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TMI Blog2022 (7) TMI 833X X X X Extracts X X X X X X X X Extracts X X X X ..... cessary to be noted for deciding this Appeal are:- (i) Respondent No. 2 - Financial Creditor who held 5,50,000; 12% non-convertible debentures of Rs.100 each of the Corporate Debtor having interest @ 12% per annum with due date of redemption as 31.12.2015, which was extended till 31.12.2020. (ii) Insolvency proceedings under Section 7 of the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as 'I&B Code') were initiated against the Corporate Debtor vide Financial Creditor's application dated 25.09.2019. (iii) On 07.12.2020, the Adjudicating Authority admitted the Application under Section 7 and appointed one Shri Sanyam Goel as the Interim Resolution Professional (IRP) who was subsequently approved as Resolution Professional (RP). (iv) Resolution Professional invited claims. 15 claims from the creditors were received. The Committee of Creditors (CoC) was constituted by the Resolution Professional in terms of Section 21 of the I&B Code with Respondent No. 2 - the Financial Creditor as the only member of the CoC. (v) Resolution Professional prepared the Information Memorandum and issued Form-G inviting Prospective Resolution Applicants. Five Prospective Reso ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ebentures, is related party and ought to be ousted from the CoC. Smt. Sunaina Singh is grand-daughter of Smt. Sita Chaudhary, who is Director of the Corporate Debtor. Both Smt. Sunaina Singh and Smt. Sita Chaudhary being related to each other Smt. Sunaina Singh being the grand-daughter, the Financial Creditor being a related party of the Corporate Debtor in terms of Section 5(24) of the Code cannot be Member of the CoC. The Application filed by the Appellant being I.A. No. 728 of 2020 has wrongly been rejected by the Adjudicating Authority. The earlier order dated 05.03.2021 was passed on an application of an Operational Creditor- one Rajiv Babbar, which order does not operate as res-judicata nor the said order can come in the way of the Appellant in pressing his Application I.A. No. 728 of 2020. Learned counsel for the Appellant has referred to detailed chart showing the relation of Smt. Sunaina Singh and Smt. Sita Chaudhary and different shareholdings of the entities controlled by them. 4. Learned counsel appearing for the Corporate Debtor as well as Resolution Professional has opposed the submissions of the learned counsel for the Appellant. It is submitted that Appellant who w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Spade. Appeal was filed before the Hon'ble Supreme Court challenging the impugned orders passed by NCLAT. The Appeal was filed by 'Phoenix ARC Pvt. Ltd.' confined to the finding that Spade and AAA are Financial Creditors. Spade and AAA have independently filed an appeal under Section 62 assailing the decision of NCLAT affirming their exclusion from participating in the CoC on the ground that they are related parties of the Corporate Debtor in terms of Section 5(24) and the first proviso to Section 21(2) of the I&B Code. The Hon'ble Apex Court come to consider the concept of related parties. The issues which came for consideration have been noted in Para 88, Paras 88, 89 and 90 are to the following effect:- "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 (supra), the issue was whether ineligibility of the resolution applicant under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2) must apply. For, it is on the strength of the financial debt as defined in Section 5(8) that an entity claiming as a financial creditor under Section 5(7) seeks a position on the CoC under Section 21(2). If the definition of the expression 'related party' under section 5(24) applies at the time when the debt was created, the exclusion in the first proviso to Section 21(2) would stand attracted." 8. The Hon'ble Supreme Court also came to the conclusion that transactions alleged to be financial debt by Spade and AAA were collusive in nature, hence they cannot be treated to be Financial Creditors also. Conclusion has been recorded by Hon'ble Supreme Court in Para 105-106, which are as follows:- "105. In the present case, there is a finding that AAA and Spade were related parties within the meaning of Section 5(24) at the time when the alleged financial debt on the basis of which they assert a claim to be a part of the CoC was created. This was due to the long-standing relationship between Mr Arun Anand and Mr Anil Nanda, and their respective corporations. Admittedly, such a relationship still existed even in 2017, since Mr Anil Nanda's JIPL held shareholding in Mr Arun An ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ated 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." 10. We may also notice the provision of Section 5(24). Section 5(24) deals with 'related party', which is to the following effect:- "5(24) "related party", in relation to a corporate debtor, means- (a) a director or partner of the corporate debtor or a relative of a director or partner of the corporate debtor; (b) a key managerial personnel of the corporate debtor or a relative of a key managerial personnel of the corporate debtor; (c) a limited liability partnership or a partnership firm in which a director, partner, or manager of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a trustee of a trust in which the beneficiary of the trust includes the individual, or the terms of the trust confers a power on the trustee which may be exercised for the benefit of the individual; (d) a private company in which the individual is a director and holds along with his relatives, more than two per cent. of its share capital; (e) a public company in which the individual is a director and holds along with relatives, more than two per cent. of its paid-up share capital; (f) a body corporate whose board of directors, managing director or manager, in the ordinary course of business, acts on the advice, directions or instructions of the individual; (g) a limited liability partnership or a partnership firm whose partners or employees in the ordinary course of business, act on the advice, directions or instructions of the individual; (h) a person on whose advice, directions or instructions, the individual is accustomed to act; (i) a company, where the individual or the individual along with its related party, own more than fifty per cent. of the share capital of the company or controls the appointment of the board of directors of the company. Explanation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aughter and Smt. Sita Chaudhary, the grand-mother are related to each other. Smt. Sunaina Singh is Executive Director in the Financial Creditor and is erstwhile Director of the Corporate Debtor and Smt. Sita Chaudhary is Ex-Director of the Financial Creditor and active Director of the Corporate Debtor. In the Application, I.A. No. 728 of 2020, detail reply was filed by the Corporate Debtor challenging the locus of the Appellant to file I.A. and following preliminary objection was raised in Para A and B of the Reply:- "A. The Applicant was a prospective resolution applicant who submitted a defective resolution plan which could not be voted upon by the CoC. Assuming the plan was not defective, the Applicant was still H3 and there were two better plans before the COC. Having lost out in a fair and transparent process, the Applicant has approached this Hon'ble Court having found the proverbial grapes to be sour inasmuch as everything the Applicant questions and assail in his Application was known to it when it filed its expression of interest on 7.7.2020, received the information memorandum on 24.07.2020, when it submitted his resolution plan on 02.09.2020, and when it was informed t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mt. Sunaina Singh was not Director of the Corporate Debtor, she having resigned six months prior to date of filing of the Section 7 Application. Appellant has filed a rejoinder where following was stated in Para 5:- "5. I say that by a bare perusal of the letter dated 01.01.2019, which is a part of the said transaction documents, would make it evident that Ms. Sunaina Singh being a Director of the Financial Creditor had addressed the letter dated 01.01.2019 to the Corporate Debtor for redemption of the non-convertible debentures whereas she was admittedly resigned from the Board of the Corporate Debtor on 25.03.2019, thereby, directly being in control of both Corporate Debtor as well as Financial Creditor at the time of requesting for redemption of the non-convertible debentures to the Corporate Debtor, which was defaulted by the Corporate Debtor and the present proceedings under Section 7 of the Insolvency & Bankruptcy Code, 2016 had been initiated by the Financial Creditor." 16. The fact that Smt. Sunaina Singh on 01.01.2019 requested the Corporate Debtor for redemption of non-convertible debentures and the fact that Smt. Sunaina Singh was a Director of the Corporate Debtor w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... respondent/financial creditor, since she had admittedly resigned as a Director from the corporate debtor on 25.03.2019. The financial creditor/third respondent is not a holding, subsidiary or associate company of the corporate debtor. The averments made or documents filed on behalf of the applicant do not show that any of the Directors of the corporate debtor have in any manner interfered in the working of the financial creditor/third respondent in the ordinary course of business of that the Directors of the corporate debtor in any way advise/instruct the Directors of the financial creditor/third respondent or vice versa. In the absence of the same, it cannot be stated that the third respondent/financial creditor is a related party to the corporate debtor. Mere relationship between Mrs. Sunaina Singh and Mrs. Sita Chaudhary i.e. granddaughter and grandmother without there being sufficient evidence to show that both of them are working conjointly on aid and advise of each other shall not disentitle the third respondent/financial creditor to be the COC Member either under Section 5(24) or/and Section 21(2). In view of our finding that the applicant failed to show that the third respo ..... X X X X Extracts X X X X X X X X Extracts X X X X
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