The court affirmed that under the Insolvency and Bankruptcy Code, related and unrelated unsecured financial creditors have equal priority in asset distribution, precluding Operational Creditors from claiming precedence.

JUDGMENT

(19^th September, 2024)

Ashok Bhushan, J.

This Appeal by an Operational Creditor has been filed challenging the order dated 24.04.2024 passed by the Adjudicating Authority (National Company Law Tribunal), Mumbai Bench, Court-II in IA No.2382 of 2021. The Adjudicating Authority by the impugned order rejected the IA filed by the Appellant, aggrieved by which order this Appeal has been filed.

2. Brief facts of the case necessary to be noticed for deciding the Appeal are:-

2.1. On an application filed under Section 9 , Corporate Insolvency Resolution Process (CIRP) against the Corporate Debtor- ‘Brand Connect Communications (India) Pvt. Ltd. commenced vide order dated 27.03.2018. By an order dated 28.01.2019, the Adjudicating Authority directed for liquidation of the Corporate Debtor. In the CIRP of the Corporate Debtor, Appellant as well as the Respondent No.2 who was ex-Director of the Corporate Debtor before the liquidator had filed their claims. In the Liquidation Proceedings, an IA No.2382 of 2021 was filed by the Appellant, the Operational Creditor where following prayers were made:-

“a. Be pleased to set aside order dated 03.09.2021 passed by the Learned Liquidator;

b. Be pleased to direct the Liquidator to disburse the amount derived from liquidation process by giving priority to the Operational Creditor over the Financial Creditor when the Financial Creditor is a related party to the Corporate Debtor,

c. That delay, if any, in filing the present application be condoned.

d. Till the pendency and final disposal of the present application be pleased to stay the effect of the order dated 03.09.2021 pass by the Learned Liquidator;

e. Interim/ ad-interim order in terms of prayer clause (a), (b) above;

f. To pass Order or Orders as this Hon’ble Tribunal may deem fit and expedient in the interest of Justice.”

2.2. In the application, the Appellant has questioned the order dated 03.09.2021 communicated by liquidator. Appellant has filed objection before the Liquidator objecting to preference to be given to the Financial Creditor- Respondent No.2. The objection of the Appellant was that in the distribution under Section 53 priority be not given to the related party which objection was rejected by the liquidator vide its communication dated 03.09.2021, aggrieved by which communication, IA was filed.

2.3. The Adjudicating Authority vide impugned order dated 24.04.2024 rejected the application filed by the Appellant and has held that Appellant who is an Operational Creditor cannot be given any preference over the debt of the unsecured financial creditor. It was also held that Section 53 of the Code does not envisage any difference between unsecured financial creditor and related party unsecured financial creditor.

3. We have heard Dr. Atul Singh, Learned Counsel for the Appellant, Mr. Yahya Batatawala, Learned Counsel for the Respondent No.1 and Ms. Honey Satpal, Learned Counsel for the Respondent No.2.

4. Counsel for the Appellant in support of the Appeal submits that the Respondent No.2 being related party/financial creditor cannot be given priority in distribution of proceeds of liquidation assets of the Corporate Debtor, ahead of the Appellant/ Operational Creditor. Submission of the Appellant is that Respondent No.2 has to be treated as equity shareholder and is not entitled to a priority in the waterfall mechanism under Section 53 of the IBC. The Respondent No.2 who wears two hats, one as a promoter/director/ equity shareholder, and later, as a financial creditor, he ought to be considered under the hat of an equity shareholder and treated under (1)(h) of the IBC. Corporate Debtor had started repayment of l