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TMI Blog2025 (2) TMI 78X X X X Extracts X X X X X X X X Extracts X X X X ..... appointment of IRP as RP the matters relating to CoC continue to be handled by RP as he chairs the CoC meetings - RP is empowered to decide on the related party status of a creditor. Determination of appellant as related party of the CD in terms of various clauses of Section 5(24) of the Code - HELD THAT:- This network of shareholding establishes a clear connection between the Corporate Debtor and Hari Vitthal Mission, with both entities being subsidiaries or affiliates under the broader umbrella of Kanoria Foundation. Given this relationship, Hari Vitthal Mission is not only indirectly linked to the Corporate Debtor, but is effectively part of the same corporate group. Therefore, under Section 5(24)(i), Hari Vitthal Mission qualifies as a related party by virtue of its position as a subsidiary of Kanoria Foundation, the holding company/trust that controls the Corporate Debtor - Section 5(24)(j) defines a related party as any person or entity that controls more than 20% of the voting rights in the Corporate Debtor. As seen earlier the Kanoria Foundation holds 99.9% in the appellant which is the Financial Creditor. On the other side the Kanoria Foundation through a series of entit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hospital aimed at providing free and affordable medical care to the public. This project was aligned with the charitable objectives of Appellant, which was engaged in providing healthcare relief to the poor. Consequently, an agreement was signed on 10th October 2017 between CD and Appellant. According to the agreement, Appellant committed to provide financial assistance of Rs. 44.2 crore to the CD. In return, the CD agreed to reserve 100 hospital beds for Appellant, to be used for treating underprivileged patients free of cost. The CD further committed to complete the hospital's construction by December 2018 and making it fully operational by April 2019. (ii) To ensure this, Appellant provided Rs. 50 crore as an interest-free refundable security deposit. A clause in the agreement stipulated that if the hospital was not operational by the December 2018 deadline, the full deposit would become payable with 10% interest. The CD defaulted on its obligations as the project could not be completed on time. By July 2021, the CD was in default which lead to termination of the agreement. (iii) In view of the default, the CD filed an application under Section 10 of the IBC, 2016, seeking ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arty as a holding, subsidiary, or associate company of the CD. Later, during the course of legal arguments, the RP also cited Sections 5(24)(h), (j), and (l), which cover entities that exert control over the CD or its management. The RP argued that Kanoria Foundation controlled CD through SREI and TAIML, and further appellant was a subsidiary of Kanoria Foundation, it was deemed a related party. (viii) The appellant submitted a detailed reply on 22nd January 2022, disputing the RP's declaration. The Appellant argued that Kanoria Foundation, being a trust, could not be classified as a holding company under corporate law. Further, any alleged control by Kanoria Foundation over the CD had ceased when SREI entered CIRP on 6th October 2020. The appellant emphasized that it held no shares in Suasth Healthcare Foundation, had no voting rights, and exerted no control over the CD. Additionally, the Appellant pointed out that the resolution passed in the second CoC meeting in October 2021 had recognized appellant as a legitimate financial creditor. (ix) The RP however rejected the arguments made by the appellant in a letter dated 7th February 2022, reaffirming the decision to classify it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... crucial decisions, severely prejudicing its interests as a financial creditor. 4. The counsel for the appellant further submits that after the exclusion of SREI Infrastructure Finance Limited from the CoC, the appellant's voting share increased to 20.37% from an earlier 9.61%, on the strength of its admitted claim of Rs. 62.16 crores. The exclusion of the appellant from the CoC resulted in a significant reduction of its ability to influence the resolution process, despite the legitimate size of its claim. He submitted that the exclusion of the appellant from the CoC was unjustified and disproportionate, particularly given its substantial financial stake in the Corporate Debtor. 5. He further stated that the AA reasoned that the appellant is a "related party" of the Corporate Debtor, based on Section 5(24)(j) of the Insolvency and Bankruptcy Code, 2016 (IBC). This conclusion was drawn due to the purported connection between the appellant and Kanoria Foundation, which holds 99.9% of the appellant's shares. The AA opined that this ownership link established control over the Corporate Debtor, rendering the appellant a related party and warranting its exclusion from the CoC. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as controllers of a trust's assets. Therefore, the appellant's relationship with TAIML or the Corporate Debtor, even if tenuous, does not meet the threshold of control as required to be classified as a related party under Section 5(24)(h) and (j) of the IBC. 9. The counsel for the appellant submits that the appellant's exclusion from the CoC has caused significant prejudice, both procedurally and substantively. Procedurally, the appellant was deprived of its right to participate in the decision- making process, including deliberations on the Resolution Plan. This exclusion mirrors the denial of notice to a creditor, which was deemed a fatal procedural defect by the Hon'ble Supreme Court in Greater Noida Industrial Development Authority v. Prabhjit Singh Soni & Anr., 2024 (6) SCC 767. In that case, the Supreme Court set aside the resolution plan for failing to include a financial creditor who had been excluded without justification, similar to the present scenario. 10. He further argued that on a substantive level, the exclusion from the CoC deprived the appellant of any meaningful opportunity to have its claims considered in the Resolution Plan, resulting in its financial cl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Infrastructure holds 50.76% in Trinity Alternate Investment Managers Lad ("TAIML") * TAIMI, is the Settlor Contributor/ Manager of a trust called SREI Alternate Investment Trust (SAIT) * SAIT in turn holds 99.99% each in SIPL and PCPL thereby clearly establishing the Appellant as a 'Related Party' of the CD. 15. He submitted that the AA passed the Admission Order against the CD on 31.08.2021. The Interim Resolution Professional was replaced by the present RP in the 2th COC Meeting dated 8.10.2021. The COC Members inquired from the present RP with regard to the Related Party status. 16. At this stage, the COC consisted of (a) Yes Bank-19.87% (b) Axis Bank-19.45% (c) SREI-51.07% (d) Hari Vitthal Mission -19.61% 17. The RP conducted a comprehensive verification exercise to inquire about the Related Party status of the Appellant. The RP sought information from the Appellant to which he did not receive any response/ reply. In this regard the counsel invited attention to RP's email dated 31.12.2021 and RP's Letter dated 31.12.2021. 18. The RP, vide his letter dated 11.01.2022 concluded that the Appellant is a 'Related Party' and conseque ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... also deserves to be rejected. He cited this Tribunal Judgment in the case of SREI Infrastructure Finance Ltd. v. Shri Ashish Chhawchharia (Company Appeal (AT)(Ins) No. 1407 of 2019 which has already dealt with the same issue and held in favour of the holding company of the "Investment Manager" of the Trust would be a related party to the companies held by the Trust. 24. The counsel stated that the Resolution Plan of CD was placed before the COC in the 15th COC Meeting dated 21.09.2022. The COC approved the Resolution Plan on 6.10.2022 with 100% majority. Consequently, IA 1381/KB/2022 was filed by the RP under Section 30(6) read with Section 31 of IBC, which was approved by the Ld. NCLT on 18.12.2023. The Successful Resolution Applicant, which is a consortium of Nishkala Healthcare Pvt Ltd and Ujin Pharma Chem, has already implemented the Plan as on 24.07.2024. Even if the Appellant was not to be disqualified as a Related Party, it would have held approximately 19.61% voting rights in the COC and it would not have been in the position to determine the Successful Resolution Applicant. 25. In the end, the counsel submitted that there is no merit in the instant appeal and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... i-tier shareholding structure establishes a clear chain of control from the Kanoria Foundation down to the Corporate Debtor, with the Appellant falling within this chain of control. (b) Chain of Control Through Contractual Arrangements (i) Further, the counsel for Respondent No. 2 submits that in addition to the shareholding control, a chain of control through contractual arrangements also exists between the Appellant and the Corporate Debtor. The chain of control from TAIML to the CD by Contractual Arrangement can also be established. (ii) TAIML is the settlor and contributor of SREI ALternative Investment Trust ("SAIT") (a trust settled by Trinity Alternative Investment Managers Limited, erstwhile SREI Venture Capital Limited and SREI Alternative Investment Managers Limited) in terms of the Trust Deed dated 29.08.2012 ("Trust Deed") and has the right to appoint and remove trustees in SAIT as is evident from Clauses 4.2, 5.5.2 and 5.5.2.3 of the Trust Deed. (iii)Further, TAIML is also the investment manager of SAIT and in terms of Clause 8 and Clause 26,28,29 in Schedule A of the Amended Investment Agreement dated 10.3.2012 ("Amended Investment Agreement") has the right t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly established from Kanoria Foundation to the Corporate Debtor. 29. In view thereof, the Appellant is a subsidiary of a holding company i.e. Kanoria Foundation, of which the Corporate Debtor is a subsidiary, attracting the provision of Section 5(24)(i) of the Code and warranting classification of the Appellant as a 'Related Party' in terms thereof. Kanoria Foundation is the entity on whose advice, directions or instructions, both the Appellant as well as the Corporate Debtor are accustomed to act and thus, Section 5(24)(h) of the Code clearly stands attracted. 30. The counsel stated that in view of the aforesaid shareholding pattern as well as contractual arrangements, it is evident that the Kanoria Foundation through a series of layered sequencing as elaborated in the table extracted in the Impugned Order (calculated on the basis of the shareholding percentage of the each of the entities, starting from Kanoria Foundation, in the subsequent entity) exercises approx. 31% control over the Corporate Debtor. Accordingly, the threshold of 20% of the voting rights in the corporate debtor stipulated under Section 5(24)(j) of the Code is attracted in the present case. 31. Lastly, the co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ant has also raised a question regarding the powers of RP to decide about the 'related party'. 36. Appellant has further raised a question about Kanoria Foundation which is a trust being held on par with a holding company and has stated that the same is not in accordance with Section 5(24)(i) of the Code and therefore such finding is liable to be set aside by this Tribunal. 37. We first examine whether the RP's competence to decide whether a party in CIRP proceeding is related party or not. The Section 21 of the Code gives the procedure as to how the committee of creditors would be constituted. The relevant sub-Sections (1) & (2) of the Section 21 are reproduced below: "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 '[financial creditor or the authorised representative of the financial creditor referred to in sub-section (6) or sub-section (6-A) or sub- sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arding Section 5(24)(h), it is seen that Kanoria Foundation at the apex of the organogram shown earlier held 99.9% shares of appellant (Hari Vitthal Mission) which is a Section 8 company. Similarly, Kanoria Foundation controls the CD through a chain of entities. The shareholding of Kanoria Foundation in the CD is approximately 31%. It has also been seen that Dr. Sanjeev Kanoria (beneficiary of the Kanoria Foundation) was the director of the Corporate Debtor till April 20, 2019 and Mr. Hari Prasad Kanoria (trustee of the Kanoria Foundation) was a director at the Corporate Debtor till November 28, 2019. The AA found that Suasth Healthcare Foundation had historically been accustomed to acting on the advice, directions, and instructions of Kanoria Foundation. This satisfied the conditions under Section 5(24)(h) of the IBC, which deals with entities influencing or advising the management of the Corporate Debtor. We agree with the findings of the AA that even though Hari Vitthal Mission did not directly own or control shares in the Corporate Debtor, the substantial influence exercised by Kanoria Foundation as holding trust over both the appellant and the Corporate Debtor's management wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ection between the Corporate Debtor and Hari Vitthal Mission, with both entities being subsidiaries or affiliates under the broader umbrella of Kanoria Foundation. Given this relationship, Hari Vitthal Mission is not only indirectly linked to the Corporate Debtor, but is effectively part of the same corporate group. Therefore, under Section 5(24)(i), Hari Vitthal Mission qualifies as a related party by virtue of its position as a subsidiary of Kanoria Foundation, the holding company/trust that controls the Corporate Debtor. 47. The appellant has placed reliance on Hon'ble Supreme Court Judgment in W.O. Holdsworth & Ors Vs. The State of Uttar Pradesh (1958 (1) SCR 296) to assert that, like trustees in Holdsworth, they do not control the Corporate Debtor (Suasth Healthcare Foundation), but simply manage the funds for charitable purposes. Thus, the appellant argues they should not be classified as a "related party" under the Insolvency and Bankruptcy Code (IBC). In Holdsworth, the trustees were managing agricultural income for the benefit of beneficiaries without exercising control over the property itself. The relationship was purely fiduciary, where the trustees' held ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... investment / shareholder agreements with the Portfolio Companies; (b) the Investment Manager shall require each Portfolio Company to provide quarterly reports of operating results, financial position and marketing prospects, as well as audited annual statement of accounts from reputable auditing firms; And (c) the investment manager shall ensure that the portfolio Companies take all secretarial steps including issue of share certificates, appointment of nominee non-executive directors, amendment of articles of association. etc. to give full effect and protection to the rights of the Scheme. Schedule A- Clause 26 : To manage Portfolio Investments by doing or causing to be done all such acts or things as may be necessary to mobilise, invest (according to the decision of the Investment Committee), manage and to collect and receive by installments or otherwise all monies due to the Trust. Schedule A- Clause 28 : To exercise all the rights, powers and privileges of shareholders, capital participants, debenture holders, bondholders and other security holders in such Portfolio Company. Schedule A- Clause 29 : To nominate or get appointed directors on the board of directors ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oard resolution in Parmeshwari Prasad Gupta (supra), where a resolution was passed without notifying a director. We have seen that in Parmeshwari Prasad Gupta, the Supreme Court dealt with a case where a board resolution was invalidated, because a director was not notified, violating the principle of due process. The case focused on the importance of giving notice to all relevant parties before taking decisions that affect their rights. However, in our case, the exclusion from the COC is not a result of a failure to provide notice or a lack of due process. Instead, it is a consequence of a substantive legal finding that the appellant is a related party under Section 5(24) of the IBC and is therefore excluded from the CoC meeting. 55. Thereafter, the appellant has cited the Hon'ble SC's Judgement in Committee of Creditors of Essar Steel vs. Satish Kumar Gupta & Ors (2020 (8) SCC 531) to argue that delays in the disposal of their appeal should not result in their exclusion being upheld, invoking the principle of "Actus Curiae Neminem Gravabit" (an act of the court shall prejudice no one). They suggest that their exclusion from the COC, which was part of the ongoing insolvency proces ..... X X X X Extracts X X X X X X X X Extracts X X X X
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