The National Company Law Appellate Tribunal ( NCLAT ) has ruled that the Resolution Professional ( RP ) has the authority to determine the related party status of a creditor. While dismissing the appeal, the bench endorsed the findings of RP and NCLT where the appellant had been held as related party in terms of provisions of Section 5 (24) of the Code.
Suasth Healthcare Foundation , the Corporate Debtor approached Hari Vitthal Mission , the Appellant to raise financial assistance of Rs. 44.2 crore for the construction of a hospital for affordable healthcare. An agreement was signed on 10.10.2017 between Corporate Debtor and Appellant. The construction was to be completed by December 2018 and fully operational by April 2019.
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The Appellant provided Rs. 50 crore as an interest-free security deposit, refundable with 10% interest. The Corporate Debtor defaulted on its obligations as the project was not completed on time. The agreement was terminated.
The Corporate Debtor filed an application under section 10 of the the Insolvency and Bankruptcy Code, 2016 (IBC) to initiate voluntary insolvency resolution process. On 31.08.2021, the National Company Law Tribunal (NCLT), Kolkata, admitted the application, initiated Corporate Insolvency Resolution Process (CIRP) and appointed an Interim Resolution Professional (IRP).
The Appellant filed a claim as financial creditor, which was accepted by IRP. The Appellant became a member of Committee of Creditors (CoC). The RP notified the Appellant of its classification as a related party under section 5(24) of IBC due to its connection with Kanoria Foundation, which purportedly had indirect control over the Corporate Debtor through a series of entities, including SREI Infrastructure Finance Limited (SIFL) and Trinity Alternative Investment Managers Limited (TAIML). The RP excluded the Appellant from the CoC.
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The National Company Law Tribunal (NCLT) upheld the RP’s decision, confirming the Appellant’s related party status due to its connection with Kanoria Foundation resulting in its exclusion from the CoC.
It was alleged that the classification of the Appellant as “related party” and exclusion unlawfully deprives it of participation rights in the resolution process and prejudices its interests as a financial creditor. The appellant is a public charitable trust, and its link to Kanoria Foundation does not translate into any form of control over the Corporate Debtor. Kanoria Foundation is a trust and not a company as defined under Section 2(46) of the Companies Act, 2013. Section 5(24)(i) of IBC would not be applicable as it pertains to relationships between holding and subsidiary companies.
The Tribunal first examined whether the RP has the power to decide whether a party in CIRP proceeding is a related party or not. The Tribunal observed that the language of section 21 makes it clear that the related party of Corporate Debtor has no right of representation participation or voting in a meeting of CoC. The IRP has to decide about related party status of creditors of the CD for constituting the CoC as related parties cannot form part of CoC. It was held that RP is empowered to decide on the related party status of a creditor.
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The Tribunal agreed with the findings of the NCLT that even though the Appellant did not directly own or control shares in the Corporate Debtor, the substantial influence exercised by Kanoria Foundation as holding trust over both the appellant and the Corporate Debtor’s management was sufficient to establish a related party relationship.
According to section 5(24)(i), a related party may be any corporate entity that is a holding, subsidiary, or associate company of the corporate debtor, or a subsidiary of a holding company that the corporate debtor is also a subsidiary of.
The bench of Justice Rakesh Kumar Jain (Judicial Member), Mr. Naresh Salecha (Technical Member) and Mr. Indevar Pandey (Technical Member) held that RP is empowered to decide about the status of a creditor as related party. While dismissing the appeal, the bench endorsed the findings of RP and NCLT where the appellant had been held as related party in terms of provisions of Section 5 (24) of the Code.
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