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

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 the COC and it would not have been in the position to determine the Successful Resolution Applicant.

Submission of Respondent No. 2

The appeal had been rendered infructuous due to the successful implementation of the Resolution Plan, which was approved by the COC. The Appellant has already received Rs. 10 lakhs as part of the Resolution Plan. Any interference with the impugned order would reopen the concluded CIRP, which would be contrary to the objective of the IBC.

The Appellant is a subsidiary of a holding company i.e. Kanoria Foundation, of which the Corporate Debtor is a subsidiary. Kanoria Foundation is the entity on whose advice, directions or instructions, both the Appellant as well as the Corporate Debtor were accustomed to act. Therefore, section 5 (24) (i) of IBC was attracted.

Any technical objections raised by the Appellant to state that (a) Section 5(24) cannot be applied to 'trusts' or (b) Kanoria Foundation may be a related party to the Corporate Debtor however that does not make the Appellant a related party, ought to be rejected on the basis that, (i) Section 5(24) ought to be given a purposive interpretation, keeping the overall intent of the said provision in mind, which has been introduced for the purpose of excluding a related party of the corporate debtor from the committee of creditors, to obviate conflicts of interests which are likely to arise in the event that a related party is allowed to become a part of the committee of creditors; and (ii) In SREI Infrastructure Finance Limited v. Ashish Chhawchharia, resolution professional of Odisha Slurry Pipeline Infrastructure Limited & Anr, it was held that the holding company of the “Investment Manager” of the Trust would be a related party to the companies held by the Trust.

Observations:

The Tribunal first examined whether the RP has the power to decide whether a party in CIRP proceeding is a related party or not. The Tribunal observed that the language of section 21 makes it clear that the related party of Corporate Debtor has no right of representation participation or voting in a meeting of CoC. The IRP has to decide about related party status of creditors of the CD for constituting the CoC as related parties cannot form part of CoC. After appointment of IRP as RP the matters relating to CoC continue to be handled by RP as he chairs the CoC meetings. Thus, it held that RP is empowered to decide on the related party status of a creditor.

The Tribunal further observed that the definition of "person" under Section 2(23) makes it clear that a trust is a person. 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).

The next issue before the court was whether the appellant was correctly determined as related party of the Corporate Debtor in terms of section 5(24). The Tribunal agreed with the findings of the NCLT that even though the Appellant did not directly own or control shares in the Corporate Debtor, the substantial influence exercised by Kanoria Foundation as holding trust over both the appellant and the Corporate Debtor's management was sufficient to establish a related party relationship.

According to section 5(24)(i), a related party may be any corporate entity that is a holding, subsidiary, or associate company of the corporate debtor, or a subsidiary of a holding company that the corporate debtor is also a subsidiary of, the tribunal stated. It held that Kanoria Foundation is the equivalent of the holding company, which owns 99.9% of the appellant. It noted that the appellant is subjected to the same ownership structures that connect it to Kanoria Foundation.

The Tribunal noted that the network of shareholding established a clear connection between the Corporate Debtor and Hari Vitthal Mission. Both entities were subsidiaries or affiliates of Kanoria Foundation. Given this connection, Hari Vitthal Mission was not only indirectly related to the Corporate Debtor, but also part of the same corporate group. The Tribunal held that the appellant is a related party under Section 5(24)(i) since it is a subsidiary of Kanoria Foundation, the holding company/trust that controls the Corporate Debtor.

The Tribunal referred to Phoenix Arc Private Limited v. Spade Financial Services Limited, wherein the Supreme court emphasized that related parties must be excluded from the CoC to maintain the integrity of the insolvency resolution process. The Tribunal classified the appellant as related party under section 5(24)(j) due to the substantial voting rights control held by Kanoria Foundation.

The Tribunal held that RP is empowered to decide about the status of a creditor as related party. It endorsed the findings of RP and NCLT where the appellant had been held as related party in terms of provisions of Section 5 (24) of the Code. The Tribunal dismissed the appeal.

Case Title: Hari Vitthal Mission vs. Ravi Sethia & Ors.

Case Number: Company Appeal (Ins) No. 1206 of 2022 & I.A. No. 3657, 3658, 3659 of 2022 & 4766 of 2023

For Appellant: Mr. Akshay Ringe, Ms. Megha Mukherjee & Mr. Dhananjay Gupta, Advocates.

For Respondents: Mr. Sunil Fernandes, Sr. Advocate, Mr. Deep Roy, Ms. Rajshree Chaudhary, Ms. Diksha Dadu, Mr. Rony O John & Mr. Dhaval Savla, Advocates for R1. Mr. Gopal Jain, Sr. Advocate, Mr. Raunak Dhillon, Ms. Isha Malik & Ms. Niharika Shukla, Advocates for R-2/ CoC.

Date of Judgment: 5.11.2024