Related Party Status Established Through Agreement Cannot Be Changed By Sending Termination Notice Against Terms Of Agreement: NCLAT

The National Company Law Appellate Tribunal (NCLAT) New Delhi bench of Justice Rakesh Kumar Jain (Judicial Member) and Mr. Naresh Salecha (Technical Member) has held that related party status established through an agreement under Section 5(24) of the Insolvency and Bankruptcy Code, 2016 (Code) cannot be changed by sending a termination notice in contravention of expressed terms of the agreement. Brief Facts: The Corporate Debtor invited the manufacturers to set up their units at mega food park (food park) and the manufacturers are promised basic utilities such as power, steam, water, refrigeration, cold storage etc. Schreiber Dynamix Dairies Pvt. Ltd. (Appellant) executed a lease deed dated 06.11.2015 with the Corporate Debtor which was subsequently registered on 09.03.2016, pursuant to which the Corporate Debtor leased a part of its food park on a long-term lease basis to the Appellant. The lease deed was effective for a period of 20 years with a lock in period of 10 years expiring on 28.02.2026. The Appellant and the Corporate Debtor also entered into a Utility Services and Common Facilities Agreement (Utility Services Agreement) on 08.02.2016. As per this agreement, the Corporate Debtor was to provide uninterrupted and timely provisions of various utilities including but not limited to warehousing, steam, refrigeration, soft water, cold storage etc. The Appellant also agreed to invest money for modifying the utility assets, pre-operative expenses, working capital and accordingly entered into a Utility Operation and Management Agreement (UOMA) on 08.12.2017 as per which the Appellant got a right to operate and manage some of the utility assets and to appoint a third party for it. The UOMA also provided for a profit-sharing mechanism, whereby the surplus generated from the utility operations were to be shared with the Appellant and the Corporate Debtor in an agreed ratio. The Small Industries Development Bank of India (Financial Creditor) filed an application under Section 7 of the Insolvency and Bankruptcy Code, 2016 (in short 'Code') against the Corporate Debtor which was admitted on 28.02.2019 and the Respondent was appointed as the Resolution Professional. On 26.04.2019 the Appellant sent email to the Respondent asking him to admit the claim of the Appellant and include the Appellant as a member of the Committee of Creditors (CoC) but it received an email dated 06.05.2019 in which it was alleged that the Appellant is a related party of the Corporate Debtor under Section 5(24)(m)(iv) of the Code, therefore, it is not included in the CoC. The termination notice issued by the appellant was not accepted by the RP against which an Interlocutory Application (IA) was filed. The Tribunal by its order dismissed the IA filed by the Appellant. Hence, the present appeal. Contentions: The appellant submitted that the Tribunal has not identified the relevant sub-section of Section 5(24) on the basis of which the Appellant has been held to be a related party of the CD. It was also argued that the impugned order only mentions that the Appellant is the related party of the CD based on the terms and conditions of the UOMA but it failed to refer to any provision of the Code under which an investment in or profit sharing with the CD qualifies the Appellant as a related party. It was further contended that the Tribunal has committed an error in holding that the termination of the said agreement before the CIRP will not make any material change to the status of the Appellant who continues to be a related party of the CD even after the initiation of CIRP also. Lastly, it was submitted that the Tribunal has seriously erred in holding that the Appellant is a partner of the CD by virtue of UOMA, therefore, Section 5(24)(a) is not attracted. Per contra, the respondent submitted that clause XXI (b) of the UOMA provides that no amendment or waiver of any of the provisions of the agreement or annexures is binding unless made in writing. It was also argued that the fabricated document letter issued on 31.12.2018 which is alleged to be a notice, to show that the agreement was terminated by giving one month's notice, just to wriggle out of the related party relationship in view of the stringent provisions of the Code. It was also argued that appropriation of surplus income generated from the Utility assets (profit sharing) is an enough indicator that the Appellant was a related party of the Corporate Debtor. Observations: The Tribunal observed that the parties were bound by the terms and conditions of the UOMA in which it was categorically provided that for the purpose of terminating the agreement a notice of three months has to be given and the termination of notice on 31.12.2018 was issued for terminating the said agreement after a period of one month i.e. w.e.f 31.01.2019 instead of three months. ...

Related Party Status Established Through Agreement Cannot Be Changed By Sending Termination Notice Against Terms Of Agreement: NCLAT

Mohd Malik Chauhan

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