TaxTMI 
TaxTMI 
2022 (7) TMI 833
X X X X Extracts X X X X
X X X X Extracts X X X X
....344 of 2020. Brief facts of the case necessary to be noted for deciding this Appeal are:- (i) Respondent No. 2 - Financial Creditor who held 5,50,000; 12% non-convertible debentures of Rs.100 each of the Corporate Debtor having interest @ 12% per annum with due date of redemption as 31.12.2015, which was extended till 31.12.2020. (ii) Insolvency proceedings under Section 7 of the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as 'I&B Code') were initiated against the Corporate Debtor vide Financial Creditor's application dated 25.09.2019. (iii) On 07.12.2020, the Adjudicating Authority admitted the Application under Section 7 and appointed one Shri Sanyam Goel as the Interim Resolution Professional (IRP) who was subsequently approved as Resolution Professional (RP). (iv) Resolution Professional invited claims. 15 claims from the creditors were received. The Committee of Creditors (CoC) was constituted by the Resolution Professional in terms of Section 21 of the I&B Code with Respondent No. 2 - the Financial Creditor as the only member of the CoC. (v) Resolution Professional prepared the Information Memorandum and issued Fo....
X X X X Extracts X X X X
X X X X Extracts X X X X
.....03.2019 and she being Director at the time the request for redemption of non-convertible debentures, is related party and ought to be ousted from the CoC. Smt. Sunaina Singh is grand-daughter of Smt. Sita Chaudhary, who is Director of the Corporate Debtor. Both Smt. Sunaina Singh and Smt. Sita Chaudhary being related to each other Smt. Sunaina Singh being the grand-daughter, the Financial Creditor being a related party of the Corporate Debtor in terms of Section 5(24) of the Code cannot be Member of the CoC. The Application filed by the Appellant being I.A. No. 728 of 2020 has wrongly been rejected by the Adjudicating Authority. The earlier order dated 05.03.2021 was passed on an application of an Operational Creditor- one Rajiv Babbar, which order does not operate as res-judicata nor the said order can come in the way of the Appellant in pressing his Application I.A. No. 728 of 2020. Learned counsel for the Appellant has referred to detailed chart showing the relation of Smt. Sunaina Singh and Smt. Sita Chaudhary and different shareholdings of the entities controlled by them. 4. Learned counsel appearing for the Corporate Debtor as well as Resolution Professional has opposed t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....st the Corporate Debtor - AKME Projects Ltd. The NCLAT dismissed the Appeal preferred by AAA and Spade. Appeal was filed before the Hon'ble Supreme Court challenging the impugned orders passed by NCLAT. The Appeal was filed by 'Phoenix ARC Pvt. Ltd.' confined to the finding that Spade and AAA are Financial Creditors. Spade and AAA have independently filed an appeal under Section 62 assailing the decision of NCLAT affirming their exclusion from participating in the CoC on the ground that they are related parties of the Corporate Debtor in terms of Section 5(24) and the first proviso to Section 21(2) of the I&B Code. The Hon'ble Apex Court come to consider the concept of related parties. The issues which came for consideration have been noted in Para 88, Paras 88, 89 and 90 are to the following effect:- "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 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....as 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." 8. The Hon'ble Supreme Court also came to the conclusion that transactions alleged to be financial debt by Spade and AAA were collusive in nature, hence they cannot be treated to be Financial Creditors also. Conclusion has been recorded by Hon'ble Supreme Court in Para 105-106, which are as follows:- "105. In the present case, there is a finding that AAA and Spade were related parties within the meaning of Section 5(24) at the time when the alleged financial debt on the basis of which they assert a claim to be a part of the CoC was created. This was due to the long-standing relationship between Mr Arun Anand and Mr Anil Nanda, and their respe....
X X X X Extracts X X X X
X X X X Extracts X X X X
...."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 creditor, as one debarred under the first proviso." 10. We may also notice the provision of Section 5(24). Section 5(24) deals with 'related party', which is to the following effect:- "5(24) "related party", in relation to a corporate debtor, means- (a) a director or partner of the corporate debtor or a relative of a director or partner of the corporate debtor; (b) a key managerial personnel of th....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... individual, means- (a) a person who is a relative of the individual or a relative of the spouse of the individual; (b) a partner of a limited liability partnership, or a limited liability partnership or a partnership firm, in which the individual is a partner; (c) a person who is a trustee of a trust in which the beneficiary of the trust includes the individual, or the terms of the trust confers a power on the trustee which may be exercised for the benefit of the individual; (d) a private company in which the individual is a director and holds along with his relatives, more than two per cent. of its share capital; (e) a public company in which the individual is a director and holds along with relatives, more than two per cent. of its paid-up share capital; (f) a body corporate whose board of directors, managing director or manager, in the ordinary course of business, acts on the advice, directions or instructions of the individual; (g) a limited liability partnership or a partnership firm whose partners or employees in the ordinary course of business, act on the advice, directions or instructions of the individual; ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... law in the facts of the present case to find out whether Financial Creditor i.e. Respondent No. 2 to Appeal is a related party of the Corporate Debtor so as to be not part of the CoC. 13. We may first notice the facts and pleadings in I.A. No. 728 of 2020 filed by the Appellant. Para 6 and 7 of the Application gives the details and grounds on which the Appellant claim that the Financial Creditor is related to the Corporate Debtor. The case of the Appellant was that Smt. Sunaina Singh, the grand-daughter and Smt. Sita Chaudhary, the grand-mother are related to each other. Smt. Sunaina Singh is Executive Director in the Financial Creditor and is erstwhile Director of the Corporate Debtor and Smt. Sita Chaudhary is Ex-Director of the Financial Creditor and active Director of the Corporate Debtor. In the Application, I.A. No. 728 of 2020, detail reply was filed by the Corporate Debtor challenging the locus of the Appellant to file I.A. and following preliminary objection was raised in Para A and B of the Reply:- "A. The Applicant was a prospective resolution applicant who submitted a defective resolution plan which could not be voted upon by the CoC. Assuming the plan was ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... ii. Rajpura Steel Tubes LLP (40%) iii. Rama Packaging and Wire Industries LLP (10%)" 15. From the material on the record it is clear that Smt. Sunaina Singh, who is Director of the Financial Creditor at present was also Director of the Corporate Debtor but she resigned as Director of the Corporate Debtor on 25.03.2019 and w.e.f. 25.03.2019 Smt. Sunaina Singh has not been continuing as Director of the Corporate Debtor. Thus, there is no dispute that on the day when Section 7 Application was filed and the day when Section 7 Application was admitted Smt. Sunaina Singh was not Director of the Corporate Debtor, she having resigned six months prior to date of filing of the Section 7 Application. Appellant has filed a rejoinder where following was stated in Para 5:- "5. I say that by a bare perusal of the letter dated 01.01.2019, which is a part of the said transaction documents, would make it evident that Ms. Sunaina Singh being a Director of the Financial Creditor had addressed the letter dated 01.01.2019 to the Corporate Debtor for redemption of the non-convertible debentures whereas she was admittedly resigned from the Board of the Corporate Debtor on 25.03.201....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... alleging that Smt. Sunaina Singh being Director who has resigned on 25.03.2019 is related party and Financial Creditor cannot be part of the CoC. Adjudicating Authority dealt the issue elaborately in Para 10, which is to the following effect:- "10. From the above, it is clear that though Mrs. Sunaina Singh was a Director of the third respondent/financial creditor on an earlier point of time but either on the date of filing of Section 7 application or on the date of initiation of the CIR Proceedings i.e. the date of admission of CP, she was not the Director of the third respondent/financial creditor, since she had admittedly resigned as a Director from the corporate debtor on 25.03.2019. The financial creditor/third respondent is not a holding, subsidiary or associate company of the corporate debtor. The averments made or documents filed on behalf of the applicant do not show that any of the Directors of the corporate debtor have in any manner interfered in the working of the financial creditor/third respondent in the ordinary course of business of that the Directors of the corporate debtor in any way advise/instruct the Directors of the financial creditor/third respondent....