TaxTMI 
TaxTMI 
2024 (2) TMI 914
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....erjee, Advocates for R-3 to 8 JUDGMENT ASHOK BHUSHAN, J. This Appeal has been filed by the Appellant challenging the order dated 26.05.2023 passed by NCLT, New Delhi Special bench (Court-II) in CA No.237/ND/2018, by which order, CA filed by the Appellant challenging the decision of Resolution Professional ("RP") and Committee of Creditors ("CoC") to declare the Appellant as disqualified under Section 29A, has been rejected. The Appellant aggrieved by the order has come up in this Appeal. 2. Brief facts necessary to be noticed for deciding this Appeal are: (i) Athena Demwe Power Limited, the Corporate Debtor was a company, incorporated for execution of demwe hydro electric project. The Corporate Debtor was incorporated as SPV on 09.07.2007. The Appellant has entered into a Memorandum of Understanding ("MoU") dated 15.03.2013 with Corporate Debtor and AIPPPL (Athena Infraprojects Private Limited), under which the Appellant undertook to infuse equity capital of 30% into the Corporate Debtor. The Appellant through its 100% subsidiary Regina Infrastructure Pvt. Ltd. ("RIPL") invested an amount of Rs.235.35 Crores through its 100% subsidiary, i.e. RIPL, which held 21.55% equity i....
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.... Applicant. b) Direct the Resolution Professional and/ or the Committee of Creditors to accept the resolution plan submitted by the Applicant and declare the Applicant as the successful resolution applicant or alternatively, direct the Resolution Professional I Committee of Creditors to provide an equal and fair opportunity to the Applicant to submit a revised resolution plan after being made privy to the details of the revised plan submitted by SPICL; c) Set aside the decision of the Resolution Professional/ Committee of Creditors accepting the revised resolution plan by SPICL as recorded in the minutes of meeting dated 15th June, 2018; d) Pending the disposal of the present application, pass an ex-parte ad interim order restraining the Resolution Professional/ Committee of Creditors from entering into any discussion or negotiations with SPICL; e) Pending the disposal of the present Application, pass orders/ directions injuncting the Resolution Professional/ Committee of Creditors from carrying on with the resolution process any further; f) Pass orders confirming the ad-interim injunction prayed for above, upon return of motion; g) Pass such other order/ orders a....
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....ares of Regina (RIPL) by the Applicant/NECL was done in cash, the date of receipt of which cannot be proved beyond doubt in the absence of any digital record, especially when both the transferor and transferee of shares are known and connected to each other. Further, while the Applicant/NECL had given a loan of Rs. 328 Crores to Regina (RIPL), the act of transferring its shares including to one of the Directors of Regina at a nominal amount of Rs. 1,00,000/- (One Lakh), that too only 6 days prior to the date of commencement of the CIR Process of the Corporate Debtor/ADPL, raises serious doubts about the fairness of the transaction. In the circumstances, there exists sufficient ground for agreeing with the contention of CoC/RP that the transaction was a sham. (v) Even otherwise, on lifting the Corporate Veil of Regina (RIPL), we found that the Applicant/Navayuga (NECL) was exercising control over Regina (RIPL) through the "Directors of its Related/Connected Companies" even on the date of submission of the Resolution Plan. 56. We have also noted, in paragraph 53 above, from the documents placed on record that the Corporate Debtor was NPA since 31.05.2013. 57. The Section 29A(c....
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....te Debtor, through its subsidiary RIPL. Reliance of the Adjudicating Authority on the MoU dated 23/28.03.2016 for holding that Appellant came into management and control of the Corporate Debtor is incorrect and unfounded. As per the MoU, the Appellant was to invest equity share in the Corporate Debtor to the extent of 51%, which shareholding required approval of the Lenders and the Government of Arunachal Pradesh. The control and management was to be given to the Appellant subject to Appellant performing its obligation of equity infusion upto 51% in the Corporate Debtor. Process for approval by the Lenders remained pending and equity share of 51% could not be invested by the Appellant, hence, the Appellant cannot be said to have acquired management and control of the Corporate Debtor. The MoU dated 23/28.03.2016 was a conditional/ contingent contract, which conditions/ contingencies were never satisfied. The learned Counsel for the Appellant has specially relied on Clause 1.9 of MoU dated 23/28.03.2016 to support his submission. The rights contemplated in the MoU were to be given in future in consideration of Appellant's performing its obligation and to pass on the management and c....
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....ideration of Rs.1 lakh speaks for itself. The transaction dated 22.09.2017 is back dated transaction, since neither there is any proof of any payment nor any material to prove that transaction took place on 22.09.2017. The MoU dated 23/28.03.2016, clearly indicate that MoU was executed for implementation of the project and the operations of the business of the Corporate Debtor and it was in lieu of investment already made by the Appellant through its subsidiary and for the investment, which was to be made in future. The Appellant took management and control over the Corporate Debtor even before further infusion of the funds by the Appellant. As per MoU, NEC was to arrange all future fund requirements to meet the Debt Equity Ratio for implementation of the project. Clauses of First and Second MoU dated 23/28.03.2016 when read together, clearly indicate that the Appellant was given control and management of the Corporate Debtor, which disqualify the Appellant under Section 29A(c). All relevant correspondence between the parties and the emails sent by the Appellant, reflects control over all functions of the Corporate Debtor, including policy decision which were placed before the Adju....
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..... We have considered the submissions of learned Counsel for the parties and have perused the record. 9. From the submissions of learned Counsel for the parties and materials on record, following issues arise for consideration in this Appeal: (I) Whether Section 29A, sub-section (c) disqualify only those persons who were in management and control of the Corporate Debtor at the time when Corporate Debtor's account was declared NPA or the persons/ entity, which is in control of the management of the Corporate Debtor at the time of submission of Resolution Plan can also be held ineligible under Section 29A, sub-section (c)? (II) Whether as per Second MoU dated 23/28.03.2016 entered between the Appellant, Corporate Debtor and Athena Group, the Appellant can be held to be in control and management of the Corporate Debtor with effect from the date of execution of the MoU? (III) Whether transfer of 100% of shareholding by the Appellant in its subsidiary RIPL on 22.09.2017 was a sham transaction? (IV) Whether the Adjudicating Authority committed error in holding Appellant, disqualified, to submit the Resolution Plan under Section 29A (c) of the IBC? Question No. (I) 10. The firs....
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....n I.- For the purposes of this proviso, the expression "related party" shall not include a financial entity, regulated by a financial sector regulator, if it is a financial creditor of the corporate debtor and is a related party of the corporate debtor solely on account of conversion or substitution of debt into equity shares or instruments convertible into equity shares or completion of such transactions as may be prescribed], prior to the insolvency commencement date. Explanation II.- For the purposes of this clause, where a resolution applicant has an account, or an account of a corporate debtor under the management or control of such person or of whom such person is a promoter, classified as non-performing asset and such account was acquired pursuant to a prior resolution plan approved under this Code, then, the provisions of this clause shall not apply to such resolution applicant for a period of three years from the date of approval of such resolution plan by the Adjudicating Authority under this Code;" 12. The submission, which has been advanced by the Appellant is that the expression "an account of the Corporate Debtor, under the management or control for such person o....
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....pany goes into the resolution process, then applications would be invited with regard to the potential resolution proposals as far as the company is concerned or the enterprise is concerned. Now a number of ineligibility clauses were not there in the original Act and, therefore, Section 29-A introduces those who are not eligible to apply. For instance there is a clause with regard to an undischarged insolvent who is not eligible to apply; a person who has been disqualified under the Companies Act as a Director cannot apply and a person who is prohibited under the SEBI Act cannot apply. So these are statutory disqualifications. And there is also a disqualification in clause (c) with regard to those who are corporate debtors and who as on the date of the application making a bid do not operationalise the account by paying the interest itself i.e. you cannot say that I have an NPA. I am not making the account operational. The accounts will continue to be NPAs and yet I am going to apply for this. Effectively this clause will mean that those who are in management and on account of whom this insolvent or non-performing asset has arisen will now try and say, I do not discharge any of the....
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....ared as non-performing asset, event at previous point of time, those who are managing the affairs of the Corporate Debtor and arranged the affairs, who did not take any steps to clear the non-performing asset and regularize the account, also are in the net of Section 29A, under their management and control the Corporate Debtor could not come out from NPA, but still if they are held to be eligible to submit a Resolution Plan, the same shall not be as per the Scheme of the IBC. The Hon'ble Supreme Court in paragraph 60 as extracted above has used the expression "the affairs of the persons referred to in Section 29A are so arranged, as to avoid paying off the debt of the non-performing asset concerned, such persons must be held to be ineligible to submit a resolution plan,". Thus, persons in the management and control of the affairs of the Corporate Debtor, who led the Corporate Debtor to slip into NPA and persons, who are in the management and control of the affairs of the Corporate Debtor in the close proximate of time, before the submission of Resolution Plan, who failed to pay the debt of the Corporate Debtor, are also ineligible. We, thus, are satisfied that narrow interpretation....
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....ce of MoU dated 23/28.03.2016 and is having management and control of the Corporate Debtor, is also fallacious, since the very basis of said findings that control and management have been transferred by MoU dated 23/28.03.2016 is incorrect. 17. On the other hand, learned Counsel for RP as well as CoC have contended that MoU dated 23/28.03.2016 handed over the management and control to the Appellant and the handing over of the management and control was on effective date, which was the date of signing of the MoU and was not dependent on 51% equity investment by the Appellant. The learned Counsel for the RP has referred to various correspondences and letters written by the Appellant subsequent to 23/28.03.2016. It is submitted that learned Counsel for the Appellant is selectively reading the clauses of MoU and if the MoU is read as a whole the intendment of the parties will be clear that management and control was handed over w.e.f. effective date. It is submitted that in the Corporate Debtor, the Appellant has already invested Rs.236 Crores through its wholly owned subsidiary RIPL and the action of the Appellant transferring 100% shareholding in RIPL, six days before the initiation....
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....ed to include its associates, affiliates, subsidiaries, successors and permitted assigns);" 20. We need to look into various clauses of MoU dated 23/28.03.2016 to decipher the real effect and consequence of MoU between the parties. The key to answer the question as to whether MoU dated 23/28.03.2016 gave management and control to the Appellant, need to be find out from the clauses of the MoU. We shall, thus, notice relevant clauses of MoU. Clause 1.8 of the MoU provides as follows : "1.8. The Parties have arrived at revised business understanding with respect to investment in ADPL and implementation of the Project. Accordingly, in supersession of the Old Moa, the Parties have agreed that NECL shall be holding 51% (fifty one percent) equity share capital of ADPL at the time of COD and are entering into this binding MOU, to record the principal terms of their renewed understanding in relation to operations of the business of ADPL and implementation of the Project. Subsequently, this MoU would be converted into a shareholders' agreement and/or any such other agreements ("Definitive Agreements"), which would govern their respective rights and obligations as joint venture partners a....
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...., where various sub-clauses under Clause-3 clearly indicate the intention of the parties. Clause 3 and its various sub-clauses of MoU dated 23/28.03.2016 are as follows: "3. Management of ADPL 3.1. From the Effective Date till the execution of the Definitive Agreements or till the term of this MOU, whichever is earlier, the relationship between the Parties would be governed in terms of this MOU> 3.2 From the Effective Date, NEC shall have right to nominate its directors on the board of directors of ADPL ("Board") and NEC nominated directors shall form the majority of reconstituted Board. 3.3 From the Effective Date, all matters listed in Annexure 'A' of the MOU shall require the affirmative vote of the NEC nominee directors in the board meeting(s) of ADPL and shall require the affirmative vote of the NEC representatives in the shareholder's meeting(s) of ADPL as the case may be to be passed successfully. 3.4 From the Effective Date, NEC shall have the right to appoint or replace the Key Managerial Personnel like Managing Director and Chief Financial Officer of ADPL. 3.5 Subject to the provisions of the Companies Act, 2013, from the Effective Date, the presence of a....
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....tment contemplated by NEC shall be subject to receipt of all regulatory approvals. Clause-5, is as follows: "5. CONDITIONS ANO APPROVALS The investment contemplated by NEC pursuant to this MOU shall be subject to receipt of all regulatory approvals and approvals from the senior lenders, as may be necessary." 28. The aforesaid clause was thus, only with regard to investment. Under Clause-8.5 the MOU was binding on all the parties. Clause 8.5 is as follows: "8.5. Binding : this MOU is binding in nature." 29. It is well settled that a document is to be read as a whole to find out its intention and purpose. The MoU became effective from the date of execution as per the clauses as quoted above. Annexure to the MoU clearly contemplated the matters, which required Affirmative votes or approvals of the NEC. Annexure of the MoU is as follows: "ANNEXURE Matters requiring an Affirmative votes/ approvals of NEC nominee Directors and their representatives in Board Meeting(s) and Shareholders meeting(s) 1. Reconstitution of the existing Project Management Committee ("PMC") and change in its delegated roles, responsibilities and authorities. 2. Review of all existing delegatio....
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....bt-equity ration specified by the lenders of ADPL; (b) NEC shall provide such other financial support as it may deem necessary for implementation of the Project." 33. It was due to this reason the President of Corporate Debtor wrote to the Appellant to clear the dues of the Indian Bank to make equity infusion towards part payment of short-term loan dues of the Indian Bank. It is to be noted that it is the Indian Bank, who filed the Application under Section 7, which led to CIRP of the Corporate Debtor. Thus, the Appellant had every opportunity and right to clear the debt of short-term loan, which led to insolvency and the Appellant, who was in management and control of the Corporate Debtor, cannot be heard in saying that it has no opportunity to clear the debt in the proximate time of commencement of CIRP. 34. The Adjudicating Authority after considering all relevant materials has come to the conclusion in paragraph 55 to 58, which we have already quoted in paragraph 2(ix) of this judgment. 35. On the question as to whether the transaction entered on 22.09.2017, under which the Appellant came to have transferred the 100% shareholding to the RIPL, the Adjudicating Authority h....
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....aybhaskar and C. Vijay Kumar, who were all Directors and Officials of NEC and C. Vijay Kumar was also related. The Adjudicating Authority after considering all materials including the Balance Sheets/ Financial Statements etc. of RIPL has come to the finding that transaction dated 22.09.2017 was a sham transaction. All relevant materials were considered by the Adjudicating Authority and in paragraph 50 has held the following: "50. Thus, we have examined the transaction of shares in Regina (RIPL) from both angles. Not only, we did not find any reason to differ with the contention of RP/CoC that the transaction was a sham, but also even for the sake of argument, while assuming the transaction to be genuine, we found that the Applicant/NECL was exercising control over Regina (RIPL) through the Directors of its Related/ Connected Companies. Hence, we find no merit in the contention raised by the Applicant/NECL that after the sale of its shareholding, it was not in a position to control Regina (RIPL) hence, it cannot ADPL/Corporate Debtor." 37. We fully concur with the view of the Adjudicating Authority that transaction of shares to RIPL on 22.09.2017 was a sham transaction with the ....
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....reholding or management rights or shareholders agreements or voting agreements or in any other manner". This definition is an inclusive one and not exhaustive and it has two distinct and separate features : (i) the right to appoint majority of Directors or, (ii) the ability to control the management or policy decisions by various means referred to in the definition. This control of management or policy decisions could be by virtue of shareholding or management rights or shareholders agreement or voting agreements or in any other manner. This definition appears to be similar to the one as given in Black's Law Dictionary (Eighth Edn.) at p. 353 where this term has been defined as under: 'Control-The direct or indirect power to direct the management and policies of a person or entity, whether through ownership of voting securities, by contract, or otherwise; the power or authority to manage, direct, or oversee.' Control, according to the definition, is a proactive and not a reactive power. It is a power by which an acquirer can command the target company to do what he wants it to do. Control really means creating or controlling a situation by taking the initiative. Power by ....