2025 (2) TMI 634 - AT - IBC

NCLAT upholds related party classification despite termination notice violating three-month UOMA agreement requirement

NCLAT dismissed the appeal challenging the classification of appellant as a related party of the corporate debtor. The Tribunal found operational and ... Classification of Appellant as a related party of the Corporate Debtor - relationship between the parties - HELD THAT:- The Tribunal has concluded that the Appellant is a related party on the basis of the terms and conditions of the UOMA and there are no error or infirmity in the said findings. The very fact that the parties were bound by the terms and conditions of the UOMA in which it was categorically provided that for the purpose of terminating the agreement a notice of three months has to be given and the termination of notice dated 31.12.2018 was issued for terminating the said agreement after a period of one month i.e. w.e.f 31.01.2019 instead of three months especially when it has been provided in the agreement that the terms and conditions of the agreement cannot be waived or amended without the written consent of the parties, the letter dated 31.12.2018 cannot be relied upon which is the base of the case of the Appellant. Conclusion - The existence of operational and financial interdependence, as evidenced by agreements like the UOMA, can substantiate a related party classification under the IBC. There are no merit in the present appeal for the purpose of interference and hence, the same is hereby dismissed. ISSUES PRESENTED and CONSIDEREDThe primary legal issue considered in this judgment was whether the Appellant, Schreiber Dynamix Dairies Private Limited (SDDPL), should be classified as a 'related party' of the Corporate Debtor, International Mega Food Park Limited (IMFPL), under the Insolvency and Bankruptcy Code, 2016 (IBC), specifically under Section 5(24). This classification affects the Appellant's inclusion in the Committee of Creditors (CoC) during the Corporate Insolvency Resolution Process (CIRP). The judgment also considered the validity and effect of the termination notice dated 31.12.2018, which purportedly ended the Utility Operation and Management Agreement (UOMA) between the parties.ISSUE-WISE DETAILED ANALYSISRelevant Legal Framework and PrecedentsThe legal framework primarily involved the IBC, specifically Section 5(24), which defines a 'related party.' The Tribunal also referenced judicial decisions, including the case of Phoenix ARC Pvt. Ltd. vs. Spade Financial Services Limited, to interpret the related party concept.Court's Interpretation and ReasoningThe Tribunal analyzed the terms of the UOMA, which included provisions for investment, profit-sharing, and management of utility assets, and concluded that these terms indicated a substantial relationship between the Appellant and the Corporate Debtor. The Tribunal noted that the agreement involved joint management and sharing of confidential information, which supported the classification of the Appellant as a related party.Key Evidence and FindingsThe Tribunal found that the UOMA provided for a transfer of rights to operate and manage utility assets, investment commitments, and a profit-sharing mechanism. The Tribunal highlighted that the agreement was not properly terminated as per its terms, which required a three-month notice period. The purported termination notice dated 31.12.2018, which provided only a one-month notice, was deemed inconsistent with the agreement's terms.Application of Law to FactsThe Tribunal applied Section 5(24) of the IBC to the facts, concluding that the Appellant's involvement in the management and operation of the Corporate Debtor's utility assets, along with the financial and operational interdependence outlined in the UOMA, rendered the Appellant a related party. The Tribunal dismissed the Appellant's argument that the termination of the UOMA before the CIRP commencement altered this status.Treatment of Competing ArgumentsThe Appellant argued that the UOMA was terminated before the CIRP commenced, thus negating any related party status. The Tribunal rejected this argument, emphasizing that the termination notice did not comply with the agreement's terms, and therefore, the UOMA was still in effect at the time of the CIRP's initiation. The Tribunal also dismissed the Appellant's claim that the UOMA did not create a partnership or joint venture, instead focusing on the operational and financial ties established by the agreement.ConclusionsThe Tribunal concluded that the Appellant was a related party of the Corporate Debtor based on the terms and conditions of the UOMA, which established a significant degree of control and financial involvement by the Appellant in the Corporate Debtor's operations.SIGNIFICANT HOLDINGSPreserve Verbatim Quotes of Crucial Legal Reasoning'In view of the aforementioned facts and judicial decisions, and the terms and conditions of the Utility O & M Agreement dated 08.12.2017 between the parties, we hold that the applicant is a 'related party' of the Corporate Debtor and the termination of the said agreement before the CIRP will not make any material change to the status of the applicant who continues to be a 'related party' of the corporate debtor after the initiation of CIRP also.'Core Principles EstablishedThe Tribunal established that the existence of operational and financial interdependence, as evidenced by agreements like the UOMA, can substantiate a related party classification under the IBC. The Tribunal also emphasized the importance of adhering to contractual termination procedures to affect changes in such classifications.Final Determinations on Each IssueThe Tribunal determined that the Appellant's classification as a related party was justified based on the UOMA's terms, which indicated significant involvement in the Corporate Debtor's operations. The purported termination of the UOMA was deemed invalid due to non-compliance with the agreement's notice requirements, thus maintaining the Appellant's related party status at the time of the CIRP's initiation.