2025 (2) TMI 78 - AT - Companies Law

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 ... Classification of Appellant as a 'related party' of Corporate Debtor - powers of RP to decide about the ‘related party’ - Appellant's removal from the Committee of Creditors (CoC) of Corporate Debtor (CD). Powers of RP to decide about the ‘related party’ - HELD THAT:- It is clear from the language of the Section that IRP is responsible for constituting Committee of Creditors. As per the proviso of sub-Section 2 of Section 21 the related party of Corporate Debtor has no right of representation participation or voting in a meeting of Committee of Creditors. It is evident from that IRP has to decide about related party status of creditors of the CD for constituting the CoC as related parties cannot form part of CoC. After confirmation as RP appointment of IRP as RP the matters relating to CoC continue to be handled by RP as he chairs the CoC meetings - RP is empowered to decide on the related party status of a creditor. Determination of appellant as related party of the CD in terms of various clauses of Section 5(24) of the Code - HELD THAT:- This network of shareholding establishes a clear connection between the Corporate Debtor and Hari Vitthal Mission, with both entities being subsidiaries or affiliates under the broader umbrella of Kanoria Foundation. Given this relationship, Hari Vitthal Mission is not only indirectly linked to the Corporate Debtor, but is effectively part of the same corporate group. Therefore, under Section 5(24)(i), Hari Vitthal Mission qualifies as a related party by virtue of its position as a subsidiary of Kanoria Foundation, the holding company/trust that controls the Corporate Debtor - Section 5(24)(j) defines a related party as any person or entity that controls more than 20% of the voting rights in the Corporate Debtor. As seen earlier the Kanoria Foundation holds 99.9% in the appellant which is the Financial Creditor. On the other side the Kanoria Foundation through a series of entities holds a 31% stake in CD. The control of Kanoria Foundation on CD is through several intermediary entities including Adisri, SIFL, TAIML, SAIT, SIPL and PCPL. This layered ownership has been clearly shown in the organogram and even though there may be intermediary entities between Kanoria Foundation and the Corporate Debtor the overall control through shareholding and appointment of Directors through the clauses of trust deed and investment agreement is real and substantial. Hari Vitthal Mission which is 99.9% owned by Kanoria Foundation is a subsidiary company of Kanoria Foundation. The holding entity Kanoria Foundation in this case holds more than 20% in both CD and appellant and appellant therefore squarely falls in the definition of related party of CD. Conclusion - RP is empowered to decide about the status of a creditor as related party. The findings of RP and AA endorsed, wherein the appellant has been held as related party in terms of provisions of Section 5 (24) of the Code. There are no infirmity in the order of AA - appeal dismissed. Issues Presented and ConsideredThe 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 AnalysisRelevant Legal Framework and PrecedentsThe 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 ReasoningThe 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 FindingsThe 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 FactsThe 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 ArgumentsThe 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 HoldingsThe 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.