NCLAT Ruling: Understanding Related Party Exclusion from Committee of Creditors

NCLAT Ruling: Understanding Related Party Exclusion from Committee of Creditors

IBC

A Significant Decision Affirming Resolution Professional’s Authority Under IBC

In a significant ruling that clarifies the scope of Resolution Professional’s powers under the Insolvency and Bankruptcy Code (IBC), the National Company Law Appellate Tribunal (NCLAT) has upheld the exclusion of a related party from the Committee of Creditors (CoC). This decision reaffirms the importance of maintaining the integrity of the insolvency resolution process by preventing potential conflicts of interest.

Case Background

The dispute originated from a financial arrangement between Hari Vitthal Mission (Appellant) and Suasth Healthcare Foundation (Corporate Debtor) in October 2017. The Corporate Debtor had sought financial assistance of Rs. 44.2 crore for constructing a hospital, which included obligations to reserve 100 beds for underprivileged patients. The Appellant provided Rs. 50 crore as an interest-free refundable security deposit.

When the project faced delays and the Corporate Debtor defaulted, the agreement was terminated in July 2021. Subsequently, the Corporate Debtor filed an application under Section 10 of the IBC, which was admitted by the NCLT on August 31, 2021, initiating the Corporate Insolvency Resolution Process (CIRP).

Initially, the Interim Resolution Professional (IRP) admitted the Appellant’s claim and included it in the CoC. However, upon appointment of a new Resolution Professional (RP), the Appellant’s status was reviewed, and by February 7, 2022, it was classified as a related party and excluded from the CoC.

The NCLAT’s Findings

The NCLAT bench, comprising Justice Rakesh Kumar Jain and Technical Members Mr. Naresh Salecha and Mr. Indevar Pandey, examined the RP’s decision to exclude the Appellant based on its connection to the Kanoria Foundation, which allegedly controlled the Corporate Debtor through various entities.

The Tribunal found substantial evidence supporting the RP’s determination:

  • Shareholding Structure: Evidence showed that Kanoria Foundation held 99.9% of the Appellant’s shares and also controlled Adisri Commercial Private Limited, which held a 60.36% stake in SREI Infrastructure Finance Limited (SIFL).
  • Control Chain: SIFL, along with key individuals, held 50.88% in Trinity Alternative Investment Managers Limited (TAIML), extending control over the Corporate Debtor through various investment schemes.
  • Contractual Control: TAIML acted as the settlor and investment manager of SREI Alternative Investment Trust (SAIT), which controlled entities holding a 99.99% stake in the Corporate Debtor.

Based on these findings, the Appellant was deemed a related party under Section 5(24)(i), (j), and (h) of the IBC.

Legal Implications

This ruling has several important implications for insolvency proceedings:

  • RP’s Authority: The decision confirms that Resolution Professionals have the authority to determine a creditor’s related party status under Section 5(24) of the IBC.
  • Substantive vs. Procedural Assessment: The NCLAT distinguished between substantive legal findings of control and influence versus mere procedural lapses, emphasizing that related party determinations must be based on careful factual analysis.
  • Prevention of Conflicts: The ruling reinforces the IBC’s objective to maintain the integrity of the Committee of Creditors by preventing entities with potential conflicts of interest from participating in the decision-making process.
  • Precedential Value: The NCLAT relied on established Supreme Court jurisprudence, particularly Phoenix Arc Private Limited v. Spade Financial Services Limited and ArcelorMittal India Private Limited v. Satish Kumar Gupta and Others, to support its reasoning.

Looking Forward

This decision serves as an important reminder for creditors and stakeholders in insolvency proceedings to be aware of their corporate relationships and potential classification as related parties. The ruling strengthens the position of Resolution Professionals in making determinations that protect the integrity of the insolvency resolution process.

For legal practitioners advising clients in insolvency matters, this case highlights the importance of:

  • Conducting thorough due diligence on corporate relationships before filing claims
  • Understanding the broad interpretation of “control” under Section 5(24) of the IBC
  • Recognizing that both direct and indirect control through corporate structures can lead to related party classification
  • The NCLAT’s decision ultimately reinforces the IBC’s goal of creating a fair and transparent resolution process that balances the interests of all stakeholders while preventing undue influence from related parties.

This blog post is intended for informational purposes only and does not constitute legal advice.

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