Successful Resolution Applicant Can Seek Termination Of Related Party Contracts Via Clauses In Resolution Plan: NCLT Delhi

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.

In the meanwhile, the CoC had approved a resolution plan and a Successful Resolution Applicant (“SRA”) had emerged. The Resolution Professional had filed an application before the NCLT seeking approval of the SRA’s plan. The SRA in its plan had sought termination of the Service and Lease Agreements.

Issue

Whether, on approval of the Resolution Plan, the SRA is empowered to terminate the “related party contracts/Agreements?

Relevant Law

Regulation 39(6) of IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016

“39. Approval of resolution plan.

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6. A provision in a resolution plan which would otherwise require the consent of the members or partners of the corporate debtor, as the case may be, under the terms of the constitutional documents of the corporate debtor, shareholders’ agreement, joint venture agreement or other document of a similar nature, shall take effect notwithstanding that such consent has not been obtained.”

NCLT Verdict

The Bench took note of Regulation 39(6) of IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, which states that a clause in resolution plan, which would otherwise require consent of members/partners of Corporate Debtor, shall take effect even when no such consent has been obtained.

Reliance was placed on the Supreme Court judgment in State Bank of India v Bhushan Steel Limited, wherein it was held as under:

“There is no scope for argument left that shareholder, or parties to joint venture agreement or anyone holding similar document need to accord sanction in view of the provisions of Regulation 39(6) of the CIRP Regulations. Regulation 39 (6) clarifies that the resolution plan as approved by the CoC must take effect notwithstanding the requirement of consent of the members or partners of the Corporate Debtor under the terms of the constitutional documents of the Corporate Debtor, shareholders' agreement, joint venture agreement or other document of a similar nature.”

Further reliance was placed on the Supreme Court judgment in IDBI Bank Vs. Jaypee Infratech Limited, wherein it was held that the Successful Resolution Applicant can legally inculcate a clause in its resolution plan to seek termination of the related party contracts of the Corporate Debtor.

The Bench held that the aforementioned Supreme Court judgments make it evident that the Related Party Contract/Agreement can be sought to be terminated through the relevant clauses in the Resolution Plan.

“In view of the Judgement in “IDBI Bank Vs. Jaypee Infratech Limited” (2023) ibclaw.in 91 NCLT and “State Bank of India Vs. Bhushan Steel Limited” dated, (2018) ibclaw.in 274 NCLT, dated 15.05.2018, it is evident that the Related Party Contract/Agreement can be sought to be terminated via the relevant Clauses in the Resolution Plan.”

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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