Related Party Status Must Be Determined On When Insolvency Proceedings Commence, Not By Historical Facts: NCLT Ahmedabad

The National Company Law Tribunal, Ahmedabad bench of Mr. Shammi Khan (Judicial Member) and Mr. Sanjeev Kumar Sharma (Technical Member), held that related party status as per the Insolvency & Bankruptcy Code must be determined on the date of commencement of Insolvency Proceedings and not based on historical roles. Background Facts: The Corporate Debtor, Sebacic India Limited, was incorporated on 10.09.2007. Between 2011 and 2018, venture Capital Funds, Wayzata III India Ocean Pvt. Ltd. and India Nivesh Renaissance Fund, held significant shareholdings in this company. On 15.05.2024, the National Company Law Tribunal admitted a petition filed by Basil Enterprises, an Operational Creditor, under Section 9 of the Code and initiated insolvency proceedings against the Corporate Debtor. Thereafter, Mr. Manish Kumar Bhagat was appointed as the Interim Resolution Professional. The IRP issued a public announcement and invited claims from creditors. After verifying the claims received, he constituted a CoC comprising five financial creditors, and Sterling Auxiliaries Pvt. Ltd. held the largest voting share with 48.84%. Sterling claimed its status as a financial creditor based on a bridge loan of ₹16.73 crore provided in March 2023. The loan was given to settle corporate debtor's outstanding dues with the State Bank of India under a One-Time Settlement. Subsequently, Sterling Auxiliaries Pvt. Ltd. Filed an application, alleging that the respondents Tushar Patel and Vishnu Patel are related parties under Section 5(24) due to their historical roles as promoters, directors, shareholders, and guarantors, which disqualified them from CoC participation. Replying to this, Tushar Patel filed an application asserting that he ceased being a director in 2018 and held no shares by 2024, making him an unrelated party, as related party status is limited to present relationships unless divestment was mala fide.” Tushar Patel further alleged that Sterling was not a genuine financial creditor, he submitted that the bridge loan of Rs. 16.73 crores, was a cover for a takeover plan by Sterling to gain control of Corporate Debtor's assets and board. Due to these disputes, the first CoC meeting failed to reach the required 66% majority under Section 22(2) of the IBC to confirm the IRP as Resolution Professional (RP). The CoC members holding 51.16% voting share, voted in favour of continuing the IRP as the RP, while Sterling with a majority sharevoted against it. Thereafter, the IRP filed an application seeking the Tribunal's intervention to resolve the deadlock and confirm his appointment as the RP. Findings: The Tribunal observed that the bridge loan transaction, supported by the Loan Agreement, Board Resolution and Mortgage Deed, satisfied the definition of “financial debt” under Section 5(8) of the Code. In Phoenix ARC v. Spade Financial , the Supreme Court held that “Related party status must be determined in praesenti, not by historical associations unless there is clear mala fide divestment. Therefore, the Court noted that both the respondents, Tushar Patel and Vishnu Patel were neither directors nor shareholders of the Corporate Debtor when insolvency proceedings were commenced, hence were not disqualified from being part of Committee of Creditors. Since the CoC failed to secure the required 66% majority under Section 22(2), the Tribunal exercised its inherent powers to avoid delay in insolvency proceedings and confirmed the IRP as the RP. The Tribunal further clarified that “It is settled law that the IRP's role is limited to collation and verification of claims, not adjudication of complex disputes on related party status. The CoC was constituted correctly on the basis of the shareholding and directorship position as on the insolvency commencement date.” Thus, the Tribunal disposed of all the applications and directed that CIRP should proceed without obstruction and all parties shall extend full cooperation to the Resolution Professional. Case Title: Basil Enterprise V/s Sebacic India Limited Case Number: CP (IB)/53 (AHM)/ 2023 Judgement Date: 17.04.2025 For the Applicant: Mr. Nipun Singhvi, Adv. A.w. Mr. Mayur Jugtawat, Adv. for (for IA 1037 of 2024): Mr. Saurabh Soparkar, Sr. Adv, a.w. Mr.Siddharth K Gujarati, Adv. & Ms. DivyaShah, Adv. (in IA/1222 of 2024 : Mr. Nandish Chudgar, Adv. (in IA/1787 of 2024) For the Respondent: Mr. Turab Ali Kazmi, Adv. : Mr. Utkarsh Singh, Adv. : Mr. Hardik Kukreja, Adv. a.w. Mr.Himanshu Shah, Adv. Click Here To Read/Download The Order

Related Party Status Must Be Determined On When Insolvency Proceedings Commence, Not By Historical Facts: NCLT Ahmedabad

Mehak Aggarwal

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