TaxTMI 
TaxTMI 
2021 (9) TMI 991
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....ad Bench). 2. The 'Adjudicating Authority' (National Company Law Tribunal Hyderabad Bench) while passing the impugned order dated 04.01.2021 in I.A. 555 of 2020 in CP (IB) No.143/7/HDB/2019 at paragraph 57 to 61 had observed the following: 57 "It is the case of the applicant the respondent no.3 is having 11% voting share in the Corporate Debtor and it is also the fact that balance amount of Rs. 5,93,23,625/- is payable by Corporate Debtor to respondent no.3 vide loan agreement dated 09.05.2006. It is a fact that respondent no.3 is a shareholder in the Corporate Debtor and having voting share of 11%. We have to examine whether respondent no.3 is a related party or not in the light of the above definition. We observe that respondent No.3 squarely fits into the definition of 'related party' under section 5(24) (a), (h), (j), (l) and (m) of the Code. From the record submitted to the Tribunal it is observed that out of four directors of the Board of Directors, two directors are nominated by respondent no.3. We are of the view that the role and responsibility of the Directors is to protect the interests of the Corporate Debtor and not to merely sit in the Board meetings of th....
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....tors, but there must be included in the qualified majority at least one director nominee by APTPCL. 60. Article 62 plays vital role in deciding the subject matter in this case. From reading of Article 62 it is clearly evident that nominee-directors of Corporate Debtor and they cannot now claim that they only nominee-directors and they do not have much role in the Corporate Debtor. Such claim is untenable. 61. We are, therefore, not in agreement with the decision taken by the Resolution Professional to include respondent no. 3 as a Member of the CoC. Accordingly, we are of the that TSTPCL falls within the meaning of 'related party' as given in the I&B Code and Articles of Association of the Corporate Debtor. Accordingly, we direct that the Resolution Professional shall reconstitute the CoC treating the TSTPCL as a 'related party'. Accordingly, the IA is disposed of with the above directions to the Resolution Professional. and disposed of the interlocutory application with directions being issued to the 'Resolution Professional'. Background 3. Assailing the correctness, validity and legality of the impugned order dated 04.01.2021 in I.A. No.555 of 2020 in C....
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....37,000/- per acre) as the actual extent of land on physical verification was decided at Ac 2-05 Guntas etc. 8. The Learned Counsel for the Appellant points out that pursuant to the Memorandum of Understanding dated 12.06.2002, the 1st Respondent/ Company was incorporated on 24.09.2002 for the development of show room/ market palace for Gems and Jewellery in the property by one Mr. Suresh Chukapalli and Mrs. Madhumati Chukapalli. Subsequently, 'APSTC' alienated the property to 1st Respondent/ Company with certain conditions GoAP as per Go Ms. NO.115 dated 28.05.2004 approved shareholding pattern of 11% and 89% of equity and preferential share to 'APSTC' and 'IOIM' respectively, and nominated 'Managing Director', 'APSTC' as one of the 'Directors' on the Board of 'SPC'. 9. It transpires that 'APSTC' was allotted 2,95,000 Equity Shares at INR 10 each amounting to INR 29,50,000 and 9,15,000 preferential shares at INR 10 (each) amount to INR amounting to INR 91,50,000 and the reminder amount of 11,56,91,125 (referred to as 'loan amount') was extended as loan to Respondent No.1/ Company with an interest of 11% per annum (on yearly rest basis). In reality the 1st Respondent paid Rs. ....
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....its claim for INR 38, 64, 42,140 falling from the loan agreement dated 09.05.2006 before the 'Resolution Professional' as per the ingredients of 'I&B' Code, 2016. The 'Resolution Professional' included the Appellant as the Member of the 'Committee of Creditors' in the 7th meeting that took place on 15.06.2020 after due consideration of the documents submitted in respect of the claim amount and admitted the claim of INR 38,46,16,545. Before admitting the claim, the Appellant had revised its claim supported by relevant documents. 15. It is projected on the side of the Appellant that the Second Respondent/ Company filed an Interlocutory Application No. 555 of 2020 in CP (IB) No.143/07/HDB/2019 as per Section 65 (5) read with Section 21 (2) of the Code before the 'Adjudicating Authority' (National Company Law Tribunal Hyderabad Bench) seeking for removal of the Appellant (APSTC/TSTPC) from the 'CoC' based on the reason that 'Appellant' is a 'related party' and prayed for consequent action. Appellant's Submissions 16. According to the Learned Counsel for the Appellant the 'Adjudicating Authority' has committed an error in concluding that the Appellant represented through one no....
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....of the Appellant that the 'Adjudicating Authority' had committed an error in making an observation that the 'Appellant' is a related party as per Section 24(m) of the 'I&B' Code. 22. Advancing his argument, the Learned Counsel for the Appellant submits that the 'Adjudicating Authority' had incorrectly observed that there are two nominee Directors of the Appellant and they have significant influence in the decisions making process of the First Respondent/ Company. 23. It is the specific case of the Appellant that the 'Adjudicating Authority' had relied on 'Article 62 of the Articles of Association' of First Respondent/ Company to come to the conclusion that the Appellant is a 'related party' having significant influence on the First Respondent/ Company. 24. The Learned Counsel for the Appellant adverts to Article 62 of the 'Articles of Association' which provides that there must be at least one Director of the Appellant in the minimum 'quorum' of three and that such 'right of representation' cannot be construed to mean as a right of majority. 25. The Learned Counsel for the Appellant comes out with a plea that Clause 62 of the 'Articles of Association' of the 'Corporate ....
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....declare the Appellant as a related party as per Section 5(24) of the I&B Code is an erroneous one, because of the fact that a mere power to block 'Resolution(s)' of a Company cannot amount to control. Also, it is the plea of the Appellant that it is to be appreciated and borne in mind that the purpose of appointing a 'Nominee Director' is to ensure that the nominator's interest and rights are not prejudiced. 30. The Learned Counsel for the Appellant refers to Section (24) of the Code, which provides that any person who can control the composition of the Board of Directors or corresponding governing body of the Corporate Debtor and submits that there is no manner such control on the composition of the board is attributable to the 'Appellant' with a meagre 11% shareholder. 31. The Learned Counsel for the Appellant adverts to the ingredients of definition of Section 5(24) (m) of the Code, which runs to the following effect: (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 the corporate debtor and such p....
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....cluded the 'Appellant' as a Member of the 'Committee of Creditors'. 36. The plea taken on behalf of the First Respondent is that in the 7th CoC meeting, the representative of the 'Financial Creditor' / Applicant was also present but he had not expressed any objection or concerned over the inclusion of the 'Appellant' as a Member of the Committee of Creditors. Even, in the 8th 'Committee of Creditors' meeting that took place on 09.07.2020, the Second Respondent / Applicant had not raised any concern and even approved the minutes of the earlier 7th 'Committee of Creditors' meeting. 37. The Learned Counsel for the First Respondent submits that by the time the order of 'admission' was passed by the 'Adjudicating Authority' on 04.06.2019, the 'Corporate Debtor' was under strike off' mode and later the 'Corporate Debtor' was restored on the rolls of the Registrar of Companies under the directions of the Tribunal. Furthermore, as on the date of the order, there were no Operations in the Company and there were no 'Employees'. As a matter of fact, the only asset of the 'Corporate Debtor' under development was attached by the Enforcement Directorate as per PAO dated 10.04.2019. That ap....
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....vernment of Andhra Pradesh from time to time as to the relation, the Appellant is not a mere 'shareholder' but a controlling partner who has a 'definitive say' and control in the affairs of the First Respondent/ Company/ Corporate Debtor. 43. The Learned Counsel for the Second Respondent takes a plea that the Appellant/ Company has a representation of two Directors out of five Members in the Board of Directors of the First Respondent. In fact, the Directors nominated by/ representing the Appellant have been participated in the meeting of Board of Directors of the First Respondent and that 'Board of Directors' is the final policy making Body of any Company. Indeed, the 1st Respondent is having a thorough participation in Appellant's policy making process and that the Managing Director of the Appellant was a Director in the 1st Respondent/ Company along with one more Director. In short, the presence of two Directors in the Board of Directors of the First Respondent itself makes the Appellant Company a 'related party' as contemplated in the I&B Code. 44. It is the fervent plea of the Second Respondent that many of the policy decision cannot be taken with the affirmative vote of ....
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....t of the undertaking; xvi. Entry into any contract, agreement or transaction, other than in the ordinary course of business, or other than in arm's length basis, or granting favourable or concession terms to any of the Shareholders, their associates or private interests; xvii. The Board many from time to time raise or borrow any sums of money, for and on behalf of the company from the members or other persons, companies, banks or financial institutions or any of the Directors may himself/herself advance money to the company on such interest as may be approved by the Board of Directors; xviii. All borrowing from banks, financial institutions and other agencies including issue of debentures and providing corporate guarantees." (Emphasis supplied) 45. The Learned Counsel for the Second Respondent brings to the notice of this Tribunal that Article 70 and 71 of the Articles of Association of the First Respondent confers special power upon the Appellant as to auditing the First Respondent and also the appointment of statutory auditors of the First Respondent. Further, the Appellant can control their composition of Board of Directors of the First Res....
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....'related party' and has reported the transactions between them as 'related party' transactions in a statutory document such as annual reports and audited financial documents and the same is reported as per the definition of 'related party' in terms of the provisions of the Companies Act and mandatory accounting standards. Further, the definition of the 'related party' under IBC is adopted from the definition of the 'related party' under the 'Companies Act' after making modification to suit the context. 50. It is projected on the side of the Second Respondent that description of nature of 'related party' relationship is reported under the category 'enterprises which are owned or have significant influence of or are partners with key management personnel and their relatives' indeed the vital influence as reported is clearly visible in the formation of First Respondent/ Company and its conduct of the business, 'Articles of Association' and the 'Qualified Majority' required for key business decisions. Therefore, it is the stand of the Second Respondent that the Appellant is treated as 'related party' by the First Respondent through its existence. 51. According to the Learned Coun....
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.... person acquires 'by purchase' or 'otherwise' majority of votes carrying shares in that Company for the control of the Company rights in the voting power of its shares. At this stage, this Tribunal aptly points out that if few persons hold comparatively small proportion of total shares may enable actual control to be exercised by such persons as per decision Hindustan Motors Ltd. vs. MRTP Commission reported in AIR 1973 Cal 450, 459. 56. In this connection, this Tribunal worth recalls and recollects the decision in Inland Revenue Commissioners vs. Bibby and Sons Ltd. reported in (1946) 14 ITR (Suppl.) 7 wherein it is observed that the term 'controlling' interest does not refer to the Directors beneficial interest in the Company, but to the 'power of controlling' by votes in the decision binding of the Company in the shape of resolutions passed at a General Meeting. 57. The real test is whether a person controls either the steering or the accelerators, gears and brakes. If the answer is in the affirmative, then he would be in the 'Control of Company' in the considered opinion of this Tribunal. Evaluation 58. At the outset, this Tribunal points out that in I.A. No. 555/20....
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....of the fact that the Appellant is a 'Financial Creditor'. 62. It is the stand of the First Respondent that only after due verification of the claim furnished by the Appellant / TSTPC and in compliance with the ingredients of the 'I&B' Code and Rules and Regulations applicable thereunder admitted the Appellant into the Committee of Creditors as a Financial Creditor with 67% of voting rights in proportion to the claim admitted by him. Also that the second Respondent / Phoenix Tech Power Pvt. Ltd.(Applicant) had expressed his happiness at the Appellant joining the 'Committee of Creditors' therefore, it is not open to the second Respondent / Phoenix Tech Power Pvt. Ltd. (Applicant in IA No. 555/2020) to file the said Interlocutory Application at a later stage of the 'Corporate Insolvency Resolution Process' (CIRP). 63. The clear cut stand of the Second Respondent is that the Appellant the Appellant is a body Corporate whose Managing Director was also a Director of the first Respondent and that the other Director nominated by the Appellant advises the Appellant / Company in matters related to the first Respondent. Therefore, the double role of the two nominee Directors clearly poi....
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....on process, operationalised by the CoC(Bankruptcy Law Reforms Committee, Volume I: Rationale and Design, of November 2015, page 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 deter....
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.... members of the CoC, has also been recommended in the UNCITRAL Legislative Guide on Insolvency law(26 UNCITRAL, Legislative Guide on Insolvency Law, 2005, available at <https://uncitral.un.org/sites/uncitral.un.org/files/media-documents/uncitral/en/05-80722_ebook.pdf>, at page 204.) 65. Continuing further, in the aforesaid decision of the Hon'ble Supreme Court of India at spl. Page 520, 521, 524, 526, 527 and 528 wherein at 1.4 under the caption Related parties - Interpretation in praesenti paragraph 88, 89, 90, 97, 100, 101, 103, 104, 105 it is observed as under:- 88. "An issue of interpretation in relation to the first proviso of Section 21(2) is whether the disqualification under the proviso would attach to a financial creditor only in praesenti, or if the disqualification also extends to those financial creditors who were related to the corporate debtor at the time of acquiring the debt. 89. In Arcelor Mittal India Private Limited vs. Satish Kumar Gupta (2019) 2 SCC 1, the issue was whether ineligibility of the resolution applicant under Section 29-A(c) of the Code attached to an applicant at the date of commencement of the CIRP or at the time when the reso....
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....eative interpretation are when the Court looks at both the literal language as well as the purpose or object of the statute in order to better determine what the words used by the draftsman of legislation mean. In D.R. Venkatachalam v. Transport Commr. [D.R. Venkatachalam 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 ....
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....h an interpretation is given to the first proviso of Section 21(2), all financial creditors would stand excluded if they were a 'related party' of the corporate debtor at the time when the financial debt was created. This may arguably lead to absurd conclusions for entities which have legitimately taken over the debt of related parties, or where the related party entity had stopped being a 'related party' long ago. 103 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 cred....
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....ed with the term 'management' means 'De facto control of actual management or policy decisions that may be or are in reality taken. 67. As far as the present case is concerned, this Tribunal points out that, the Appellant's Managing Director was also a Director of the first Respondent Company. Moreover, the Director nominated by the Appellant, in fact, advises the Appellant / Company in matters relating to the first Respondent / Company. To put it precisely, the part played by the two nominee Directors clearly point out that the first Respondent / Company acts on the advice, direction and instructions of the Appellant in its normal business affairs relating to the first Respondent. As such, this Tribunal is of the earnest opinion that the Appellant 'squarely comes within the ambit of related party as per clause (f) of Sub Section 24 of section 5 of the Code. 68. The other important fact that cannot be brushed aside is that that the First Respondent had reported the transactions between the Appellant and it, in their 'Annual Reports' and 'Audited Financial Statements'. Besides this, as perceived from the 'Articles of Association' and the requisite majority needed for taking im....