Resolution Professional has authority to classify creditors as related parties and exclude them from Committee of Creditors under Section 21(2)

NCLAT dismissed appeal challenging appellant's classification as related party of Corporate Debtor and removal from Committee of Creditors. Tribunal held that Resolution Professional has power to determine related party status of creditors since related parties cannot participate in CoC under Section 21(2) proviso. Appellant qualified as related party under Section 5(24)(i) and (j) as both appellant and Corporate Debtor were subsidiaries under Kanoria Foundation, which held 99.9% in appellant and 31% in Corporate Debtor through intermediary entities. The layered ownership structure established substantial control, making appellant ineligible for CoC participation. Adjudicating Authority's findings upheld.

---

---

Issues Presented and Considered

The central issue in this appeal is whether the appellant, Hari Vitthal Mission, was correctly classified as a "related party" of the Corporate Debtor (Suasth Healthcare Foundation) under Section 5(24) of the Insolvency and Bankruptcy Code, 2016 (IBC), which led to its exclusion from the Committee of Creditors (CoC). This classification was based on the appellant's alleged association with the Kanoria Foundation, which purportedly exerted control over the Corporate Debtor through a series of entities.

Additional issues include the authority of the Resolution Professional (RP) to determine the related party status and the implications of the appellant's exclusion on its rights as a financial creditor.

Issue-Wise Detailed Analysis

Relevant Legal Framework and Precedents

The legal framework primarily involves Section 5(24) of the IBC, which defines "related party" in relation to a corporate debtor. The relevant subsections include:

• Section 5(24)(h): Any person on whose advice, directions, or instructions a director, partner, or manager of the corporate debtor is accustomed to act.
• Section 5(24)(i): A body corporate which is a holding, subsidiary, or associate company of the corporate debtor, or a subsidiary of a holding company to which the corporate debtor is a subsidiary.
• Section 5(24)(j): Any person who controls more than twenty percent of voting rights on account of ownership or a voting agreement.

Court's Interpretation and Reasoning

The Tribunal examined whether the RP had the authority to classify the appellant as a related party. It was determined that the RP, under Section 21 of the IBC, is responsible for constituting the CoC and must decide on the related party status of creditors, as related parties cannot form part of the CoC.

The Tribunal also analyzed the definition of "person" under Section 2(23) of the IBC, which includes trusts, thereby allowing the classification of the Kanoria Foundation as a related party if it controls the Corporate Debtor.

Key Evidence and Findings

The Tribunal considered the organogram and shareholding structure, which showed that the Kanoria Foundation held significant control over both the appellant and the Corporate Debtor through a series of entities. This included the Kanoria Foundation's 99.9% shareholding in the appellant and its control over entities like SREI Infrastructure Finance Limited (SIFL) and Trinity Alternative Investment Managers Limited (TAIML), which indirectly controlled the Corporate Debtor.

The Tribunal found that the Kanoria Foundation's influence over the Corporate Debtor's management, as evidenced by the historical involvement of its trustees and beneficiaries in the Corporate Debtor's board, satisfied the conditions under Section 5(24)(h).

Application of Law to Facts

The Tribunal applied Section 5(24)(i) and (j) to establish that the appellant, as a subsidiary of the Kanoria Foundation, was a related party due to the Foundation's control over the Corporate Debtor. The multi-tier shareholding structure and contractual arrangements demonstrated a clear chain of control, fulfilling the criteria for related party classification.

Treatment of Competing Arguments

The appellant argued that the Kanoria Foundation, being a trust, could not be classified as a holding company and that its control ceased when SREI entered CIRP. The Tribunal rejected these arguments, noting that the definition of "person" in the IBC includes trusts and that the control exercised by the Kanoria Foundation was substantial and ongoing.

The appellant also cited several Supreme Court judgments to argue against its exclusion, but the Tribunal found these cases inapplicable, as they primarily dealt with procedural issues or eligibility unrelated to the substantive classification of related parties under the IBC.

Significant Holdings

The Tribunal upheld the RP's decision to classify the appellant as a related party, affirming that the RP is empowered to make such determinations under the IBC. The Tribunal found no infirmity in the Adjudicating Authority's order and dismissed the appeal, concluding that the appellant's exclusion from the CoC was justified based on the substantial control exerted by the Kanoria Foundation.

The Tribunal emphasized the importance of excluding related parties from the CoC to maintain the integrity of the insolvency resolution process, as highlighted in the Supreme Court's judgment in Phoenix Arc Private Limited v. Spade Financial Services Limited.

The Tribunal's decision reaffirms the principles of related party exclusion under the IBC, ensuring that entities with potential conflicts of interest do not influence the resolution process.

---