Creditor facing PMLA investigation cannot be part of Committee of Creditors, NCLAT
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Creditor facing PMLA investigation cannot be part of Committee of Creditors, NCLAT

Aditi Singh

The National Company Law Appellate Tribunal (NCLAT) has held that a creditor against whom a money laundering case has been initiated cannot be allowed to be a member of the Committee of Creditors for a corporate insolvency resolution process.

The NCLAT has further held that after the Committee of Creditors has been constituted and three months have elapsed, the Resolution Professional is not competent to entertain applications for inclusion of more Financial Creditor without the permission of the Committee.

The Judgment was passed by a two-member Bench of Chairperson Justice SJ Mukhopadhyay and Member (Judicial) Justice Bansi Lal Bhat.

The Corporate Debtor, Viceroy Hotels Limited and Mahal Hotel Private Limited had entered into a Business Transfer Agreement pursuant to which the Corporate Debtor was paid part of the consideration amount of Rs.122.23 crores.

Subsequently, Mahal Hotel Private Limited cancelled the Business Transfer Agreement and the amount paid by Mahal Hotel Private Limited was shown as forfeited and reflected in the Balance Sheet of the Corporate Debtor for the Financial Year 2013-14 onwards.

A corporate insolvency resolution process was initiated against the Corporate Debtor in March 2018 and the Committee of Creditors was constituted.

The first meeting of the Committee of Creditors was held on April 9, 2018, and Mahal Hotel Private Limited was not its member.

On April 23, 2018, the Information Memorandum was circulated by the Resolution Professional and the list of creditors, as disclosed in the Information Memorandum, did not include Mahal Hotel Private Limited.

Even the updated list of members of Committee of Creditors which was circulated on July 7, 2018, by the Resolution Professional did not include Mahal Hotel Private Limited.

On the same day, the Committee of Creditors directed the Resolution Professional to convene a meeting for changing the Resolution Professional.

Thereafter, on July 11, 2018, the Resolution Professional circulated an email with the “updated list” of members of the Committee of Creditors. This list included Mahal Hotel Private Limited as a Financial Creditor.

Aggrieved by this new Committee of Creditors, Asset Reconstruction Company (I) Limited (ARCIL) filed an application under Section 24(3) of the Insolvency and Bankruptcy Code, 2016 before the National Company Law Tribunal, Hyderabad Bench.

The application was disposed of by giving a direction to Resolution Professional to only revise the claim submitted by Mahal Hotels Private Limited.

Subsequently, ARCIL moved in appeal before the NCLAT.

ARCIL contended that Mahal Hotel Private Limited was not a Financial Creditor as forfeiture of the amount received under Business Transfer Agreement did not come within the meaning of Financial Debt. It was also pointed out that Mahal Hotel Private Limited’s name was included after three months of constitution of the Committee of Creditors and at a time when the Resolution Professional was going to be removed, hence the same was done with an intent to defeat the purpose of IBC.

It was the appellant’s contention that the Mahal Hotel Private Limited was unethically included as Financial Creditor by the Resolution Professional with the intention to ensure that he was not removed by the Committee of Creditors.

Lastly, it was submitted that the new Committee of Creditors could not be sustained as Mahal Hotel Private Limited was involved in money laundering and was facing proceedings under Prevention of Money Laundering Act, 2002 for the transaction which formed the basis of its admitted claim in the present case.

Mahal Hotel Private Limited argued that pendency of an investigation under PMLA for a transaction that forms the basis of the admitted claim would not result in the claim being set aside under IBC. It was submitted that holding otherwise would suggest that Mahal Hotel Private Limited was guilty of money laundering while the investigation was still pending.

After hearing the parties, the NCLAT held that the Resolution Professional was not competent to entertain applications for inclusion of more Financial Creditor without the permission of the Committee of Creditors when more than three months had elapsed from the date of its constitution.

“..while we hold that there is a dispute as to whether Mahal Hotel Private Limited comes within the meaning of ‘Financial Creditor’ or not, we hold that after constitution of the ‘Committee of Creditors’, without its permission, the ‘Resolution Professional’ was not competent to entertain more applications after three months to include one or other person as ‘Financial Creditor’.”

It added that once a decision was taken by the Committee of Creditors to call for a meeting for the removal of the Resolution Professional, it was improper for him to include Mahal Hotel Private Limited as a Financial Creditor.

With respect to the pending PMLA investigation against Mahal Hotel Private Limited, the NCLAT held that since money laundering case had been initiated against Mahal Hotel Private Limited, it could not be allowed to be a member of the Committee of Creditors.

In view of the fact that the NCLT failed to notice these facts and circumstances, the NCLAT opined that NCLT order could not be upheld.

The NCLAT clarified that it was not giving any finding with regard to the performance of the Resolution Professional. It nonetheless added,

..it will be open to the Members of the ‘Committee of  Creditors’ to bring the fact to the notice of the Insolvency and Bankruptcy Board of India for appropriate order.”

The Appellant was represented by Senior Advocate Arun Kathpalia with DSK Legal Advocate Satendra K Rai and Advocate Aditya Dewan. 

The Resolution Professional was represented by Senior Advocate Rana Mokharjee with Advocates Diwakar Maheshwari, Aditya V. Singh, Sreoshi Chatterjee. 

Mahal Hotel was represented by Advocate Kumar Sudeep.

Read the Judgement:

Asset-Reconstruction-Company-I-Limited-vs-Koteswara-Rao-Karuchola-ORs.pdf
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