2021 (9) TMI 991 - AT - Insolvency and Bankruptcy

Seeking for removal of the Appellant (APSTC/TSTPC) from the CoC - Promotion of trade from the State and create logistics infrastructure in the state and to carry out its existing business of manufacture and sale of notebooks for students - related party as construed under Section 24(5) of the I B Code, 2016 - submission of appellant is that there is no participation in policy making of the First Respondent/ Company nor there is interchange of managerial personnel between the Appellant and the First Respondent/ Company - HELD THAT - It must be borne in mind that the expression control in Section 29A(c) of the I B Code symbolizes only the positive control i.e. that the mere power to block special resolutions of a Company cannot amount to control. In reality, the word control juxtaposed with the term management means De facto control of actual management or policy decisions that may be or are in reality taken - 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. 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. 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 important business decisions, the conduct of the business of the First Respondent, the establishment of First Respondent Company, all considered in an integral and cumulative manner will exhibit the noteworthy influence of the Appellant in issues concerning the First Respondent. In this manner also, the First Respondent is treating the Appellant as Related Party . The Appellant / Company has a control in regard to the arrangement of Board of Directors of the First Respondent / Company and on this score also, the Appellant comes within the purview of related party as per clause L of sub section 24 of 5 of the I B Code, as opined by this Tribunal - It is to be pointed out that the Articles of Association point out that action relating to significant matters ought to be taken only by affirmative vote of three or more Directors and in the qualified majority, minimum one Director is to be nominated for inclusion by the APTPCL. Considering the facts and circumstances of the instant case in a conspectus fashion and keeping in mind the ingredients of the Articles of Association to the effect that the nominee Directors have a vital influence in regard to the working of the Corporate Debtor , this Tribunal unhesitatingly comes to a consequent conclusion that the Appellant is a related party and the view arrived at by the Resolution Professional to include the Appellant/TSTPCL as member of the Committee of Creditors is clearly unsustainable in the eye of law. This Tribunal concurs with a view arrived at by the Adjudicating Authority in the impugned order that the Appellant is a related party - Appeal dismissed.

Summary

Issues Involved:
1. Whether the Appellant is a 'related party' under Section 5(24) of the Insolvency and Bankruptcy Code (I&B Code), 2016.
2. Whether the Appellant should be included in the Committee of Creditors (CoC).
3. The validity of the Adjudicating Authority's order directing the Resolution Professional to reconstitute the CoC treating the Appellant as a 'related party'.

Issue-wise Detailed Analysis:

1. Whether the Appellant is a 'related party' under Section 5(24) of the Insolvency and Bankruptcy Code (I&B Code), 2016:
The Adjudicating Authority determined that the Appellant, holding an 11% voting share in the Corporate Debtor and having two nominee directors on the Board, fits the definition of a 'related party' under Section 5(24) (a), (h), (j), (l), and (m) of the I&B Code. The Tribunal observed that the nominee directors have significant influence in decision-making processes and are responsible for protecting the interests of the shareholders, including the Appellant. The Tribunal concluded that the Appellant's influence over the Corporate Debtor's policy decisions and the presence of its nominee directors on the Board align with the criteria for being classified as a 'related party.'

2. Whether the Appellant should be included in the Committee of Creditors (CoC):
The Adjudicating Authority found that the Appellant, being a 'related party,' should not be included in the CoC. The Tribunal emphasized that the purpose of excluding related parties from the CoC is to prevent them from influencing the decision-making process to the detriment of other creditors. The Tribunal referred to the Supreme Court's judgment in Phoenix ARC Pvt. Ltd. v. Spade Financial Services Ltd. & Ors., which highlighted the need to exclude related parties from the CoC to ensure fairness and prevent conflicts of interest.

3. The validity of the Adjudicating Authority's order directing the Resolution Professional to reconstitute the CoC treating the Appellant as a 'related party':
The Tribunal upheld the Adjudicating Authority's order directing the Resolution Professional to reconstitute the CoC by excluding the Appellant as a 'related party.' The Tribunal agreed with the Adjudicating Authority's view that the Appellant's nominee directors have a significant influence on the Corporate Debtor's decisions, thereby justifying their exclusion from the CoC. The Tribunal also noted that the Appellant's inclusion in the CoC would undermine the objective of the I&B Code to balance the interests of all stakeholders and maximize the value of the Corporate Debtor's assets.

Conclusion:
The Tribunal dismissed the appeal, affirming the Adjudicating Authority's decision that the Appellant is a 'related party' under the I&B Code and should be excluded from the CoC. The Tribunal found no legal errors in the Adjudicating Authority's order and concluded that the Resolution Professional should reconstitute the CoC by treating the Appellant as a 'related party.' All connected interlocutory applications were also closed.