TMI Blog2021 (9) TMI 991X X X X Extracts X X X X X X X X Extracts X X X X ..... Managing Director was also a Director of the first Respondent Company. Moreover, the Director nominated by the Appellant, in fact, advises the Appellant / Company in matters relating to the first Respondent / Company. The part played by the two nominee Directors clearly point out that the first Respondent / Company acts on the advice, direction and instructions of the Appellant in its normal business affairs relating to the first Respondent. As such, this Tribunal is of the earnest opinion that the Appellant squarely comes within the ambit of related party as per clause (f) of Sub Section 24 of section 5 of the Code. The other important fact that cannot be brushed aside is that that the First Respondent had reported the transactions between the Appellant and it, in their Annual Reports and Audited Financial Statements . Besides this, as perceived from the Articles of Association and the requisite majority needed for taking important business decisions, the conduct of the business of the First Respondent, the establishment of First Respondent Company, all considered in an integral and cumulative manner will exhibit the noteworthy influence of the Appellant in issues con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 021 in I.A. 555 of 2020 in CP (IB) No.143/7/HDB/2019 at paragraph 57 to 61 had observed the following: 57 It is the case of the applicant the respondent no.3 is having 11% voting share in the Corporate Debtor and it is also the fact that balance amount of ₹ 5,93,23,625/- is payable by Corporate Debtor to respondent no.3 vide loan agreement dated 09.05.2006. It is a fact that respondent no.3 is a shareholder in the Corporate Debtor and having voting share of 11%. We have to examine whether respondent no.3 is a related party or not in the light of the above definition. We observe that respondent No.3 squarely fits into the definition of related party under section 5(24) (a), (h), (j), (l) and (m) of the Code. From the record submitted to the Tribunal it is observed that out of four directors of the Board of Directors, two directors are nominated by respondent no.3. We are of the view that the role and responsibility of the Directors is to protect the interests of the Corporate Debtor and not to merely sit in the Board meetings of the corporation. They have a fiduciary role to protect the interests of the Corporate Debtor and are responsible for shareholders of the Corpor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the subject matter in this case. From reading of Article 62 it is clearly evident that nominee-directors of Corporate Debtor and they cannot now claim that they only nominee-directors and they do not have much role in the Corporate Debtor. Such claim is untenable. 61. We are, therefore, not in agreement with the decision taken by the Resolution Professional to include respondent no. 3 as a Member of the CoC. Accordingly, we are of the that TSTPCL falls within the meaning of related party as given in the I B Code and Articles of Association of the Corporate Debtor. Accordingly, we direct that the Resolution Professional shall reconstitute the CoC treating the TSTPCL as a related party . Accordingly, the IA is disposed of with the above directions to the Resolution Professional. and disposed of the interlocutory application with directions being issued to the Resolution Professional . Background 3. Assailing the correctness, validity and legality of the impugned order dated 04.01.2021 in I.A. No.555 of 2020 in CP (IB) No.143/7/HDB/2019 passed by the Adjudicating Authority (National Company Law Tribunal Hyderabad Bench), the Learned Counsel for the Appellant s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... points out that pursuant to the Memorandum of Understanding dated 12.06.2002, the 1st Respondent/ Company was incorporated on 24.09.2002 for the development of show room/ market palace for Gems and Jewellery in the property by one Mr. Suresh Chukapalli and Mrs. Madhumati Chukapalli. Subsequently, APSTC alienated the property to 1st Respondent/ Company with certain conditions GoAP as per Go Ms. NO.115 dated 28.05.2004 approved shareholding pattern of 11% and 89% of equity and preferential share to APSTC and IOIM respectively, and nominated Managing Director , APSTC as one of the Directors on the Board of SPC . 9. It transpires that APSTC was allotted 2,95,000 Equity Shares at INR 10 each amounting to INR 29,50,000 and 9,15,000 preferential shares at INR 10 (each) amount to INR amounting to INR 91,50,000 and the reminder amount of 11,56,91,125 (referred to as loan amount ) was extended as loan to Respondent No.1/ Company with an interest of 11% per annum (on yearly rest basis). In reality the 1st Respondent paid ₹ 5,65,67,500 to the Government as per GoMS No.481 dated 12.05.2005 and the remaining sum of ₹ 5,91,23,625/- is treated as loan from the Appel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... I B Code, 2016. The Resolution Professional included the Appellant as the Member of the Committee of Creditors in the 7th meeting that took place on 15.06.2020 after due consideration of the documents submitted in respect of the claim amount and admitted the claim of INR 38,46,16,545. Before admitting the claim, the Appellant had revised its claim supported by relevant documents. 15. It is projected on the side of the Appellant that the Second Respondent/ Company filed an Interlocutory Application No. 555 of 2020 in CP (IB) No.143/07/HDB/2019 as per Section 65 (5) read with Section 21 (2) of the Code before the Adjudicating Authority (National Company Law Tribunal Hyderabad Bench) seeking for removal of the Appellant (APSTC/TSTPC) from the CoC based on the reason that Appellant is a related party and prayed for consequent action. Appellant s Submissions 16. According to the Learned Counsel for the Appellant the Adjudicating Authority has committed an error in concluding that the Appellant represented through one nominee Director (i.e. Mr. Saida V) has significant influence over the First Respondent/ Company. 17. The Learned Counsel for the Appellant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s per Section 24(m) of the I B Code. 22. Advancing his argument, the Learned Counsel for the Appellant submits that the Adjudicating Authority had incorrectly observed that there are two nominee Directors of the Appellant and they have significant influence in the decisions making process of the First Respondent/ Company. 23. It is the specific case of the Appellant that the Adjudicating Authority had relied on Article 62 of the Articles of Association of First Respondent/ Company to come to the conclusion that the Appellant is a related party having significant influence on the First Respondent/ Company. 24. The Learned Counsel for the Appellant adverts to Article 62 of the Articles of Association which provides that there must be at least one Director of the Appellant in the minimum quorum of three and that such right of representation cannot be construed to mean as a right of majority. 25. The Learned Counsel for the Appellant comes out with a plea that Clause 62 of the Articles of Association of the Corporate Debtor provides for an affirmative voting right to protect its investment and envisages no control to the Appellant over the Corporate Deb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Resolution(s) of a Company cannot amount to control. Also, it is the plea of the Appellant that it is to be appreciated and borne in mind that the purpose of appointing a Nominee Director is to ensure that the nominator s interest and rights are not prejudiced. 30. The Learned Counsel for the Appellant refers to Section (24) of the Code, which provides that any person who can control the composition of the Board of Directors or corresponding governing body of the Corporate Debtor and submits that there is no manner such control on the composition of the board is attributable to the Appellant with a meagre 11% shareholder. 31. The Learned Counsel for the Appellant adverts to the ingredients of definition of Section 5(24) (m) of the Code, which runs to the following effect: (m) any person who is associated with the corporate debtor on account of- (i) participation in policy making processes of the corporate debtor; or (ii) having more than two directors in common between the corporate debtor and such person; or (iii) interchange of managerial personnel between the corporate debtor and such person; or (iv) provision of essential technical informatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th CoC meeting, the representative of the Financial Creditor / Applicant was also present but he had not expressed any objection or concerned over the inclusion of the Appellant as a Member of the Committee of Creditors. Even, in the 8th Committee of Creditors meeting that took place on 09.07.2020, the Second Respondent / Applicant had not raised any concern and even approved the minutes of the earlier 7th Committee of Creditors meeting. 37. The Learned Counsel for the First Respondent submits that by the time the order of admission was passed by the Adjudicating Authority on 04.06.2019, the Corporate Debtor was under strike off mode and later the Corporate Debtor was restored on the rolls of the Registrar of Companies under the directions of the Tribunal. Furthermore, as on the date of the order, there were no Operations in the Company and there were no Employees . As a matter of fact, the only asset of the Corporate Debtor under development was attached by the Enforcement Directorate as per PAO dated 10.04.2019. That apart, there were no Books of Accounts nor any other statutory records present at the registered office. 38. The Learned Counsel for the Fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has a definitive say and control in the affairs of the First Respondent/ Company/ Corporate Debtor. 43. The Learned Counsel for the Second Respondent takes a plea that the Appellant/ Company has a representation of two Directors out of five Members in the Board of Directors of the First Respondent. In fact, the Directors nominated by/ representing the Appellant have been participated in the meeting of Board of Directors of the First Respondent and that Board of Directors is the final policy making Body of any Company. Indeed, the 1st Respondent is having a thorough participation in Appellant s policy making process and that the Managing Director of the Appellant was a Director in the 1st Respondent/ Company along with one more Director. In short, the presence of two Directors in the Board of Directors of the First Respondent itself makes the Appellant Company a related party as contemplated in the I B Code. 44. It is the fervent plea of the Second Respondent that many of the policy decision cannot be taken with the affirmative vote of at least one Director nominated by/representing the Appellant in the First Respondent (qualified majority) as laid down in Article 62 of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on terms to any of the Shareholders, their associates or private interests; xvii. The Board many from time to time raise or borrow any sums of money, for and on behalf of the company from the members or other persons, companies, banks or financial institutions or any of the Directors may himself/herself advance money to the company on such interest as may be approved by the Board of Directors; xviii. All borrowing from banks, financial institutions and other agencies including issue of debentures and providing corporate guarantees. (Emphasis supplied) 45. The Learned Counsel for the Second Respondent brings to the notice of this Tribunal that Article 70 and 71 of the Articles of Association of the First Respondent confers special power upon the Appellant as to auditing the First Respondent and also the appointment of statutory auditors of the First Respondent. Further, the Appellant can control their composition of Board of Directors of the First Respondent as per Clause (a) of Article 62 of the Articles of Association of the First Respondent. The affirmative action of at least one Director (qualified majority) nominated by/ representing the Appellant is require ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion of related party in terms of the provisions of the Companies Act and mandatory accounting standards. Further, the definition of the related party under IBC is adopted from the definition of the related party under the Companies Act after making modification to suit the context. 50. It is projected on the side of the Second Respondent that description of nature of related party relationship is reported under the category enterprises which are owned or have significant influence of or are partners with key management personnel and their relatives indeed the vital influence as reported is clearly visible in the formation of First Respondent/ Company and its conduct of the business, Articles of Association and the Qualified Majority required for key business decisions. Therefore, it is the stand of the Second Respondent that the Appellant is treated as related party by the First Respondent through its existence. 51. According to the Learned Counsel for the Second Respondent, the Appellant is falling unhesitatingly in many of the Clause within the definition of Section 5(24) of the I B Code. Even fulfilling one of the Clauses is enough to treat the Appellant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ut that if few persons hold comparatively small proportion of total shares may enable actual control to be exercised by such persons as per decision Hindustan Motors Ltd. vs. MRTP Commission reported in AIR 1973 Cal 450, 459. 56. In this connection, this Tribunal worth recalls and recollects the decision in Inland Revenue Commissioners vs. Bibby and Sons Ltd. reported in (1946) 14 ITR (Suppl.) 7 wherein it is observed that the term controlling interest does not refer to the Directors beneficial interest in the Company, but to the power of controlling by votes in the decision binding of the Company in the shape of resolutions passed at a General Meeting. 57. The real test is whether a person controls either the steering or the accelerators, gears and brakes. If the answer is in the affirmative, then he would be in the Control of Company in the considered opinion of this Tribunal. Evaluation 58. At the outset, this Tribunal points out that in I.A. No. 555/2021 in CP (IB) No.143/7/HDB/2019 the 2nd Respondent / Applicant (M/s Phoenix Tech Power Private Ltd.) had prayed before the Adjudicating Authority (1) for removal of the Appellant / TSTPCl, a related party ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the ingredients of the I B Code and Rules and Regulations applicable thereunder admitted the Appellant into the Committee of Creditors as a Financial Creditor with 67% of voting rights in proportion to the claim admitted by him. Also that the second Respondent / Phoenix Tech Power Pvt. Ltd.(Applicant) had expressed his happiness at the Appellant joining the Committee of Creditors therefore, it is not open to the second Respondent / Phoenix Tech Power Pvt. Ltd. (Applicant in IA No. 555/2020) to file the said Interlocutory Application at a later stage of the Corporate Insolvency Resolution Process (CIRP). 63. The clear cut stand of the Second Respondent is that the Appellant the Appellant is a body Corporate whose Managing Director was also a Director of the first Respondent and that the other Director nominated by the Appellant advises the Appellant / Company in matters related to the first Respondent. Therefore, the double role of the two nominee Directors clearly points out that the first Respondent acts on the advice and directions and instructions of the Appellant in its ordinary course of business in matters / issues pertaining to the first Respondent. Therefore, an e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... most well developed bankruptcy and insolvency resolution regimes share: a linear process that both creditors and debtors follow when insolvency is triggered; a collective mechanism for resolving insolvency within a framework of equity and fairness to all stakeholders to preserve economic value in the process; a time bound process either ends in keeping the firm as a going enterprise, or liquidates and distributes the assets to the various stakeholders. These features are common across widespread differences in structure and content, present either through statutory provisions or their implementation in practice . These features ensure certainty in the process, starting from what constitutes insolvency, and the processes to be followed to resolve the insolvency, or the process to resolve bankruptcy once it has been determined. Done correctly, such a framework can incentivise all stakeholders to behave rationally in negotiations towards determination of viability, or in bankruptcy resolution. In turn, this will lead to shorter times to recovery and better recovery under insolvency, and a greater certainty about creditors rights in developing a corporate debt market. 80. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... book.pdf , at page 204.) 65. Continuing further, in the aforesaid decision of the Hon ble Supreme Court of India at spl. Page 520, 521, 524, 526, 527 and 528 wherein at 1.4 under the caption Related parties Interpretation in praesenti paragraph 88, 89, 90, 97, 100, 101, 103, 104, 105 it is observed as under:- 88. An issue of interpretation in relation to the first proviso of Section 21(2) is whether the disqualification under the proviso would attach to a financial creditor only in praesenti, or if the disqualification also extends to those financial creditors who were related to the corporate debtor at the time of acquiring the debt. 89. In Arcelor Mittal India Private Limited vs. Satish Kumar Gupta (2019) 2 SCC 1, the issue was whether ineligibility of the resolution applicant under Section 29-A(c) of the Code attached to an applicant at the date of commencement of the CIRP or at the time when the resolution plan is submitted by the resolution applicant. Speaking for this Court, Justice Rohinton F Nariman interpreted the pre-2018 amendment, framing of Section 29-A(c), in the following terms: 46. According to us, it is clear that the opening words of Section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ., (1977) 2 SCC 273, an early instance of this is found in the concurring judgment of Beg, J. The learned Judge put it rather well when he said: (SCC p. 287, para 28): 28. It is, however, becoming increasingly fashionable to start with some theory of what is basic to a provision or a chapter or in a statute or even to our Constitution in order to interpret and determine the meaning of a particular provision or Rule made to subserve an assumed basic requirement. I think that this novel method of construction puts, if I may say so, the cart before the horse. It is apt to seriously mislead us unless the tendency to use such a mode of construction is checked or corrected by this Court. What is basic for a Section or a chapter in a statute is provided: firstly, by the words used in the statute itself; secondly, by the context in which a provision occurs, or, in other words, by reading the statute as a whole; thirdly, by the Preamble which could supply the key to the meaning of the statute in cases of uncertainty or doubt; and, fourthly, where some further aid to construction may still be needed to resolve an uncertainty, by the legislative history which discloses the wider con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... related parties, or where the related party entity had stopped being a related party long ago. 103 Thus, it has been clarified that the exclusion under the first proviso to Section 21(2) is related not to the debt itself but to the relationship existing between a related party financial creditor and the corporate debtor. As such, the financial creditor who in praesenti is not a related party, would not be debarred from being a member of the CoC. However, in case where the related party financial creditor divests itself of its shareholding or ceases to become a related party in a business capacity with the sole intention of participating the CoC and sabotage the CIRP, by diluting the vote share of other creditors or otherwise, it would be in keeping with the object and purpose of the first proviso to Section 21(2), to consider the former related party creditor, as one debarred under the first proviso. 104. Hence, while the default rule under the first proviso to Section 21(2) is that only those financial creditors that are related parties in praesenti would be debarred from the CoC, those related party financial creditors that cease to be related parties in order to cir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the Appellant, in fact, advises the Appellant / Company in matters relating to the first Respondent / Company. To put it precisely, the part played by the two nominee Directors clearly point out that the first Respondent / Company acts on the advice, direction and instructions of the Appellant in its normal business affairs relating to the first Respondent. As such, this Tribunal is of the earnest opinion that the Appellant squarely comes within the ambit of related party as per clause (f) of Sub Section 24 of section 5 of the Code. 68. The other important fact that cannot be brushed aside is that that the First Respondent had reported the transactions between the Appellant and it, in their Annual Reports and Audited Financial Statements . Besides this, as perceived from the Articles of Association and the requisite majority needed for taking important business decisions, the conduct of the business of the First Respondent, the establishment of First Respondent Company, all considered in an integral and cumulative manner will exhibit the noteworthy influence of the Appellant in issues concerning the First Respondent. In this manner also, the First Respondent is treating ..... X X X X Extracts X X X X X X X X Extracts X X X X
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