TMI Blog2024 (3) TMI 81X X X X Extracts X X X X X X X X Extracts X X X X ..... pellant is akin to a related party and held that the Appellant shall have no voting of the CoC of the Corporate Debtor. It is noticed that in the avoidance application which was filed by the Administrator there was pleading that Rs.25 Crores was routed through SIFL and SEFL from its related entities to the Rare ARC for paying the consideration. The avoidance application still pending for consideration before the Adjudicating Authority, it is not necessary for us to return any finding on issue which is pending consideration before the Adjudicating Authority in the avoidance application filed by the Administrator in the CIRP of SIFL and SEFL. It is relevant to notice that in spite of there being pleading on behalf of the Resolution Professional in its Affidavit filed before the Adjudicating Authority that the funding for obtaining assignment was through SEFL itself, no details have been given by the Appellant to indicate the source of funding especially when there are allegations that the assignment was a fraudulent transaction. It was incumbent on the Appellant to clear the doubt by bringing relevant materials to show that for taking assignment no fund was used through SIFL and S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... efore we notice the respective contentions of the parties with respect to the impugned order in this Appeal, it is relevant to notice certain background facts and sequence of the events giving rise to this Appeal. 2.1. On 29.08.2018, Srei Infrastructure Finance Limited (SIFL) sanctioned a rupee term loan of Rs.300 Crores to Sarga Hotel Private Limited (Corporate Debtor). In the year 2019, SIFL transferred its entire lending, interest bearing and leasing business including the loan dated 29.08.2018 to Srei Equipment Finance Limited (SEFL) vide a Business Transfer Agreement. On 12.08.2020, the Adjudicating Authority admitted an application under Section 9 against the Corporate Debtor filed by one Universal International Creation Limited . On 09.09.2020, SEFL entered into an Assignment Agreement with Rare ARC (Appellant herein) to assign the loan dated 29.08.2018. Cut-off date in the Assignment Agreement was defined as 12.08.2020 i.e. the date on which the Corporate Insolvency Resolution Process (CIRP) commenced against the Corporate Debtor. 2.2. On 09.09.2020 itself, the Appellant filed its claim in the CIRP of the Corporate Debtor relying on the assignment. The order dat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n where the loan dated 29.08.2018 by SIFL in favour of the Corporate Debtor was classified as transaction amounting to fraudulent and wrongful trading under Section 66 of the Code. Administrator filed another application being IA No.77 of 2023 in the CIRP of the SIFL and SEFL wherein it apprised the NCLAT that the majority of funds Rs.25 Crores used to pay upfront consideration to SEFL in relation to the purported assignment was indirectly provided by SEFL itself. The Adjudicating Authority vide impugned order dated 13.09.2023 upheld the decision of the Resolution Professional dated 30.04.2022 ousting the Appellant from the CoC. The Appellant aggrieved by the order dated 13.09.2023 has come up in this Appeal. 3. We have heard Shri Krishnendu Datta, Learned Senior Counsel for the Appellant. Shri Ramji Srinivasan, Learned Senior Counsel for the Respondent No.1. Dr. Abhishek Manu Singhvi and Shri Abhinav Vashisht, Learned Senior Counsel for the JC Flowers who has been permitted to intervene in the Appeal. Shri Joy Saha, Learned Senior Counsel appeared for SRA who has also been permitted to intervene in the Appeal and Shri Nalin Kohli, Learned Counsel has appeared for NARCL, interve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rom the CoC. The Appellant is a bonafide Financial Creditor and ought to be in the CoC. SIFL and SEFL being in the CIRP since 08.10.2021, Kanoria family who claimed to be promoter of SIFL and SEFL as well as the Corporate Debtor is no more in control or beneficiary. It is submitted that the Resolution Professional in its affidavit has clearly stated that the ingredients of Section 5(24)(h)(i)(j)(l)(m) (n) of the IBC are not met. Resolution Professional having stated in the Affidavit ingredients are not met and still wrongly held Appellant as a related party. 5. Learned Counsel for the Resolution Professional refuting the submissions of the Counsel for the Appellant submits that the shareholding structure of the Corporate Debtor and SEFL makes it clear that both the Corporate Debtor and SEFL were eventually held by Kanoria Foundation. Corporate Debtor in various transactions admitted SIFL is a related and connected party. The deep relationship between SEFL and Corporate Debtor had not been disputed by the Appellant, during the course of arguments before the Adjudicating Authority. The entire case before the Adjudicating Authority by the Appellant was that while SEFL may be relat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Crores was received by Appellant through SIFL to pay for assignment which fact has been brought before the Adjudicating Authority. The amount of Rs.25 Crores was round tripped by SEFL/SIFL itself using two connected shell companies, namely Predicate Consultants and Ambrelo Ventures Private Limited which details were brought before the Adjudicating Authority. The Adjudicating Authority has after considering entire facts and circumstances of the case has rightly rejected the application filed by the Appellant. 6. Dr. Abhishek Manu Singhvi, Learned Senior Counsel appearing for JC Flowers Asset Reconstruction Pvt. Ltd., the member of the CoC supported the impugned order. It is submitted that the loan transaction between SIFL and the Corporate Debtor were transaction between entities controlled by Kanoria Foundation. Dr. Abhishek Manu Singhvi during his submission by producing a chart illustrated holding structure of the Corporate Debtor and related entities, he submits that both the SIFL and SEFL were ultimately controlled by Kanoria Foundation, a Private Trust whereas the Corporate Debtor- Sarga Hotel Private Limited is also controlled by Shristi Infrastructure Development Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... being security receipt holder of 85%, Appellant being security receipt holder was only 15% in the ARC Trust. The provision of the Trust Deed indicates that even the Appellant can be replaced from the trust. 8. Shri Nalin Kohli, Learned Counsel appearing for the NARCL also supports the impugned order and submitted that the NARCL also contend that the SIFL and SEFL were related parties to the Corporate Debtor and assignment was made with intent to control the CIRP of the Corporate Debtor. 9. We have considered the submissions of the Counsel for the parties and perused the record. 10. The Appellant has filed its claim in the first CIRP of the Corporate Debtor on the strength of assignment dated 09.09.2020 which assignment was executed by SEFL assigning the Rupee Term Loan and other benefits to the Appellant. It is relevant to notice that the assignment dated 09.09.2020 was made during the pendency of the CIRP process against the Corporate Debtor which was initiated by order dated 12.08.2020 on an application under Section 9 filed by Universal International Creation Ltd. . Agreement was entered between the SEFL and the Appellant as assignee on 09.09.2020 on which date CIRP ag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith the admission application is certainly not proper and defeats the purpose and intent of the IBC in letter and spirit. 12. Admittedly, the claim was filed by the Appellant in the second CIRP of the Corporate Debtor which claim was based on assignment dated 09.09.2020. After receipt of the claim by Appellant, there has been correspondences between Resolution Professional and the Appellant. After certain correspondences between the parties, the Resolution Professional issued an e-mail dated 30.04.2022 communicated to the Appellant i.e. assignee that the Appellant is akin to a related party and held that the Appellant shall have no voting of the CoC of the Corporate Debtor. It is useful to extract the sequence of the events and the reasons given by the Resolution Professional in its e-mail:- Dear Ma'am Sir, This reference to the claim filed by Rare Asset Reconstruction Limited Rare ARC) is in on Sarga Hotel Private Limited ( Corporate Debtor / SHPL ), which is undergoing corporate insolvency resolution process under the provisions of the Insolvency and Bankruptcy Code, 2016 ( Code / IBC ). 1. as the resolution professional ( RP ) of the Corporate Debtor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er 2020, SEFL and Rare ARC entered into the Assignment Agreement under which SEFL assigned to Rare ARC, in its capacity as trustee of Rare ARC 051 Trust, the loans disbursed to the Corporate Debtor under the Financing Documents along with all rights, title and interest in the Financing Documents and underlying security etc. While the Assignment Agreement was entered into on 9 September 2020, Clause 1.1 (g) of the Assignment Agreement defined the 'Cut-off Date' as 12 August 2020 Thus, for all practical purposes, the effective date of the assignment from SEFL to Rare ARC came to be 12 August 2020, which is the same as the date of the Farlier CIRP Admission Order. The Earlier CIRP Admission Order was challenged, inter alia, by Rishima SA Investments LLC ( Rishima ) before the Hon'ble National Company Law Appellate Tribunal ( NCLAT ) alleging, inter alia, that the Section 9 application was a collusive proceeding By an order dated 27 August 2021 in CA(AT) (Ins) No. 800 of 2020, the Hon'ble NCLAT set aside the Earlier CIRP Admission Order, nhserving that the Section 9 application filed by UICL contained documents of doubtful origin which did not inspire ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld like to inform you that while the claim of Rure ARC is being admitted as financial debt, Rare ARC shall not have any right of representation, participation or voting in the CoC of the Corporate Debtor in light of the first proviso to Section 21(2) of the IBC 13. It was subsequent to receipt of the email dated 30.04.2022, IA was filed by the Appellant before the Adjudicating Authority being IA No.822 of 2022. In IA No. 822 OF 2022, following prayers were made by the Appellant:- I. Allow the Instant Application and direct the Resolution Professional to allow the Applicant to participate, represent and vote in the capacity of a financial creditor within the committee of creditors constituted for the Corporate Debtor; II. Post the re- constitution of the CoC, the RP to share with the applicant copies of agendas and minutes of all previous CoC meetings conducted by the RP including all such important documents and information, as necessary for the applicants' standing as a CoC member and III. Pass all such orders as may be necessary to protect the interest of the Applicant as the single largest financial creditor of the Corporate Debtor and as may be warran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the Appellant has placed reliance on the judgment of the Hon ble Supreme Court in Mohinder Singh Gill and Anr. vs. Chief Election Commissioner- AIR 1981 SC to support his submission that the Resolution Professional could not have supplemented its decision by fresh reason in shape of Affidavit and otherwise. Mohinder Singh Gill was a case where challenge was to an order passed by the Election Commission of India. To support the order of the Election Commission of India, Affidavit was filed giving additional reasons. In the said background, the Hon ble Supreme Court held that the order passed by Election Commission have to be examined on the basis of reasons given in the order and no new reasons can be supplemented subsequently. The present is not a case where any adjudicatory order is under challenge which is sought to be supported by new reasons. Adjudication on the claim of the Appellant commenced only after filing of the application, hence, during the adjudication of the issue all relevant materials existing and the reasons can be placed before the Adjudicating Authority. We do not accept the submission of the Appellant that the Resolution Professional could not have filed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not do so indirectly by assigning its debt to a thirdparty assignee for the purposes of circumventing this restriction. Therefore, in order to prevent any misuse, the Committee recommended that prior to including an assignee of a related party financial creditor within the CoC, the resolution professional should verify that the assignee is not a related party of the corporate debtor. In cases where it may be proved that a related party financial creditor had assigned or transferred its debts to a third party in bad faith or with a fraudulent intent to vitiate the proceedings under the Code, the assignee should be treated akin to a related party financial creditor under the first proviso to Section 21(2). 18. Affidavit in reply filed by the Resolution Professional has to be read as a whole. Other averments in the affidavit clearly indicate that the Resolution Professional reiterated its stand that the Appellant is not entitled to have any voting share in the CIRP. In paragraph 5 while giving brief facts relevant for adjudication of the application in respect to the e-mail dated 30.04.2022 issued by the Resolution Professional following was stated in paragraph 5 (xii) and (xiv) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... i), the Resolution Professional has referred to the judgment of the Hon ble Supreme Court in Phoenix ARC Private Limited (supra) and made following averments:- (vi) Further, the Hon'ble Supreme Court in Phoenix Arc Private Limited v Spade Financial Services Limited Ors., (2021) 3 SCC 475 ( Phoenix v Spade ) has observed that The aim of the CoC is to enable coordination between various creditors so as to ensure that the interests of all stakeholders are balanced, and the value of the assets of the entity in financial distress is maximized . In the context of related parties and CoC, referring to the Report of the Bankruptcy Law Reforms Committee (Volume I: Rationale and Design), the long title of the IBC and the UNCITRAL Legislative Guide on Insolvency Law, the Hon'ble Supreme Court observes as follows:- 81...The objects and purposes of the Code are best served when the CIRP is driven by external creditors, so as ensure that the CoC is not sabotaged by related parties of the corporate debtor. This is the intent behind the first proviso to Section 21(2) which disqualifies a financial creditor or the authorized representative of the financial creditor under su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isri Commercial Private Limited ( Adisri ). Adisri is also held by the Kanoria Foundation. As per MCA master data, Adishakti and Adisri were incorporated on the same date (i.e, 24 January 2014), have the same registered address and the same directors. The ownership structure of the Corporate Debtor is illustrated in Annexure-4. A copy of documents reflecting the shareholding pattern are attached as Annexure-5(Colly). b. As per MCA filings relating to declaration of Significant Beneficial Owner ( SBO ) under Section 90 of the Companies Act, 2013: SIDCL has reported itself as Holding Reporting Company' of the Corporate Debtor. Adishakti has reported itself as 'Holding Reporting Company' of SIDCL. Adishakti has reported Mr. Hari Prasad Kanoria (as) Trustee of the Kanoria Foundation) to be the SBO of Adishakti. A copy of the SBO filings as available on MCA website are attached as Annexure-6(Colly). c. Further, as per information provided by Rare ARC, Mr. Hari Prasad Kanoria (as trustee of the Kanoria Foundation) is the SBO of shares held in SIFL by Adisri. d. The Annual Reports of SIDCL for FY 2017-18, 2018- 19, 2019-20 and 20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st 2008 ( SSHA ) and an Addendum to SSHA dated 31 August 2009 ( Addendum ) was entered between the Corporate Debtor and its shareholders (including Rishima and SIDCL), A copy of relevant extracts of the SSHA and the Addendum is attached as Annexure-13(Colly). j. Schedule 2 to the SSHA deals with Warranties given by the CD to Rishima. Clause 7.3 of Schedule 2 deals with agreements with connected parties. Sub-clause 7.3.1 provides as follows - Apart from the Lease Deed and the term sheet dated July 22, 2008 entered into with SREI Infrastructure Finance Limited, there are no existing Related Party contracts or arrangements or understandings between, on the one hand, the Company and, on the other hand, any Affiliates or any persons directly or indirectly in control of the Company or its Affiliates or any Related Parties. Further, Clause 2 (ii) of the Addendum provides as follows - A new Clause 5.1.1 shall be inserted immediately after Clause 5.1 (e) in the Agreement as following: 5.1.1 Any loan/ financial assistance availed from SREI Infrastructure Finance Limited ( SREI ) towards Total Debt of the Company shall be termed as the connected party transac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an assignee of a debt cannot have a better title than the assignor itself. The Appellate Authority has taken the latter approach in Pankaj Yadav v State Bank of India Ltd., where the promoter of the corporate debtor had assigned his debt in favour of the appellant, after an application for initiation of CIRP was filed under Section 10. The Appellate Authority held that as the assignee steps into the shoes of the assignor, the rights of the assignee cannot be better than those of the assignor. Therefore, the appellant, being an assignee of the promoter of the corporate debtor, was held to be ineligible under the first proviso to Section 21(2). 11.9. The Committee was of the view that the disability under the first proviso to Section 21(2) is aimed at removing any conflict of interest within the CoC, to prevent erstwhile promoters and other related parties of the corporate debtor from gaining control of the corporate debtor during the CIRP by virtue of any loan that may have been provided by them. As a third-party assignee, who by itself is not a related party, would not have any such conflict of interest, it should not be disabled from participating in the CoC. Further, the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iso to Section 21(2). Reliance on the report is thus, relevant and the report clearly indicate that an assignee of a related party financial creditor is not ipso facto disqualified but it has to be examined and verified as to whether assignment is in good faith or bad faith or whether assignment is with a fraudulent intent to vitiate the proceeding under the Code. The Resolution Professional in its pleading has relied on paragraph 11.10 and has pleaded that what ILC Report as mentioned in paragraph 11.10 is fully attracted in the present case. 25. Both the Learned Counsel for the parties have relied on the judgment of the Hon ble Supreme Court in Phoenix ARC Pvt. Ltd. (supra). Counsel for the Appellant to support his submission has placed reliance on the judgment of the Hon ble Supreme Court and submits that in view of the above judgment of the Hon ble Supreme Court, the disqualification is to attach to the financial creditors who are related parties in praesenti. The Hon ble Supreme Court in the above case had occasion to consider the provision of Section 21(2) and the question which came for consideration was as to whether AAA could be excluded from the CoC. Under the headin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0 which has already focused on the said question of assignee being disqualified to participate in the CoC and it was clearly stated in the report that if the assignment is with the intent to avoid the tag of related party and to participate in the CoC which assignment is in bad faith with the intention of circumventing the disability under Section 21(2) of the Code, the assignee must be treated as akin to a related party. The judgment of the Hon ble Supreme Court in Phoenix ARC Pvt. Ltd. (supra) in paragraphs 94 and 95, as extracted above, clearly reiterate the same principle of law which have to be applied in the present case. 28. In facts of the case to find out whether Financial Creditor is to be excluded from CoC or not, Learned Counsel for the Respondent has also placed reliance another judgment of this Tribunal in Citi Securities Financial Services Pvt. Ltd. vs. Sudip Bhatacharya- Company Appeal (AT) (Insolvency) No. 240 of 2022 . In the above case, the debt was assigned in favour of the Appellant by Reliance Infrastructure Ltd. Claim of the Appellant was rejected which was questioned by the Appellant. In the above case also both the parties have placed reliance on th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ugh the Applicant assignee to have a control over the process of the CIRP as the Reliance Infrastructure Ltd. being the related party to the Corporate Debtor could not be the member of the CoC. The Adjudicating Authority further held that an act of this kind done with malafide intention cannot give an equivalent right with that of the unrelated financial creditors. The above opinion expressed by the Adjudicating Authority is based on consideration of relevant materials with which opinion we also are in concurrence after considering the facts and circumstances of the present case. 29. Dr. Abhishek Manu Singhvi has laid much emphasis on the materials which has been brought on record in the Affidavit by JC Flowers , it is submitted that not only Rs.25 Crores as was noticed in the avoidance application filed by the Administrator but the entire amount of Rs.44 Crores was round tripped by SEFL and SIFL to the Rare ARC for funding the Assignment Agreement. It is not necessary for us to enter into the issue and record a finding as to whether entire amount of Rs.44 Crores which was paid by Rare ARC towards 15% security receipts consideration was indirectly funded by SEFL SIFL. We o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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