2024 (3) TMI 81 - AT - Insolvency and Bankruptcy

ARC excluded from Committee of Creditors after assignment from related party deemed illegitimate

M/s. Rare Asset Reconstruction Ltd. Versus Sh. Avishek Gupta

The NCLAT dismissed an appeal by an ARC challenging its exclusion from the Committee of Creditors. The Resolution Professional correctly deemed the ... Exclusion of appellant from the Committee of Creditors (CoC) - The Resolution Professional deemed Rare ARC (appellant) akin to a related party, thus ineligible for CoC participation - assignment of term loan - it is contended 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 - HELD THAT:- 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 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 SEFL. It is relevant to reiterate again that the fact that appellant filed its claim on 09.09.2020 in first CIRP on the same date on which it took assignment from SEFL, a date on which it took assignment from SEFL, a related party to Corporate Debtor makes it crystal clear that assignment in favour of appellant was made only for participating in CIRP of Corporate Debtor as assignee of SEFL, hence, appellant the assignee has rightly been held to be related party to the Corporate Debtor. There are no grounds have been made out to interfere with the impugned order of the Adjudicating Authority by which application has been rejected. There is no merit in the Appeal - appeal dismissed. Issues Involved:1. Whether the Appellant is a related party to the Corporate Debtor.2. Validity of the assignment of debt from SEFL to the Appellant.3. The role of the Resolution Professional in determining the status of the Appellant.4. The applicability of the Insolvency Law Committee Report 2020 and the judgment in Phoenix ARC Pvt. Ltd. vs. Spade Financial Services Ltd.Summary:1. Whether the Appellant is a related party to the Corporate Debtor:The primary issue was whether the Appellant, Rare ARC, should be considered a related party to the Corporate Debtor, Sarga Hotel Private Limited. The Resolution Professional determined that the Appellant should not have any right of representation, participation, or voting in the Committee of Creditors (CoC) as it was akin to a related party. This decision was based on the relationship between SEFL (the assignor) and the Corporate Debtor, which were both controlled by the Kanoria Foundation. The Adjudicating Authority upheld this decision, noting that the assignment appeared to be made in suspicious circumstances to circumvent the exclusion under Section 21(2) of the Insolvency and Bankruptcy Code (IBC).2. Validity of the assignment of debt from SEFL to the Appellant:The assignment of the debt from SEFL to Rare ARC was executed on 09.09.2020, during the pendency of the first Corporate Insolvency Resolution Process (CIRP) against the Corporate Debtor. The cut-off date for the assignment was 12.08.2020, the same date the CIRP order was passed. The Resolution Professional and the Adjudicating Authority concluded that the assignment was made to remove the label of a related party from SEFL and allow Rare ARC to participate in the CIRP of the Corporate Debtor. The Adjudicating Authority also noted that SEFL retained 85% of the security receipts in the Rare ARC 051 Trust, indicating continued interest in the loan.3. The role of the Resolution Professional in determining the status of the Appellant:The Resolution Professional's role was to verify and collate claims submitted by creditors and ensure that related parties did not circumvent the exclusion under Section 21(2) of the IBC. The Resolution Professional examined the circumstances of the assignment and the relationship between SEFL and the Corporate Debtor, concluding that SEFL was a related party. The decision was supported by additional affidavits and materials, including an avoidance application filed by the Administrator of SEFL, which alleged that the loan transaction was fraudulent.4. The applicability of the Insolvency Law Committee Report 2020 and the judgment in Phoenix ARC Pvt. Ltd. vs. Spade Financial Services Ltd.:Both parties relied on the Insolvency Law Committee Report 2020 and the judgment in Phoenix ARC Pvt. Ltd. vs. Spade Financial Services Ltd. The Report and the judgment clarified that an assignee of a related party financial creditor should not be disqualified if the assignment is made in good faith. However, if the assignment is made with the intention of circumventing the exclusion under Section 21(2) of the IBC, the assignee should be treated akin to a related party. The Adjudicating Authority and the Tribunal concluded that the assignment in this case was made in bad faith to allow SEFL to indirectly participate in the CIRP of the Corporate Debtor.Conclusion:The Tribunal upheld the decision of the Adjudicating Authority, concluding that the Appellant, Rare ARC, was rightly excluded from the CoC as it was akin to a related party to the Corporate Debtor. The assignment of the debt from SEFL to Rare ARC was found to be made in suspicious circumstances, with the intent to circumvent the exclusion under Section 21(2) of the IBC. The appeal was dismissed.