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IBC

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

LIVELAW NEWS NETWORK
29 May 2022 2:51 PM GMT
Split Verdict Of NCLT, Hyderabad Bench On The Question Of Related Party, Issue Referred To President Of The Principal Bench
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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 the financial debt by JC Flowers) and JC Flowers are part of the same group of companies having common directors. All entities including Jindal Saw, which is one of the PRAs are having inter-corporate investments and they share common email addresses. The registered offices and Books of Accounts and papers of the companies, including Jindal Saw are all maintained by Jindal Centre. Moreover, the spouse of the owner of Siddheshwari is one of the Directors of Jindal Saw/ R3.

It was also contended that the contract for carrying out maintenance works of the CD was granted to Jindal Saw for Rs. 266 Crores, which is also related party to the Sole member of CoC.

The two-member bench of the NCLT delivered a split verdict on whether the parties are related parties within the ambit of the IBC and whether the Tribunal has the power to pass directions u/s 60(5) when the resolution plan has not yet been approved by the CoC.

The Tribunal framed 3 issues for consideration-

  1. Whether JC Flowers/ R2 can be directed to disclose all information as to the funding it had received for acquiring Financial Debt of the CD/ SIL by way of assignment under the SARFAESI Act?
  2. Whether the Applicant has locus standi to be appointed as an observer in the meetings of the CoC of the Corporate Debtor?
  3. Whether CoC be restrained from considering the resolution plan of the 3
    rd
    Respondent, prospective resolution applicant, which has already been submitted by the RP to the CoC?

Decision Of Venkata Ramakrishna Badarinath Nandula, Judicial Member

Whether JC Flowers/ R2 can be directed to disclose all information as to the funding it had received for acquiring Financial Debt of the CD/ SIL by way of assignment under the SARFAESI Act?

The Tribunal observed that there are no specific provisions under the IBC which empower an Adjudicating Authority, i.e. NCLT to consider questions relating to assignment of debt under the SARFAESI Act. Thus, it proceeded to consider whether the Tribunal, in its inherent or residuary powers under IBC or NCLT Rules can consider the same or not.

For this, the Tribunal relied on the decision of the Punjab & Haryana HC in M/s. Rita Machine (India) Ltd. v. Debt Recovery Appellate Tribunal & Ors., and held that when the legal position is that even a defaulted borrower whose debt has been assigned cannot challenge the same before a Tribunal or Court, a 3rd party like the Applicant cannot demand details of the funding for purchase of the debt by the assignee.

It also relied on the decision of the SC in Tata Consultancy Services Ltd. v. Vishal Ghisulal Jain, Resolution Professional, wherein the SC held that the NCLT cannot exercise its jurisdiction over matters dehors the insolvency proceedings. Such matters fall outside the realm of the IBC and that any other interpretation of Section 60(5)(c) would be in contradiction of the judgment of the SC in Satish Kumar Gupta.

The Tribunal concluded that assignment of a debt by the Banker or a Financial Institution would fall outside the realm of the IBC. Hence, the Applicant is not entitled to ask for details as to funding in respect if the purchase of debt of the Corporate Debtor by way of assignment under the SARFAESI Act.

Whether The Applicant Has Locus Standi To Be Appointed As An Observer In The Meetings Of The COC Of The Corporate Debtor?

The Applicant contended that in the present case, after the debt was assigned to JC Flowers, the entire debt of the CD was owed to it, which was the sole Asset Reconstruction Company. It thus became the sole member of the Committee of Creditors of the CD. The Applicant contended that when the CoC is constituted by one Financial Creditor, it would be unlikely to maintain complete fairness in its dealings with the Resolution Applicant, CD and the Creditors. It relied on the Parliamentary Debates on the Amendment Act in the 16th Lok Sabha Session wherein it was observed that extreme power to CoC will result in gross abuse, massive corruption, favouritism and nepotism.

Noting the law as laid down in Section 24(3) of the Code, which requires the Resolution Professional to give notice of meeting of the CoC to those Operational Creditors or their representatives whose aggregate dues are not less than 10% of the debt, the Tribunal observed that in the present case, the debt owed to the Applicant amounted to much less than 10% of the total debts of the CD and hence, it is not even entitled to receive notice of the meetings of Co.

Since the Applicant is not even qualified to be a member of the CoC, it is highly preposterous to seek entry into the meetings of the CoC in any capacity, much less as an observer, and rejected this relief.

Whether COC Be Restrained From Considering The Resolution Plan Of The Jindal Saw, Prospective Resolution Applicant, Which Has Already Been Submitted By The RP To The COC?

The Applicant contended that choosing Jindal Saw, R3 as the contractor for carrying out repair and maintenance work was done because Jindal Saw and Siddeshwari, a company which funded the purchase of the financial debt by JC Flowers, were related parties to JC Flower, which was the sole member of the CoC. Thus, there was an overlap of members and management between the Financial Creditor/ JC, Prospective Resolution Applicant, Jindal Saw.

Pre-Mature Application

The Tribunal observed that the application filed by the Applicant is pre-mature as none of the resolution plans had been approved by the CoC. The applicant has proceeded on the presumption that the CoC will approve the resolution plan of Jindal Saw, which is a related party.

Observing that the nature of interim relief is such that it will survive only till the disposal of the interlocutory application or till the main proceeding in which the IA was filed, it is common to also pray for a similar relief in the main prayer.

It was held that since in the present case, the Applicant did not pray for the relief of restraining JC Flowers from considering the resolution plan of Jindal Saw/ R3 as the main relief, in the absence of a main relief, the interim relief cannot be granted in this application at its final disposal.

If the Tribunal bars the CoC from 'considering' the resolution plan of Jindal Saw, it would even bar the Committee from rejecting the plan, thus the prayer itself is self-defeating.

Judicial Review At Pre-Approval Stage

The Tribunal noted that the application filed by the Applicant is premature, and in case the plan of Jindal Saw/ R3 is accepted by the CoC, the same can be challenged u/s 31 of the IBC.

Consideration and approval of the resolution plan is within the commercial wisdom of the CoC and the scope of judicial review is limited to the four corners of Section 30(2). If the AA interferes at the pre-approval stage of the Resolution Plan, it would result in enlargement of the limited power of Judicial Review u/s 30(2) and would also amount to judicial creation of a procedural or substantive remedy which is not envisaged by the statute.

Related Party

The Applicant contended that the resolution plan by Jindal Saw/R3 would be hit by Section 29A r/w 5(24). The Tribunal held that this plea would be within the jurisdiction of the CoC while voting for the plan and interference by the AA would amount to usurpation of power which is not available under the Code.

The Applicant can exercise its remedy u/s 31, if the plan is approved by the CoC.

It also rejected the contention of the Applicant that 'essential technical information' which will be provided to Jindal Saw during the execution of the repairs and maintenance contract will be used to its advantage and held that the information provided during the term of the contract is not essential technical information.

Lifting Of Corporate Veil

The Tribunal also rejected the prayer of the Applicant seeking lifting of the corporate veil and observed that merely because Jindal Saw and JC Flowers are related, it would not mean that the corporate veil would have to be lifted, relying on the SC decision in Balwant Rai Saluja v. Air India Ltd.

Exercise Of Jurisdiction U/S 60(5)

It was held that the passing of a restraint order on the CoC at this stage would defeat the very object and purpose of the Code and will jeopardize the time bound process under the Code.

Decision Of Shri Veera Brahma Rao Arekapudi, Technical Member

Shri Veera Bhrama Rao Arekapudi concurred with the decision of the Judicial Member, Venkata Ramakrishna Badarinath Nandula on prayer (i) and (ii). On prayer (iv) however, a differing opinion was passed by the Technical Member.

Findings

The Technical Member came to a finding that prayer (iv) of the Applicant has merit and invoked the power u/s 60(5) of the Code and directed the CoC to not consider the resolution plan submitted by Jindal Saw/R3.

The Technical Member referred the question-

'Whether CoC be restrained from considering the resolution plan of the 3rd Respondent, prospective resolution applicant, which has already been submitted by the RP to the CoC?'

to the Hon'ble President of the Bench u/s 419(5) of the Companies Act, 2013.

The Technical Member in his opinion, agreed with the contention raised by the Applicant that to mobilize resources to purchase the debt owed by the Corporate Debtor, it utilized various entities which had common directors, common registered office and common email address. The Prospective Resolution Applicant/Jindal Saw is also one of the group companies which has common directors and is part of the group companies of the sole Financial Creditor- JC Flowers.

It was held that the Resolution Professional had delegated his roles and responsibilities u/s 25 of the Code by firstly, vesting the entire control and management in the hands of Jindal Saw and secondly, by not allowing Section 29A eligibility criteria, meticulously. The plan was thus hit by Section 5(24)(m)(iv) and Section 5(24)(b). The Resolution Professional had vested "de facto" control of the Corporate Debtor in Jindal Saw, who is also a prospective resolution applicant.

Since Jindal Saw would get access to all technical information regarding the Corporate Debtor, it would be at an added advantage.

The CoC was directed to consider plans submitted by PRAs other than Jindal Saw, as it was a related party to the Financial Creditor.

Case Title: Trimex Industries Pvt. Ltd. v. M/s. Sathavahana Ispat Ltd.

Counsel for Applicant: Shri Arvind Pandiyan, Senior Advocate

Counsel for Respondents: Shri Arun Kathpalia, Senior Advocate assisted by Shri Shashank Agarwal for R1, Shri Ramji Srinivasan, Senior Advocate for R2 , Shri S. Niranjan Reddy, Senior Advocate for R3

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