NCLAT finds patent errors in related party determination under Section 5(24), remands case for fresh consideration

The NCLAT found that the Adjudicating Authority committed patent errors in determining whether the appellant was a related party under Section 5(24) of the Code. The Authority incorrectly held that related parties have voting rights in Committee of Creditors meetings and failed to consider detailed evidence including MCA data and director charts provided by the appellant. The Authority also erroneously stated no material was produced except general observations, despite substantial documentation being on record. The NCLAT allowed the appeal by remand, directing the Adjudicating Authority to decide afresh after considering all evidence and recording specific findings in a speaking order.

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Issues Involved:

1. Right of related parties to join the Committee of Creditors (CoC) meetings.
2. Determination of whether Respondents No. 1 to 13 are related parties under Section 5(24) of the Insolvency and Bankruptcy Code (IBC), 2016.
3. Quantum of debt owed by the corporate debtor to the applicant-financial creditors.
4. Validity of the order of the Adjudicating Authority.

Summary:

1. Right of Related Parties to Join CoC Meetings:

The Appellate Tribunal held that the Adjudicating Authority committed a patent error in law by observing that whether or not Respondents No. 1 to 13 are related parties, they have a right to join the meetings of the CoC. This finding was deemed "patently illegal" and "contrary to the provisions of Section 21(2) proviso" of the IBC, which states that a related party of the corporate debtor shall not have any right of representation, participation, or voting in a meeting of the CoC. Consequently, the Tribunal set aside this finding.

2. Determination of Related Parties:

The Tribunal noted that the Adjudicating Authority erred in observing that the Appellant did not refer to a specific sub-clause of Section 5(24) of the IBC. The Appellant had, in fact, referred to Clause 5(24)(m) and provided detailed information about the directors, which was included in the impugned order but not addressed in the findings. The Tribunal emphasized that the Adjudicating Authority failed to consider the detailed summary prepared on the basis of MCA Data, which was reproduced in the impugned order but not discussed in the decision-making process. The Tribunal also highlighted that the Adjudicating Authority dismissed the order of the Securities Appellate Tribunal (SAT) without proper consideration, despite it detailing the fraudulent transactions and interchangeable management between Tayal Group and Silvassa Group.

3. Quantum of Debt:

The Tribunal acknowledged the Adjudicating Authority's direction to the RP and the applicant-financial creditors to verify the quantum of debt owed within fifteen days. The Tribunal noted that the RP had initially contradicted itself by admitting the principal amount while disputing the interest, and directed further verification to resolve this issue.

4. Validity of the Order of the Adjudicating Authority:

The Tribunal found that the Adjudicating Authority failed to properly evaluate the evidence presented by the Appellant, including the detailed summary based on MCA Data and the SAT order. The Tribunal concluded that the Adjudicating Authority's decision was flawed and required a fresh assessment. Consequently, the Tribunal allowed the appeal, set aside the impugned order, and remanded the matter back to the Adjudicating Authority for a fresh decision based on the entire evidence brought on record by both parties.

The parties were directed to appear before the Adjudicating Authority on 06th November, 2023.

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