Mr. Ajit Kumar & Ors. vs M/S. Alpha (India) Properties Pvt. Ltd. & Ors.

“10.

Having discussed the legal background, it is absolutely clear whether the applicant financial creditors are relative or not but they have got a right to join the meetings of COC. Thus, actionof IRP in not allowing them to participate in COC meetings even after accepting their claims to the extent of principal amount is against the provisions of law and arbitrary. Thus, we reverse the same and direct IRP to include them into COC with immediate effect.

11.

Now, coming to the aspect whether they are, in fact, relative ornot, it is noted that originally RP relied on Clause 2(q) of SAST(SEBI) Regulation to hold that they were a related party under Section 5(24) of IBC, 2016. However, no specific clause ofSection 5(24) of IBC, 2016 has been involved to do so whereas during the course of hearing, the learned senior counsel Mr. Rashesh Sanjanwala, appearing on behalf of the Resolution Professional, has relied on Clause 5(24)(m) to justify this action of RP. He specifically pointed out that following parties fall under the provisions of this Clause:

Sr. No.	NAME OF THE DIRECTOR	PAGENO.	APPLICANT COMPANY SR. NO. (Commonalityin the entities)
17.	Kulwinder Kumar Nayyar	178	CD, TG** AND 10
20.	Farindra Bihari Bhuneshwar Rai	187	CD, TG, 8
29.	Mahendra kumar Gopikrishna Aggarwal	204	TG**, 3, 5
30.	Madhusudan Dinabandhu Paul	205	CD, TG** AND 3

In this regard, it is noted that the basis for such action remains the order of SAT in the case of Tayal Industries vs. Securities and Exchange Board of India dated 11.02.2014. Onthe other hand, it has been strongly countered by the learned senior counsel Mr. Navin Pahwa appearing on behalf of the applicants. We have also noted that no reply by RP has been given on the report of External Expert dated 24.10.2020 submitted by the applicants to him on 29.10.2020 wherein ithas been already stated that applicants are not a related party. The applicants-financial creditors have also placed reliance onthe decision of Hon'ble Supreme Court in the case of Phoenix ARC Private Limited vs. Spade Financial Services Limited &Ors. dated 01.02.2021 wherein it has been categorically hold that ifparties were a related party at the some point of time but thereafter they did not remain so in the normal course i.e. without having intention or design to alter or extinguish this relationship to dominate the CIRP or otherwise derail insolvency resolution of a corporate debtor then such partiescould not be considered as a related party for all times. In thepresent case, there is nothing on record show that suchrelationship, if any, has been converted into a situation of norelationship with this purpose or object. It is also noted thatno material has been brought on record except general observations given by the RP on the basis of said order of SATthat these parties are related parties but no exercise has beendone to substantiate its case. The letters from some of the ex-directors have been produced subsequent to our directions,however, in our opinion do not serve any purpose as far asrelated party issue is concerned. Further, legal aspects relating to application of SEBI Regulation vis-a-vis Section 5(24) ofIBC, 2016 have already been dealt by us in IA 953 of 2020 andIA 13 of 2021 and those finding are squarely applicable here. In view of above discussion, we are of the view that even onfacts and in the background of applicable legal position asnarrated here-in-before, applicants cannot be considered as arelated party. Accordingly, this decision of the RP is also reversed. Accordingly, we hold that these parties will get proportionate voting rights according debt owed by the corporate debtor to such applicant-financial creditors.

12.

One issue which remains is what should be the quantum oftheir debt owed by the corporate debtor to them. Initially, theRP relying on provisions of Section 186 of the Companies Act,2013 and Section 372 of Companies Act, 1956 as that such transactions were void ab-initio, however, subsequently the Resolution Professional has himself admitted the principal amount. Hence, this stand of the RP stands contradicted by itsown conduct. One reason for not allowing the interest which is outstanding on these loans and payable for each Financial Year is that same is not reflected in the Financial Statements of both the sides i.e. financial creditor as well as corporate debtor. Even Form-26AS has not been produced either by applicants or corporate debtor. TDS certificate, if any, has alsonot been produced by applicants-financial creditors. The company is bound to maintain its account on accrual basis of accounting, hence, provision of such interest in the books ofaccount is mandatory and non-provision thereof needs qualification from the statutory auditors. No such qualification has been brought to our notice. In this background, we are ofthe view that no conclusive view can be taken by us because it requires some further verification. Hence, we direct RP as wellas applicant-financial creditors to do the needful exercise inthis regard within fifteen (15) days from the date of receipt ofthis order. In case, the applicant-financial creditors fail to submit necessary documentary evidences or otherwise justify their claim of interest, we hold that the claim of interest amount shall not be considered while calculating amount of debt owed by corporate debtor to the applicant-financial creditors.

13.

Although, we are not very much convinced with the approach of IRP in not allowing the applicant-financial creditors to participate in the first COC meeting itself and the manner in which they have been not so allowed as evident from averments/minutes of meetings provided to us by RP, we arenot replacing him because he has given opportunity of hearing to the applicant-financial creditors before declaring them as a related party and reply by them has not been given within the scheduled time. The reply of applicant-financial creditors hasbeen given after lapse of three or four months. However, weadvise him to act in a fair and balanced manner without getting influenced by the conflicting interests of the secured financial creditors.

14.

In view of above discussion and applicable legal position, this IA69 of 2021 in CP (IB) 625 of 2018 stands allowed in terms of directions given as above.

15.

Urgent certified copy of this order, if applied for, be issued upon compliance with all requisite formalities.”

“(2)

The committee of creditors shall comprise all financial creditors of the corporate debtor: Provided that a financial creditor or the authorised representative of the financial creditor referred to in sub-section (6) or sub-section (6A) or sub-section (5) of section 24, if it is a related party of the corporate debtor, shall not have any right of representation, participation or voting in a meeting of the committee of creditors”

“a. There were incorrect disclosures made by Bank of Rajasthan('BOR' for short) regarding its shareholding held byPromoters group led by Mr. Pravin Kumar Tayal and Others. b. Though promoters of BoR reported certain reduction in their stake in BoR as mandated by RBI in its Guidelines datedFebruary 28, 2005, it appeared that they had increased their stake in BoR simultaneously through surrogate acquisition. c. There were inter-corporate transfer of funds to the accountsof other corporate bodies who had purchased the stake inBOR. d. Most of those companies have contact details same as that ofvarious Tayal group companies. e. Some of the directors were common in the said corporate bodies and Tayal group companies.”

“11.

Based on evidence on record, AO has held that above four group entities were inter-connected with each other by having common addresses, common directors as also by transfer of shares and transfer of funds within the group as more particularly set out in the impugned order. It is further held in the impugned order that promoters of BOR in connivance with other group entities have cancelled correct information from investors regarding their shareholding in BOR and their act culminated into fraud on investors and securities market and thus Tayal family as also four group entities have violated PFUTP Regulations, 2003 and some entities violated SAST Regulation, 1997 and hence were liable for monetary penalty.”

“33

a)

Although 44 appellants in Appeal No. 83 of 2013 are distinct legalentities duly registered under Companies Act 1956, for sake ofconvenience AO has considered all these appellants as Silvassa group because all these 44 entities are situated at Silvassa. Fact that these Silvassa group entities were connected with Promoter/Tayalgroup is established from following facts:

i)

Most of Silvassa group entities were incorporatedafter RBI circular dated February 28, 2005 whichrequired every promoter of banking company toreduce its shareholding in that company to the extentspecified there in.

ii) Out of 44 entities in Silvassa group, 35 entities had addresses at various flats in Silver Park, Plot No. 5 ofsurvey no. 6, Vanmali Park, Silvassa Khanvel Main Road, Samarvani, Silvassa 396230. Investigationconducted by SEBI revealed that those flats in which35 appellants are supposed to have their offices were residential premises of the employees of Krishna Mill which is owned by Krishna Knitwear Technologies Ltd., a Tayal group company (see para 22 of impugned order). This fact is not disputed by appellants. Moreover, in their reply to show cause notice, appellants have merely stated that they areunable to offer comments on the above issue. Since 35out of 44 Silvassa group entities are situated at the residential premises of employees of entities controlled by Tayal group, conclusion drawn by AO that Silvassa group were connected with Promoter/Tayal group cannot be said to be without any basis.

iii.) Out of remaining 9 Silvassa group companies 5 ofthem were found to be situated in different flats at Gurudev Complex, phase - I/II/III Silvassa - 396230. Investigation revealed these flats were residential flatsused as Guest House of Krishna Mill, owned byKrishna Knitwear Technologies Ltd., a Tayal groupcompany. This fact further supports conclusion drawn by AO that Silvassa group companies were connectedwith Promoter/Tayal group.

b)

Investigation carried out by SEBI reveals that during the investigation period, Promoter group entities had transferred by wayof off market transaction 166.35 lac shares of BoR (see para 26) to various Silvassa group entities (71.05 lac shares by Sovotex Textile Pvt. Ltd.+ 60 lac shares by Ginger Clothing Pvt. Ltd.+ 35.30 lacshares by other Promoter group entities). Similarly Tayal group entities had transferred 31.13 lac BoR shares in off market (see para27) and Yadav group entities had transferred 231.18 lac BoR shares to various Silvassa group entities in off market. Thus during the investigation period Silvassa group entities had acquired 428.66 lacshares of BOR in off market transactions from Promoter/Tayal/Yadav group entities. Although it is contended that above off market transfers were genuine business transactions, factson record establish to the contrary. For example, from the ledgersproduced by appellants it is seen that on November 13, 2009 Acrow Constructions Pvt. Ltd ('Acrow' for short) a Silvassa group entity acquired in off market 4,85,653 and 2,34,456 shares of BoR from two Yadav group entities, namely Hiren Trading Co. Pvt. Ltd., and Niti Mercantile Co. Pvt. Ltd., respectively (see page 1456 in AppealNo. 83 of 2013). From ledger account produced by Acrow for the period 1.4.2009 to 31.3.2010, it is seen that for acquisition of 4,85,663 BoR shares from Hiren Trading Co. Pvt. Ltd. in off market Acrow claims to have paid by way of book adjustment 3,76,87,449/-(at page 1458). Similarly, as per ledger account of Niti Mercantile Co. Pvt. Ltd. (at page 1459) maintained by Acrow, consideration paid by Acrow to Niti Mercantile Co. Pvt. Ltd. for acquisition of 2,34,456 BoR shares is 19,92,877/- by way of book adjustment. Thus as per ledger account, on November 13, 2009 Acrow has acquired in off market 4,85,663 BoR shares for3,76,87,449 and 2,34,456 shares for 19,92,877/-. No explanation was offered before AO as to the circumstances under which on November 13, 2009, 4,85,663 shares were purchased at 77.60 pershare and 2,34,456 shares were purchased at 8.50 per share. Even before us, learned counsel for appellants fairly stated that facts speak for themselves and he cannot improve them. Apart from above, ledger accounts of various Silvassa group entities (at pages1456 to 1769 in Appeal No. 83 of 2013) show that those entities had acquired BoR shares in off market from Promoter/Tayal/Yadav group entities during the investigation period at a price ranging from 8.50 per share to 277.09 per share and all entities paid consideration for such acquisition by way of book adjustment and not by actual payment. It is interesting to note that the ledger accounts of all Silvassa group entities show that they had sold fabrics from time to time without receiving payment and on purchasing BoR shares in off market from those entities to whom fabrics were sold accounts have been squared off by book adjustment. In majority of cases, it is seen that adjustment of alleged consideration brings about a nil balance because it corresponds perfectly to the amounts built up in the ledgers as alleged purchase/sale of fabrics. In these circumstances decision of AO (see para 43) that these are absurd and meaningless transactions and have been recorded in ledgers with a view to evade detection and togive an impression of legitimacy cannot be faulted.”

“22.

We further think it pertinent to mention that IBC is a complete CODE in itself and unless IBC, 2016 incorporates the provisions of other Acts, provisions of other Acts cannot be applied to IBC, 2016 as such although some assistance can be taken there-from in a given set of circumstances. Asnoted earlier, provisions of Section 5(24) of the CODE have been part of thestatute since beginning which define who could be a related party in relation to a Corporate Debtor This clause, in fact, uses the word “means” which further indicates the legislative intent as to how to determine the nature relationship of related party in relation to a Corporate Debtor to find ananswer to such issue which crops up during the course of CIRP of a Corporate Debtor. Provisions of Section 3(37) of the CODE also provide that"words and expression” used in the CODE and not defined in this CODE but defined in certain statutes shall have the meanings respectively assigned tothem in those Acts. In the list of Acts mentioned in Section 3(37) of theCODE, the Securities and Exchange Board of India (SEBI) Act, 1992 is included. The term "person acting in a concert" is not mentioned in any ofthe clauses of Section 5(24) of CODE, hence, there is no occasion to refer to definition of this term for the purposes of interpreting provisions of Section 5(24) meaning thereby that one needs to confine itself to the provisions of Section 5(24) of the CODE as this specific provision defines that who could be a related party to Corporate Debtor. As against this, if we look at the provisions of Section 29A r.w. Clause (f) thereof, it is noted that the main provision itself mentions that a person shall not be eligible to submit a Resolution Plan, if such person, or any other person acting jointly or inconcert with such person prohibited by SEBI from trading the securities or accessing the securities markets whereas provisions similar to main clauseof Section 29A or clause(f) to Section29A do not exist in Section 5(24) of theCODE for determining of status of a financial creditor as a related party. It is also to be noted that in Section 29A not only related but other categories ofpersons have also been made ineligible to submit Resolution Plan, hence, in that section wider definition has been given in respect of an ineligible personand in that context person acting in concert, in certain situations provided therein, have been barred from submitting Resolution Plan and for thispurpose, the definition of such term as given in SEBI Act can be used in viewof provisions of Section 3(37) of the CODE as the same has not been definedin the CODE. Thus, for the purpose of Section 29A, both persons actingjointly or in concert and a related party would be treated as "connected person" as defined in Explanation I of clause (j) of Section 29A of CODE. However, for the purpose of Section 29A also, in our view, the provisions of Section 5(24) or 5(29A) of CODE will also have to be applied to find out themeaning of the term "related party" as these terms have not defined inSection 29A separately. Thus, for different purposes, the legislature has provided distinct provisions i.e., Section 21(2) for constitution of COC and Section 29A as regards to ineligibility of certain persons including a related party to submit a Resolution Plan and this mechanism further confirms ourview that related party even though it may not be eligible to submit a Resolution Plan but it would remain a member of COC having no voting rights.”