9911796707
TMI Blog2021 (2) TMI 91X X X X Extracts X X X X X X X X Extracts X X X X ..... etween Anil Nanda and Arun Anand G Whether Spade and AAA are financial creditors of the Corporate Debtor G.1 Submission of Counsel G.2 Assessment of preliminary submissions G.2.1 Res Judicata G.2.2 Issues before NCLAT G.2.3 Remand to NCLAT G.3 Analysis G.3.1 Statutory Provisions G.3.2 Financial Creditor and Financial Debt G.3.3 Collusive Transactions G.3.4 Spade and AAA H Whether Spade and AAA are related parties H.1 Submission of Counsel H.2 Statutory provisions H.3 Analysis I Whether Spade and AAA can be excluded from the CoC I.1 Submissions of Counsel I.2 Related Parties and CoC I.3 Amendment to First Proviso of Section 21(2) I.4 Related Parties - Interpretation In Praesenti J Conclusion PART A A The appeals 1 This judgment would govern two sets of appeals arising from the judgment of the National Company Law Appellate Tribunal ("NCLAT" or "Appellate Tribunal"). By a judgment dated 27 January 2020, NCLAT dismissed the appeal under Section 61 of the Insolvency and Bankruptcy Code, 2016 ("IBC") preferred by AAA Landmark Private Limited ("AAA") and Spade Financial Services Private Limited ("Spade") to assail the order dated 19 July 2019 of the National Compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... editor, Mr. Hari Krishan Sharma, under Section 9 of IBC. 6 During the CIRP, claims were invited by the Interim Resolution Professional ("IRP"). Spade filed its claim in Form C as a financial creditor for a sum of Rs. 52,96,00,000 on 10 May 2018. Thereafter, Spade filed a revised Form C for a sum of Rs. 109,11,00,000 on 20 May 2018. Spade had filed the form on the basis of an alleged Memorandum of Understanding dated 12 August 2011 executed with the Corporate Debtor, which stated that Inter Corporate Deposits ("ICDs") of Rs. 26,55,00,000 have been granted to the Corporate Debtor by Spade bearing interest of 24% repayable in terms of the mutual agreement between the parties. However, Spade has submitted before this Court that it has granted ICDs of Rs. 66,00,00,000 (approx.) to the Corporate Debtor between June 2009 and January 2013. Out of this amount, Spade is claiming a principal amount of Rs. 23,00,00,000. The balance amount of Rs. 43,06,00,000 was credited in the account of AAA, which is a wholly owned subsidiary of Spade. The total claim of Spade has increased to Rs. 109,11,00,000 in 7 years on account of interest at the rate of 24%. 7 AAA filed its claim before the IRP in Fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is also a financial creditor of the Corporate Debtor and is a part of CoC. Its claim is based on a registered Deed of Assignment in its favour dated 28 December 2015, pursuant to which, Karnataka Bank Limited had assigned the non-performing assets relating to the credit facilities granted to the Corporate Debtor. The voting share of Phoenix was reduced to 4.28% on account of AAA and Spade being included in the CoC. 11 On 1 June 2018, a meeting of the CoC took place which was attended by YES Bank and Phoenix, and also by the newly approved financial creditors, AAA and Spade. Following the meeting, YES Bank and Phoenix filed applications in the NCLT for the exclusion of AAA and Spade from the CoC on the ground that they are related parties. Notice was issued by the NCLT in the two applications - Civil Appeal No. 267/2018 and Civil Appeal 368/2018. 12 The application moved on behalf of YES Bank under Section 60(5), on 28 June 2018, sought the following reliefs: (i) A direction to the IRP to reconstitute the CoC in terms of the Insolvency and Bankruptcy (Amendment) Ordinance 2018 ("IBC Ordinance 2018"); and (ii) A direction prohibiting the IRP from allowing AAA and Spade to parti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... proceeded in paragraph 11 of its decision to observe that "admittedly" Spade and AAA "are the financial creditors of the corporate debtor". Having stated so, the Appellate Tribunal proceeded to enquire into whether AAA and Spade are related parties within the meaning of Section 5(24) of the IBC. 18 Answering the above issue in the affirmative, the NCLAT held that Spade and AAA are related parties of the Corporate Debtor since: (i) AAA was a partner of the Corporate Debtor in accordance with Section 5(24)(a) -"(a) a director or partner of the corporate debtor or a relative of a director or partner of the corporate debtor;". The Appellate Tribunal held that since even after the cancellation of Development Agreement dated 1 March 2012 between the parties, they had entered into an Agreement to Sale and Side Letter dated 25 October 2012, which was merely a camouflage under which they were partners in developing a residential project to be sold to a third party; (ii) In accordance with Section 5(24)(f)- "(f) anybody corporate whose board of directors, managing director or manager, in the ordinary course of business, acts on the advice, directions or instructions of a director, partn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the individual or a relative of the spouse of the individual;", being a relative of another director; and (vi) A holding company of the Corporate Debtor, Joint Investment Private Limited ("JIPL"), holds shareholding in Spade. 19 Hence, NCLAT came to the conclusion that the Adjudicating Authority had rightly excluded both Spade and AAA from participation in the CoC since Mr. Anil Nanda, in concert with Mr. Arun Anand and his family, had created a web of companies which were related parties to the Corporate Debtor, and was now trying to gain a backdoor entry into the CoC through them. E Transactions of the Corporate Debtor 20 Before we proceed with our analysis of the issues, it is important to note the relevant transactions between the Corporate Debtor on one hand and Spade and AAA on the other hand, which gives rise to their claims as financial creditors. 21 The following transactions between the Corporate Debtor and Spade are relevant for our consideration: (i) Memorandum of Understanding dated 12 August 2011, through which Spade provided the Corporate Debtor with ICDs worth a net amount of Rs. 66 crores from 1 June 2009 till January 2013, which provided for 24% interest. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... il Nanda for about 25 years. 24 The purported transactions took place when he was an employee of Escorts Limited/Nanda Group of Companies, including the Corporate Debtor and also held key managerial posts in the said companies. Spade and AAA, in their written submissions, have given details of Mr Arun Anand's association with the Corporate Debtor during the relevant period (June 2009 to January 2013) and thereafter: 1 June 2009 - 31 October 2011 Consultant 1 November 2011 - 25 November 2012 Strategic Advisor 26 November 2012 - 14 February 2013 (81 days) Group CEO 15 March 2013 till 18 April 2018 (CIRP date) Since February 2013, Mr. Arun Anand has no association with Corporate Debtor in any manner whatsoever G Whether Spade and AAA are financial creditors of the Corporate Debtor G.1 Submission of Counsel 25 The learned Senior Counsel who appeared in these proceedings on behalf of the contesting parties are: (i) Mr K.V. Viswanathan for AAA and Spade; (ii) Mr Neeraj Kishan Kaul for Phoenix; and (iii) Mr Sanjiv Sen for the Resolution Professional ("RP"). 26 The submission of Mr K V Viswanathan is that NCLT held against AAA and Spade on the ground that they were not f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... heir submission that they are financial creditors. 28 The submission of Mr Neeraj Kishan Kaul is that AAA and Spade are not creditors of the Corporate Debtor, much less financial creditors, in terms of Section 5(7) of the IBC. The submissions made in relation to the transaction between AAA and the Corporate Debtor are: (i) The Development Agreement dated 1 March 2012 entered between AAA and the Corporate Debtor was collusive. AAA had sought to purchase 38.3% of the development rights in a project called AKME RAAGA as a co-developer/partner. However, the development license granted by the Government could not be sub-divided. As a result, the Corporate Debtor and AAA converted the Development Agreement into an unregistered Agreement to Sell dated 25 October 2012; (ii) AAA and the Corporate Debtor executed an unlawful Side Letter dated 25 October 2012 with the intention to co-develop the land and sell it in the market. The Side Letter contained terms akin to the terms which were a part of the Development Agreement. It contained terms for sharing of costs of development of the project relating to cost of land, construction, license and approvals, manpower, liaison cost etc. and th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rporate Debtor by Spade in 2013; however, no valid financial contract was entered between the Corporate Debtor and Spade to stipulate the consideration in terms of the time value of money against each transaction. A financial contract is essential for considering a debt as financial debt; (e) The calculation sheet reflects that the inflow and outflow of funds are in the nature of a running account, indicating that the debit and credit balances lack any commercial effect of borrowing, which is an essential element in terms of Section 5(8)(f) of IBC; and (f) The emails relied on by Spade dated 16/17 January 2013 mention that documents in relation to an extension of a loan of Rs. 2 Crores were to be executed. No such documents have been produced on record. G.2 Assessment of preliminary submissions G.2.1 Res Judicata 30 In order to appreciate the line of submissions carefully propounded by Mr K V Viswanathan, it becomes necessary to sift through the facts. Initially, on 31 May 2018, an order was passed by the NCLT allowing AAA and Spade to submit their claims as financial creditors with a direction to the IRP to consider the claims. However, when the NCLT allowed AAA and Spade t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed on the real nature of transactions between the parties. G.2.3 Remand to NCLAT 33 The submission that the NCLAT has acted beyond jurisdiction in the appeal filed by AAA and Spade in enquiring into whether they are related parties is the next aspect which needs to be considered. NCLT in its decision on 19 July 2019 had formulated two questions for consideration. The first was whether the transactions between AAA and Spade qualify to be treated as a financial debt under Section 5(8). The second pertained to the date with reference to which the relationship between the parties needs to be considered for assessing whether they are related parties. On the first aspect, the adjudicating authority came to the conclusion that the transaction between the corporate debtor and Spade is not a financial debt under Section 5(8) and Spade is not a financial creditor under Section 5(7). The basis of this finding is contained in paragraph 11.2 of the decision, which is extracted below: "11.2 Perusal of the documents pertaining to the inter corporate deposit stated to have been given by Spade Financial Services Private Limited to the Corporate Debtor from 01.06.2009 to January 2013 shows the f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ME Raaga" were sold to AAA for 32.80 crores and subsequently on 25.10.2012 the Agreement to Sell was executed to superseding the development agreement with an enhanced value of Rs. 43.06 crores. The multiplicity of Agreements regarding the same property, with no explanation or rational reasoning regarding variation in values of transaction, shows that these transactions are also collusive in nature and an attempt to divert the properties of the CD to AAA for reasons best known to the parties. It is also noted that the transactions between the CD and AAA as well as Spade were done during the period when Arun Anand, who along with his family members is the promoter and director of both Spade and AAA Landmark was associated in various capacities from 1982 to 2013 with the CD and its directors and the group of companies to which the CD belongs. It is during this period only that Mr. Arun Anand promoted and subscribed to the memorandum of association of the CD, Spade and AAA Landmark. Mr. Arun Anand and his family members at various points of time also had shareholding in the group companies of the Mr. Anil Nanda group. It is also seen that the alleged financial transactions of Spade an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are financial creditors within the meaning of Section 5(8). 37 Sub-sections (1) and (2) of Section 21, insofar as is material provide as follows: "21. Committee of Creditors.- (1) The interim resolution professional shall after collation of all claims received against the corporate debtor and determination of the financial position of the corporate debtor, constitute a committee of creditors. (2) The committee of creditors shall comprise all financial creditors of the corporate debtor: Provided that a related partyto whom a corporate debtor owes a financial debt shall not have any right of representation, participation or voting in a meeting of the committee of creditors." 38 Sub-section (2) of Section 21 stipulates that the CoC is to comprise of all financial creditors of the corporate debtor. The first proviso to Sub-section (2) has been amended by Act 26 of 2018 with effect from 6 June 2018. Having held that AAA and Spade are not financial creditors, NCLT came to the conclusion that they were not entitled to inclusion in the CoC. 39 On the second issue, the Adjudicating Authority was of the view that it was not really necessary for it to consider what should be the date ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... consideration is whether AAA and Spade can be considered as financial creditors. G.3 Analysis G.3.1 Relevant Provisions 41 Section 5 (7) of the IBC defines a financial creditor : "(7) "financial creditor" means any person to whom a financial debt is owed and includes a person to whom such debt has been legally assigned or transferred to;" 42 Section 5(8) of the IBC provides a definition of financial debt in the following terms: "(8) "financial debt" means a debt along with interest, if any, which is disbursed against the consideration for the time value of money and includes-- (a) money borrowed against the payment of interest; (b) any amount raised by acceptance under any acceptance credit facility or its de-materialised equivalent; (c) any amount raised pursuant to any note purchase facility or the issue of bonds, notes, debentures, loan stock or any similar instrument; (d) the amount of any liability in respect of any lease or hire purchase contract which is deemed as a finance or capital lease under the Indian Accounting Standards or such other accounting standards as may be prescribed; (e) receivables sold or discounted other than any receivables sold on non ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e value of money" used in the principal clause of Section 5(8) of the IBC. This Court has interpreted the term "disbursal" in Pioneer Urban Land and Infrastructure Ltd vs. Union of India (2019) 8 SCC 416 in the following terms: "70. The definition of "financial debt" in Section 5(8) then goes on to state that a "debt" must be "disbursed" against the consideration for time value of money. "Disbursement" is defined in Black's Law Dictionary (10th Edn.) to mean: "1. The act of paying out money, commonly from a fund or in settlement of a debt or account payable. 2. The money so paid; an amount of money given for a particular purpose." 71. In the present context, it is clear that the expression "disburse" would refer to the payment of instalments by the allottee to the real estate developer for the particular purpose of funding the real estate project in which the allottee is to be allotted a flat/apartment. The expression "disbursed" refers to money which has been paid against consideration for the "time value of money". In short, the "disbursal" must be money and must be against consideration for the "time value of money", meaning thereby, the fact that such money is now ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed) Diplock LJ also stated: "But one thing, I think, is clear in legal principle, morality and the authorities (see Yorkshire Railway Wagon Co v Maclure and Stoneleigh Finance Ltd. v Phillips), that for acts or documents to be a "sham," with whatever legal consequences follow from this, all the parties thereto must have a common intention that the acts or documents are not to create the legal rights and obligations which they give the appearance of creating. No unexpressed intentions of a "shammer" affect the rights of a party whom he deceived..." (emphasis supplied) 47 This Court, in Prem Chand Tandon vs. Krishna Chand Kapoor, (1973) 2 SCC 366 had to determine whether a usufructuary mortgage was a sham transaction entered into by the respondent there (the borrower) to avoid payment to creditors. This Court examined the real nature of the transaction to hold that the parties entered the transaction with an ulterior motive. Justice A.N. Grover, speaking for this Court, held: "As regards the consideration for the usufructuary mortgage the promissory notes were never produced. It is true that there was some evidence that Smt. Dhanta Devi [lender] had received certain insurance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n determined by the NCLT in its order dated 31 May 2018. We have already concluded that the above order would not operate as res judicata and it was within the jurisdiction of the NCLT to consider this issue afresh. NCLT in its order dated 19 July 2019 has undertaken a detailed analysis of the transactions to arrive at a finding that the transactions were collusive. We are inclined to agree with the findings of the NCLT in its order dated 19 July 2019. NCLAT has also made an observation that "we are of the considered opinion that Mr Anil Nanda, Mr Arun Anand had created a web of companies in which both along with near and dear ones including Ms Renu Anand (Wife of Mr. Arun Anand) and Mr Sonal Anand (Brother-in-law of Mr. Arun Anand) acted in concert with each other"- Paragraph 18 . It is to be noted that M/s Ernst & Young were appointed as forensic/transactional auditors by the RP on 19 November 2019. Their report contains significant findings: "Considering the above transactions, we were unable to understand the business rational of: Purchase and sale transaction with Spade Financial resulting in a loss of approx. INR 2.12 Cores to CD Rent paid to Arun Anand and Aditya Anand ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted in the written submissions filed on behalf of Spade and AAA that the auditors of the Corporate Debtor had been putting a note in its balance sheets stating that the interest of 12% was not being paid to Spade due to a dispute. This submission in fact further fortifies the finding of the IRP that no interest has been paid on the alleged loan. The IRP has also noted in his letter that the Memorandum of Understanding does not stipulate the period of repayment. Hence, the consideration for time value of money is absent, which is an essential ingredient of a financial debt. The NCLT has also noted that a major portion of the ICDs was credited in the account of Mr Arun Anand holding that the entire amount was not "disbursed" to the Corporate Debtor. NCLAT has also made a similar finding in paragraph 11(i) of its judgement. This finding has been disputed by Mr Vishwanathan who argued that no amount of the ICDs has been credited to the account of Mr Arun Anand and such an allegation has not been made by any of the parties including the RP. However, it is to be noted under Clause 2 of the Memorandum of Understanding, the amount of Rs. 26.55 Crores has been disbursed not only to the Corp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erted the Development Agreement into an Agreement to Sell executed along with a Side Letter to circumvent the legal prohibition on splitting a development license in two parts. The transaction between AAA and the Corporate Debtor was collusive in nature. 52 Since the commercial arrangements between Spade and AAA, and the Corporate Debtor were collusive in nature, they would not constitute a 'financial debt'. Hence, Spade and AAA are not financial creditors of the Corporate Debtor. H Whether Spade and AAA are related parties 53 The Appellate Tribunal has affirmed the decision of the NCLT to exclude Spade and AAA from the CoC on the ground that they are related parties. As we have seen earlier, there was a specific finding in the decision of the NCLT on the close business relationship between AAA and Spade on one hand and the Corporate Debtor on the other, in terms of the provisions contained in Section 5(24). The decision of the NCLT spoke of a deep entanglement in the business affairs. The NCLT came to the specific finding 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 i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Group CEO of the Anil Nanda Group of Companies (of which the Corporate Debtor is also a part); (iii) During this period, Mr Arun Anand's brother in-law, Mr Sonal Anand, was a director and COO of the Corporate Debtor. Further, he was also the Whole Time Director of JIPL, which is a wholly-owned subsidiary of the Corporate Debtor, and holds shareholding in Spade; (iv) During this period, Mr Anil Nanda was the promoter/director of the Corporate Debtor; and (v) The ongoing litigation between Spade and the Corporate Debtor was only started after the IBC came into force, to create a notion of dispute. 56 The submissions of Mr Kaul are supported by Mr Sen. He submits: (i) Two of the original shareholders of the Corporate Debtor, along with Mr Arun Anand, now have shareholding and positions in Spade; and (ii) There have been fraudulent transactions between Spade and JIPL, in which JIPL paid a sum to Spade for transfer of shares, which never occurred. This is a subject of proceedings under 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" ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ii) interchange of managerial personnel between the corporate debtor and such person; or
(iv) provision of essential technical information to, or from, the corporate debtor;"
The expression 'related party' is defined in Section 5(24) in relation to a corporate debtor. Section 5(24A) provides a corresponding definition in relation to an individual.
58 The definition describes a commutative relationship, meaning that X can be a related party of Y, if either X is related to Y, or Y is related to X. The definition of 'related party' under the IBC is significantly broad. The intention of the legislature in adopting such a broad definition was to capture all kinds of inter-relationships between the financial creditor and the corporate debtor- Richa Saraf, 'Concept of Related Party: Interpretation by Letter or Spirit of the IBC?', (IndiaCorpLaw, 11 August 2018) available at X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd. vs Satish Kumar Gupta (supra). However, it is important to note that the discussion there was in the context of ineligible resolution applicants under Sub-section (c) of Section 29-A of the IBC, which specifically prescribes this test. Presently, we have to determine whether the Corporate Debtor's board, directors, etc, are accustomed to act on Mr Arun Anand's advice/direction/instruction and if he participates in the policy-making process of the Corporate Debtor. While a strict determination of intent or mens rea may not always be possible by the NCLT and NCLAT in summary proceedings, it is possible to draw the inference from the facts at hand. These facts are that there was a deep entanglement between the entities of Mr Arun Anand and Mr Anil Nanda, and Mr Arun Anand did hold positions during this period which could have been used by him to guide the affairs of the Corporate Debtor. This finding is further 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... insolvency commencement date." Hence, the first proviso states that any financial creditor, barring the exceptions provided in the second proviso, shall not have any right of representation, participation and voting in the meeting of the CoC, if it is a related party of the Corporate Debtor. 67 The controversy in the present case is on the interpretation of the phrase "is" a related party in the first proviso, since the submission is that Spade and AAA are no longer related parties of the Corporate Debtor (even though in terms of the earlier finding they were so during the relevant period when the transactions constituting their alleged financial debt took place). I.1 Submissions of Counsel 68 Mr Viswanathan sought to urge that the first proviso to Sub-section (2) of Section 21 denies the right of representation, participation or voting in a meeting of the CoC to a financial creditor 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 praesent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which we proceed to elaborate. I.2 Related Parties and CoC Section 21(1) requires the IRP to constitute a CoC, after collating of the claims which are received against and determining the financial position of the corporate debtor. The CoC has to comprise of all financial creditors of the corporate debtor. The expression 'financial creditor' is defined in Section 5(7) to mean any person to whom a financial debt is owed and to include a person to whom such a debt has been legally assigned or transferred. The expression 'financial debt' is defined in Section 5(8). Under Section 28, the Resolution Professional is required to take the prior approval of the CoC specifically on certain aspects. Section 28(1) provides as follows: "28. (1) Notwithstanding anything contained in any other law for the time being in force, the resolution professional, during the corporate insolvency 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 co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y law seeks to resolve this by preventing individual creditor action. The creditor's bargain theory therefore, operates to maximise group welfare through collectivisation- Medha Shekar and Anuradha Guru, Theoretical Framework of Insolvency Law, available at X X X X Extracts X X X X X X X X Extracts X X X X ..... s: "An Act to consolidate and amend the laws relating to reorganisation and insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner for maximization of value of assets of such persons, to promote entrepreneurship, availability of credit and balance the interests of all the stakeholders including alteration in the order of priority of payment of Government dues and to establish an Insolvency and Bankruptcy Board of India, and for matters connected therewith or incidental thereto." 75 These objects underscore the composition of the CoC, guided by Section 21 of the IBC. The objects and purposes of the Code are best served when the CIRP is driven by external creditors, so as ensure that the CoC is not sabotaged by related parties of the corporate debtor- 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 representat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tation, participation or voting in a meeting of the committee of creditors." 80 The reason for the amendment appears to be the need to extend the disqualification in the first proviso of Section 21(2) to authorised representatives of financial creditors mentioned in Sections 21(6), 21(6A) and Section 24(5) as well. This was recommended by the Insolvency Law Committee, in its Report of March 2018, where it was observed: "10. 6 For certain securities, a trustee or an agent may already be appointed as per the terms of the security instrument. For example, a debenture trustee would be appointed if debentures exceeding 500 have been issued or if secured debentures are issued. Such creditors may be represented through such pre-appointed trustees or agents. For other 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 credi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ded to enable voting through electronic means such as e-mail, to address any technical issues which may arise due to a large number of creditors voting at the same time." (emphasis supplied) 81 Consequently, 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. I.4 Related Parties - Interpretation In Praesenti 82 An issue of interpretation in relation to the first proviso of Section 21(2) is whether the disqualification under the proviso would attach to a financial creditor only in praesenti, or if the disqualification also extends to those financial creditors who were related to the corporate debtor at the time of acquiring the debt. 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 resolu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the concept of 'purpose and object' or the 'reason and spirit' pervading through the statute. The process of construction, therefore, combines both literal and purposive approaches. In other words the legislative intention, i.e., the true or legal meaning of an enactment is derived by considering the meaning of the words used in the enactment in the light of any discernible purpose or object which comprehends the mischief and its remedy to which the enactment is directed. This formulation later received the approval of the Supreme Court and was called the "cardinal principle of construction"." He notes that certain enactments require a liberal construction to give effect to its objects and purpose: "A bare mechanical interpretation 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , where the court did not interpret the word "is" in praesenti because that would lead to an absurd result, defeating the purpose of the concerned provision. In that case this Court had to interpret Section 19(1) of the Prevention of Corruption Act, 1947, which provided: "19. Previous sanction necessary for prosecution. (1) No court shall take cognizance of an offence punishable under Sections 7, 10, 11, 13 and 15 alleged to have been committed by a public servant, except with the previous sanction, - (a) In the case of a person who is employed in connection with the affairs of the Union and is not removable from his office save by or with the sanction of the Central Government, of that Government; (b) 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), ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nterpretation of Section 6 would render it as a shield to an unscrupulous public servant. Someone interested in protecting may shift him from one office of public servant to another and thereby defeat the process of law. One can legitimately envisage a situation wherein a person may hold a dozen different offices, each one clothing him with the status of a public servant under Section 21 IPC and even if he has abused only one office for which either there is a valid sanction to prosecute him or he has ceased to hold that office by the time court was called upon to take cognizance, yet on this assumption, sanction of 11 different competent authorities each of which was entitled to remove him from 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to move away from the strictly literal Rule of interpretation back to the Rule of the old English case of Heydon [Heydon case, (1584) 3 Co Rep 7a: 76 ER 637], where the Court must have recourse to the purpose, object, text and context of a particular provision before arriving at a judicial result. In fact, the wheel has turned full circle. It started out by the Rule as stated in 1584 in Heydon case [Heydon case, (1584) 3 Co Rep 7a : 76 ER 637], which was then waylaid by the literal interpretation Rule laid down by the Privy Council and the House of Lords in the mid-1800s, and has come back to restate the Rule somewhat in terms of what was most felicitously put over 400 years ago 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 conflict ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f a related party creditor, to be members of the CoC. It was observed: "11.09 ... As a third-party assignee, who by itself is not a related party, would not have any such conflict of interest, it should not be disabled from participating in the CoC. Further, the aforesaid disability is not related to the debt itself but is based on the relationship existing between a related party creditor and the corporate debtor. Therefore, as the disability imposed under the first proviso to Section 21(2) pertains to the related party financial creditor and not to the debt it is owed, the Committee agreed 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. 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 indirectl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lated parties within the meaning of Section 5(24) at the time when the alleged financial debt on the basis of which they assert a claim to be a part of the CoC was created. This was due to the long-standing relationship between Mr Arun Anand and Mr Anil Nanda, and their respective corporations. Admittedly, such a relationship still existed even in 2017, since Mr Anil Nanda's JIPL held shareholding in Mr Arun Anand's Spade. Further, we have also concluded that the transactions between Spade and AAA on one hand, and the Corporate Debtor on the other hand, which gave rise to their alleged financial debts were collusive in nature. Therefore, 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 credito ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
