Tribunal invalidates related party inclusion in CoC, upholds debt assignment, sets aside liquidation order

The Tribunal found 'Kamla Mills Private Limited' and 'Fasqua Investment Private Limited' to be related parties to the Corporate Debtor, invalidating their inclusion in the Committee of Creditors (CoC). The validity of debt assignment to 'Kamla Mills Ltd' was upheld, as the assignment's parties were not made parties in the proceedings. The formation of the CoC based solely on unverified claims was deemed a nullity, leading to the setting aside of the liquidation order and the appointment of a new IRP/Resolution Professional to conduct the Corporate Insolvency Resolution Process (CIRP) in compliance with statutory provisions.

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Issues Involved:
1. Whether 'Kamla Mills Private Limited' and 'Fasqua Investment Private Limited' are related parties in terms of proviso to Section 21(2) of the Insolvency and Bankruptcy Code 2016Rs.
2. Whether assignment of debt in violation of Section 5 of the SARFAESI Act 2002 and Factoring Regulation Act 2011 is validRs.
3. Whether IRP/RP can constitute CoC based on submission of claims only, without verifying and admitting or rejecting the claimsRs.

Issue-Wise Analysis:

1. Related Parties in CoC:
The primary issue was whether 'Kamla Mills Private Limited' and 'Fasqua Investment Private Limited' were related parties to the Corporate Debtor, which would affect their participation in the Committee of Creditors (CoC). The Appellant contended that these entities were related parties as Mr. Ramesh Ghamandiram Gowani, who had substantial shareholding and directorship in both companies, was also a Director of the Corporate Debtor until the commencement of the CIRP. The Respondent argued that Mr. Gowani's directorship was invalidated by a High Court order and his resignation was merely a corrective measure. The Tribunal found that Mr. Gowani was indeed a Director of the Corporate Debtor until his resignation on 20th November 2019, thus making 'Kamla Mills Private Limited' and 'Fasqua Investment Private Limited' related parties. Consequently, their inclusion in the CoC was invalid, and they should not have had the right to represent, participate, or vote in the CoC meetings.

2. Validity of Debt Assignment:
The Appellant questioned the validity of the debt assignment to 'Kamla Mills Ltd' under Section 5 of the SARFAESI Act 2002 and the Factoring Regulation Act 2011, arguing that Kamla Mills Ltd was not an eligible party for such an assignment. The Respondent countered that the assignment was valid under the Transfer of Property Act, 1882, and that the SARFAESI Act did not apply to proceedings under the Insolvency and Bankruptcy Code 2016. The Tribunal concluded that the assignment's validity could not be questioned in this case as the parties to the assignment deed were not made parties either before the Adjudicating Authority or the Appellate Tribunal.

3. Constitution of CoC Without Verification:
The Tribunal examined whether the Interim Resolution Professional (IRP) could constitute the CoC based solely on the submission of claims without verifying and admitting or rejecting them. The Appellant argued that the IRP formed the CoC and assigned voting shares without verifying the claims, which was against the statutory provisions. The Tribunal found that the IRP/RP had indeed formed the CoC based on unverified claims, violating Regulation 12(3) of the CIRP Regulations. The Tribunal noted that the entire CIRP was conducted without proper valuation, preparation of an Information Memorandum, or publication of Form 'G' for inviting expressions of interest. The Tribunal concluded that the Constitution of the CoC was a nullity in the eyes of the law, vitiating the entire CIRP process.

Conclusion and Orders:
The Tribunal set aside the liquidation order passed by the Adjudicating Authority, directed the appointment of a new IRP/Resolution Professional, and excluded the time spent from the date of the application under Section 33 of the IBC till the date of the Tribunal's order from the CIRP period. The Tribunal also directed the new IRP/Resolution Professional to collate all claims and proceed with the CIRP, excluding the related parties 'Kamla Mills Private Limited' and 'Fasqua Investment Private Limited' from the CoC. The Tribunal emphasized the need for strict adherence to the statutory provisions of the Insolvency and Bankruptcy Code and Regulations.

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