State Bank of India VS Gati Infrastructure Bhasmey Power Private Ltd
IA (IBC) 1477/2023 in CP(IB) No.203/7/HDB/2022
Facts:
1. Applicant issued a Letter of Intent (LOI) dated 12.02.2010 (Annexure 2) agreeing to finance the Corporate Debtor for a project undertook by it by way of subscribing to 49% of stake in Direct Equity of Corporate Debtor amounting to Rs.60.05 Crores. In terms of Letter of Intent various SSA, SPA and SHA were executed between the parties.
2. As part of financing the project undertook by the Corporate Debtor, an underwriting and Rupee Loan Agreement and other financing and security document dated 23.03.2010 was entered into between the Applicant and the Corporate Debtor (Annexure 6A to 6D). Accordingly, an underwriting commitment was made to the extent of Rs.250 crores with a take and hold commitment of Rs.50 crores.
3. Applicant, along with State Bank of India (SBI) and PTC India Financial Services Limited (PTC) formed a consortium and entered into a Common Loan Agreement dated 29.07.2011 with the Corporate Debtor and executed certain documents to secure the loan facility granted under the Common Loan Agreement. The term loan facility of Rs.60 crores granted by the Applicant to the Corporate Debtor was restructured by the Applicant and pursuant to the same, amendment agreement dated 26.03.2015 was made to the Common Loan Agreement dated 25.03.2010
4. On failure to abide by the term, Applicant filed an OA before the DRT Delhi for recovery of debt. Applicant, in accordance with the equity/share subscription agreement and share buyback agreement, invoked the terms therein and exercised put-option requiring the promoters of Corporate Debtor to make payment of Rs.101.59 crores against buyback of 1,50,05,166 shares. But the promoters of Corporate Debtor failed to honour the same.
5. While the things stood thus, on 24.04.2023, the Corporate Debtor was admitted into Corporate Insolvency Resolution Process (CIRP) on a Petition brought to this Tribunal by The State Bank of India. Applicant herein submitted its claim in Form C to the Respondent. The Respondent herein provisionally admitted the claim of the Applicant herein and constituted the CoC, but did not include the Applicant herein as a member of CoC stating that the Applicant, though a Financial Creditor of Corporate Debtor, being a related party as mentioned under Section 5(24) of IBC, falls under the first proviso of Section 21(2) of IBC and hence, cannot be made part of CoC.
6. Application is filed challenging the decision of Respondent.
Issue: Whether the action of Respondent is correct ?
Argument:
Applicant:
1. Counsel submitted that there is no private interest of individuals involved in the business of the Applicant. That had it been a law then baring the Applicant as Financial Creditor under second proviso to Section 21(2) of IBC, the transaction of equity subscription between the Applicant and the Corporate Debtor would never have happened.
2. It was submitted that Applicant has no intention of conducting the business of the Corporate Debtor, but subscribed to the equity of the of the Corporate Debtor to provide financial assistance to Corporate Debtor with an option to exit from the subscription. That the equity subscription is part of debt with the intention to plug in the gap of financing with clear buy back arrangement and is covered by the second proviso to Section 21(2) of IBC. That the Applicant already exercised its option to exit from the equity, but due to the failure on the part of Corporate Debtor and its promoters, is still holding the equity in the Corporate Debtor.
Respondent:
1. Counsel submitted that Respondent categorized the Applicant as a related party in terms of Section 5(24)(j) of IBC as the Applicant is a primary equity shareholder of the Corporate Debtor holding 38.73% of the total equity of the Corporate Debtor. That the Applicant itself in its claim Form C dated 12.05.2023 submitted to the Respondent declared itself to be a related party of Corporate Debtor under Section 5(24) of IBC, but sought the benefit of second proviso to Section 21(2) of IBC.
2. It was submitted that the benefit under second proviso to Section 21(2) of IBC is not available to the Applicant as there is no conversion or substitution of debt into equity shares nor any other conversion or substitution of instruments convertible into equity share.
Decision: NCLT held that respondent decision of not including the Applicant in COC was incorrect.
Rationale:
1. NCLT noted that applicant satisfies condition (i) being an entity regulated by RBI and further held that as far as the compliance to condition (ii) is concerned , it is clear that equity held by applicant is not acquired on account of conversion or substitution of debt into equity shares or instruments convertible into equity shares. Therefore part (a) of condition (ii) is not applicable in the present case and on account of not satisfying this aforesaid condition , the respondent has not included the applicant in “COC with voting right”.
2. It held that equity funding by applicant is not with an intention to be promoter of the corporate debtor or control or manage the company but it is with the sole intention of providing financial help to the promoters in the initial stage and then come out from the company through buy back arrangement.
3. It also accepted the submission of the applicant that applicant in real sense has no relationship with the CD except the relationship being of financier to it and the equity subscription because of which Section 5 (24) (j) is attracted is also a part of funding with the intention to plug in the gap of debt financing with clear buy back arrangement of equity.
Order:
