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TMI Blog2021 (2) TMI 91X X X X Extracts X X X X X X X X Extracts X X X X ..... of companies which were related parties to the Corporate Debtor, and was now trying to gain a backdoor entry into the CoC through them. Transactions of the Corporate Debtor - HELD THAT:- Development Agreement dated 1 March 2012, through which the Corporate Debtor sold to 38.3% of its development rights in its real estate project, AKME RAAGA, to AAA for a consideration of ₹ 32.80 crores - Agreement to Sell dated 25 October 2012, which superseded the Development Agreement dated 1 March 2012, through which AAA bought a saleable area of 313,928 sq. ft. in AKME RAAGA at a price of ₹ 43.06 crores - Side Letter dated 25 October 2012, which was to be read as a part of the Agreement to Sell, which noted that the area bought by AAA was 38.3% of AKME RAAGA, and AAA would provide for the cost of its development accordingly. Relationship between Anil Nanda and Arun Anand - HELD THAT:- Since February 2013, Mr. Arun Anand has no association with Corporate Debtor in any manner whatsoever. Whether Spade and AAA are financial creditors of the Corporate Debtor - HELD THAT:- The Memorandum of Understanding is unenforceable, collusive and is merely an eye-wash. An amount of o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... addition, Mr Anil Nanda, the suspended director of the Corporate Debtor, had filed an application before the NCLT alleging that Spade and AAA have not financed any amount to the Corporate Debtor. He submitted that there was no loan facility against the time value of money. In addition, he argued that the Agreement to Sell between the Corporate Debtor and AAA was a part of series of acts of fraud, and is null and void. The NCLT s order dated 19 July 2019 was passed after arguments were led on the real nature of transactions between the parties. Assessment of preliminary submissions - Remand to NCLAT - HELD THAT:- Having held that the transactions between the corporate debtor on one hand and AAA and Spade on the other did not qualify as a financial debt, the Adjudicating Authority commenced its discussion on the second issue by stating that it does not require a reply in view of the finding on the first issue. However, it then noted that the first proviso to Section 21(2) has been substituted with effect from 6 June 2018, the effect of which is to exclude a financial creditor who is a related party of the corporate debtor from being represented in and from participating o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed to mean compensation or the price paid for the length of time for which the money has been disbursed. This may be in the form of interest paid on the money, or factoring of a discount in the payment. Analysis - Collusive Transactions - HELD THAT:- The IBC has made provisions for identifying, annulling or disregarding avoidable transactions which distressed companies may have undertaken to hamper recovery of creditors in the event of the initiation of CIRP. Such avoidable transactions include: (i) preferential transactions under Section 43 of the IBC; (ii) undervalued transactions under Section 45(2) of the IBC; (iii) transactions defrauding creditors under Section 49 of the IBC; and (iv) extortionate transactions under Section 50 of the IBC. The IBC recognizes that for the success of an insolvency regime, the real nature of the transactions has to be unearthed in order to prevent any person from taking undue benefit of its provisions to the detriment of the rights of legitimate creditors. Analysis - Spade and AAA - HELD THAT:- It appears that the parties converted the Development Agreement into an Agreement to Sell executed along with a Side Letter to circumvent the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of corporate insolvencies, the effort of the court must be to aid the fulfilment of the objects of the IBC. Amendment to First Proviso of Section 21(2) - HELD THAT:- The first proviso to Section 21(2) was amended, to extend the disqualification to the specified authorised representatives, in case that these representatives happened to be related parties of the corporate debtor. The introduction of the phrase is along with related party was not a guiding factor behind the Parliamentary amendment. Related Parties - Interpretation In Praesenti - HELD THAT:- The use of the simple present tense in the first proviso to Section 21(2) indicates that the disqualification applies in praesenti. Furthermore, this interpretation would also be supported by a reading of the first proviso to Section 21(2), in light of the definition of related party under Section 5(24), which uses phrases such as is accustomed to act or is associated to define a related party in the present tense. It could be stated that where a financial creditor seeks a position on the CoC on the basis of a debt which was created when it was a related party of the corporate debtor, the exclusion which is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nter the CoC and influence its decision making at the cost of other financial creditors. It is evident that there existed a deeply entangled relationship between Spade, AAA and Corporate Debtor, when the alleged financial debt arose. While their status as related parties may no longer stand, we are inclined to agree with Mr Kaul that this was due to commercial contrivances through which these entities seek to now enter the CoC. The pervasive influence of Mr Anil Nanda (the promoter/director of the Corporate Debtor) over these entities is clear, and allowing them in the CoC would definitely affect the other independent financial creditors. Appeal disposed off. - Civil Appeal No. 2842 of 2020 Civil Appeal No. 3063 of 2020 - - - Dated:- 1-2-2021 - Justice Dr Dhananjaya Y Chandrachud, Justice Indu Malhotra And Justice Indira Banerjee For the Appellant : Mr. Neeraj Kishan Kaul, Sr. Adv.Mr. Suresh Dutt Dobhal, Adv.Mr. Shikhar Kumar, Adv.Mr. Deepak Joshi, Adv.Mr. Gaurav Agrawal, AORMr. K. V. Viswanathan, Sr. Adv.Mr. Rohit Krishan Naagpal, Adv. Mr. R. Venkatraman, Adv. Mr. Dipanshu Gaba, Adv. Mr. P. V. Yogeswaran, AOR For the Respondent : Mr. Sanjiv Sen, Sr. Adv. Mr. Ab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ismissed the appeal filed by Spade and AAA, holding that they are related parties of the Corporate Debtor and are hence to be excluded from the CoC, there is an erroneous finding that they are financial creditors. In paragraph 11 of its judgment, the NCLAT has observed that: admittedly appellants are the financial creditors of the corporate debtor AKME Projects Limited... It has been submitted that there was never any admission on the part of Phoenix that AAA and Spade are financial creditors. The appeal by Phoenix seeks to challenge the above finding on the ground that: (i) It is contrary to the record; and (ii) The specific stand of Phoenix is that both AAA and Spade are not even creditors of the corporate debtor, much less financial creditors. Phoenix is thus in appeal under Section 62 of IBC, confined to the finding that AAA and Spade are financial creditors. 3 Spade and AAA have independently filed an appeal under Section 62, Civil Appeal No. 3063 of 2020, in order to assail the decision of the NCLAT dated 27 January 2020 affirming their exclusion from participating in the CoC on the ground that they are related parties of the Corporate Debtor in terms o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for purchase of flats. The sale consideration for the Agreement to Sell was enhanced to ₹ 86,01,00,000 from ₹ 32,80,00,000 under the Development Agreement. AAA paid a sum of ₹ 43,06,00,000 as advance payment under the Agreement to Sell. This amount was adjusted out of the ICDs payable to Spade as noted above. The claim of AAA is with respect to the principal amount of ₹ 43,06,00,000, which along with interest at the rate of 18% increased to ₹ 109,72,00,000 in 5 years. 8 The CoC was constituted on 22 May 2018. On 25 May 2018, the IRP rejected the claim of Spade, inter alia, on the ground that the claim was not in the nature of a financial debt in terms of Section 5(8) of IBC since there was an absence of consideration for the time value of money, i.e., the period of repayment of the claimed ICDs was not stipulated. The IRP also rejected the claim of AAA on the ground that its claim as a financial creditor in Form C was filed after the expiry of the period for filing such a claim. C Proceedings before NCLT 9 Aggrieved by the rejection of their claim as financial creditors, AAA and Spade filed applications before the NCLT to be included in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 016. ii. What is the date on which there should be relation between the two parties for the alleged Financial Creditor to be included in the definition related party'. 15 In relation to the first issue, the NCLT held that: ...the transactions between CD and both SPADE and AAA Landmark are collusive in nature and do not qualify as financial debt for the purpose of IBC. Accordingly, NCLT held that Spade and AAA did not qualify to be considered as financial creditors. 16 In relation to the second issue, NCLT held that it does not require a reply in view of its above-mentioned finding. However, it took note of the first proviso to Section 21(2) of the IBC, which was introduced with effect from 6 June 2018. Under the first proviso, inter alia, a financial creditor who is a related party of the corporate debtor shall not have the right of representation, participation or voting in the CoC. The Adjudicating Authority held that there is no doubt in our mind that Arun Anand and his company namely Spade and AAA Landmark were related parties to the CD . However, the NCLT noted that after 2013, soon after the execution to the Agreement to Sell of 25 October 2012, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Understanding dated 2 December 2010, through which Spade, on behalf of the Corporate Debtor, paid a third party ₹ 22 crores as ICD and donated ₹ 3 crores to another third-party trust; and (b) Between 16 and 17 January 2013, the Anil Nanda Group of Companies (led by Mr. Sonal Anand) sought to settle its debts with a third party (worth ₹ 2 crores) through funds parked with Spade; (iii) In accordance with Section 5(24)(h)- (h) any person on whose advice, directions or instructions, a director, partner or manager of the corporate debtor is accustomed to act; , the Corporate Debtor was acting on the directions/instruction of Mr. Arun Anand who, along with his family, is the majority shareholder in Spade, of which AAA is a wholly-owned subsidiary. The Appellate Tribunal came to this conclusion on the basis that: (a) on 1 June 2009, Spade was appointed as Consultant to the Corporate Debtor till 21 February 2011; (b) from 1 November 2011, Mr. Arun Anand was appointed as a Strategic Advisor to the Corporate Debtor; (c) from 26 November 2012, Mr. Arun Anand was appointed as Group CEO of the Anil Nanda Group of Companies, which included the Corpora ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te Debtor s real estate project, AKME POLIS. The charge was not registered; and (iii) Out of the ICDs provided to the Corporate Debtor by Spade, ₹ 43.06 crores worth were credited to the account of Mr. Arun Anand by consent. However, this has been disputed by Spade. 22 The following transactions between the Corporate Debtor and AAA are relevant for our consideration: (i) Development Agreement dated 1 March 2012, through which the Corporate Debtor sold to 38.3% of its development rights in its real estate project, AKME RAAGA, to AAA for a consideration of ₹ 32.80 crores; (ii) Agreement to Sell dated 25 October 2012, which superseded the Development Agreement dated 1 March 2012, through which AAA bought a saleable area of 313,928 sq. ft. in AKME RAAGA at a price of ₹ 43.06 crores; and (iii) Side Letter dated 25 October 2012, which was to be read as a part of the Agreement to Sell, which noted that the area bought by AAA was 38.3% of AKME RAAGA, and AAA would provide for the cost of its development accordingly. F Relationship between Anil Nanda and Arun Anand 23 It is also important to note the close relationship between the key managerial p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly AAA and Spade are financial creditors but then went on to hold that they are related parties and are therefore liable to be excluded from the CoC. His submission is three-fold: (i) The issue as to whether Spade and AAA are financial creditors was concluded by the earlier order of the NCLT dated 31 May 2018 which operates as res judicata. NCLT having allowed the applications of AAA and Spade for submitting their claims to the IRP as financial creditors, this finding could not have been altered in the subsequent order dated 19 July 2019. The NCLT in its order dated 31 May 2018 gave a categorical finding that the amount received by the Corporate Debtor in the form of deposits by Spade and AAA are financial debts and the IRP s rejection of their claim was unsustainable; (ii) The subsequent applications filed by YES Bank and Phoenix before the NCLT only sought a re-constitution of the CoC and to restrict Spade and AAA from representing, participating or voting in the CoC. The issue in respect of the eligibility of Spade and AAA as financial creditors was never raised in their applications. The only issue raised before the NCLT was with respect to Spade and AAA being related par ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... un Anand as a director of AAA had filed its claim before the IRP accepting that it is neither a financial creditor nor an operational creditor. However, as an afterthought, Mr. Arun Anand filed a baseless, unlawful, and augmented revised claim as a financial creditor. AAA s claim of being a financial creditor is mala fide and dishonest, and was filed only with the intention of manipulating the voting percentage of CoC. 29 Mr Kaul s submissions in relation to the eligibility of Spade to be a financial creditor are: (i) Spade has concealed the real nature of the collusive transactions and had filed an unlawful claim as a financial creditor for an amount of ₹ 52,96,00,000. Spade filed a revised claim as a financial creditor exaggerating the amount it was claiming to ₹ 109,11,00,000 without any basis. The claim was filed by Spade on the basis of an alleged Memorandum of Understanding dated 12 August 2011. Clause 2 of the Memorandum of Understanding provides: whereas Spade has granted inter-corporate loan to AKME and other companies on behalf of AKME to the extent of ₹ 26.55 Crores (ICD) bearing an interest of 24% repayable as per mutual agreement between pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , Phoenix and YES Bank moved applications under Section 60(5) (5) Notwithstanding anything to the contrary contained in any other law for the time being in force, the National Company Law Tribunal shall have jurisdiction to entertain or dispose of- (a) any application or proceeding by or against the corporate debtor or corporate person; (b) any claim made by or against the corporate debtor or corporate person, including claims by or against any of its subsidiaries situated in India; and (c) any question of priorities or any question of law or facts, arising out of or in relation to the insolvency resolution or liquidation proceedings of the corporate debtor or corporate person under this Code. of the IBC for seeking the exclusion of AAA and Spade from the CoC on the ground that they were related parties. 31 In this backdrop, we are unable to subscribe to the submission that the order of the NCLT dated 31 May 2018 operated as res judicata. The order was passed without hearing financial creditors such as Phoenix and YES Bank. Hence, they were legitimately within their rights in seeking a direction for the exclusion of AAA and Spade from the CoC, if they were agg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e is dated 12.08.2011 The said MOU provided for interest at the rate of 24 /o but it is stated that only 12 /o interest was paid on mutual agreement. In the claim filed before the RP only 12% interest has been claimed Though securities were provided by way of flats and plots in the real estate projects of the Corporate Debtor, the charge of the Secured loan was not registered with the Registrar of Companies. No Board Resolutions approving deposit of such inter corporate deposits and their acceptance by the Corporate Debtor have been filed before us. Out of the ICD of ₹ 66 crores given by Spade to the CD, ₹ 43.06 crores are stated to have been credited to the account of Arun Anand, Director of CD, by consent. The above facts show that the transaction pertaining to giving of inter corporate deposits by Spade to CD appears to be collusive, as the MOU for the same has been signed more than two years after the beginning of the transaction, and the rate of interest actually stated to be charged is half of the interest mentioned in the MOU, as also a major portion of the ICD was credited to the account of Arun Anand, Director of Spade. Thus, it is se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onsultant (through Spade) to the CD, and was consultant and strategic advisor in his individual capacity to the CD and finally group CEO of the Mr. Anil Nanda group of companies. Considering the above facts, we are of the opinion that the transactions between the CD and both Spade and AAA Landmark are collusive in nature and do not qualify as Financial Debt for the purposes of IBC. Accordingly, we hold that Spade and AAA Landmarks do not qualify to be considered as Financial Creditors. 34 Having held that the transactions between the corporate debtor on one hand and AAA and Spade on the other did not qualify as a financial debt, the Adjudicating Authority commenced its discussion on the second issue by stating that it does not require a reply in view of the finding on the first issue. However, it then noted that the first proviso to Section 21(2) has been substituted with effect from 6 June 2018, the effect of which is to exclude a financial creditor who is a related party of the corporate debtor from being represented in and from participating or voting in a meeting of the CoC. After adverting to the definition of the expression related party in Section 5(24), the Adjudic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s evident that the NCLT did come to the conclusion that Mr. Arun Anand and his various companies namely AAA and Spade were related parties to the corporate debtor though after 2013, Mr Arun Anand resigned from all the companies of the Anil Nanda Group. The Adjudicating Authority observed that they are no longer related to the corporate debtor at the time of the filing of the application for initiation of the CIRP. It noted the deep entanglement of the affairs of the corporate debtor and the Arun Anand group of companies, the close business relationship of the past and the fact that the accounts of the corporate debtor had not been finalised, audited or filed with the Registrar of Companies since 2016. Reading the order of the NCLT as it stands, it is not possible to accept the submission that the applications filed by YES Bank and Phoenix were rejected only on the basis that they were not financial creditors and that there was no determination in regard to their status as related parties. In light of the above discussion, we do not agree with the submission that NCLAT exceeded its jurisdiction by considering the second issue relating to the determination of the status of AAA and Sp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... raised under any other transaction, including any forward sale or purchase agreement, having the commercial effect of a borrowing; Explanation.-- For the purposes of this sub-clause,-- (i) any amount raised from an allottee under a real estate project shall be deemed to be an amount having the commercial effect of a borrowing; and (ii) the expressions, allottee and real estate project shall have the meanings respectively assigned to them in clauses (d) and (zn) of section 2 of the Real Estate (Regulation and Development) Act, 2016 (16 of 2016);] (g) any derivative transaction entered into in connection with protection against or benefit from fluctuation in any rate or price and for calculating the value of any derivative transaction, only the market value of such transaction shall be taken into account; (h) any counter-indemnity obligation in respect of a guarantee, indemnity, bond, documentary letter of credit or any other instrument issued by a bank or financial institution; (i) the amount of any liability in respect of any of the guarantee or indemnity for any of the items referred to in sub-clauses (a) to (h) of this clause; G.3.2 Financ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ney is now no longer with the lender, but is with the borrower, who then utilises the money . (emphasis supplied) 45 The report of the Insolvency Law Committee dated 26 March 2018 has discussed the interpretation of the term time value of money and stated: The current definition of 'financial debt' Under Section 5(8) of the Code uses the words includes , thus the kinds of financial debts illustrated are not exhaustive. The phrase disbursed against the consideration for the time value of money has been the subject of interpretation only in a handful of cases under the Code. The words time value have been interpreted to mean compensation or the price paid for the length of time for which the money has been disbursed. This may be in the form of interest paid on the money, or factoring of a discount in the payment. (emphasis supplied) G.3.3 Collusive Transactions 46 The above discussion shows that money advanced as debt should be in the receipt of the borrower. The borrower is obligated to return the money or its equivalent along with the consideration for a time value of money, which is the compensation or price payable for the period of ti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... evi [lender] had received certain insurance monies on the death of her husband but the 'aggregate of those amounts did not exceed, ₹ 13,000/-. Even if she was possessed of some jewellery and other funds it is difficult to believe that she would have advanced such a substantial amount of ₹ 25,000/- to the respondent [borrower] by means of two promissory notes on December 10, 1919 and on March 17, 1920. It would further appear and some stress has been laid on this aspect by Jagat Narain J., in his judgment that the financial , position of the respondent at the time the usufructuary mortgage deed was executed was fairly good considering the various articles like diamonds and the car which he had purchased apart from the shares. The house at Ajmer and the Vile Parle land had been mortgaged with possession for ₹ 25,000/- for a period of 60 years. It was difficult to believe that the respondent would have entered into such a transaction in view of his financial position in the year 1921. It was equally not likely that a person dealing in shares who would require ready money would lock up his assets like the property in dispute in a transaction which was such that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of approx. INR 2.12 Cores to CD Rent paid to Arun Anand and Aditya Anand ICD balance of Spade Financial being transferred to AAA Landmark against which sale agreement was executed Basis of valuation of the land transaction and sale of property to AAA Landmark EY Comments: Reference to Section 66 of the Insolvency and Bankruptcy Code, 2016 Section 66 of the Insolvency and Bankruptcy Code, 2016 Section 66 (1) if during the corporate insolvency resolution process or liquidation process, it is found that any business of the corporate debtor has been carried on with intent to defraud the creditors of the corporate debtor or for any fraudulent purposes, the Adjudicating Authority may on the application of the resolution professional pass an order that any person who were knowingly parties to carrying on of the business in such manner shall be liable to make such contributions to the assets of the corporate debtor as it may deem fit. Considering the above facts and when read in reference with Section 66 of the Insolvency and Bankruptcy Code, 2016, indicates an intent to defraud the creditors and may be categorized as potentially fraudulent. Howe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2 of the Memorandum of Understanding, the amount of ₹ 26.55 Crores has been disbursed not only to the Corporate Debtor but also to other companies on behalf of AKME . In any event, the entirety of the ICDs were not disbursed to Spade. Additionally, no Board resolution was passed by Spade approving the grant of ICDs and the charge created on the loan was not registered with the Registrar of Companies. In view of the above, we are inclined to agree with Mr Kaul that the Memorandum of Understanding was an eye-wash and collusive. 51 NCLT in its order dated 19 July 2019 has noted that AAA and the Corporate Debtor had entered into multiple agreements regarding the same property without giving any explanation or rationale regarding variation in the consideration. This showed that the transactions were collusive in nature entered with the purpose of diverting properties of the Corporate Debtor to AAA. Mr Viswanathan sought to explain the multiple agreements, and argued that AAA entered into a Development Agreement dated 1 January 2012 with the Corporate Debtor to obtain 38.3% of development rights. Since the Development Agreement could not be implemented because the license for t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that Spade and AAA were related parties of the corporate debtor but, that the relationship had ended by the time the initiation of the CIRP took place. It is this aspect which now merits consideration. We shall first analyse whether Spade and AAA are related parties of the Corporate Debtor. H.1 Submissions of Counsel 54 Assailing the judgment of the NCLAT, Mr Viswanathan submits: (i) There were no common key managerial personnel or directors between the Corporate Debtor and Spade and AAA during the relevant period of the transactions between 2010 to 2013; (ii) The Appellate Tribunal has incorrectly held that Mr Arun Anand was in a position to influence the decision making of the Corporate Debtor, without satisfying the test of control established in Arcelor Mittal India (P) Ltd. vs Satish Kumar Gupta (2019) 2 SCC 1; (iii) Mr Arun Anand was a mere salaried employee without any ability to influence the decision-making process. He did not attend any Board Meetings, and did not give any directions to the directors or individuals in the Corporate Debtor; (iv) Mr Arun Anand was Group CEO of Anil Anand Group of Companies for only 81 days, which was also a titular ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der Section 66 of the IBC initiated by the RP. H.2 Statutory provisions 57 The definition of the expression related party in Section 5(24) is exhaustive, since the expression is defined to mean what is set out in clauses (a) to (m). The expression related party is defined in Section 5 (24) as follows: (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 the corporate debtor or a relative of a key managerial personnel of the corporate debtor; (c) a limited liability partnership or a partnership firm in which a director, partner, or manager of the corporate debtor or his relative is a partner; (d) a private company in which a director, partner or manager of the corporate debtor is a director and holds along with his relatives, more than two per cent. of its share capital; (e) a public company in which a director, partner or manager of the corporate debtor is a director and holds along with relatives, more than two per cent. of its paid-up share capital; (f) anybody corporate whos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... interpretation-letter-spirit-ibc.html . 59 The term related party has also been defined by Parliament in the Companies Act, 2013 for all corporations. The definition of the expression has also been expanded for listed entities by the Securities Exchange Board of India by amendment to the Equity Listing Agreement to include elements mentioned under applicable accounting standards. However, in the present case, we are assessing its definition only under the IBC, which is exhaustive. The purpose of defining the term separately under different statutes is not to avoid inconsistency but because the purpose of each of them is different. Hence, while understanding the meaning of related party in the context of the IBC, it is important to keep in mind that it was defined to ensure that those entities which are related to the Corporate Debtor can be identified clearly, since their presence can often negatively affect the insolvency process. H.3 Analysis 60 Crucial to the understanding of whether Spade and AAA were related parties of the Corporate Debtor during the relevant period is the relationship between Mr Arun Anand and Mr Anil Nanda. It is Mr Viswanathan s argument tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r supported by our conclusion that the transactions between the Corporate Debtor and the entities led by Mr Arun Anand were collusive in nature. 63 Similarly, we have no hesitation in accepting the NCLAT s conclusion that Spade entered into two transactions on the basis of the advice/instructions/directions of the board/directors of the Corporate Debtor under Section 5(24)(f). Mr Viswanathan s submission that these were purely commercial transactions between the parties cannot be accepted, given the extensive history demonstrating the interrelationship between the individuals associated with these corporations. While the transactions may have indeed been commercial, it cannot be doubted that Spade undertook them due to the pervasive influence of Mr Anil Nanda. In our analysis above, we have similarly come to the conclusion that other past transactions between these entities have been collusive. 64 Finally, we have already held that the transactions between AAA and the Corporate Debtor were collusive in nature. This supports the findings of the NCLAT that the Agreement to Sell and Side Letter dated 25 October 2012 were a mere eye-wash, through which they sought to develop the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ditor or an authorised representative of the financial creditor referred to inter alia in Sub-section (5) of Section 24, if it is a related party of the corporate debtor . Laying stress on the expression is a related party of the corporate debtor, the submission is that the statute applies in praesenti on the date of the admission of an application seeking the initiation of the CIRP. This submission is sought to be supported by urging that if the expression is a related party is not construed in its literal sense in praesenti, it will result in an ambiguity without a yardstick on how far back in point of time the relationship should be assessed. The use of that expression in the first proviso to Sub-section (2) of Section 24 has been contrasted with other provisions of the IBC. For instance, it has been submitted that in Section 29A, which elucidates when a person is not eligible to be a resolution applicant, there is a reference to both is and has been . Clause (a) refers to a situation where a person is an undischarged insolvent ; Clause (b) refers a person who is a wilful defaulter ; Clause (d) adverts to a situation where a person has been convicted ; and Clause (g) re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ency resolution process, shall not take any of the following actions without the prior approval of the committee of creditors namely:- (a) raise any interim finance in excess of the amount as may be decided by the committee of creditors in their meeting; (b) create any security interest over the assets of the corporate debtor; (c) change the capital structure of the corporate debtor, including by way of issuance of additional securities, creating a new class of securities or buying back or redemption of issued securities in case the corporate debtor is a company; (d) record any change in the ownership interest of the corporate debtor; (e) give instructions to financial institutions maintaining accounts of the corporate debtor for a debit transaction from any such accounts in excess of the amount as may be decided by the committee of creditors in their meeting; (f) undertake any related party transaction; (g) amend any constitutional documents of the corporate debtor; (h) delegate its authority to any other person; (i) dispose of or permit the disposal of shares of any shareholder of the corporate debtor or their nominees to third parties ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... writing in the Columbia Law review, whereunder insolvency law considers the distributional impact of winding up on those who may not have formal legal rights to the assets of the business. The aim of bankruptcy law under this theory is to take into account the multidimensional but conflicting interests of various claimants, and provide for a solution whereunder each claimant derives optimal value- Supra at note 20 . 72 The CoC is comprised of financial creditors, under loan and debt contracts, who have the right to vote on decisions and operational creditors such as employees, rental obligations, utilities payments and trade credit, who can participate in the CoC, but do not have the right to vote. The aim of the CoC is to enable coordination between various creditors so as to ensure that the interests of all stakeholders are balanced, and the value of the assets of the entity in financial distress is maximised. 73 The report of the Bankruptcy Law Reforms Committee (Volume I: Rationale and Design) of November 2015, has underscored the need to meet the liabilities of all creditors, who are not part of the CIRP, and that of treating the rights of all creditors fairly, through ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... - Report of the Insolvency Law Committee, March 2018, p 23, para 1.25 . This is the intent behind the first proviso to Section 21(2) which disqualifies a financial creditor or the authorised representative of the financial creditor under sub-section (6) or sub-section (6A) or sub-section (5) of section 24, if it is a related party of the corporate debtor, from having any right of representation, participation or voting in a meeting of the committee of creditors. 76 Since the IBC attempts to balance the interests of all stakeholders, such that some stakeholders are not able to benefit at the expense of others, related party financial creditors are disqualified from being represented, participating or voting in the CoC, so as to prevent them from controlling the CoC to unfairly benefit the corporate debtor- Vidhi Centre for Legal Policy, Understanding the Insolvency and Bankruptcy Code, 2016: Analysing Developments in Jurisprudence, available at https://vidhilegalpolicy.in/research/understanding-the-insolvency-and-bankruptcy-code-2016-analysing-developments-in-jurisprudence/ , at page 34 . 77 It is pertinent to note that disqualification of related parties from being members ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... classes of creditors which exceed a certain threshold in number, like home buyers or security holders for whom no trustee or agent has already been appointed under a debt instrument or otherwise, an insolvency professional (other than the IRP) shall be appointed by the NCLT on the request of the IRP. It is to be noted that as the agent or trustee or insolvency professional, i.e., the authorised representative for the creditors discussed above and executors, guarantors, etc. as discussed in paragraph 9 of this Report, shall be a part of the CoC, they cannot be related parties to the corporate debtor in line with the spirit of proviso to section 21(2). 10.7 Section 71(6) of the CA 2013 obliges the debenture trustee to take steps to protect the interests of the debenture holders and redress their grievances. The provisions regarding meetings of the debenture trustee and debenture holders is as per the trust deed. The Companies (Acceptance of Deposit) Rules, 2014 ( Deposit Rules ) provide that the deposit trustee may call a meeting of the deposit holders as and when required and provides specific power to call a meeting on the happening of any event of default. Though broad powers ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l 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. 83 In Arcelor Mittal India Private Limited vs. Satish Kumar Gupta (supra), 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 resolution plan is submitted by the resolution applicant. Speaking for this Court, Justice Rohinton F Nariman interpreted the pre-2018 amendment, framing of Section 29-A(c), in the following terms: 46. According to us, it is clear that the opening words of Section 29-A furnish a clue as to the time at which clause (c) is to operate. The opening words of Section 29-A state: a person shall not be eligible to submit a resolution plan . It is clear therefore that the stage of ineligibility attaches when the resolution plan is submitted by a resolution applicant. The contrary view expressed by Shri Rohatgi is obviously incorrect, as the date of commencement of the corporate insolvency resolution process is only relevant for the purpose of calculati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation of the words and application of a legislative intent devoid of concept of purpose will reduce most of the remedial and beneficent legislation to futility. As stated by Iyer, J. to be literal in meaning is to see the skin and miss the soul. The judicial key to construction is the composite perception of the deha and the dehi of the provision. Even in construing enactments such as those prescribing a period of limitation for initiation of proceedings where the purpose is only to intimate the people that after lapse of a certain time from a certain event a proceeding will not be entertained and where a strict grammatical construction is normally the only safe guide, a literal and mechanical construction may have to be disregarded if it conflicts with some essential requirement of fair play and natural justice which the Legislature never intended to throw overboard. Similarly, in a taxing statute provisions enacted to prevent tax evasion are given a liberal construction to effectuate the purpose of suppressing tax evasion although provisions imposing a charge are construed strictly there being no a priori liability to pay a tax and the purpose of a charging section being only t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) In the case of a person who is employed in connection with the affairs of a State and is not removable from his office save by or with the sanction of the State Government, of that Government; (c) In the case of any other person, of the authority competent to remove him from his office. (emphasis supplied) 87 It was argued before this Court that a literal interpretation should be given to Section 19(1). Since the word is has been used in sub-sections (a), (b) and (c), it was urged that this would exclude a public servant who had abused office at an earlier point in time and has now ceased to occupy that office. This Court speaking through Justice Sirpurkar rejected the argument and held: 44 we reject the argument based on the word is in Sub-sections (a), (b) and (c). It is true that the Section operates in praesenti; however, the Section contemplates a person who continues to be a public servant on the date of taking cognizance. However, as per the interpretation, it excludes a person who has abused some other office than the one which he is holding on the date of taking cognizance, by necessary implication. Once that is clear, the necessity of the literal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m 11 different public offices would be necessary before the court can take cognizance of the offence committed by such public servant/while abusing one office which he may have ceased to hold. Such an interpretation in contrary to all canons of construction and leads to an absurd and product which of necessity must be avoided. Legislation must at all costs be interpreted in such a way that it would not operate as a rougue's charter. (emphasis supplied) 89 This court has approved of a purposive interpretation of Section 29-A of the IBC in Arcelor Mittal India Private Limited v. Satish Kumar Gupta (supra), where it was observed that: 29 In Ms. Eera Through Dr. Manjula Krippendorf v. State (Govt. of NCT of Delhi) and Anr., (2017) 15 SCC 133, this Court, after referring to the golden Rule of literal construction, and its older counterpart the object rule in Heydon's case, referred to the theory of creative interpretation as follows: 122. Instances of creative 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 me ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o in Heydon case [Heydon case, (1584) 3 Co Rep 7a : 76 ER 637]. 30. A purposive interpretation of Section 29A, depending both on the text and the context in which the provision was enacted, must, therefore, inform our interpretation of the same. (emphasis supplied) 90 Hence, we would need to consider the meaning of the first proviso in the light of the context, object and purpose for which it was enacted. The purpose of excluding a related party of a corporate debtor from the CoC is to obviate conflicts of interest which are likely to arise in the event that a related party is allowed to become a part of the CoC. The logic underlying the exclusion has been summarised as follows - Insolvency Law Committee Report, 2020, pp 47-48, para 11.9 : The Committee was of the view that the disability under the first proviso to Section 21(2) is aimed at removing any conflict of interest within the CoC, to prevent erstwhile promoters and other related parties of the corporate debtor from gaining control of the corporate debtor during the CIRP by virtue of any loan that may have been provided by them. Accepting the submission of Mr Viswanathan would allow the statutory p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... signs 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. 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 third-party 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 financial creditor within the CoC, the resolution professional should verify that the assignee is not a related party of the corporate debtor. 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... evident that there existed a deeply entangled relationship between Spade, AAA and Corporate Debtor, when the alleged financial debt arose. While their status as related parties may no longer stand, we are inclined to agree with Mr Kaul that this was due to commercial contrivances through which these entities seek to now enter the CoC. The pervasive influence of Mr Anil Nanda (the promoter/director of the Corporate Debtor) over these entities is clear, and allowing them in the CoC would definitely affect the other independent financial creditors. J Conclusion 97 In conclusion, we hold that: (i) The decision of the NCLAT, in as much as it referred to Spade and AAA as financial creditors, is set aside. Due to the collusive nature of their transactions alleged to be a financial debt under Section 5(8), Spade and AAA cannot be labelled as financial creditors under Section 5(7); (ii) The decision of the NCLAT, in as much as it referred to Spade and AAA as related parties of the Corporate Debtor under Section 5(24), is affirmed; and (iii) The decision of the NCLAT, in as much as it excluded Spade and AAA from the CoC in accordance with the first proviso of Section 21(2), is ..... X X X X Extracts X X X X X X X X Extracts X X X X
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