The Interim Resolution Professional appointed by lead lender Canara Bank disallowed Srei to be part of the CoC
In a judgement that may have far reaching impact on lenders who have converted their debt into equity, the Hyderabad bench of the National Company Law Tribunal (NCLT) has ruled that any party, including financial creditors who have equity stake in the companies, cannot have voting rights or be part of the Committee of Creditors (CoC) when the case is being resolved under the Insolvency and Bankruptcy Code (IBC).
The NCLT judgement, a copy of which is with DNA Money, was delivered on November 16, 2017.
The court has ruled that if any creditor who has more than 2% shareholding in the company, then the creditor cannot be allowed the voting rights irrespective of how they have obtained the shareholding – whether through a debt conversion or an acquisition.
The court was hearing a petition filed by Srei Infrastructure Finance which had converted a part of its debt extended to Deccan Chronicle Holdings (DCHL) into equity. The Interim Resolution Professional (IRP) appointed by lead lender Canara Bank disallowed Srei to be part of the CoC. Canara Bank was of the view that Srei with over 24% equity stake in DCHL may not be impartial in its voting as they are part-owners of the company.
Srei argued that initially it was part of the CoC, but subsequently the IRP changed the constitution of the committee without involving them. Canara Bank said that "representatives of Srei were inducted into DCHL but the fact remains that Srei is a related party due to its shareholding in the company. And if the company is allowed to vote in the meeting of the committee of creditors, it will cause serious prejudice to other creditors."
Srei said that out of a total debt of Rs 240 crore, which includes interest, penal interest and other payments, only Rs 20 crore was converted into equity.
Sameer Kakar, partner, News Insolvency Professional LLP, said, "In most of the special restructuring cases like the S4A (Sustainable Structuring of Stressed Assets) and the SDR (strategic debt restructuring) or the corporate debt restructuring cases where lenders have converted part of the debt to equity will be adversely impacted."
However, the court ruled that since the financial debtor in this case Srei Infrastructure is a major shareholder in the company and the largest financial creditor of the company, it should not be allowed voting rights and the interest of the major lender in this case Canara Bank may be at risk.
The court ruled that Srei Infrastructure holds 24.5% shares in DCHL and that the mode of having the voting rights is immaterial and the leading creditor in this case Canara Bank should be given the rights to decide on the voting rights as it will cause maximum damage to the bank if there are any prejudices in the voting.
The court said that under Section 5(24 (j) of the IBC, a mere presence of a director or a partner or a relative of a director or even a key managerial personnel holding more than 2% share is sufficient to classify as related party irrespective of whether a particular director or partner or key managerial personnel participates in the affairs of the company or not. The application of Srei was rejected and the applicant is not entitled to be a member of the CoC, the order said.
THE SREI CASE
- The Interim Resolution Professional (IRP) appointed by lead lender Canara Bank disallowed Srei to be part of the CoC
- Canara Bank was of the view that Srei with over 24% equity stake in DCHL may not be impartial in its voting
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