Chintan Jhunjhunwala vs Mahesh Chand Gupta & Anr.

a. “Declaration that the constitution of the CoC of the CD by classifying the purported FC/ Avani Towers Private Limited as an Operational Creditor of the CD is patently illegal and is in absolute derogation of the provisions of the Code and Regulations framed thereunder;

b. Permanent injunction restraining the purported FC, Avani Towers Private Limited being a related party of the CD, from being inducted as a member of the CoC of the CD;

c. Direction be passed granting stay on the constitution of the Committee of Creditors (CoC) of the Corporate Debtor i.e., Energy Properties Private Limited;

d. Such further or other order or orders as to this Hon’ble Tribunal may deem fit and proper;

e. Interim Orders in terms of prayer (a) (b) and (c);

f. Ad interim orders in terms of prayer (a), (b) and (c);

g. Receiver;

h. Cost.”

“8.1

Refundable Deposit: The Developer will keep in deposit with Owner a sum of Rs. 12,00,00,000/- (Rupees twelve crore) (hereinafter referred to as the Security Deposit) which will not carry interest and will be payable & refundable in the manner as would appear from the Part-I of the Third Schedule hereunder written. The Developer as on date has already paid Rs. 7,86,83,108/- (Rupees seven crores eighty-six lac eighty there thousand one hundred eight). The said sum of Rs. 12,00,00,000/- (Rupees Twelve crore) agreed to be paid by the Developer will be treated as the Security Deposit. However, any further sum, subject to a maximum of Rs. 3,00,00,000/- (Rupees three crore), if advanced by Developer to Owner, shall form part of Security Deposit and shall carry interest at agreed rate of 18% per annum compounded and payable quarterly.”

“55.

The two main issues that arise for consideration are as follows: -

i.

Whether a security in a Development Agreement as given under the circumstances of the case can be termed as an Operational debt?

ii.

Whether the bar of related party attached to a person or to the nature of the debt?”

[...]

57.

Issue No.1 – Security deposit as Operational debt ?

58.

Elaborate submissions were made by Ld. Sr. Adv. Mr. Joy Saha on the matter (supra). It has been inter-alia contended that the ratio of the judgement of Hon’ble NCLAT in Harendra Singh Khokhar is not applicable to the present case on the plea that in the instant case the Development agreement was signed and therefore the issue is that of an unadjudicated contractual claim, as against the cited case where the development agreement was not even signed.

59.

In this regard reference need to be made to Para 14 of the said judgment that was placed by Ld. Sr. Counsel for the applicant which records that the payment which was made by the Operational Creditor was in contemplation of Development Agreement. It is therefore simple to deduce that when such a transaction is made towards even a Contemplated Development Agreement, is construed as an operational debt, then how a different treatment can be meted out to an identical transaction which is made in pursuance of an already concluded Developmental Agreement. Since the payment of 12 crores has been made in terms of a development agreement which is for the developing a real estate project thus entailing a plethora of various goods and services, the nexus with the supply of goods and services as held in M/s Hitro Energy is clearly inferred herein. It is useful to cite following parts of the said judgment by Hon’ble Supreme Court of India.

43 First, Section 5(21) defines ‘operational debt’ as a “claim in respect of the provision of goods or services”. The operative requirement is that the claim must bear some nexus with a provision of goods or services, without specifying who is to be the supplier or receiver. Such an interpretation is also supported by the observations in the BLRC Report, which specifies that operational debt is in relation to operational requirements of an entity. Second, Section 8(1) of the IBC read with Rule 5(1) and Form 3 of the 2016 Application Rules makes it abundantly clear that an operational creditor can issue a notice in relation to an operational debt either through a demand notice or an invoice. As such, the presence of an invoice (for having supplied goods or services) is not a sine qua non, since a demand notice can also be issued on the basis of other documents which prove the existence of the debt. This is made even more clear by Regulation 7(2)(b)(i) and (ii) of the CIRP Regulations 2016 which provides an operational creditor, seeking to claim an operational debt in a CIRP, an option between relying on a contract for the supply of goods and services with the corporate debtor or an invoice demanding payment for the goods and services supplied to the corporate debtor. While the latter indicates that the operational creditor should have supplied goods or services to the corporate debtor, the former is broad enough to include all forms of contracts for the supply of goods and services between the operational creditor and corporate debtor, including ones where the operational creditor may have been the receiver of goods or services from the corporate debtor. Finally, the judgment of this Court in Pioneer Urban (supra), in comparing allottees in real estate projects to operational creditors, has noted that the latter do not receive any time value for their money as consideration but only provide it in exchange for goods or services. Indeed, the decision notes that “[e]xamples given of advance payments being made for turnkey projects and capital goods, where customisation and uniqueness of such goods are important by reason of which advance payments are made, are wholly inapposite as examples vis-à-vis advance payments made by allottees”. Hence, this leaves no doubt that a debt which arises out of advance payment made to a corporate debtor for supply of goods or services would be considered as an operational debt.

(Emphasis added)

60.

It is useful to cite here the relevant provision of the Developmental agreement

8.2

Refund of Refundable Deposit: The Security Deposit shall be refunded by the Owner to the Developer in the manner provided in the Part-II of the Third Schedule. The Owner agrees to ensure timely repayment of the said Refundable Deposit in the manner as hereinbefore stated and in the event of failure to refund an interest @ 18% p.a. compounded quarterly shall become payable calculated from the due date of refund.

8.3

Recovery of Security Deposit: In event the Owner fails to refund the said Security Deposit within 7 (seven) days of the same becoming due then and in that event Developer shall be entitled to acquire and/or buy back such portion of the Owner's Allocation for repayment of the said Security Deposit at a agreed rate of Rs.1,400/- (Rupees fourteen hundred) per sq.ft. The Owner's Allocation shall stand reduced by such square feet as may be derived by dividing the outstanding refund amount with the rate of Rs.1,400/- (Rupees fourteen hundred) per square feet. The remedy envisaged in the event of non-refunding of the Security deposit is that the same shall be adjusted against the buy back of the share of the Corporate Debtor in the developed project, which supports our contention that the provision of the said security deposit has a direct co-relation with the Goods and services involved in the agreement.

61.

From the above, it is clear that the said security deposit has been paid to the corporate debtor in terms of a contract which is the development agreement, which allows Avani to develop the project and in exchange of this permission the Corporate Debtor stands to receive constructed space, which is a culmination of many a goods and services to be rendered by Avani and hence we have no hesitation is terming the same as Operational debt.

62.

Issue No.2 - Whether Avani which is categorized as a related party can now be included in the CoC as an Operational Creditor? Having demonstrated per similia that the Security deposit is an Operational debt, we are left to consider whether a related party Operational Creditor is proscribed from its inclusion in the CoC.

63.

The contention raised by the suspended director and the applicant herein now is that M/s Avani Towers has been included in the CoC in violation of the statute. The crux of the applicant's objections, being that since Avani has been disallowed to sit on the CoC as a Financial Creditor by virtue of the fact that it was termed as a related party of the Corporate Debtor, therefore, they cannot be allowed to sit in the CoC by wearing a different hat, this time of an Operational Creditor thus circumventing the statute. In this regard the contention has been sought to be supported by judgment of Hon'ble Supreme Court in the cases of Periasamy (Para 86) and Phoenix (para 103) To start with, we focus on the ratio of Periasamyand, extract Para 86 of the judgement, which is as follows:

86.

As regards the question of discrimination between the claims of related party and unrelated party, the Appellate Tribunal, while placing reliance on the decision of this Court in Phoenix ARC (P) Ltd. v. Spade Financial Services Ltd. [Phoenix ARC (P) Ltd. v. Spade Financial Services Ltd., (2021) 3 SCC 475 : (2021) 2 SCC (Civ) 1] observed that "related party" was specifically treated as a class unto itself and was restricted from any involvement in the CIRP in any capacity (under Section 21 IBC) and disqualified from being a resolution applicant (under Section 29-A IBC), the underlying object being that involvement of a related party in the CIRP is seen as giving unfair benefit to the corporate debtor and in fact, the related party is treated in the same class as the corporate debtor itself. Therefore, according to the Appellate Tribunal, a "related party" could be treated as a separate class independent of an unrelated party and ought to be equated with the promoters as equity shareholders or as partners.

(Emphasis applied)

64.

As can be seen from the highlighted portion, the reason for proscribing the inclusion of a related party in the CoC is resoundingly clear that it is only to fulfill the underlying object that the involvement of a related party in the CIRP is seen as giving unfair benefit to the Corporate Debtor, as the related party is to be treated as a same class as the Corporate Debtor itself. However, in the present case the very fact that this inclusion is being challenged by one of the Directors of the Suspended board of the Corporate Debtor, is proof enough that the corporate debtor is not getting any benefit due to inclusion of Avani in the CoC. As such the ratio and logic of this judgement does not come to the aid of the applicant.

65.

In order to bolster his assertion, Ld. Sr. Counsel relied on the judgement of Hon'ble Supreme court in Pheonix matter wherein it has been held in para 103 that the exclusion under the first provision to Section 21(2) is related not to the debt itself but to the relationship existing between a related party financial creditor and the corporate debtor" The para ibid is extracted below:

"103.

Thus, it has been clarified that the exclusion under the first proviso to Section 21(2) is related not to the debt itself but to the relationship existing between a related party financial creditor and the corporate debtor. As such, the financial creditor who in praesenti is not a related party, would not be debarred from being a member of the CoC. However, in case where the related party financial creditor divests itself of its shareholding or ceases to become a related party in a business capacity with the sole intention of participating in the CoC and sabotage the CIRP, by diluting the vote share of other creditors or otherwise, it would be in keeping with the object and purpose of the first proviso to Section 21(2), to consider the former related party creditor, as one debarred under the first proviso."

66.

Thus clearly, the concern is that a related party by acquiring a seat in the CoC with the sole intention to dilute the share of the other creditors shall be kept out of CoC. If we keep the differentiation of Operational and Financial debt aside for the sake of understanding, here we have a case where the financial creditor-cum-Operational Creditor- cum developer and one of the parties to the litigation, has a voting share of 99.97% on the basis of claims received, and therefore, it is in its own interest not to sabotage the CIRP, particularly when the CIRP has been initiated at its own instance. As such the fact of the case at hand do not support the contention of the applicant.

67.

Much reliance has been placed by R-2 that Regulation 16 while envisaging a situation where there might be only the Operational Creditors eligible to form the Committee of Creditors, there is no mention of their exclusion as a related party. So to say that the Code does not foresee a situation where the Operational Creditors should also be excluded from being on the CoC for the reason of their being related parties [...]

68.

The regulation essentially clears the path to be followed in formation of the CoC when there is no eligible Financial Creditor and it aids the cause of the R2 that there is no condition envisaged like in the case in hand.

69.

Further Ld. Counsel for R2 has sought to differentiate between the Form B and Form C of the CIRP Regulations9 to buttress its logic that as per the scheme of the code the concept of 'related party' does not include an Operational Creditor. It is submitted that the following certificate at S.no. 7 of the Form C, i.e. the form for lodging of the claim by a Financial Creditor reads as under :

"I am eligible to join committee of creditors by virtue of proviso to section 21 (2) of the Code even though I am a related party of the corporate debtor."

It is contended that this certificate is conspicuous by its absence in Form B, which is for lodging of the claim by Operational Creditors. Ld. Counsel for Avani has submitted that this omission in Form B is not accidental, but is a conscious decision by the legislature, for if it was not so, there would not be any entity left that could drive the CIRP.

70.

Though both these assertions are not very convincing, but in view of the judgement cited by Ld. Counsel in the matter of Jinia Keotin and Ors. v. Kumar Sitaram Manjhi and Ors.(Supra) that the law has to be followed as existing and any effort to interpret the law would be re-writing the same, we also tend to agree with the submissions made by Ld. Counsel for Avani that the law as enacted does not envisage a situation where an Operational Creditor would be a related party.

71.

No documents in regard to the procedure adopted for categorizing Avani as a related party, save a minute of meeting of the First CoC have been given in the application and/or reply, however that does not restrain us from analyzing the situation in regard to Avani being categorised as a related party by the RP in regard to the Financial debt. Having said so, it is essential to examine the case in relation to the provisions of the code in regard to the related party. The same is defined in Section 5(24) of the code and is set out in the table hereunder for the ease of examination:

“MOU and Shareholders Agreement: The Owner in order to develop the said Land executed a Memorandum of Undertaking dated 24th January 2008 (MOU) with the Developer where in the broad terms and conditions of Development are provided therein and also executed a Shareholders Agreement of even date whereby 60% of the Shares of the Owner were transferred by the Board of which the Developer holds 40% of the Transferred Shares and 20% of the Transferred Shares are held by Shri R.L.Gaggar of 6,Old Post Office Street Kolkata as security till the completion of the Project.”

“2.

Admittedly, the Resolution Professional (“RP” in short) of the Corporate Debtor Energy Power Private Limited has classified Avani Towers Private Limited, the Respondent No. 2 as a “related party Financial Creditor” in the very 1st meeting of the Committee of Creditors (“CoC” in short). Therefore, Avani Towers should be debarred from having any right to representation, participation, or voting in a meeting of the CoC. Avani Towers Private Limited is disqualified from having a seat in the CoC as per the first proviso to Section 21(2) of the Code. The same related party Financial Creditor is now sought to be included in the CoC as an Operational Creditor allegedly holding 99.97% of the voting share of the CoC. Such classification to allow a disqualified related party Financial Creditor to have a seat in the CoC as an Operational Creditor allegedly holding a 99.97% voting share is indeed a subterfuge to evade the disqualification under Section 21(2) of the Code which has already accrued. Such conduct militates against the object and purpose of Section 21 of the Code.

3.

Admittedly and irrefutably, Avani Towers holds a 40% share in the Corporate Debtor as a security and hence, it has been categorised as a related party in terms of Section 5(24)(j) of the Code. So, Avani Towers as a related party creditor is disqualified from having a seat in the CoC.

4.

It is manifest from the language that Section 21 of the Code employs that the legislature intends to exclude a 'related party Financial Creditor' from the CoC and a Financial Creditor, who qualifies as a 'related party', is disqualified from having any right of representation, participation or voting in a meeting of the CoC. Thus, a CoC cannot be constituted with a 'related party Financial Creditor'. It would be against the object, reason and spirit of the Code to constitute a CoC with the same related party, who stands already rejected by the RP as a 'related party Financial Creditor'. The objective enshrined in Section 21 of the Code to not include a 'related party Financial Creditor' in the CoC in any capacity whatsoever, is to exclude such person/ entity from exerting any control over the CIRP. Therefore, to allow the same related party who stands already disqualified as a related party financial creditor, to gain an entry in the CoC as an Operational Creditor would defeat the very purpose of the disability that Section 21 of the Code seeks to attract.

5.

The language Section 21 of the Code is couched in, that provides a clear disqualification to the individual related party and not to the nature and character of debt such that such related party is kept out of CoC, and once such disqualification attaches to an entity; such entity cannot form a part of the CoC in any capacity, not even as an Operational Creditor. The disqualification that Section 21 of the Code attaches must be interpreted in its widest sense and a disqualified person cannot be permitted to gain entry indirectly by devising some other ingenious strategies.

[...]

“12.12

Section 5(24)(j) – Any Person Who Controls more than Twenty Percent of Voting Rights in the Corporate Debtor on Account of Ownership or a Voting Agreement

As per section 5(24)(j) of the IBC, any person, who controls more than 20% of the voting rights in the corporate debtor is a related party. It is irrelevant as to whether such 20% voting rights are enjoyed on account of ownership or on account of any voting agreement, whereby, despite owning lesser shares, voting rights are exercised in respect of a greater number or degree. Often, creditors, especially those subscribing to debentures in addition to debt, also subscribe to a small number of equity shares with differential voting rights, which give them greater voting share in the corporate debtor. In such cases, creditors who enjoy such voting rights which constitute more than 20% of the total voting share in the corporate debtor, shall be considered “related parties” under this clause.”

“59.

[...] Therefore, it is crystal clear from the chart as stated in para 43 of this Judgment that Appellant is being an holding company of the SAIML and contributor of SMAIT IGOF who is a majority shareholder of the Corporate Debtor is a related party which falls under the above Provision of Law. Further it is also evident that as per the SEBI investigation it is also revealed that the Appellant directly invested a sum of Rs.60.49 Crores in IGOF who is a majority shareholder of the Corporate Debtor. Further, the SMAIT IGOF who is an irrevocable determinate established by SAIML is a majority shareholder more than 20% also attracts sub section (j) of Sub Section 24. Further, sub clause (l) of Sub Section 24 of Section 5, states that any person who can control the composition of Board of Directors or corresponding governing body of the Corporate Debtor is a related party. In this regard, the word ‘control’ defined under sub section 27 of Section 2 of the Companies Act, 2013 defined as “control, shall include the right to appoint majority of the Directors or to control the management or policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of their shareholding or management rights or shareholders agreements or voting agreements or in any other manner”. This tribunal is of the view that the IGOF holding 69.81%, a majority shareholder of the Corporate Debtor can have the control includes the right to appoint a majority of Directors and can positively influence in any manner management or policy decisions of the Corporate Debtor.

60.

The Hon’ble Supreme Court in Arcelor Mittal India Pvt. Ltd. v Satish Kumar Gupta and Ors. Civil Appeal Nos.9402, 9405 of 2018 dated 04.10.2018 held at Paras 46, 47 as Under:

46.

“The expression ‘control’ is defined in Section 2(27) of the Companies Act, 2013 as follows:

“(27)

“control” shall include the right to appoint majority of the directors or to control the management or policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of their shareholding or management rights or shareholders agreements or voting agreements or in any other manner.”

47.

The expression “control” is therefore defined in two parts. The first part refers to de jure control which includes the right to appoint a majority of the directors of a company. The second part refers to de facto control. So long as a person or persons acting in concert, directly or indirectly, can positively influence in any manner, management or policy decisions, they could be said to be “in control”. A management decision is a decision to be taken as to how the corporate body is to be run in its day to day affairs. A policy decision would be a decision that would be beyond running day to day affairs i.e., long term decisions. So long as management or policy decisions can be, or are in fact, taken by virtue of shareholding, management rights, shareholders agreements, voting agreements or otherwise, control can be said to exist.

61.

The Learned Counsel for the Appellant vehemently contended that a shareholder is a completely different entity than that of the company. He submitted that the shareholder of the corporate Debtor hostile, namely IGOF which is a scheme of SMAIT trust controlled by M/s. Neelina Chatterjee “(earlier Mr. Raghunath Ghosh)”, its sole trustee who is an independent practicing lawyer. The appellant had no direct control over IGOF who is a shareholder of the Corporate Debtor and in the absence thereof it is incorrect to contend that the Appellant or its subsidiary i.e. SAIML control’s the Corporate Debtor.

62.

We refuse to accept the contention of the Learned Counsel for the Appellant for the aforesaid reasons that in all the three criteria as envisaged above, i.e. Sub Clause (h), (j) and (l) of Sub Section 24 of Section 5 have met the requirement and having found the relation between the Appellant and the Corporate Debtor as per the chart at para 43 hereinabove, we unequivocally hold that the Appellant is a ‘related party’ to the Corporate Debtor.

Further, Hon’ble NCLAT has observed that:

“69.

Further, the Learned Counsel relied upon the Judgment of the Hon’ble Supreme Court in the matter of Phoenix ARC Pvt. Ltd. v Spade Financial Services Ltd. and Ors. reported in 2021 SCC Online 51 at Paras 79, 80, 81, 82, 83, 85, 86, 89, 91, 92 and 95. Para 82 the Hon’ble Supreme Court held that the COC is comprised of Financial Creditor under Loan and Debt Contracts who have the right to vote on decisions and operational creditors such as employees, rental obligations, utilities, payments and trade credit, who can participate in the COC, but do not have the right to vote. The aim of the COC is to enable coordination between various creditors so as to ensure that the interest of all stakeholders is balanced and the value of the assets of the entity in financial distress is maximized.

70.

The Hon’ble Supreme Court held at para 55 to show that these objects under scope of the composition of COC guided by Section 21 of the IBC. The objects and purposes of the Code are best served when the CIRP is driven by external Creditors, so as to ensure that the COC is not sabotaged by related parties of the corporate Debtor.

71.

At para 86 it is held that since the IBC attempts to balance the interest of all stakeholders, such that some stakeholders are not able to benefit at the expense of others, related party financial creditors or disqualified from being represented, participating or voting in the COC, so as to prevent them from controlling the COC to unfairly benefit the corporate Debtors.

72.

The Learned Counsel for the Appellant relied upon the Judgment of the Hon’ble Supreme Court in the matter of Bacha F Guzdar Bombay v Commissioner of Income Tax, Bombay reported in AIR 1955 SC 74 at Para 7. The Learned Counsel for the Appellant contended that mere shareholder of a company namely the SMAIT IGOF of the Corporate Debtor, cannot have any interest in the property of the Company except a right to participate in the profits if and when the company decides to divide them. The legal position is that “the company is a juristic person and is distinct from the shareholders. It is the company which owns the property and not the shareholders. The dividend is a share of the profits declared by the company as liable to be distributed among the shareholders. Further it is well settled law that “the true position of a shareholder is that on buying shares an investor becomes entitled to participate in the profits of the company in which he holds the shares if and when the company declares, subject to the Articles of Association, that the profits or any portion thereof should be distributed by way of dividends among the shareholders. He has undoubtedly a further right to participate in the assets of the company which would be left over after winding up but not in the assets as a whole as Lord Anderson puts it.

73.

By relying upon the Judgment of the Hon’ble Supreme Court, the Learned Counsel for the Appellant tried to convince this Tribunal that mere being a shareholder of the Company cannot have any powers in the business and management of the Company. Section 152 of the Companies Act, 2013 prescribes for appointment of Directors. As per Sub Section 2 of Section 152 of the Companies Act, every Director shall be appointed by the Company in general meeting. In view of the above provision of law, the members of the company (shareholders) only shall have the power to appoint Directors in its general meeting. As stated supra, the shareholders have only the power to elect the Directors on the Board and to the Directors the company will function, meaning thereby and taking a perspective view, this Tribunal cannot accept the contention of the Learned Counsel for the Appellant that the shareholder cannot have any major role in the business and its administration. Apart from the above, this Tribunal intend to look into through the eyes of IBC, in view of the definitions and the Provisions of the I&B Code, 2016 which have over riding effect of all other Laws.

74.

With reference to the “related party” as defined in the I&B Code, 2016 it is also paramount with respect to the word ‘control’ defined under the Companies Act, 2013 as clarified by the Hon’ble Supreme Court. Therefore, the Judgments cited by the Learned Counsel for the Appellant are not applicable to the facts of the present case.”

24.

In this present case, Avani Towers Pvt. Ltd. had entered into a developmental agreement with the Energy properties Ltd., the Corporate Debtor herein. The term of the developmental agreement includes the provision of payment of an interest free “security deposit” of Rs. 12 Crore along with an additional deposit of Rs. 3 Crore which was later upgraded to Rs. 3.5 Crore which carries a compound interest per annum compounded and payable quarterly. Thus, it is evident from the development agreement that Avani Towers has the influence, control over, and substantial interest in the corporate debtor in respect of the development programme catered to by the Energy Properties (Corporate Debtor) under the development agreement. Thus, under no stretch of imagination, Avani Towers who holds 99.97% voting rights in the CoC of the Corporate Debtor Energy Properties Ltd. shall be entitled as well as allowed to have a seat and voting rights in the CoC, for if allowed, that would vitiate and influence the entire CIRP which shall defeat the legislative intent and objectives of a successful resolution of a defaulter under the I&B Code along with its relevant Regulations. Further, it is pertinent to bring out the fact that Avani Towers, the developer of Energy Properties was admitted into CIRP on 15.10.2019 by this Adjudicating Authority and the Resolution Plan of the Avani Towers has been approved by the CoC at its 29th meeting convened on 31.10.2023, by 100% voting shares, which is pending adjudication before us, while, Energy Properties, the owner has also been was admitted into CIRP on 20.03.2024 and the Hon’ble NCLAT has dismissed the appeal challenging the order of admission on 30.05.2024. Thus, both the owner as well as the developer are in CIRP and the developer who is a related party, seeks a seat in the CoC of the owner.

25.

Further, I find that in Arcom Medical v. B&A Health care in CP (IB) No. 243/HDB/2021, the Hyderabad Bench, NCLT has disallowed a related party operational creditor by directing the RP to reconstitute the CoC treating the Operational Creditor as a related party to the corporate debtor. The Bench would order that:

“In the result, this Application is allowed, by declaring that the 2nd Respondent is a related party to the corporate debtor and the 2nd respondent as operational creditor of the corporate debtor, Consequently, it is further ordered that 1st Respondent shall reconstitute the Committee of Creditors by treating the 2nd Respondent as operational creditor to the corporate debtor and submit his report to this Tribunal within two weeks from today. With these directions IA.No.196/2023 is allowed and disposed of.”

Conclusion:

26.

From the enumerations supra, I am of the considered opinion that:

- a) A creditor who stands already classified as a ‘related party Financial Creditor’ under Section 5(24) of the I&B Code, cannot represent the CoC, in any manner whatsoever. - b) The first proviso of Section 21(2) of the I&B Code shall also squarely apply to an Operational Creditor, and in the event, he is classified as a ‘related party’, he cannot get a seat in CoC on the ground that no other financial creditor of the corporate debtor is available. - c) To allow a ‘Related Party’ of the Corporate Debtor having 99.97% voting rights in the CoC, albeit an Operational Creditor, would mean having the Corporate Debtor itself in the CoC, which would violate the object of the Code.

27.

In view of the enumerations supra, I am of the considered opinion, that the Resolution Professional has committed a patent error in allotting a seat to Avani Towers Private Limited, having 40% shares in the Corporate Debtor Company, with 99.97% voting share in the CoC of the Corporate Debtor which is against the legislative intent as enshrined in Section 21(2) read with 5(24) of the Code. Hence, the prayer sought in this application, deserves to be allowed.

28.

Accordingly, I allow this application being I.A. (IB) No. 1299/KB/2024 and direct exclusion of Avani Towers Private Limited from the CoC and reconstitution of the CoC before proceeding any further with the CIRP.”

"The point of issue on which the Members have differed is whether a related party Financial Creditor who is disqualified to be a member of CoC by virtue of his disqualification in terms of any of the clauses of Section 5(24) of the IBC, 2016 getting attracted, can be allowed to gain an entry in the CoC as an Operational Creditor if he also happens to be an Operational Creditor."

SUBMISSIONS ADVANCED BY THE PARTIES: -

'6. According to the Appellants, the following points are required to be added in addition to and modification of the point of difference earlier framed by the Hon'ble Members of the Special Bench, 'National Company Law Tribunal' Kolkata, dated 11.02.2022 and they run to the following effect:

(A)

"Whether the Petition filed by Insilco Agents Limited & Ors. in C.P. No. 112/KB/2021, by August Agents Limited & Ors. in C.P. No. 113/KB/2021 and Laneseda Agents Limited in C.P. No. 114/KB/2021 in their alleged capacity as the Significant Beneficial Owners of the shares of the Respondent No.1 Company in each of the CPs, is at all maintainable before this Tribunal, in view of the fact that there is no registered shareholding of any of the Petitioner Companies in Respondent No.1 Company.

(B)

When in a Petition under Sections 241, 242 and 244 of the Companies Act, 2013 in respect of a subsidiary company, a company with 10.90% shares in the holding company, is a co-petitioner, in light of the decision of the Hon'ble Supreme Court in the case of Shankar Sundaram vs. Amalgamations Ltd. & Ors. (dated 27.03.2017 – Civil Appeals o. 4574-4575/2017), whether such a Petition can be said to be not maintainable?

(C)

When a Petition under Sections 241, 242 and 244 of the Companies Act, 2013 in respect of a subsidiary company is jointly filed by a company with 10.90% shares in the holding company with the Committee of Administrators Pendente Lite for the Estate of a deceased shareholder having control as a Significant Beneficial Owner under Section 90 of the Companies Act, 2013, read with SBO Rules 2018 (as amended in 2019) over 53.89% shareholding in the holding company and also over the shareholding in the subsidiary company, whether such a petition can be said to be not maintainable? (D) Whether or not interim reliefs sought in the aforesaid Company Petitions deserve to be granted?

7.

It is the stand of the Appellants that the point of difference arising out of the Judgment and Order dated 02.07.2021, passed by the 'Tribunal', Kolkata Bench, ought not to have been confined only to the 'question of maintainability' of the Company Petitions in question and in fact, other issues mentioned in the 'Memo of Appeal' (including the aspect of whether 'Interim Reliefs' ought to be granted or not in three Company Petitions) should also to be included." [...]

Disposition: In fine, the instant Company Appeal Nos. 67, 68 and 69 of 2022 are dismissed. No costs. The IA No.1253 of 2022 in Comp. App (AT) No. 67 of 2022, IA Nos.1254 and 1255 of 2022 in Comp. App (AT) No. 68 of 2022 and IA Nos.1256 and 1257 in Comp. App (AT) No. 69 of 2022 are closed.

Before parting with these Appeals, this 'Tribunal', makes it lucidly clear that the 'Hon'ble Third Member of the 'Tribunal' is completely free in resolving the 'differences'/'controversies' between the 'Parties' as he thinks fit (vide decision of Hon'ble Supreme Court AIR 1965 SC 1467), (of course, keeping in mind of the fact that if the 'point of difference' is not stated), it will be for the Third Judge (or) Judges to whom the case is referred to ascertain the same and to give his/their opinion, as per decision AIR 1996 Allahabad, (Pages 135 and 164) in the subject matter in issue, as deems fit and proper. No wonder, it is the primordial duty of the 'Hon'ble Third Member' / 'Third Judge' to whom the matter is referred to consider 'all points involved' revolving around the controversies, not confined to the point formulated by the 'Hon'ble Members of the Tribunal' dated 11.02.2022, prior to the deliverance of his 'opinion'/'decision', of course with utmost 'care', 'caution', 'circumspection', and with a view to prevent an 'aberration of justice' and to secure the 'ends of justice'.

“30.

The above-mentioned judgement is only an Authority for the proposition that a claim towards unpaid license fees for an immovable property would constitute an operational debt under the Insolvency and Bankruptcy Code, 2016 (Code). It doesn’t support the cause of the Appellant that security deposit is a form of license fee available for adjustment on failure to meet the outstanding licence fee. In the present case, there is no outstanding licence fee and the security deposit, therefore, it cannot be termed as a form of license fee available for adjustment on failure to meet the outstanding licence fee. In any case, this judgement does not lay down any law that security deposit is a form of license fee. The said judgement proceeds on the basis that payment of GST was made on the license fee and as GST is only contemplated for goods and services, there were services rendered which would fall within the meaning of Section 5 subsection 21 of IBC. In the present case, no GST was payable or has been paid on the security deposit. In the present case, the security deposit was not an advance licence fee but deposit for ensuring that the Appellant entered into a license agreement. The same was not liable to be adjusted against any outstanding or future license fee. No services were rendered nor supplied either by the Appellant to the Respondent nor by the Respondent to the Appellant. On the contrary, the security deposit became liable to be forfeited on account of non performance of the obligation of the Appellant i.e. it's requirement to enter into a leave and licence agreement. Thus, this is not a case of supply of goods or services.

31.

We therefore come to a conclusion that the scope of "operational debt" under the IBC does not encompass situations like security deposits unrelated to any immediate service rendered (Emphasis Added)

'14. The payments as contemplated in paragraph 7 has been made by the Operational Creditor i.e. Rs. 3 Crores which was paid and four postdated cheques of Rs. 5.15 Crore each. Thus payment which was made by the Operational Creditor was in contemplation of Development Agreement dated 01.10.2016 which ultimately could not fructify since the Corporate Debtor refused to sign the Agreement. It is clear that the transaction which was made by the Operational Creditor was towards the joint venture development agreement between the parties under which the Operational Creditor offered to provide necessary infrastructure and man-power to construct and market the Residential Flats/Apartments as noted above.

15.

When the Operational Creditor acted in pursuance of the Proposed Development Agreement between the parties, the amount paid by the Operational Creditor of Rs. 3 Crores plus Rs. 1 Crore was towards providing services by the Operational Creditor, the same is clearly an “Operational Debt”. We do not find any substance in the submissions of Learned Counsel for the Appellant that Corporate Debtor did not owe any “Operational Debt”. We thus reject the submissions of Learned Counsel for the Appellant that the Corporate Debtor did not owe any Operational Debt to the Operational Creditor. The submissions of Learned Counsel for the Appellant that Demand Notice issued under Section 8 of the Code was never served on the Appellant is also to be rejected. In the Application filed by the Operational Creditor under Section 9 of the Code, Demand Notice and evidence of service were brought on record. We thus do not find any error in the Order dated 12.01.2022 of the Adjudicating Authority admitting Section 9 Application under the Code. There is no merit in the Appeal, the Appeal is dismissed.” (Emphasis Supplied)

“94.

Thus, it has been clarified that the exclusion under the first proviso to Section 21(2) is related not to the debt itself but to the relationship existing between a related party financial creditor and the corporate debtor. As such, the financial creditor who in praesenti is not a related party, would not be debarred from being a member of the CoC. However, in case where the related party financial creditor divests itself of its shareholding or ceases to become a related party in a business capacity with the sole intention of participating the CoC and sabotage the CIRP, by diluting the vote share of other creditors or otherwise, it would be in keeping with the object and purpose of the first proviso to Section 21(2), to consider the former related party creditor, as one debarred under the first proviso.” (Emphasis Supplied)

“86.

As regards the question of discrimination between the claims of related party and unrelated party, the Appellate Tribunal, while placing reliance on the decision of this Court in Phoenix ARC (P) Ltd. v. Spade Financial Services Ltd. [Phoenix ARC (P) Ltd. v. Spade Financial Services Ltd., (2021) 3 SCC 475 : (2021) 2 SCC (Civ) 1] observed that “related party” was specifically treated as a class unto itself and was restricted from any involvement in the CIRP in any capacity (under Section 21 IBC) and disqualified from being a resolution applicant (under Section 29-A IBC), the underlying object being that involvement of a related party in the CIRP is seen as giving unfair benefit to the corporate debtor and in fact, the related party is treated in the same class as the corporate debtor itself. Therefore, according to the Appellate Tribunal, a “related party” could be treated as a separate class independent of an unrelated party and ought to be equated with the promoters as equity shareholders or as partners.”

“121.8.

(E) Whether the Appellate Tribunal has erred in applying the principles of non-discrimination in relation to related party of corporate debtor and thereby holding against the resolution plan in question for want of provision for related party?”

“177.

After taking note of the fact that related party is prohibited to be a part of CoC and is further prohibited to be a resolution applicant or an authorised representative, etc. the Appellate Tribunal has rightly observed that involvement of a related party in CIRP in any capacity was seen as giving unfair benefit to the corporate debtor; and that the statutory recognition of related party as a different class would apply even to resolution plan when CoC would decide whether in its commercial wisdom it should pay to related party at all because that would mean paying to the same persons who are behind the corporate debtor. However, thereafter the Appellate Tribunal proceeded to observe that related party was required to be equated with the promoters as equity shareholders and then, further made certain observations about discrimination between related party unsecured financial creditor and other unsecured financial creditors as also between related party operational creditor and other operational creditors. Such far-stretched observations of the Appellate Tribunal are difficult to be reconciled with the operation of the statutory provisions.”

“16.

We have already set out the substance of the minutes of the meeting held on 15-12-1989, the letter dated 19-2-1990 (which was issued on the basis of the discussions held at the said meeting) as well as to the letter of the Commissioner dated 20-2-1990. The minutes of the meeting dated 15-12-1989 speak of fixation of the cost price of country liquor. The letter dated 19-2-1990 speaks of “cost price of rectified spirit to be supplied as country spirit/liquor from the country spirit warehouses” while the letter dated 20-2-1990 speaks of “cost price of country liquor supplied from the warehouses”. This mix-up of the expressions of “rectified spirit to be supplied as country spirit/liquor” and “country liquor” in the said proceedings/letters may perhaps be for the reason that all that it takes to convert the rectified spirit into country spirit, it is said, is adding of water to rectified spirit. May be or may not be. That is not material for our purposes. What is material is that the price of Rs 3.42 per LPL said to have been agreed upon at the meeting held on 15-12-1989, and referred to in the said letters and which cost price has now been legislatively validated, all give the break-up of the said price which includes the figure of 70 paise per LPL on account of “warehouse maintenance charges”. Now, it is admitted — indeed, it is the positive case of Mr Y.V. Giri — that the distilleries have nothing to do with maintenance of warehouses and that they were being maintained by the Government itself during the said period. The preamble to the Amending Act and the amended provisions expressly speak of the said cost price and its break-up. The Amending Act further provides expressly for deduction of the said 70 paise per LPL component for being credited to the Government’s account. In the face of all these facts, it is difficult to understand on what basis can the distilleries say that the said component of 70 paise should not be deducted. The Amending Act is not taking away anything from the distilleries; it is merely affirming and validating the acts and orders already issued in view of, and with a view to remove, the defect pointed out by the High Court in its first judgment. It cannot be disputed, at this stage, by the distilleries that they were not parties to the meeting held on 15-12-1989 or that they did not receive the letter of the Commissioner dated 19-2-1990. If this were so, it is ununderstandable on what basis and at whose request or order, they were supplying the spirit to the distilleries. It cannot but be held in the circumstances that the distilleries accepted the offer contained in the Commissioner's letter dated 19-2-1990 and were making supplies on the basis of the said letter and the orders placed pursuant to that letter and their acceptance of it.

17.

Now coming to the reasoning in the impugned judgment, we must say with all respect that we have not been able to appreciate it. The approach of the court, while examining the challenge to the constitutionality of an enactment, is to start with the presumption of constitutionality. The court should try to sustain its validity to the extent possible. It should strike down the enactment only when it is not possible to sustain it. The court should not approach the enactment with a view to pick holes or to search for defects of drafting, much less inexactitude of language employed. Indeed, any such defects of drafting should be ironed out as part of the attempt to sustain the validity/constitutionality of the enactment. After all, an Act made by the legislature represents the will of the people and that cannot be lightly interfered with. The unconstitutionality must be plainly and clearly established before an enactment is declared as void. The same approach holds good while ascertaining the intent and purpose of an enactment or its scope and application. Now, the result of the impugned judgment is that the Amending Act has become an exercise in futility — a purposeless piece of legislation. And this result has been arrived at by pointing out some drafting errors and some imperfection in the language employed. If only the High Court had looked into the minutes of the meeting dated 15-12-1989 and the two letters of the Commissioner aforementioned, it would have become clear that the Amending Act was doing no more than repeating contents of the said letters and placing the legislative imprimatur on them. As the impugned judgment itself suggests, part of the imperfection of language is perhaps attributable to translation from Hindi to English. Indeed, it is surprising that the Court has not even referred to the long preamble to the Act which clearly sets out the context and purpose of the said enactment. It was put in at such length only with a view to aid the interpretation of its provisions. It was not done without a purpose. To call the entire exercise a mere waste is, to say the least, most unwarranted besides being uncharitable. The court must recognize the fundamental nature and importance of legislative process and accord due regard and deference to it, just as the legislature and the executive are expected to show due regard and deference to the judiciary. It cannot also be forgotten that our Constitution recognises and gives effect to the concept of equality between the three wings of the State and the concept of “checks and balances” inherent in such scheme.

20.

We may also refer to the following perceptive observations in the decision of Lord Denning in Seaford Court Estates Ltd. v. Asher [(1949) 2 KB 481 : (1949) 2 All ER 155] :

“Whenever a statute comes up for consideration it must be remembered that it is not within human powers to foresee the manifold sets of facts which may arise, and, even if it were, it is not possible to provide for them in terms free from all ambiguity. The English language is not an instrument of mathematical precision. Our literature would be much the poorer if it were. This is where the draftsmen of Acts of Parliament have often been unfairly criticized. A judge, believing himself to be fettered by the supposed rule that he must look to the language and nothing else, laments that the draftsmen have not provided for this or that, or have been guilty of some or other ambiguity. It would certainly save the judges trouble if Acts of Parliament were drafted with divine prescience and perfect clarity. In the absence of it, when a defect appears a judge cannot simply fold his hands and blame the draftsman. He must set to work on the constructive task of finding the intention of Parliament, and he must do this not only from the language of the statute, but also from a consideration of the social conditions which gave rise to it and of the mischief which it was passed to remedy, and then he must supplement the written word so as to give ‘force and life’ to the intention of the legislature. That was clearly laid down by the resolution of the judges in Heydon case [(1584) 3 Co Rep 7a], and it is the safest guide today. Good practical advice on the subject was given about the same time by Plowden... Put into homely metaphor it is this: A judge should ask himself the question: If the makers of the Act had themselves come across this ruck in the texture of it, how would they have straightened it out? He must then do as they would have done. A judge must not alter the material of which it is woven, but he can and should iron out the creases.”

“We must not adopt a strictly literal interpretation of Section 52 sub-section (2) but we must construe its language having regard to the object and purpose which the legislature had in view in enacting that provision and in the context of the setting in which it occurs. We cannot ignore the context and the collocation of the provisions in which Section 52 sub-section (2) appears, because, as pointed out by Judge Learned Hand in most felicitous language:

“... the meaning of a sentence may be more than that of the separate words, as a melody is more than the notes, and no degree of particularity can ever obviate recourse to the setting in which all appear, and which all collectively create.”

Keeping these observations in mind we may now approach the construction of Section 52 sub-section (2).

6.

The primary objection against the literal construction of Section 52 sub-section (2) is that it leads to manifestly unreasonable and absurd consequences. It is true that the consequences of a suggested construction cannot alter the meaning of a statutory provision but they can certainly help to fix its meaning. It is a well-recognised rule of construction that a statutory provision must be so construed, if possible, that absurdity and mischief may be avoided. There are many situations where the construction suggested on behalf of the Revenue would lead to a wholly unreasonable result which could never have been intended by the legislature.” (Emphasis Supplied)

81.

This Court in K.P. Varghese v. CIT [K.P. Varghese v. CIT, (1981) 4 SCC 173 : 1981 SCC (Tax) 293] had an occasion to consider the question as to whether the speech made by the Hon’ble Finance Minister explaining the reason for the introduction of the Bill could be referred for the purpose of ascertaining the mischief sought to be remedied by the legislation. This Court observed thus : (SCC p. 184, para 8)

“8.

... Now it is true that the speeches made by the Members of the Legislature on the floor of the House when a Bill for enacting a statutory provision is being debated are inadmissible for the purpose of interpreting the statutory provision but the speech made by the Mover of the Bill explaining the reason for the introduction of the Bill can certainly be referred to for the purpose of ascertaining the mischief sought to be remedied by the legislation and the object and purpose for which the legislation is enacted. This is in accord with the recent trend in juristic thought not only in western countries but also in India that interpretation of a statute being an exercise in the ascertainment of meaning, everything which is logically relevant should be admissible. In fact there are at least three decisions of this Court, one in Lok Shikshana Trust v. CIT [Lok Shikshana Trust v. CIT, (1976) 1 SCC 254 : 1976 SCC (Tax) 14], the other in Indian Chamber of Commerce v. CIT [Indian Chamber of Commerce v. CIT, (1976) 1 SCC 324 : 1976 SCC (Tax) 41] and the third in CIT v. Surat Art Silk Cloth Manufacturers’ Assn. [CIT v. Surat Art Silk Cloth Manufacturers’ Assn., (1980) 2 SCC 31 : 1980 SCC (Tax) 170] where the speech made by the Finance Minister while introducing the exclusionary clause in Section 2, clause (15) of the Act was relied upon by the Court for the purpose of ascertaining what was the reason for introducing that clause. The speech made by the Finance Minister while moving the amendment introducing sub-section (2) clearly states what were the circumstances in which sub-section (2) came to be passed, what was the mischief for which Section 52 as it then stood did not provide and which was sought to be remedied by the enactment of sub-section (2) and why the enactment of sub-section (2) was found necessary.”

82.

This Court in Union of India v. Martin Lottery Agencies Ltd. [Union of India v. Martin Lottery Agencies Ltd., (2009) 12 SCC 209], in para 38 has relied on the aforesaid observations made in the judgment of K.P. Varghese [K.P. Varghese v. CIT, (1981) 4 SCC 173 : 1981 SCC (Tax) 293].

84.

It is clear that the mischief which was noticed prior to amendment of Section 31 of the I&B Code was that though the legislative intent was to extinguish all such debts owed to the Central Government, any State Government or any local authority, including the tax authorities once an approval was granted to the resolution plan by NCLT; on account of there being some ambiguity, the State/Central Government authorities continued with the proceedings in respect of the debts owed to them. In order to remedy the said mischief, the legislature thought it appropriate to clarify the position that once such a resolution plan was approved by the adjudicating authority, all such claims/dues owed to the State/Central Government or any local authority including tax authorities, which were not part of the resolution plan shall stand extinguished.

“98.

Hence, we would need to consider the meaning of the first proviso in the light of the context, object and purpose for which it was enacted. The purpose of excluding a related party of a corporate debtor from the CoC is to obviate conflicts of interest which are likely to arise in the event that a related party is allowed to become a part of the CoC. The logic underlying the exclusion has been summarised as follows [ Insolvency Law Committee Report, 2020, pp. 47-48, para 11.9.] :

“11.9.

The Committee was of the view that the disability under the first proviso to Section 21(2) is aimed at removing any conflict of interest within the CoC, to prevent erstwhile promoters and other related parties of the corporate debtor from gaining control of the corporate debtor during the CIRP by virtue of any loan that may have been provided by them.” (Emphasis Supplied)

C. *ATTENDANCE OF DIRECTORS (not applicable for OPC)

“19.

The Ld. Counsel for RP submitted that the Application has been heard on the point of ad-interim reliefs and affidavits are yet to be filed by the Respondents and thus made the following submissions:”

“4.

We do not agree. Rules of procedure are handmaids of justice. Section 151 of the Code of Civil Procedure gives inherent powers to the court to do justice. That provision has to be interpreted to mean that every procedure is permitted to the court for doing justice unless expressly prohibited, and not that every procedure is prohibited unless expressly permitted. There is no express bar in filing an application for withdrawal of the withdrawal application.

5.

In Narsingh Das v. Mangal Dubey [ILR (1883) 5 All 163], Mahmood, J. the celebrated Judge of the Allahabad High Court, observed:

“Courts are not to act upon the principle that every procedure is to be taken as prohibited unless it is expressly provided for by the Code, but on the converse principle that every procedure is to be understood as permissible till it is shown to be prohibited by the law. As a matter of general principle prohibition cannot be presumed.”

“41.

It is well settled that a judgment is a precedent for the issue of law that is raised and decided. The judgment has to be construed in the backdrop of the facts and circumstances in which the judgment, cannot be read out of context. Nor is a judgment to be read and interpreted in the manner of a statute. It is only the law as interpreted by in an earlier judgment, which constitutes a binding precedent, and not everything that the judges say.”

“31A. Stakeholders’ consultation committee

[...]

(2)

The voting share of a member of the consultation committee shall be in proportion to his admitted claim in the total admitted claim:

Provided a secured creditor who has not relinquished his security interest under section 52 shall not be part of the consultation committee;

Provided that the promoters, directors, partners or their representatives may attend the meeting of the consultation committee, but shall not have any right to vote.

Provided further that a financial creditor or his representative, if he is a related party of the corporate debtor, shall not have right to vote”

(3). The liquidator may facilitate the stakeholders of each class namely financial creditors in a class, workmen, employees, government departments, other operational creditors, shareholders, partners, to nominate their representative for participation in the consultation committee.

(4)

If the stakeholders of any class fail to nominate their representatives, under sub-regulation (3), such representatives shall be selected by a majority of voting share of the class, present and voting.

(4A) the representative under sub-regulation (3) or (4) shall vote in proportion to the voting share of the stakeholders it represents.”

“86.

As regards the question of discrimination between the claims of related party and unrelated party, the Appellate Tribunal, while placing reliance on the decision of this Court in Phoenix ARC (P) Ltd. v. Spade Financial Services Ltd. [Phoenix ARC (P) Ltd. v. Spade Financial Services Ltd., (2021) 3 SCC 475 : (2021) 2 SCC (Civ) 1] observed that “related party” was specifically treated as a class unto itself and was restricted from any involvement in the CIRP in any capacity (under Section 21 IBC) and disqualified from being a resolution applicant (under Section 29-A IBC), the underlying object being that involvement of a related party in the CIRP is seen as giving unfair benefit to the corporate debtor and in fact, the related party is treated in the same class as the corporate debtor itself. Therefore, according to the Appellate Tribunal, a “related party” could be treated as a separate class independent of an unrelated party and ought to be equated with the promoters as equity shareholders or as partners.”

ANALYSIS AND FINDINGS: -

ITEM NO.:6

NOTING OF CONSTITUTION OF COMMITTEE OF CREDITORS

IRP informed the meeting that since the claims has been received from the sole financial creditor that as per the available information appears to be related party of the corporate debtor and as provided under Regulation 16 of the IBBI (CIRP) Regulations 2016 that where the corporate debtor has no financial debt or where all the financial creditors are related parties of the corporate debtor, the committee shall be set up in accordance with this Regulation. The committee formed under this regulation consists of eighteen largest operational creditors by value provided that if the number of operational creditors is less than eighteen, the committee shall include all such operational creditor. In this case where there is no financial creditor (unrelated) to the corporate debtor and three claims are received from the operational creditors (out of which one is related party), IRP has considered the claims filed by all the operational creditors for the purpose of constitution of Committee of Creditors under regulation 16 and he has duly verified the claims of the aforementioned creditors from the documents/clarifications submitted by the claimants and the records made available to him. Claims may be updated as & when necessary, on receipt of additional information regarding such claims and reconciliation from the records of the Corporate Debtor. He further informs that the report on constitution of Committee has been submitted with the Hon'ble NCLT on 12-03-2024.

Following are the Operational Creditors, forming part of CoC as per Regulation 16 of IBBI (CIRP) Regulations and having voting rights as contained in the Section 21 of IBC, 2016:

“(24)

“related party”, in relation to a corporate debtor, means— [...]

(j)

any person who controls more than twenty percent of voting rights in the corporate debtor on account of ownership or a voting agreement;”

“59.

The term ‘related party’ has also been defined by Parliament in the Companies Act, 2013 for all corporations. The definition of the expression has also been expanded for listed entities by the Securities Exchange Board of India by amendment to the Equity Listing Agreement to include elements mentioned under applicable accounting standards. However, in the present case, we are assessing its definition only under the IBC, which is exhaustive. The purpose of defining the term separately under different statutes is not to avoid inconsistency but because the purpose of each of them is different. Hence, while understanding the meaning of ‘related party’ in the context of the IBC, it is important to keep in mind that it was defined to ensure that those entities which are related to the Corporate Debtor can be identified clearly, since their presence can often negatively affect the insolvency process.

[...]

72.

The CoC is comprised of financial creditors, under loan and debt contracts, who have the right to vote on decisions and operational creditors such as employees, rental obligations, utilities payments and trade credit, who can participate in the CoC, but do not have the right to vote. The aim of the CoC is to enable coordination between various creditors so as to ensure that the interests of all stakeholders are balanced, and the value of the assets of the entity in financial distress is maximised.

[...]

75.

These objects underscore the composition of the CoC, guided by Section 21 of the IBC. The objects and purposes of the Code are best served when the CIRP is driven by external creditors, so as ensure that the CoC is not sabotaged by related parties of the corporate debtor. This is the intent behind the first proviso to Section 21(2) which disqualifies a financial creditor or the authorised representative of the financial creditor under sub-section (6) or sub-section (6A) or sub-section (5) of section 24, if it is a related party of the corporate debtor, from having any right of representation, participation or voting in a meeting of the committee of creditors.

76.

Since the IBC attempts to balance the interests of all stakeholders, such that some stakeholders are not able to benefit at the expense of others, related party financial creditors are disqualified from being represented, participating or voting in the CoC, so as to prevent them from controlling the CoC to unfairly benefit the corporate debtor.”

“94.

Thus, it has been clarified that the exclusion under the first proviso to Section 21(2) is related not to the debt itself but to the relationship existing between a related party financial creditor and the corporate debtor. As such, the financial creditor who in praesenti is not a related party, would not be debarred from being a member of the CoC. However, in case where the related party financial creditor divests itself of its shareholding or ceases to become a related party in a business capacity with the sole intention of participating the CoC and sabotage the CIRP, by diluting the vote share of other creditors or otherwise, it would be in keeping with the object and purpose of the first proviso to Section 21(2), to consider the former related party creditor, as one debarred under the first proviso.”

“16. Committee with only operational creditors-

(1)

Where the corporate debtor has no financial debt or where all financial creditors are related parties of the corporate debtor, the committee shall be set up in accordance with this Regulation.

(2)

The committee formed under this Regulation shall consist of members as under –

(a)

eighteen largest operational creditors by value:

Provided that if the number of operational creditors is less than eighteen, the committee shall include all such operational creditors;

(b)

one representative elected by all workmen other than those workmen included under sub-clause (a); and

(c)

one representative elected by all employees other than those employees included under sub-clause (a).

(3)

A member of the committee formed under this Regulation shall have voting rights in proportion of the debt due to such creditor or debt represented by such representative, as the case may be, to the total debt. Explanation – For the purposes of this sub-regulation, ‘total debt’ is the sum of-

(a)

the amount of debt due to the creditors listed in sub-regulation 2(a);

(b)

the amount of the aggregate debt due to workmen under sub-regulation 2(b); and

(c)

the amount of the aggregate debt due to employees under sub-regulation 2(c).

(4)

A committee formed under this Regulation and its members shall have the same rights, powers, duties and obligations as a committee comprising financial creditors and its members, as the case may be.”

“Point. 1

Whether the 2nd Respondent is a related party to the Corporate Debtor, if so, is it required that the Committee of Creditors constituted by the Resolution Professional be reconstituted?

[...]

12.

From the above dates and events it is clear that, Respondent No. 2 has filed the captioned Company Petition on 17.09.2021 against the Corporate Debtor and just before the admission of the captioned Company Petition has sold its shareholding. According to the Ld. Counsel for the petitioner with full knowledge of filing the captioned Company Petition the 2nd respondent has sold its investment of Rs. 75,00,000/- for acquiring 7,50,000/- for a meagre value of Rs. 2,00,000/- shares and the same goes to show the mala fide, intention of the 2nd Respondent to circumvent the ineligibility under Section 24 of the Code to get a back-door entry into the CoC of the Corporate Debtor.

15.(i). Having carefully examined the afore stated rival contentions, we are convinced that the ruling of Hon’ble Supreme Court of India, in Phoenix Arc Private Limited Vs. Spade Financial Services Limited and Ors in MANU/SC/0045/2021, squarely applies to the facts of the case, in as much as in the case on hand also a Memorandum of Understanding has been entered between the Corporate Debtor and the 2nd Respondent on 27.06.2017 facilitating the recording of loan amount purportedly advanced to the Corporate Debtor by the 2 nd Respondent to the tune of Rs.1,25,00,000/- besides investment of Rs.75,00,000/- in the form of 7,50,000 equity shares of Rs.10/- each. Without any board resolution been passed by the Corporate Debtor approving the grant of ICD and no charge is created on the said loan and registered with the Registrar of Companies. Therefore, in identical circumstances, Hon’ble Supreme Court has held that, the Memorandum of Understanding was an eye wash and collusive. We find no reason to take a difference view in this matter since the facts and circumstances are identical.

(ii). That apart the impugned transfer of investment by the 2nd Respondent was admittedly after initiation of CIRP proceedings against the Corporate Debtor. Therefore, in the light of the undeniable factors, we find force in the submission of the Learned Counsel for the Petitioner. Thus the 2nd Respondent is a related party to the Corporate Debtor. So much so the 2nd Respondent is not qualified to be a voting member of the Committee of Creditors. As such the 2nd respondent cannot continue the role which has been conferred on him by the Resolution Professional.

(iii). We therefore declare that the Committee of Creditors as constituted by 1st Respondent is not in accordance with the provisions of the Code, and the same is hereby set aside, and 1st Respondent is hereby directed to forthwith reconstitute the Committee of Creditors of the Corporate Debtor by treating the 2nd Respondent as related party to the corporate debtor.

The point is answered accordingly

16.Point. 2:

Whether the transaction of ICD from 2nd Respondent is a financial debt in terms of Section 5(8) of IBC?

[...]

18.

Having carefully examined the afore stated rival contentions, more particularly the record as to disbursement of Rs.40,00,000/- on 27.06.2017 vide RTGS/ NEFT, to the account of the corporate debtor, as against the claim of investment of a sum of Rs. 1,00,00,000/- (Rupees One Crore only) as interest free advance to the Corporate Debtor, absence of any board resolution for the alleged investment, more particularly having regard to the condition that all the finished goods sales will be supplied by the Respondent No. 2 subject to the payment of 3% margin on the said amount. Later on, due to operational convenience, the Corporate Debtor has discontinued supply and billing by the Respondent No.2 and after adjusting credit note, commission etc., Respondent No.2 it was entitled to receive back a sum of Rs.89,12,338/- (Rupees Eighty Nine Lakhs Twelve Thousand Three Hundred and Thirty Eight only). We find force in the contention of the Applicant that the above arrangement between the Corporate Debtor and the 2nd Respondent is in the nature of an operational debt and not a financial debt.

The Point is answered accordingly.

In the result, this Application is allowed, by declaring that the 2nd Respondent is a related party to the corporate debtor and the 2nd respondent as operational creditor of the corporate debtor, Consequently, it is further ordered that 1st Respondent shall reconstitute the Committee of Creditors by treating the 2nd Respondent as operational creditor to the corporate debtor and submit his report to this Tribunal within two weeks from today. With these directions IA.No.196/2023 is allowed and disposed of.”