Union Bank Of India vs M/S. Rajdeep Clothing And Advisory Pvt. ...

(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 -ravi@ravics.com 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