NCLT Delhi Upholds Termination Of Related Party Agreements By Resolution Professional With Coc’s Consent

Background Facts

M/s Medirad Tech India Limited (“Corporate Debtor”) is the absolute owner of a Speciality Hospital named Hemalata Hospitals & Research Centre (“Hospital”).

In 2006, a Service Agreement dated was entered into between the Corporate Debtor and Hemalata Hospitals Limited (“Applicant”), whereby the Applicant agreed to manage and run the medical services in the Hospital. The Service Agreement provided for revenue sharing between the Applicant and the Corporate Debtor in the ratio of 15:85 respectively. Further, the Service Agreement could only be terminated upon mutual consent of the Parties.

In 2013, a Lease Agreement was entered into between the Corporate Debtor and Applicant, whereby the Corporate Debtor agreed to lease the Hospital, its equipment, furniture & fixture at an annual rent to Applicant. In 2014, the Lease Agreement was amended vide a Supplementary Agreement.

In 2021, the Corporate Debtor was admitted into the Corporate Insolvency Resolution Process (CIRP) by the NCLT. Resolution Plans were submitted by prospective Resolution Applicants for the Corporate Debtor. The Resolution Professional of the Corporate Debtor terminated the Service Agreement, Lease Agreement and Supplementary Agreement without seeking consent of the Applicant.

The Applicant filed an application before the NCLT seeking setting aside of the termination of Agreements done by the Resolution Professional.

The Resolution Professional submitted that admittedly the Applicant is a related party of the Corporate Debtor. Further, the prospective Resolution Applicants submitted plans over the condition that such related party Agreements need to be terminated. Hence, in the interest of the Corporate Debtor the Agreements were terminated.

Issue

Whether the Resolution Professional can continue the operation of Agreements that are related party transactions during the CIRP?

NCLT Verdict

The Bench placed reliance on Section 25 of IBC which lays down the duties of the Resolution Professional. It was observed that the duties do not contain any provision for dealing with the related party transaction. As per Section 28(1)(f) read with Section 28(3) of IBC, the “related party transactions” cannot be undertaken by the Resolution Professional during CIRP, without the knowledge and approval of Committee of Creditors (CoC) with 66% of votes.

The Bench observed that in 7^th CoC meeting the major concern of all prospective Resolution Applicants that their plans are conditional to the termination of the Service and Lease agreements. Accordingly, the Resolution Professional sought consent of the CoC for cancellation of the concerned agreements. The CoC conveyed its no objection to such termination.

The Bench held that the Resolution Professional had rightfully terminated the Service Agreement and Lease Agreement since the consent of CoC was ought for such termination.

“In a nutshell, in terms of Section 28(1)(f) read with Section 28(3) of IBC 2016, the “related party transactions” cannot be undertaken by the RP without the approval of the CoC with 66% of the votes. In the instant case, the CoC instead of giving approval to continue with “the related party transactions in terms of Lease Deed and Service Agreements” has given its consent to terminate those related party agreements, in its commercial wisdom. Hence, we find no illegality committed by the RP in terminating the Service Agreement dated 01.09.2006, the Lease Agreement dated 31.12.2013 along with Supplementary Agreement dated 01.01.2014.”

The application has been dismissed.

Case Title: India SME Asset Reconstruction Company Limited v M/s Medirad Tech India Limited

Case No.: Company Petition No. (IB)-1243(ND)/2018

Counsel For Applicant: Adv. Tishampati Sen, Adv. Shubhanshu Gupta, Adv. Kartik Pant

Counsel For Respondent: Adv. Meghna Rao

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