Resolution Professional Has Authority To Determine Creditor's Related Party Status: NCLAT

The NCLAT bench of Justice Rakesh Kumar Jain (Judicial Member), Mr. Naresh Salecha (Technical Member) and Mr. Indevar Pandey (Technical Member) has held that the Resolution Professional (RP) has the authority to determine the related party status of a creditor. The Tribunal also held that In all cases where the Corporate Debtor is controlled by a trust, the trust would fall under the category of a related party in section 5(24)(h) and (j) of the Insolvency and Bankruptcy Code, 2016 (IBC). Brief Facts: In October 2017, Suasth Healthcare Foundation (Corporate Debtor) approached Hari Vitthal Mission (Appellant) to raise financial assistance of Rs. 44.2 crore for the construction of a hospital for affordable healthcare. An agreement was signed on 10.10.2017 between Corporate Debtor and Appellant. The construction was to be completed by December 2018 and fully operational by April 2019. The Appellant provided Rs. 50 crore as an interest-free security deposit, refundable with 10% interest. The Corporate Debtor defaulted on its obligations as the project was not completed on time. The agreement was terminated. The Corporate Debtor filed an application under section 10 of the IBC to initiate voluntary insolvency resolution process. On 31.08.2021, the National Company Law Tribunal (NCLT), Kolkata, admitted the application, initiated Corporate Insolvency Resolution Process (CIRP) and appointed an Interim Resolution Professional (IRP). The Appellant filed a claim as financial creditor, which was accepted by IRP. The Appellant became a member of Committee of Creditors (CoC). On 31.12.2021, the RP notified the Appellant of its classification as a related party under section 5(24) of IBC due to its connection with Kanoria Foundation, which purportedly had indirect control over the Corporate Debtor through a series of entities, including SREI Infrastructure Finance Limited (SIFL) and Trinity Alternative Investment Managers Limited (TAIML). The RP excluded the Appellant from the CoC. Following this decision, appellant filed an I.A. before NCLT Kolkata on 19.04.2022 to quash the RP's decision and reinstate the Appellant as a member of the CoC. The Appellant argued that the RP had overstepped his authority by adjudicating the status of appellant as a related party. The Appellant further contended that the RP had failed to provide any concrete evidence supporting the claim that appellant was a related party. On 23.09.2022, the NCLT upheld the RP's decision, confirming the Appellant's related party status due to its connection with Kanoria Foundation resulting in its exclusion from the CoC. Aggrieved by this decision, the Appellant filed the appeal. Submissions: Submission of the Appellant: The classification of the Appellant as “related party” and exclusion unlawfully deprives it of participation rights in the resolution process and prejudices its interests as a financial creditor.The appellant is a public charitable trust, and its link to Kanoria Foundation does not translate into any form of control over the Corporate Debtor. Kanoria Foundation is a trust and not a company as defined under Section 2(46) of the Companies Act, 2013. Section 5(24)(i) of IBC would not be applicable as it pertains to relationships between holding and subsidiary companies.According to the well-established principles of trust law, only the trustees hold legal control over the trust 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.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 claim of Rs.62.16 crores being completely ignored. The CoC-approved Resolution Plan was unfairly passed without its 20.37% voting share input. Submissions of the Respondent No.1: The RP conducted a comprehensive verification exercise to inquire about the related party status of the Appellant to which the Appellant did not respond. The RP concluded that the Appellant is a 'Related Party' and consequently would have no right of representation and voting on the CoC in terms of Section 21(2) of IBC. Kanoria Foundation has 99.9% shares in the Appellant. Therefore the foundation was controlling the Appellant and Corporate Debtor. The “Chain" of control is not broken due to there being a trust in the middle (SREI Trust). In the case of SREI Infrastructure Finance Ltd. v. Shri Ashish Chhawchharia, the court 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. Even if the Appellant was not to be disqualified as a Related Party, it would have held approximately 19.61% voting rights in...

Resolution Professional Has Authority To Determine Creditor's Related Party Status: NCLAT

Tazeen Ahmed

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