Split Verdict Of NCLT, Hyderabad Bench On The Question Of Related Party, Issue Referred To President Of The Principal Bench

In a split verdict, a 2-judge Bench of NCLT, Hyderabad in the matter of Trimex Industries Pvt. Ltd. v. M/s. Sathavahana Ispat Ltd. has referred to the President of the Principal Bench the question of – whether in an application filed by an Operational Creditor u/s 60(5) of the Code, the CoC can be barred from considering the resolution plan of a Prospective Resolution Applicant (PRA), when the same has not received approval of the CoC on the ground that the PRA and sole member of CoC are related parties. The application was filed by Trimex Industries Pvt. Ltd., which is an Operational Creditor (OC) of the Corporate Debtor, Sathavahana Ispat Ltd. alleging that due to the sole-member constituted CoC/JC Flowers Asset Reconstruction Company to whom the CD owed the entire financial debt after its assignment and the Jindal Saws, which is one of the PRAs, being related parties, the CoC must be restrained from considering any resolution plan which was proposed by Jindal Saws. Allowing the CoC to consider the resolution plan proposed by its related party will have an effect on the fairness of the CIRP and will be detrimental to the interest of the Applicant/ OC. Thus, the CoC must be directed to consider the resolution plan proposed by PRAs other than Jindal Saws. In its application, the OC sought the following reliefs- Disclosure of information from the FC regarding the sources of funding it received towards and for the purpose of receiving the assignment of the Financial Debt of the Corporate Debtor,It sought to be appointed as an observer of the Committee of Creditors of SIL, to ensure that the CoC functions in a transparent and fair manner,To restrain Jindal Saw/ R3, who is a related party to the sole member of CoC from submitting any resolution plan, and To restrain the CoC from considering any resolution plan of the CD, which is submitted by Jindal Saw/R3. The Judicial Member, Venkata Ramakrishna Badarinath Nandula rejected plea no. (iv) and held that the NCLT does not have the jurisdiction to exercise power u/s 60(5) of the Code to pass an order when a Resolution Plan has not been approved by the Committee of Creditors, as the same will amount to enlargement of the limited scope of jurisdiction that the Tribunal has u/s 30(2) and that such an application is pre-mature, as the resolution plan has not yet been approved. The Technical Member, Shri Veera Brahma Rao Arekapudi, while concurring on some issues, differed on the question of related party. He allowed the application u/s 60(5) and directed the CoC not to consider the resolution plan of the PRA as the entire process of CIRP is vitiated and collusion between the parties is writ large on the face of CIRP of the CD, as the PRA was a related party to the sole member of the CoC, JC Flower Asset Reconstruction Company, to whom, after assignment of debts, the Corporate Debtor owed all financial debts. Thus, at this stage, the application to pass an order is not premature. Factual Background The Corporate Debtor, Sathavahana Ispat Ltd. (SIL) defaulted in payments of its loans to its financial creditors- SBI, UBI and Canara Bank along with one NBFC along with its operational debts to various Operational Creditors, one of whom was the Applicant. JC Flowers Asset Reconstruction Company/FC was assigned all debts of the CD under a Swiss challenge auction, prior to the filing of the Section 9 application for initiation of CIRP. For the purpose of assignment of these loans, it utilized two sources for funding- one was 15% of the total value, which was issued by pledge of security receipts to Siddheshwari Tradex Pvt. Ltd. and second, of 85%, from alleged private investors, whose details are unknown. Thereafter, it assumed the position of the sole financial creditor of SIL/ Corporate Debtor, by assignment by 3 financial lenders- SBI, UBI and Canara Bank along with one NBFC. The primary contention of the Applicant/ OC was that since all the debts were acquired by the sole Asset Reconstruction Company, JC Flowers Asset Reconstruction Company Pvt./ R2, it became the sole member of the CoC, the CoC could not function in a manner to maintain complete fairness in the process. Due to the sole-member constituted CoC and PRA being related parties, it could result in a potential conflict of interest which would be detrimental to the interest of SIL as well as other Operational Creditors and thus the Applicant has prayed that the CoC be barred from considering any resolution plan put forth by Jindal Saw on the ground that JC Flowers and Jindal Saw are related parties. The resolution plan of Jindal Saw, which is a PRA, when placed before the CoC, will be accepted and this will have an effect on the fairness of the process. The relationship between the parties as alleged by the Applicant is that Siddheshwari Tradex Pvt. Ltd., (the entity which funded the purchase of ...

Split Verdict Of NCLT, Hyderabad Bench On The Question Of Related Party, Issue Referred To President Of The Principal Bench

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Split Verdict Of NCLT, Hyderabad Bench On The Question Of Related Party, Issue Referred To President Of The Principal Bench

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