TaxTMI 
TaxTMI 
2021 (2) TMI 91
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....ansactions of the Corporate Debtor F Relationship between Anil Nanda and Arun Anand G Whether Spade and AAA are financial creditors of the Corporate Debtor G.1 Submission of Counsel G.2 Assessment of preliminary submissions G.2.1 Res Judicata G.2.2 Issues before NCLAT G.2.3 Remand to NCLAT G.3 Analysis G.3.1 Statutory Provisions G.3.2 Financial Creditor and Financial Debt G.3.3 Collusive Transactions G.3.4 Spade and AAA H Whether Spade and AAA are related parties H.1 Submission of Counsel H.2 Statutory provisions H.3 Analysis I Whether Spade and AAA can be excluded from the CoC I.1 Submissions of Counsel I.2 Related Parties and CoC I.3 Amendment to First Proviso of Section 21(2) I.4 Related Parties - Interpretation In Praesenti J Conclusion PART A A The appeals 1 This judgment would govern two sets of appeals arising from the judgment of the National Company Law Appellate Tribunal ("NCLAT" or "Appellate Tribunal"). By a judgment dated 27 January 2020, NCLAT dismissed the appeal under Section 61 of the Insolvency and Bankruptcy Code, 2016 ("IBC") preferred by AAA Landmark Private Limited ("AAA") and Spade Fin....
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....r 5 The brief facts of the case are that CIRP has been initiated against the Corporate Debtor on 18 April 2018 on an application filed by an operational creditor, Mr. Hari Krishan Sharma, under Section 9 of IBC. 6 During the CIRP, claims were invited by the Interim Resolution Professional ("IRP"). Spade filed its claim in Form C as a financial creditor for a sum of Rs. 52,96,00,000 on 10 May 2018. Thereafter, Spade filed a revised Form C for a sum of Rs. 109,11,00,000 on 20 May 2018. Spade had filed the form on the basis of an alleged Memorandum of Understanding dated 12 August 2011 executed with the Corporate Debtor, which stated that Inter Corporate Deposits ("ICDs") of Rs. 26,55,00,000 have been granted to the Corporate Debtor by Spade bearing interest of 24% repayable in terms of the mutual agreement between the parties. However, Spade has submitted before this Court that it has granted ICDs of Rs. 66,00,00,000 (approx.) to the Corporate Debtor between June 2009 and January 2013. Out of this amount, Spade is claiming a principal amount of Rs. 23,00,00,000. The balance amount of Rs. 43,06,00,000 was credited in the account of AAA, which is a wholly owned subsidiary of Spad....
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....ducting TDS on interest. Thus, NCLT allowed Spade and AAA to submit their claims as financial creditors with a direction to the IRP to consider the claims. 10 Phoenix is also a financial creditor of the Corporate Debtor and is a part of CoC. Its claim is based on a registered Deed of Assignment in its favour dated 28 December 2015, pursuant to which, Karnataka Bank Limited had assigned the non-performing assets relating to the credit facilities granted to the Corporate Debtor. The voting share of Phoenix was reduced to 4.28% on account of AAA and Spade being included in the CoC. 11 On 1 June 2018, a meeting of the CoC took place which was attended by YES Bank and Phoenix, and also by the newly approved financial creditors, AAA and Spade. Following the meeting, YES Bank and Phoenix filed applications in the NCLT for the exclusion of AAA and Spade from the CoC on the ground that they are related parties. Notice was issued by the NCLT in the two applications - Civil Appeal No. 267/2018 and Civil Appeal 368/2018. 12 The application moved on behalf of YES Bank under Section 60(5), on 28 June 2018, sought the following reliefs: (i) A direction to the IRP to reconstitute....
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....ultimate decision of the NCLT was to allow the applications filed by YES Bank and Phoenix for the exclusion of AAA and Spade from the CoC based on its findings on the first issue. D Proceedings before NCLAT 17 In appeal, the NCLAT proceeded in paragraph 11 of its decision to observe that "admittedly" Spade and AAA "are the financial creditors of the corporate debtor". Having stated so, the Appellate Tribunal proceeded to enquire into whether AAA and Spade are related parties within the meaning of Section 5(24) of the IBC. 18 Answering the above issue in the affirmative, the NCLAT held that Spade and AAA are related parties of the Corporate Debtor since: (i) AAA was a partner of the Corporate Debtor in accordance with Section 5(24)(a) -"(a) a director or partner of the corporate debtor or a relative of a director or partner of the corporate debtor;". The Appellate Tribunal held that since even after the cancellation of Development Agreement dated 1 March 2012 between the parties, they had entered into an Agreement to Sale and Side Letter dated 25 October 2012, which was merely a camouflage under which they were partners in developing a residential project to be sol....
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....sses of the corporate debtor;"; (v) Mr. Arun Anand and Mr. Sonal Anand were directors of the Corporate Debtor till 2013. Hence, Mr. Arun Anand would be a related party under Section 5(24)(a) read with 5(24A)(a)- "(24-A) "related party", in relation to an individual, means- (a) a person who is a relative of the individual or a relative of the spouse of the individual;", being a relative of another director; and (vi) A holding company of the Corporate Debtor, Joint Investment Private Limited ("JIPL"), holds shareholding in Spade. 19 Hence, NCLAT came to the conclusion that the Adjudicating Authority had rightly excluded both Spade and AAA from participation in the CoC since Mr. Anil Nanda, in concert with Mr. Arun Anand and his family, had created a web of companies which were related parties to the Corporate Debtor, and was now trying to gain a backdoor entry into the CoC through them. E Transactions of the Corporate Debtor 20 Before we proceed with our analysis of the issues, it is important to note the relevant transactions between the Corporate Debtor on one hand and Spade and AAA on the other hand, which gives rise to their claims as financial creditor....
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....r. Arun Anand and his son, Mr. Aditya Anand, sold their shareholding in the Corporate Debtor in the year 2004/2005; (v) Mr. Arun Anand was also closely related to one of the directors of the Corporate Debtor, Mr. Sonal Anand, who is his brother-in-law. Sonal Anand was the director of the Corporate Debtor from November 2007 to 2013; and (vi) Mr. Arun Anand has worked in different capacities for Mr. Anil Nanda for about 25 years. 24 The purported transactions took place when he was an employee of Escorts Limited/Nanda Group of Companies, including the Corporate Debtor and also held key managerial posts in the said companies. Spade and AAA, in their written submissions, have given details of Mr Arun Anand's association with the Corporate Debtor during the relevant period (June 2009 to January 2013) and thereafter: 1 June 2009 - 31 October 2011 Consultant 1 November 2011 - 25 November 2012 Strategic Advisor 26 November 2012 - 14 February 2013 (81 days) Group CEO 15 March 2013 till 18 April 2018 (CIRP date) Since February 2013, Mr. Arun Anand has no association with Corporate Debtor in any manner whatsoever G Whether Spade and AAA are fina....
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.... creditors which was moot, for being considered. The NCLAT proceeded to dismiss the appeal, despite its finding that "admittedly" AAA and Spade are financial creditors by coming to the conclusion that they are related parties. 27 On the basis of the above submissions, Mr Viswanathan has submitted that the proceedings should be remanded back for reconsideration since the NCLAT has made an error of jurisdiction in rejecting the appeal filed by AAA and Spade despite having agreed with their submission that they are financial creditors. 28 The submission of Mr Neeraj Kishan Kaul is that AAA and Spade are not creditors of the Corporate Debtor, much less financial creditors, in terms of Section 5(7) of the IBC. The submissions made in relation to the transaction between AAA and the Corporate Debtor are: (i) The Development Agreement dated 1 March 2012 entered between AAA and the Corporate Debtor was collusive. AAA had sought to purchase 38.3% of the development rights in a project called AKME RAAGA as a co-developer/partner. However, the development license granted by the Government could not be sub-divided. As a result, the Corporate Debtor and AAA converted the Developme....
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....a financial debt in terms of Section 5(8) of the IBC is absent, which is the consideration for the time value of money. The exact period of repayment of the ICDs has not been stipulated in the Memorandum of Understanding; (b) The calculation sheet provided by Spade to ascertain the interest rate and payment of interest does not reflect adjustment of any part of payment against the payment of interest; (c) The ledger provided by Spade does not stipulate the interest claimed on the alleged debt; (d) ICDs were allegedly granted to the Corporate Debtor by Spade in 2013; however, no valid financial contract was entered between the Corporate Debtor and Spade to stipulate the consideration in terms of the time value of money against each transaction. A financial contract is essential for considering a debt as financial debt; (e) The calculation sheet reflects that the inflow and outflow of funds are in the nature of a running account, indicating that the debit and credit balances lack any commercial effect of borrowing, which is an essential element in terms of Section 5(8)(f) of IBC; and (f) The emails relied on by Spade dated 16/17 January 20....
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.... concealment of material facts, circumstances and the real nature of the transactions. In addition, Mr Anil Nanda, the suspended director of the Corporate Debtor, had filed an application - CA -224/ND/2018 before the NCLT alleging that Spade and AAA have not financed any amount to the Corporate Debtor. He submitted that there was no loan facility against the time value of money. In addition, he argued that the Agreement to Sell between the Corporate Debtor and AAA was a part of series of acts of fraud, and is null and void. The NCLT's order dated 19 July 2019 was passed after arguments were led on the real nature of transactions between the parties. G.2.3 Remand to NCLAT 33 The submission that the NCLAT has acted beyond jurisdiction in the appeal filed by AAA and Spade in enquiring into whether they are related parties is the next aspect which needs to be considered. NCLT in its decision on 19 July 2019 had formulated two questions for consideration. The first was whether the transactions between AAA and Spade qualify to be treated as a financial debt under Section 5(8). The second pertained to the date with reference to which the relationship between the parties needs to be ....
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.... debtor and AAA were discussed in paragraph 11.3 and a finding was arrived at to the effect that they were collusive in nature, and did not qualify as a financial debt. Paragraph 11.3 is extracted below: "11.3 The details of transaction and entered by CD with AAA Landmark have been discussed in detail in Para 4.3 above. It is seen that as regards to the same property the parties entered into several agreements over a period of 3 years, including plot buyers Agreement, MOU, Development Agreement and finally, Agreement to Sell dated 25.10.2012. By the Development Agreement dated 01.03.2012, 38.3% of the Development rights of the Project named "AKME Raaga" were sold to AAA for 32.80 crores and subsequently on 25.10.2012 the Agreement to Sell was executed to superseding the development agreement with an enhanced value of Rs. 43.06 crores. The multiplicity of Agreements regarding the same property, with no explanation or rational reasoning regarding variation in values of transaction, shows that these transactions are also collusive in nature and an attempt to divert the properties of the CD to AAA for reasons best known to the parties. It is also noted that the transactions be....
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....plications filed by YES Bank and Phoenix would have to be allowed. Its conclusion is extracted below: "13. Before parting with this application, we would like to observe that the affairs of the CD as well as the Group of Arun Anand companies are deeply entangled and it is difficult for the Tribunal in a summary jurisdiction to unravel-the same. Considering that the CD and Spade and AAA were Registrar of Companies since 2016, we have no hesitation in allowing the instant applications filed by Yes Bank Limited and Phoenix ARC Private Limited." 36 The above analysis of the decision of the NCLT indicates that its primary finding was that neither AAA nor Spade are financial creditors within the meaning of Section 5(8). 37 Sub-sections (1) and (2) of Section 21, insofar as is material provide as follows: "21. Committee of Creditors.- (1) The interim resolution professional shall after collation of all claims received against the corporate debtor and determination of the financial position of the corporate debtor, constitute a committee of creditors. (2) The committee of creditors shall comprise all financial creditors of the corporate debtor: Provid....
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....es. 40 The dispute fell into a quagmire when the NCLAT proceeded on the basis that it was an admitted position that AAA and Spade are financial creditors. The finding of fact in paragraph 11 of the decision of the NCLAT that this is the "admitted position" is plainly erroneous since there was an express finding of the NCLT to the contrary. The fact that it necessitated an appeal by AAA and Spade would indicate that this was not an admitted position. It is also evident from the contents of the appeal filed by Spade and AAA, and the reply filed by Phoenix before the NCLAT, that the status of Spade and AAA as financial creditors was in dispute. Having said that, the issue that now falls for our consideration is whether AAA and Spade can be considered as financial creditors. G.3 Analysis G.3.1 Relevant Provisions 41 Section 5 (7) of the IBC defines a financial creditor : "(7) "financial creditor" means any person to whom a financial debt is owed and includes a person to whom such debt has been legally assigned or transferred to;" 42 Section 5(8) of the IBC provides a definition of financial debt in the following terms: "(8) "financial debt" means a debt....
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.... Pvt. Ltd. v. Union of India (2019) 4 SCC 17 has held: "42. A perusal of the definition of "financial creditor" and "financial debt" makes it clear that a financial debt is a debt together with interest, if any, which is disbursed against the consideration for time value of money. It may further be money that is borrowed or raised in any of the manners prescribed in Section 5(8) or otherwise, as Section 5(8) is an inclusive definition. On the other hand, an "operational debt" would include a claim in respect of the provision of goods or services, including employment, or a debt in respect of payment of dues arising under any law and payable to the Government or any local authority." (emphasis supplied) 44 In this context, it would be relevant to discuss the meaning of the terms "disburse" and "time value of money" used in the principal clause of Section 5(8) of the IBC. This Court has interpreted the term "disbursal" in Pioneer Urban Land and Infrastructure Ltd vs. Union of India (2019) 8 SCC 416 in the following terms: "70. The definition of "financial debt" in Section 5(8) then goes on to state that a "debt" must be "disbursed" against the considerat....
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.... real agreement between the parties is something other than advancing a financial debt. A useful elaboration of "sham transactions" can be found in the opinion of Diplock LJ in Snook vs. London and West Riding Investments Ltd. [1967] 2 QB 786: "As regards the contention of the plaintiff that the transactions between himself, Auto Finance and the defendants were a "sham," it is, I think, necessary to consider what, if any, legal concept is involved in the use of this popular and pejorative word. I apprehend that, if it has any meaning in law, it means acts done or documents executed by the parties to the "sham" which are intended by them to give to third parties or to the court the appearance of creating between the parties legal rights and obligations different from the actual legal rights and obligations (if any) which the parties intend to create." (emphasis supplied) Diplock LJ also stated: "But one thing, I think, is clear in legal principle, morality and the authorities (see Yorkshire Railway Wagon Co v Maclure and Stoneleigh Finance Ltd. v Phillips), that for acts or documents to be a "sham," with whatever legal consequences follow from this, all....
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....ies may have undertaken to hamper recovery of creditors in the event of the initiation of CIRP. Such avoidable transactions include: (i) preferential transactions under Section 43 of the IBC; (ii) undervalued transactions under Section 45(2) of the IBC; (iii) transactions defrauding creditors under Section 49 of the IBC; and (iv) extortionate transactions under Section 50 of the IBC. The IBC recognizes that for the success of an insolvency regime, the real nature of the transactions has to be unearthed in order to prevent any person from taking undue benefit of its provisions to the detriment of the rights of legitimate creditors. G.3.4 Spade and AAA 49 Mr Kaul argued that the transactions entered into between the Corporate Debtor and Spade and AAA are collusive in nature and do not constitute a financial debt. Mr Viswanathan has urged that the eligibility of Spade and AAA as financial creditors has conclusively been determined by the NCLT in its order dated 31 May 2018. We have already concluded that the above order would not operate as res judicata and it was within the jurisdiction of the NCLT to consider this issue afresh. NCLT in its order dated 19 July 2019 has undertak....
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....n the basis of which Spade had filed its claim in Form C before the IRP, was signed two years after the commencement of the purported transaction. The execution of the Memorandum of Understanding was sought to be explained on the basis that a formal document was created for specifying the rate of interest on the ICDs given by Spade to the Corporate Debtor. However, despite the creation of a formal document, the rate of interest being charged on the ICDs was 12% as mentioned in the claim before the IRP, which is half of the interest rate of 24% stipulated in the Memorandum of Understanding. During the arguments, Mr Kaul and Mr Sen have also brought to the notice of this Court that the Memorandum of Understanding is unregistered and unstamped. The IRP in his letter dated 25 May 2018 has noted that as per the ledger provided by Spade, no interest was claimed on the alleged debt and no adjustment was made regarding the payment of principal or interest by the Corporate Debtor to Spade. It has been submitted in the written submissions filed on behalf of Spade and AAA that the auditors of the Corporate Debtor had been putting a note in its balance sheets stating that the interest of 12% w....
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....e sale consideration was re-negotiated and enhanced from Rs. 32.80 crores under the Development Agreement to Rs. 86.01 crores under the Agreement to Sell. Mr Viswanathan has submitted that there was no partnership clause in the Agreement to Sell. However, Clause 3 of the Side Letter dated 25 October 2012 shows that the intent of the parties was to continue to co-develop the land. Clause 3 of the Side Letter provides: "3. It is agreed that ALPL shall share the cost of the Project in the same ratio as the share of respective development in the Property (i.e. Villas- 50% and other developments (group housing etc.) - 36.33%). The cost of the Project shall include: a. Land cost b. License and approval costs c. Construction cost d. Direct project management costs (people at the site) e. Marketing & sales promotion cost f. Liaison cost g. Maintenance cost for unsold inventory h. Government levies and charges including EDS & IDC and any enhancement thereof." It appears that the parties converted the Development Agreement into an Agreement to Sell executed along with a Side Letter to circumvent the legal pro....
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....ds only 1.45% shareholding in Spade, which is below the 2% threshold in Section 5(24)(d); (vi) The Corporate Debtor and AAA are incorrectly assumed to be 'partners' in accordance with Section 5(24)(a); (vii) The two transactions mentioned in order to prove a relationship under Section 5(24)(f) were commercial transactions where the Corporate Debtor borrowed money from Spade to pay third parties, which would have been paid back with interest; and (viii) Section 5(24A) has no application, since it applies to the insolvency resolution and liquidation process for individuals and partnerships. 55 Supporting the judgment of the NCLAT, Mr Kaul submits: (i) Mr Arun Anand incorporated the Corporate Debtor on 15 December 2003, following which it was acquired by Mr Anil Nanda in 2007. Mr Arun Anand has also held numerous positions in the Anil Nanda Group of Companies, and has a long-standing relationship with Mr Anil Nanda; (ii) During the relevant transactions with Spade and AAA, Mr Arun Anand held the position of Consultant or Strategic Advisor to the Corporate Debtor, and later became the Group CEO of the Anil Nanda Group of Companies (of which the Corporate Debtor is als....
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....artnership firm whose partners or employees in the ordinary course of business, acts on the advice, directions or instructions of a director, partner or manager of the corporate debtor; (h) any person on whose advice, directions or instructions, a director, partner or manager of the corporate debtor is accustomed to act; (i) a body corporate which is a holding, subsidiary or an associate company of the corporate debtor, or a subsidiary of a holding company to which the corporate debtor is a subsidiary; (j) any person who controls more than twenty per cent. of voting rights in the corporate debtor on account of ownership or a voting agreement; (k) any person in whom the corporate debtor controls more than twenty per cent. of voting rights on account of ownership or a voting agreement; (l) any person who can control the composition of the board of directors or corresponding governing body of the corporate debtor; (m) any person who is associated with the corporate debtor on account of- (i) participation in policy making processes of the corporate debtor; or (ii) having more than two directors in common between th....
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....s. Further, Mr Anil Nanda has himself invested in companies owned by Mr Arun Anand, and had commercial transactions with them. Through Spade and AAA's own admission, Mr Arun Anand was appointed as the Group CEO of the Anil Nanda Group of Companies (for however short a period) on circular approval by Mr Anil Nanda himself. Finally, Mr Arun Anand's brother in-law, Mr Sonal Anand, has also been consistently associated with companies in the Anil Nanda Group of Companies, including the Corporate Debtor and JIPL. This deep entanglement between these individuals was noted by the NCLT and the NCLAT. 61 Admittedly, Mr Arun Anand was in control of Spade and AAA during the relevant period. Further, he held positions in the Corporate Debtor or the Anil Nanda Group of Companies, which included the Corporate Debtor. Mr Anil Nanda and Mr Sonal Anand also held positions in the Corporate Debtor and JIPL during this period. 62 Based on the above, it is not difficult for us to accept the conclusion of the NCLAT that Mr Arun Anand would be a related party of the Corporate Debtor in accordance with Section 5(24)(h) and Sections 5(24)(m)(i). Mr Viswanathan has tried to refute this argument by rely....
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.... Mr Arun Anand, Spade and AAA were related parties of the Corporate Debtor during the relevant period when the transactions on the basis of which Spade and AAA claim their status as financial creditors took place. I Whether Spade and AAA can be excluded from the CoC 66 Section 21(1) of the IBC requires the IRP to form the CoC for the CIRP of the Corporate Debtor. The membership of the CoC is determined in accordance with Section 21(2), which reads thus: "(2) The committee of creditors shall comprise all financial creditors of the corporate debtor: Provided that a financial creditor or the authorised representative of the financial creditor referred to in sub-section (6) or sub-section (6-A) or sub-section (5) of Section 24, if it is a related party of the corporate debtor, shall not have any right of representation, participation or voting in a meeting of the committee of creditors: Provided further that the first proviso shall not apply to a financial creditor, regulated by a financial sector regulator, if it is a related party of the corporate debtor solely on account of conversion or substitution of debt into equity shares or instruments converti....
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....ade to Section 43(4) which deals with preferential transactions and incorporates a look back period of two years. Reference has also been made in the course of the submission to Section 5(24)(m) which uses the expression "is associated" with the corporate debtor. Based on the above submissions, it has been urged that where the statute intends to consider situations as they existed in the past, it has utilised expression "has been". Consequently, it has been urged that when in the first proviso to Section 21(2), the expression "is a related party" is used, this must clearly be a reference to the present and not to an uncertain past. In essence, it has been urged that the existence of a live link of being a related party in the present is a requirement of the statutory provision. 69 While opposing the submissions which have been urged by Mr Viswanathan, Mr Kaul, submitted that the provisions of Section 21(2) must receive a purposive interpretation. Mr Kaul has urged that if this were not done the provisions of the IBC will be defeated by adopting commercial artifices and contrivances. He urged that the interpretation which the court adopts must facilitate and not defeat the ful....
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....r material contracts otherwise than in the ordinary course of business; (l) make changes in the appointment or terms of contract of such personnel as specified by the committee of creditors; or (m) make changes in the appointment or terms of contract of statutory auditors or internal auditors of the corporate debtor." 70 In an instructive article published in the Yale Law Journal, titled 'Bankruptcy, Non-Bankruptcy Entitlements, and the Creditors' Bargain', Thomas H. Jackson, argues that creditors prefer a collective process as opposed to a race to grab as many assets, which often leads ultimately to the demise of the corporate debtor- Thomas H. Jackson, 'Bankruptcy, Non-Bankruptcy Entitlements, and the Creditors' Bargain', 91 Yale Law Journal 857, (1982) at 859-71. The reason why a collective process is considered superior is because individual creditors, left to their own whims, are motivated to act solely in their own interests, even when their interests may directly conflict with the creditors' collective interests as a group. This self-interest creates a collective action problem, such that creditors eventually enter a grab race, operating under the belief....
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....e 29. The report recognised this in the following terms: "[The] three core features that most well developed bankruptcy and insolvency resolution regimes share: a linear process that both creditors and debtors follow when insolvency is triggered; a collective mechanism for resolving insolvency within a framework of equity and fairness to all stakeholders to preserve economic value in the process; a time bound process either ends in keeping the firm as a going enterprise, or liquidates and distributes the assets to the various stakeholders. These features are common across widespread differences in structure and content, present either through statutory provisions or their implementation in practice .... These features ensure certainty in the process, starting from what constitutes insolvency, and the processes to be followed to resolve the insolvency, or the process to resolve bankruptcy once it has been determined. Done correctly, such a framework can incentivise all stakeholders to behave rationally in negotiations towards determination of viability, or in bankruptcy resolution. In turn, this will lead to shorter times to recovery and better recovery un....
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....able at <https://uncitral.un.org/sites/uncitral.un.org/files/media-documents/uncitral/en/05-80722_ebook.pdf>, at page 204: "The insolvency law should specify the creditors that are eligible to be appointed to a committee. Creditors who may not be appointed to a creditor committee would include related persons and others who for any reason might not be impartial. The insolvency law should specify whether or not a creditor's claim must be admitted before the creditor is entitled to be appointed to a committee." In interpreting the legislation, which represents a Parliamentary effort to bring about structural changes in the resolution of corporate insolvencies, the effort of the court must be to aid the fulfilment of the objects of the IBC. I.3 Amendment to First Proviso of Section 21(2) 78 Originally, the first proviso to Section 21(2) read as follows: "Provided that a related party to whom a corporate debtor owes a financial debt shall not have any right of representation, participation or voting in a meeting of the committee of creditors." 79 The language was subsequently amended by the Amendment Act, 2018 and at present the first proviso reads as foll....
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....to the amendments in the Code and CIRP Rules / CIRP Regulations to provide clarity on empowering debenture trustees to file for initiation of CIRP on behalf of the creditors and vote on their behalf. 10.8 In light of the deliberation above, the Committee felt that a mechanism requires to be provided in the Code to mandate representation in meetings of security holders, deposit holders, and all other classes of financial creditors which exceed a certain number, through an authorised representative. This can be done by adding a new provision to section 21 of the Code. Such a representative may either be a trustee or an agent appointed under the terms of the debt agreement of such creditors, otherwise an insolvency professional may be appointed by the NCLT for each such class of financial creditors. Additionally, the representative shall act and attend the meetings on behalf of the respective class of financial creditors and shall vote on behalf of each of the financial creditor to the extent of the voting share of each such creditor, and as per their instructions. To ensure adequate representation by the authorised representative of the financial creditors, a specific provis....
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....sion used is "has", which as Dr Singhvi has correctly argued, is in praesenti. This is to be contrasted with the expression "has been", which is used in clauses (d) and (g), which refers to an anterior point of time. Consequently, the amendment of 2018 introducing the words "at the time of submission of the resolution plan" is clarificatory, as this was always the correct interpretation as to the point of time at which the disqualification in clause (c) of Section 29-A will attach." 84 Thus, facially, it would appear that the use of the simple present tense in the first proviso to Section 21(2) indicates that the disqualification applies in praesenti. Furthermore, this interpretation would also be supported by a reading of the first proviso to Section 21(2), in light of the definition of 'related party' under Section 5(24), which uses phrases such as 'is accustomed to act' or 'is associated' to define a related party in the present tense. 85 However, it is relevant to examine whether the object and purpose for which the proviso was enacted, are fulfilled by the literal interpretation of the first proviso. Justice G.P. Singh in his authoritative commentary on the interpretatio....
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....ating to defence services "the considerations of the security of the state and enforcement of high degree of discipline additionally intervene and have to be assigned weightage while dealing with any expression needing to be defined or any provision needing to be interpreted." Similar words used in different parts of the enactment can have different meanings. As Justice G P Singh notes: "The rule is of general application as even plainest terms may be controlled by the context, and "it is conceivable," as Lord Watson said, "that the Legislature whilst enacting one clause in plain terms, might introduce into the same statute other enactments which to some extent qualify or neutralise its effect". The same word may mean one thing in one context and another in a different context. For this reason the same word used in different sections of a statute or even when used at different places in the same clause or section of a statute may bear different meanings. The conclusion that the language used by the Legislature is plain or ambiguous can only be truly arrived at by studying the statute as a whole. How far and to what extent each component part of the statute influences th....
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....ith the principles laid down in Robert Wigram Crawford v. Richard Spooner 4 MIA 179, Re Bedia v. Genreal Accident, Fir and Life Assurance Corporation Ltd. 1948 (2) All ER 995 and Bourne (Inspector of Taxes) v. Norwich Crematorium Ltd.1967 (2) All ER 576, we specifically hold that giving the literal interpretation to the Section would lead to absurdity and some unwanted results, as had already been pointed out in Antulay's case (cited supra) (see the emphasis supplied to para 24 of Antulay's judgment)." 88 This Court relied on the judgement in R S Nayak v. A R Antulay to fortify its interpretation of Section 19(1) of the Prevention of Corruption Act, 1947: "24 .... An illustration was posed to the learned Counsel that a Minister who is indisputably a public servant greased his palms by abusing his office as Minister, and then ceased to hold the office before the court was called upon to take cognizance of the offence against him and therefore, sanction as contemplated by Section 6 would not be necessary; but if after committing the offence and before the date of taking of cognizance of the offence, he was elected as a Municipal President in which capacity he was ....
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.... v. Transport Commr., (1977) 2 SCC 273, an early instance of this is found in the concurring judgment of Beg, J. The learned Judge put it rather well when he said: (SCC p. 287, para 28): "28. It is, however, becoming increasingly fashionable to start with some theory of what is basic to a provision or a chapter or in a statute or even to our Constitution in order to interpret and determine the meaning of a particular provision or Rule made to subserve an assumed "basic" requirement. I think that this novel method of construction puts, if I may say so, the cart before the horse. It is apt to seriously mislead us unless the tendency to use such a mode of construction is checked or corrected by this Court. What is basic for a Section or a chapter in a statute is provided: firstly, by the words used in the statute itself; secondly, by the context in which a provision occurs, or, in other words, by reading the statute as a whole; thirdly, by the Preamble which could supply the "key" to the meaning of the statute in cases of uncertainty or doubt; and, fourthly, where some further aid to construction may still be needed to resolve an uncertainty, by the legislative history which ....
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.... of a corporate debtor creating commercial contrivances which have the effect of denuding its status as a related party, by the time that the CIRP is initiated. The true test for determining whether the exclusion in the first proviso to Section 21(2) applies must be formulated in a manner which would advance the object and purpose of the statute and not lead to its provisions being defeated by disingenuous strategies. 91 Therefore, it could be stated that where a financial creditor seeks a position on the CoC on the basis of a debt which was created when it was a related party of the corporate debtor, the exclusion which is created by the first proviso to Section 21(2) must apply. For, it is on the strength of the financial debt as defined in Section 5(8) that an entity claiming as a financial creditor under Section 5(7) seeks a position on the CoC under Section 21(2). If the definition of the expression 'related party' under section 5(24) applies at the time when the debt was created, the exclusion in the first proviso to Section 21(2) would stand attracted. 92 However, if such an interpretation is given to the first proviso of Section 21(2), all financial creditors would st....
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....)." (emphasis supplied) 94 Thus, it has been clarified that the exclusion under the first proviso to Section 21(2) is related not to the debt itself but to the relationship existing between a related party financial creditor and the corporate debtor. As such, the financial creditor who in praesenti is not a related party, would not be debarred from being a member of the CoC. However, in case where the related party financial creditor divests itself of its shareholding or ceases to become a related party in a business capacity with the sole intention of participating the CoC and sabotage the CIRP, by diluting the vote share of other creditors or otherwise, it would be in keeping with the object and purpose of the first proviso to Section 21(2), to consider the former related party creditor, as one debarred under the first proviso. 95 Hence, while the default rule under the first proviso to Section 21(2) is that only those financial creditors that are related parties in praesenti would be debarred from the CoC, those related party financial creditors that cease to be related parties in order to circumvent the exclusion under the first proviso to Section 21(2), should a....