Brief Facts
Phoenix Arc Private Limited (Phoenix), the Appellant in this case, and Yes Bank filed applications before National Company Law Tribunal (NCLT) for initiation of the Corporate Insolvency Resolution Process (CIRP) against AKME Projects Limited (Corporate Debtor).
NCLT passed the order dated 19 July 2019 on applications filed by Phoenix ad Yes Bank under Section 60(5)(c) of the Insolvency and Bankruptcy Code, 2016 (IBC) and held that Spade Financial Services Private Limited (Spade), the respondent and AAA Landmark Private Limited (AAA), which is a wholly-owned subsidiary of Spade, have to exclude from the Committee of Creditors (CoC).
Against the order of NCLT, the appeal was filed by AAA and Spade before the National Company Law Appellate Tribunal (NCLAT) under Section 61 of IBC. The NCLAT dismissed the appeal.
The Phoenix submitted that the appeal was correctly dismissed by NCLAT but the finding that AAA and Spade are financial creditors is erroneous. Thus, Phoenix, in this appeal under Section 62 of IBC, confined to the finding that AAA and Spade are financial creditors.
Appellant’s Argument
Mr Anil Nanda is a major shareholder of JIPL, which holds 80% of the shareholding in the Corporate Debtor and Mr Arun Nanda was director of Spade and AAA.
Mr Arun Anand incorporated the Corporate Debtor on 15 December 2003, following which it was acquired by Anil Nanda in the year 2007. Arun Anand held numerous positions in the Anil Nanda Group of Companies and had a long-standing relationship with Anil Nanda.
During the relevant transactions with Spade and AAA, Mr Arun Anand held the position of Consultant to the Corporate Debtor and late became the Group CEO of the Anil Nanda Group of Companies.
During this period, Mr Arun Anand’s brother-in-law Mr Sonal Nanda was director and COO of the Corporate Debtor. Further, he was also the whole Time Director of JIPL, which is a wholly-owned subsidiary of the Corporate Debtor and holds shareholding in Spade.
During this period, Mr Anil Nanda was the promoter/director of the Corporate Debtor. The ongoing litigation between Spade and Corporate Debtor was only started after IBC came into force, to create a notion of a dispute.
The Counsel for Resolution Professional submitted that two of the original shareholders of the Corporate Debtor, along with Arun Nanda, had shareholding and positions in spade. There had been fraudulent transactions between Spade and JIPL, in which JIPL paid a sum to Spade for transfer of shares, which never occurred.
Respondent’s Argument
It was submitted that there was no common key managerial personnel between the Corporate Debtor and Spade and AAA during the relevant period. The NCLAT had incorrectly held that Mr Arun Nanda was in a position to influence the decision making of the Corporate Debtor, without satisfying the teat of “Control” established in Arcelor Mittal India (P) Ltd, vs. Satish Kumar Gupta.
Mr Arun Anand was a mere salaried employee with no ability to influence the decision-making process. Further, he was Group CEO of Anil Nanda Group of Companies for only 81 days, which was also a titular position and not a statutory position as there was no approval from the Board of Directors. Thus, cannot influence the decisions.
JPIL, and through it the Corporate Debtor, held only 1.45% shareholding in Spade, which is below the two per cent threshold in Section 5(24)(d). The Corporate Debtor and AAA were incorrectly assumed to be ‘partners’ following Section 5(24)(a).
The two transactions mentioned for proving the relationship under Section 5(24)(f) were commercial transactions where the Corporate Debtor borrowed money from Spade to pay to third parties, which would have been paid back with interest. Section 5(24A) had no application, as it applies to the insolvency resolution and liquidation process for individuals and partnerships.
Observation by the Court
The arguments submitted by the Counsel for the Appellant had been accepted by the Court. It was admitted that Mr Arun Anand was in control of Spade and AAA during the relevant period. Further, he held positions in Mr Anil Nanda Group of Companies, which included the Corporate Debtor Mr Anil Nanda, and Sonal Nanda also held positions in the Corporate Debtor and JPIL during this period.
Based on the aforesaid mentioned facts, it can be swiftly concluded that Mr Arun Anand and Corporate Debtor would be a related party of the Corporate Debtor under Section 5(24)(h) and Section 5(24)(m)(i).
From the facts at hand, it can be inferred that there was deep entanglement between the entities of Mr Arun Anand and Mr Anil Nanda and Mr Arun Anand did hold positions at that time which could be used by him to guide the affairs of the Corporate Debtor. The Court had no hesitation in accepting the NCLAT’s conclusion that Spade entered into two transactions based on the advice of the board with the Corporate Debtor. The transactions between AAA and Corporate Debtor were held to be collusive.
Thus, it was concluded that AAA, Spade, and Mr Arun Anand were related parties to the Corporate Debtor.
The purpose of IBC is beat served when the CIRP is driven by external creditors, to 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 sub-section (6) or sub-section (6A) or sub-section (5) of Section 24, from having any right of representation, participation or voting in a meeting of the committee of creditors.
The Court also clarified the first proviso to Section 21(2) that the exclusion under the given proviso is not related to the debt itself but the relationship existing between the related party financial creditor and Corporate Debtor. Thus, the financial creditor who is not in praesenti is not a related party, would not be debarred from being a member of the CoC.
This is so because, otherwise, under the first proviso to Section 21(2), all financial creditors would stand excluded if they were ‘related party’ of the Corporate Debtor at the time when the financial debt was created. This may lead to absurd conclusions for entities that have legitimately taken over the debt of related parties, or where the elated party entity had stopped being a ‘related party’ long ago.
The Court’s Decision
The appeals and pending applications were disposed of.
Click here to read the judgment.
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