Resolution professional can’t reclassify financial creditor as operational on his own: Allahabad HC
Can the resolution professional reclassify the status of a financial creditor to Operational Creditor based on ‘expert’ opinions despite that the Adjudicating Authority had taken a contrary view?
Hearing a petition filed by the promoter of a corporate debtor challenging the Adjudicating Authority’s ruling reinstating a creditor as financial creditor, the Allahabad High Court has observed that if a resolution professional has accepted a claim as a Financial Debt and Creditor as a Financial Creditor, then he cannot review or change that position in the name of updation of Claim.
The court terms the attempt of the resolution professional to ‘undo’ the adjudicating authority’s order and re-classify the said creditor from financial to operational creditor as his high-handedness and said the act of the resolution professional reeks of collusion with the promoters to deny the financial creditor its due.
Facts of the case
The case pertains to corporate insolvency resolution process of Jain Mfg (India) Pvt Limited, which was admitted to NCLT in February 2019. The appellant in this case was Rajnish Jain, the promoter, stakeholder and Managing Director of Suspended Board of Jain Mfg (India).
The financial creditor in question is BVN Traders, which was listed as the financial creditors by the Interim Resolution Professional and hence was made part of the Committee of Creditors (CoC). However, after a submission by the ex-managing director, the resolution professional professional – Anupam Tiwari – changed BVN Traders’ status from financial creditor to operational creditor without consulting the CoC.
When on 19th August 2019, the Allahabad bench of the NCLT pointed this out and asked the RP to get CoC approval on the same.
The CoC in its 4th meeting on 30 August 2019 passed the resolution treating the BVN Traders as financial creditor. Following this the ex-promoter moved the NCLT against the CoC’s decision.
NCLT in its 23 January rejected the petition of the Rajnish Jain. Its order read: “This adjudicating Authority is of the view that as the COC has voted in majority in favour of BVN Traders as “financial creditor” and thus Suspended Management as well as Resolution Professional has no locus to challenge the commercial wisdom and decision of Committee of Creditors with regard to determination of Respondent as financial Creditor.”
Also Check our section on Landmark Judgments
This did not deter the resolution professional as well as the ex-promoter of the company to try and remove BVN Traders from the list of financial creditors. They managed to convince some of the CoC members, and in its 8th meeting on 18 February 2020, the CoC passed a resolution ‘to eliminate the name of BVN Traders from the list of ‘Committee of Creditors’.
In the same meeting (8th CoC meeting), the CoC passed a resolution withdrawing CIRP against the corporate debtor by 100% vote after removing BVN Traders from CoC. A similar resolution to withdraw CIRP against the CD was rejected by the CoC when BVN Traders was in the CoC.
Court’s view
The Allahabad High Court observed in its order that the resolution professional in the name of “updating list of claims” sat down to review the claims on his own, and for this, he called reports from two alleged experts.
“The IRP after collation of Claims and formation of ‘Committee of Creditors’ was not entitled to suo-moto review or change the status of a creditor from Financial to Operational Creditor. Updating list and review are different acts. If Resolution Professional was aggrieved, he should have moved the Adjudicating Authority. The aggrieved person can challenge either constitution of ‘Committee of Creditors’ or for any grievance against rejection, incorrect acceptance or categorisation of creditors before the Adjudicating Authority. But the Resolution Professional cannot arbitrarily on its own overturn earlier decision, to change the status of a creditor from Financial Creditor to Operational Creditor,” said the court.
The court even alluded to RP’s collusion with the ex-promoter. “It is apparent that every action of Resolution Professional, either about the change of status of ‘BVN Traders’ from financial to Operational Creditor or regarding the elimination of name of ‘BVN Traders’ from the ‘Committee of Creditors’ was being done in collusion with erstwhile Member of suspended Board of Directors, Promoter and Managing Director Mr Rajnish Jain,” it says in its order.
Based on its findings and readings, the Allahabad High Court dismissed the appeal of Rajnish Jain to overturn NCLT’s 23 January order rejecting the change in status of BVN Traders.
