facts of the case and the manner in which CIRP is being conducted, as evident from the proceedings which have taken place as regard to rejection of claims and re-constitution of COC by excluding the applicants from COC, we are of the considered Company Appeal (AT)(Ins) No.399/2021 78 view that some accountability mechanism for the authorised representatives of members of COC is also required on lines of provisions of Section 70(2) of CODE wherein Insolvency Professional can be questioned for its deliberate contravention of the provisions relating to CIRP/Liquidation of the Corporate Debtor. We also consider it appropriate to mention that principles of natural justice and equal opportunity are cardinal to any process including CIRP which is to be completed in a time-bound manner and any deviation there-from may invite judicial intervention as commercial wisdom of COC is final in respect of certain matters only which have been specifically mentioned in the CODE and the matters as regard to status of a Financial Creditors being a related party and re-constitution of COC, which are under our consideration in the present applications, do not fall into that category. Thus, till such mechanism is brought on the statute or even otherwise, we humbly advise the COC to work in a fashion which meets the objects and scheme of the CODE so that interests of all stakeholders are taken care of.
The Adjudicating authority in its order has framed certain issues involved in the case which were to be adjudicated in the following manner:-
"17. Both these matters were heard together. Now, these are being disposed of through common order. In both applications the following issues are involved:
Company Appeal (AT)(Ins) No.399/2021 79
(i) Whether Resolution Professional, after including Financial Creditors in Committee of Creditors, can remove them from COC for the reason that they are related parties, without prior approval of Adjudicating Authority?
(ii) Whether Financial Creditors, though they may be a related party remain entitled to be a part of COC without having any voting rights or right to participate or represent in the COC meetings?
(iii) whether such financial creditors, in view of evidence brought on record, are a related party of the corporate debtor or not?
(iv) Whether opportunity of hearing to the affected parties is to be given before taking such action?
18. Now, we will deal with these questions in the following manner:
(i)Whether Resolution Professional, after including Financial Creditors in Committee of Creditors, can remove them from COC for the reason that they are related parties, without prior approval of Adjudicating Authority?
(ii)Whether Financial Creditors, though they may be a related party remain entitled to be a part of COC without having any voting rights or right to participate or represent in the COC meetings?
Company Appeal (AT)(Ins) No.399/2021 80 In IA No.953/2021, here are 7 applicants. Claims of applicant no. 1 to 7 have been admitted at principal amount. Applicants no. 1 to 4 have participated in first four COC meetings whereas applicants no 5 to 7 were never informed about COC meeting nor any communication was made by RP as regard to status of claims submitted by them. It is further claimed that RP issued certain queries, which according to the applicants were of arbitrary nature and the sole object was to not to invite applicants no 5 to 7 for participation in COC meetings. In IA 13 of 2021, the claims pertain to amount of corporate guarantees which were invoked and such amount includes interest also. It is further noted that all supporting documents as required were attached with Form-C submitted by all applicants in both the applications. It is noteworthy that the basis for treating all the applicants as a related party is based upon the order of SAT dated 11.02.2014 and a report submitted by Transaction Auditor appointed by RP."
On going through the aforesaid order we are of the considered opinion that while passing order for replacement of RP, the Learned Adjudicating Authority has not committed any error rather the situation warranted the Adjudicating Authority which has been dealt with in the order to take such stringent step. Company Appeal (AT)(Ins) No.399/2021 81 Similarly while discussing all the issues certain comments were made which appears to be insignificant and as such we donot find any ground to interfere with the order of replacement of the RP nor anything is required to be indicated on the point of so called adverse comments.
We are of the opinion that if IRP/RP proceeds contrary to the established principles of conducting CoC Meeting and commits several illegalities the Adjudicating Authority may not act only as a spectator or he may shut his eyes. In such situation the Adjudicating Authority is entitled to exercise inherent jurisdiction under Rule 11 of NCLT Rules, 2016. Moreover, the said exercise by the Adjudicating Authority has already been approved in a case by this Appellate Tribunal in Company Appeal (AT)(Ins) No.786 of 2020 in Anil Kumar Vs Allahabad Bank and others. It would be appropriate to reproduce paragraph 11 of the said order as follows:-
"11.FINDINGS
(i) After hearing the Learned Counsel for the Parties, after going through the Status Report submitted by Respondent No. 2 and after going through the Written Submissions filed on behalf of the Parties, we are of the considered view that Company Appeal (AT)(Ins) No.399/2021 82 so far statutory provision as contained in Section 22 of the I&B Code which contemplates appointment of Resolution Professional and further replacement is concerned, this power can only be used when the ingredients of Section 22 is met.
(ii) (ii) Further, so far as the provision of Section 27 of 'IB Code' is concerned it contemplates with the Replacement of Resolution Professional by CoC. This power can only be used when the ingredients of Section is met.
(iii) (iii) In the facts of this case neither the ingredients of Section 22 & 27 of the Insolvency & Bankruptcy Code, 2016 ('I&B Code') is made out.
(iv) So, the Learned Adjudicating Authority have rightly invoked inherent jurisdiction in the fact of this case and passed the Impugned Order.
(v) The Learned Adjudicating Authority is conscious of the fact that the Appellant herein could not provide leadership to CIRP proceedings and further there was clash between the Secured and Unsecured Creditors and timeline for CIRP proceedings was running out.
(vi) So, the Learned Adjudicating Authority in order to shape the CIRP proceedings on an Application under Rule 11 filed by Respondent No. 1/ Allahabad Bank, taking note of the fact that there is conflict between the Secured and Unsecured Creditors and no commencement reached by majority of Company Appeal (AT)(Ins) No.399/2021 83 voting share to appoint the Appellant herein as IRP/RP invoked thereunder part in Rule 11 and rightly have passed the Impugned order.
(vii) Further, from the perusal of the Status Report submitted by the Respondent No. 2- M/s LSL & Industries Ltd., through Mr. Kiran Shah on 29.06.2021, which has been discussed in detail, it reveals that substantial progress in the CIRP proceedings had been made.
(viii) Taking all these circumstances and also the fact that the Appellant has only argued on one question of law which was formulated by this Tribunal under this Order dated by 17.09.2020, is only about the exercise of power of Rule 11 of NCLT by the Learned Adjudicating Authority in the facts of this case.
(ix) We are of the considered that the Learned Adjudicating Authority have rightly exercise this power and there is no merit in the Appeal and is accordingly dismissed.
(x) It appears from the perusal of the record that this Instant Appeal was filed on 03.09.2020 before this Tribunal and Notices were issued on 17.09.2020 and being disposed off by Judgement dated 20.07.2021."
On examination of the impugned order in the present appeal it is evident that though some of the respondents were allowed to participate in 1st CoC Meeting subsequently without prior approval Company Appeal (AT)(Ins) No.399/2021 84 of the Adjudicating Authority they were restrained from participating in the proceeding. Similarly number of other irregularities were committed by the RP. In such situation it was imperative for the Adjudicating Authority to pass order for removal of the RP by the impugned order.
We do not find merit in the appeal. The appeal stands dismissed. In view of dismissal of this appeal Interim Order stands also vacated.
The appeal stands dismissed without cost.
(Justice Rakesh Kumar) Member (Judicial) (Dr. Ashok Kumar Mishra) Member (Technical) Bm Company Appeal (AT)(Ins) No.399/2021