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2024 (3) TMI 81
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....Mr. Sidhartha Sharma, Mr. Arjun Asthana, Ms. Namrata Basu, Ms. Shalini Basu, Ms. Smita Poddar, Advocates for Shri Ram Multicom Pvt. Ltd. Mr. Nalin Kohli, Ms. Nimisha, Mr. Anupm Prakash, Ms. Kirti Taluja, Advocates for NARCL. (I.A. No. 5357 of 2023) JUDGMENT Ashok Bhushan, J. This Appeal by a Financial Creditor of the Corporate Debtor namely- 'Sarga Hotel Private Limited' has been filed challenging the order dated 13.09.2023 passed by the Adjudicating Authority (National Company Law Tribunal), Kolkata Bench (Court-II) in IA(IB) No. 822/(KB)/2022 which was filed by the Appellant praying for setting aside the decision of the Resolution Professional dated 30.04.2022 ousting the Appellant from the Committee of Creditors. By the impugned order, the Adjudicating Authority dismissed the IA No. 822 of 2022, aggrieved by which order, this Appeal has been filed. 2. Before we notice the respective contentions of the parties with respect to the impugned order in this Appeal, it is relevant to notice certain background facts and sequence of the events giving rise to this Appeal. 2.1. On 29.08.2018, 'Srei Infrastructure Finance Limited' (SIFL) sanctioned a rupee term loan of Rs.300....
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....s Affidavit in reply to IA No.822 of 2022. Resolution Professional filed its first supplementary affidavit on 19.02.2022 placing on record additional facts and documents. Appellant filed its reply affidavit to the first supplementary affidavit on behalf of the Resolution Professional. Resolution Professional on 04.02.2022 filed second supplementary affidavit to place on record certain other facts and documents to which reply was filed by the Appellant. 2.6. It is also relevant to notice that the Reserve Bank of India superseded the board of management of SIFL and SEFL by order dated 08.10.2021 on a petition filed by the RBI under Section 227 and 239 of the Code. Insolvency Process commenced and one Mr. Rajneesh Sharma was appointed as the Administrator for conducting the CIRP of SIFL and SEFL. On 24.07.2022, the Administrator of SIFL/SEFL filed an avoidance application where the loan dated 29.08.2018 by SIFL in favour of the Corporate Debtor was classified as transaction amounting to fraudulent and wrongful trading under Section 66 of the Code. Administrator filed another application being IA No.77 of 2023 in the CIRP of the SIFL and SEFL wherein it apprised the NCLAT that the m....
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.... dated 30.04.2022. It is submitted that the allegations in the avoidance application are only allegations which application have not yet been adjudicated by the Adjudicating Authority. No reliance can be placed on the said allegations. It is submitted that at the time when CIRP commenced against the Corporate Debtor i.e. 11.02.2022, SIFL and SEFL were already in CIRP since 08.10.2021. In any view of the matter by Resolution Plan approved on 11.08.2023 in CIRP of SIFL and SEFL, NARCL has been taken over the SIFL and SEFL. Resolution Professional never asked for any information from the Appellant regarding funding with respect to assignment dated 09.09.2020. Averments regarding funding of Rs.25 Crores by SIFL for payment towards consideration of assignment by Appellant need no consideration nor were before the Resolution Professional when he decided to oust the Appellant from the CoC. The Appellant is a bonafide Financial Creditor and ought to be in the CoC. SIFL and SEFL being in the CIRP since 08.10.2021, Kanoria family who claimed to be promoter of SIFL and SEFL as well as the Corporate Debtor is no more in control or beneficiary. It is submitted that the Resolution Professional i....
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....ion removed with regard to loan in question. The facts and circumstances under which the assignment was made by SEFL to the Appellant indicate that the assignment was in bad faith and to participate in the CoC of the Corporate Debtor indirectly through assignee which could not have been done by SEFL directly which being related party to the Corporate Debtor. The Resolution Professional asked for relevant details regarding assignment and other facts from the Appellant, on being satisfied that the Appellant is akin to a related party, declared that it is not entitled to any voting right in the CoC. It is submitted that the source of funds for acquisition of loan by the Appellant was also result of round-tripped by SIFL/SEFL. It is submitted that in the avoidance application filed by the Administrator in the CIRP of the SEFL/SIFL, it was pleaded by Administrator that Rs.25 Crores was received by Appellant through SIFL to pay for assignment which fact has been brought before the Adjudicating Authority. The amount of Rs.25 Crores was round tripped by SEFL/SIFL itself using two connected shell companies, namely 'Predicate Consultants' and 'Ambrelo Ventures Private Limited' which details ....
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....t, no material was disclosed by the Appellant. Judgment of the Hon'ble Supreme Court in "Phoenix ARC Pvt. Ltd.' (supra) is fully attracted in the facts of the present case. The fact that the CIRP of SIFL/ SEFL commenced prior to the second CIRP on the Corporate Debtor would not affect the classification of Appellant- Rare ARC as a related party. 7. Shri Joy Saha, Learned Senior Counsel appeared for the Successful Resolution Applicant (SRA) has also refuted the submissions of the Counsel for the Appellant and submits that the SEFL/SIFL are related parties to the Corporate Debtor which fact cannot be disputed. The assignment of loan was made to the Appellant only by the related party, SEFL so that it may participate in the CIRP of the Corporate Debtor indirectly through the Appellant. It is submitted that the SIFL even after assignment fully control the Appellant by it being security receipt holder of 85%, Appellant being security receipt holder was only 15% in the ARC Trust. The provision of the Trust Deed indicates that even the Appellant can be replaced from the trust. 8. Shri Nalin Kohli, Learned Counsel appearing for the NARCL also supports the impugned order and submitted....
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....e Debtor was also taken note by this Appellate Tribunal. In paragraph 33 of the judgment, following was held:- "33. In view of the submissions and arguments made by the Appellant and Respondents and a close perusal of documents submitted by the operational creditor and other parties lead us to the conclusion that the application u/s 9 was not submitted within limitation and it contained documents of doubtful origin which do not inspire confidence, and which formed the basis of admission order. The allegations of collusion between the Operational Creditor and the corporate debtor raise reasonable doubt. Documents filed to hold debt was due, or payable do not raise confidence. Initiation of CIRP of a company which is a going concern, on the basis of a short defence note without a proper reply/defence called from the corporate debtor, and based on such documents attached with the admission application is certainly not proper and defeats the purpose and intent of the IBC in letter and spirit." 12. Admittedly, the claim was filed by the Appellant in the second CIRP of the Corporate Debtor which claim was based on assignment dated 09.09.2020. After receipt of the claim by App....
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.... CoC. If such is the case, then the third-party assignee must be treated akin to a related party financial creditor and ought to be excluded from the CoC under the first proviso to Section 21(2) of the Code. These observations have been made in the Insolvency Law Committee Report of 2020 ("ILC Report 2020") and have been quoted with approval by the Hon'ble Supreme Court in Phoenix Arc Private Limited v Spade Financial Services Limited & Ors., (2021) 3 SCC 475. In the above backdrop, I have examined the circumstances and documents relating to the assignment made from SEFL to Rare ARC and note as follows - On 12 August 2020, the Adjudicating Authority had passed an order ("Earlier CIRP Admission Order") admitting an application filed under Section 9 of IBC by one Universal International Creation Limited ("UICL"). Within a month of the Earlier CIRP Admission Order, on 9 September 2020, SEFL and Rare ARC entered into the Assignment Agreement under which SEFL assigned to Rare ARC, in its capacity as trustee of Rare ARC 051 Trust, the loans disbursed to the Corporate Debtor under the Financing Documents along with all rights, title and interest in the Finan....
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....nancial creditor) to remove its label of a 'related party' so as to circumvent the restriction/ disability under the first proviso to Section 21(2) of the IBC. It appears that apprehending exclusion from the CoC as a related party financial creditor of the Corporate Debtor, SEFL used the contrivance of assigning its loans to Rare ARC 051 Trust as a purported third-party assignee, with effect from 12 August 2020, in the hope that Rare ARC would get a seat in the CoC. However, SEFL continued to retain interest in the loan as the holder of 85% of security receipts of Rare ARC 051 Trust. In light of the above, based on the principles observed in the ILC Report 2020 and Phoenix v Spade, the assignee i.e., Rare ARC, should be treated akin to a related party financial creditor under the first proviso to Section 21(2) of the Code and be accordingly excluded from the CoC of the Corporate Debtor. Therefore, I would like to inform you that while the claim of Rure ARC is being admitted as financial debt, Rare ARC shall not have any right of representation, participation or voting in the CoC of the Corporate Debtor in light of the first proviso to Section 21(2) of the ....
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..... It is submitted that no new reasons can be supplemented by the Resolution Professional which did not find place in the e-mail dated 30.04.2022. It is well settled that the Resolution Professional does not exercise any adjudicatory function and his function is only to verify and collate the claim submitted by the creditors. The adjudicatory function is entrusted to the Adjudicating Authority under Section 60(5) of the Code and in the present case, issue of adjudication arose only when an application was filed by the Appellant before the Adjudicating Authority for setting aside the e-mail dated 30.04.2022. Resolution Professional to support the decision was not precluded from relying on any subsequent material which come into notice of the Resolution Professional after the email dated 30.04.2022, hence, the facts which were pleaded by the Administrator in the avoidance application cannot be said to be irrelevant. 16. Learned Counsel for the Appellant has placed reliance on the judgment of the Hon'ble Supreme Court in "Mohinder Singh Gill and Anr. vs. Chief Election Commissioner- AIR 1981 SC" to support his submission that the Resolution Professional could not have supplemented i....
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....re ARC does not appear to directly fall under any of the subclauses of Section 5(24) of the Code, however, in the facts of the present case, it would not suffice to only look at Rare ARC from the lens of related party. Rather, it is also essential to examine the circumstances of the assignment and the relationship between SEFL and the Corporate Debtor at the time of the assignment. This test is required to be carried out in view of the following observations contained in the ILC Report regarding the eligibility of third-party assignees under the first proviso to Section 21(2) of the Code - "11.10. However, the Committee discussed that in certain cases, a related party creditor may assign its debts with the intention of circumventing the disability imposed under the first proviso to Section 21(2) by indirectly participating in the CoC through the assignee. As a related party is expressly prohibited from participating in the CoC, it cannot do so indirectly by assigning its debt to a thirdparty assignee for the purposes of circumventing this restriction. Therefore, in order to prevent any misuse, the Committee recommended that prior to including an assignee of a related party....
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....ertain fraudulent and wrongful trading transactions and contribution to the assets of SEFL by the Respondents, which includes the Corporate Debtor (as the Respondent No. 10). In the SEFL Avoidance Application, the Administrator has flagged the term loan from SIFL to the Corporate Debtor as fraudulent and unusual for various reasons. It has further been submitted in the SEFL Avoidance Application by the Administrator that the Corporate Debtor is connected/ linked to SIFL, SEFL and the Kanoria group of companies. A copy of the pleadings in the SEFL Avoidance Application is attached as Annexure- 2(Colly)." 19. Paragraph 6 which has been relied by the Appellant also contains several other averments. The Resolution Professional has also referred to and relied Insolvency Law Commission Report 2020 in the Affidavit. It is relevant to notice that Shri Krishnendu Datta also has relied on Paragraphs 11.9 and 11.10 of the ILC Report 2020. In paragraph 6(vi), the Resolution Professional has referred to the judgment of the Hon'ble Supreme Court in "Phoenix ARC Private Limited" (supra) and made following averments:- "(vi) Further, the Hon'ble Supreme Court in Phoenix Arc Private ....
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....o a related party financial creditor and ought to be excluded from the CoC under the first proviso to Section 21 (2) of the Code." 21. In paragraph 6(xiv) under the heading 'relationship between the Corporate Debtor and SEFL', following was pleaded by the Resolution Professional:- "Relationship between the Corporate Debtor and SEFL (xiv) I state that, at the time when the assignment was made, SEFL was a related party of the Corporate Debtor under Clauses (h) (i) (j), (l) and (m) of Section 5(24) of the Code for the following reasons - a. The Corporate Debtor is a subsidiary of Shristi Infrastructure Development Corporation Limited ("SIDCL"). SIDCL is a subsidiary of Adishakti Commercial Private Limited ("Adishakti"). Adishakti is held by the Kanoria Foundation, a private discretionary trust whose trustee is Mr. Hari Prasad Kanoria. On the other hand, SEFL (which assigned its loan to Rare ARC) is a subsidiary of SIFL. SIFL is a subsidiary of Adisri Commercial Private Limited ("Adisri"). Adisri is also held by the Kanoria Foundation. As per MCA master data, Adishakti and Adisri were incorporated on the same date (i.e, 24 January 2014), have the same regi....
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....kwork Ratings Report dated 1 July 2021 (available in the public domain) records that "Sarga Hotel Put. Ltd. (formerly known as Shristi Hotel Pvt. Ltd.) was incorporated in 2004. It was promoted by the Shristi group, which is a part of the Kanoria foundation, a trust founded by the Kanoria family, headquartered in Kolkata. Shristi Infrastructure Development Corporation Ltd. holds 65% stake in SHPL." Another Brickwork Ratings Report dated 2 December 2019 (also available in the public domain) not only records the above but further records that the Corporate Debtor "has implicit support from the Kanoria family and SREI group of companies." Brickwork Ratings is a SEBI registered Credit Rating Agency which has also been accredited by RBI and offers rating services on Bank Loans, NCD, Commercial Paper, Fixed deposits etc. A copy of the Brickwork Ratings Report dated 1 July 2021 and 2 December 2019 is attached herewith as Annexure- 12(Colly). i. A Share Subscription and Shareholders' Agreement dated 7 August 2008 ("SSHA") and an Addendum to SSHA dated 31 August 2009 ("Addendum") was entered between the Corporate Debtor and its shareholders (including Rishima and SIDCL), A copy....
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.... 11.7. Although the first proviso to Section 21(2) prohibits a related party financial creditor from participating in the CoC, the Code is silent on the status of a third- party assignee of such a financial creditor. It was brought to the Committee that this was creating uncertainty regarding the right of a third-party assignee of a related party financial creditor to participate, vote or be represented in the CoC. 11.8. On a review of relevant judgements, the Committee noted that different Adjudicating Authorities have taken different approaches to determine the eligibility of assignees of related party financial creditors to participate in the CoC. One approach has been to look at the legal validity of the assignment deed and the underlying intention of the parties to the assignment to determine whether the assignee had a legitimate right to participate in the CoC. 70 The other approach has been to hold the assignees of related party financial creditors ineligible under the first proviso to Section 21(2), on the ground that an assignee of a debt cannot have a better title than the assignor itself. The Appellate Authority has taken the latter approach in Pankaj Yadav ....
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....hat a related party financial creditor had assigned or transferred its debts to a third party in bad faith or with a fraudulent intent to vitiate the proceedings under the Code, the assignee should be treated akin to a related party financial creditor under the first proviso to Section 21(2)." 24. Learned Counsel for the Appellant has relied on paragraph 11.9 where the Committee has expressed its view that it is clear that when a related party financial creditor assigns her debt to a third party in good faith, such third party should not be disqualified from participating, voting or being represented in a meeting of the CoC. It is also relevant to notice that in the very next paragraph i.e. 11.10, Committee has also expressed its view that in cases where it may be proved that a related party financial creditor had assigned or transferred its debts to a third party in bad faith or with a fraudulent intent to vitiate the proceedings under the Code, the assignee should be treated akin to a related party financial creditor under the first proviso to Section 21(2). Reliance on the report is thus, relevant and the report clearly indicate that an assignee of a related party financial c....
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....he exclusion thereunder. Mr Kaul has argued, correctly in our opinion, that if this interpretation is not given to the first proviso of Section 21(2), then a related party financial creditor can devise a mechanism to remove its label of a 'related party' before the Corporate Debtor undergoes CIRP, so as to be able to enter the CoC and influence its decision making at the cost of other financial creditors." 26. The Hon'ble Supreme Court, thus, held that the financial creditor who in praesenti is not a related party, could not be debarred. 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. 27. We have already noticed ILC Report 2020 which has already focused on the said question of assignee being disqualified to participate in the CoC and it was clearly stated in t....
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...., the Reliance Infrastructure Ltd. had Hypothecation Deed and Mortgage. The time and manner in which assignment has been made clearly indicate that Assignment is not bonafide and was made only to put the Appellant in the CoC with ulterior motive to watch the interest of the related party. Para 103 of the judgment of Hon'ble Supreme Court in "Phoenix ARC Private Limited" (Supra) clearly lays down that '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. The expression 'otherwise' shall also include assigning the right to third party, which is for the same purpose and object. 22. We, thus, do not find any infirmity in the opinion of the Adjudicating Authority where it has held that the Assignment Deed dated 01.03.2019 was not in good faith and rather shows that the arrangement was made with a view to get backdoor entry into the COC through the Applicant assignee to have a control over the process of the CIRP as the Reliance Infrastructure Ltd. being the related ....