KEY HIGHLIGHTS

  • CLT: A related party of the financial creditor is not barred under Section 29A of the IBC to submit a resolution plan.
  • NCLAT: Attachment of Corporate Debtor's bank account by the Employees' Provident Fund Organization cannot continue during Moratorium.
  • NCLT: Indemnity of obligations under an agreement is not a 'financial debt' under Section 5(8) of the Insolvency and Bankruptcy Code, 2016.
  • Supreme Court: Appeals and Applications under the Arbitration & Conciliation Act, 1996 relating to commercial dispute of specified value, other than the international commercial arbitration, shall lie before the commercial courts established under the Commercial Courts Act, 2015 even though they are subordinate to the rank of the Principal Civil Judge in the District.

  1. NCLT: A related party of the financial creditor is not barred under Section 29A of the IBC to submit a resolution plan.

The National Company Law Tribunal, Cuttack ("NCLT"), in the case of Trimex Industries Private Limited v. M/s. Sathavahana Ispat Limited and Others [I.A. No. 791/2021 in CP. (IB) No.179/HDB/2020], has held that a related party of the financial creditor is not barred under Section 29A of the Insolvency and Bankruptcy Code, 2016 ("IBC") to submit a resolution plan.

Facts

The Applicant is one among the Operational Creditors ("Applicant/OC") of M/s. Sathavahana Ispat Limited ("Corporate Debtor/1st Respondent"). The petition for corporate insolvency resolution process ("CIRP") was filed by M/s. Thirumal Logistics under Section 9 (Application for initiation of corporate insolvency resolution process by operational creditor) of the IBC, against which the Corporate Debtor was admitted by the adjudicating authority.

The entire financial debt of the Corporate Debtor was assigned to JC Flowers Asset Reconstruction Private Limited ("2 nd Respondent") for a consideration, which was paid by it in two modes, namely, 15% by pledging security receipts to the primary and end-point allottee, namely, M/s. Siddeshwari Tradex Private Limited ("Siddeshwari"), via a trustee company, namely, M/s. Axis Trustee Services Limited, in respect of which a charge was created, and the balance 85% from private investors. Accordingly, the 2nd Respondent was the sole successor of the financial creditor of the Corporate Debtor, as well as, the sole member in the Committee of Creditors ("CoC") of the Corporate Debtor.

The Resolution Professional ("RP") issued an invitation for Expression of Interest ("EoI"). A provisional list was issued, wherein seven EoIs were submitted by different resolution applicants.

In the meantime, since the Corporate Debtor was a running concern, to cater to its repair and maintenance works, a request for proposal was issued by the interim RP. The works contract, with the approval from the CoC, was issued to the Prospective Resolution Applicant ("PRA"). Mr. Prithvi Raj Jindal, who is shareholder in Siddeshwari, and also a director and a key managerial person in the PRA.

Thus, it was contended that by awarding the works contract to the PRA, there existed a scheme of unitary collusion. In this situation, it was impossible for the CoC to act in a manner that exuded 'commercial wisdom' without allowing the betterment of the interests of Siddeshwari, and thereby the CoC polluted the possibility of a better outcome for the Corporate Debtor and for the other operational creditors.

Issue

Whether the CoC be restrained from considering the resolution plan of the PRA which has already been submitted by the Resolution Professional to the CoC.

Arguments

Contentions raised by the Applicant:

The Applicant had prayed to restrain the CoC from considering the resolution plan submitted to it by the PRA because the CoC and PRA are related parties. It was argued that the CoC, the PRA, Siddeshwari and M/s. Hexa Securities and Finance Company are all group companies, which have colluded with each other. The PRA was holding a key position in the latter two companies, and the said two companies funded the purchase by the CoC of the entire financial debts of the Corporate Debtor from its original financial creditors.

Thus, the PRA taking advantageous position held by the CoC as the sole successor of financial creditors and the member in the CoC of the Corporate Debtor, had submitted the resolution plan and further obtained the works contract for repairs and maintenance of the Corporate Debtor. Hence, the PRA played different roles, via its related parties, and dominated the entire CIRP against the interests of the other stakeholders of the Corporate Debtor.

It was also argued that the RP instead of proceeding with the resolution plans submitted by the other resolution applicants has considered the disputed plan of the PRA and kept silent without bothering about the delay and expiry of the resolution period. The RP failed to act in accordance with Regulation 39(1)(c) of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 ("Regulations") and further failed to gather the necessary information and records pertaining to the fact that the PRA is the sole person behind the CoC who has hijacked the entire CIRP.

The OC further argued that the RP failed to act diligently, and instead has acted in a biased manner causing prejudice to the rights of the other operational creditors and stakeholders of the Corporate Debtor.

Contentions raised by the Respondents and RP:

The Respondents contended that the application is pre-mature and devoid of any merit. Even before consideration by the CoC, the OC had made assumptions and was casting aspersions with the sole intent to delay the proceedings.

The RP contended that he acted as per the provisions of the IBC. The scheme of the IBC mandates the RP to function under the umbrella of the CoC, and hence the contention of the OC that the RP can proceed with other resolution plans, while leaving the PRA is neither within the ambit of the RP nor statutorily permitted.

It was also argued that Section 5(24) and proviso to Sections 21(2), 28(1)(f) and 29A of the IBC define related party only to the Corporate Debtor and restrain the RP to admit them into the CoC, and not to undertake any related party transactions without prior permission from the CoC and receipt of resolution plan, but there is no such restriction to related party in respect of the financial creditor. Hence, the RP acted in accordance with the provisions of IBC.

The RP, in accordance with Regulation 36A(10) of the Regulations, also issued the provisional list of resolution applicants to the OC and called for objections to exclude or include any resolution applicant named in the provisional list. This was never objected to by anyone, including the OC, and hence the OC is estopped from subsequently raising any objection.

The 2nd Respondent argued that it was assigned the financial debts of the Corporate Debtor by the consortium led by Canara Bank in a manner known to law, under Section 5 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002, and the Reserve Bank of India ("RBI") guidelines. The Applicant has no locus standi to question the validity of the said assignment in IBC proceedings. It is also unnecessary to the OC to know the source of the CoC to get the assignment, albeit the source of funding was furnished by it.

The relief to restrain the CoC from considering the resolution plan of the PRA amounts to restraining the CoC from carrying out its functions as provided in the IBC, and hence such a relief cannot be granted. The PRA argued that if the instant application was conceded, it would nullify the role of CoC under the IBC. The OC having missed the bus to raise any objection, when the RP called for them pursuant to issuance of the provisional list mentioning the resolution applicants, cannot now be permitted as an afterthought to file this instant application. The OC was also named in the final list of resolution applicants, which however was not considered after it failed to submit the resolution plan, evaluation matrix and information memorandum. Hence, this application was not filed with a bona fide intention, since the OC is attempting to avoid the competition indirectly, when it directly failed to qualify to be appointed as the prospective resolution applicant.

Further, all the transactions were carried out in a transparent manner and hence, the PRA is not disqualified in any manner.

Observations of the NCLT

The arguments of the Applicant were observed as unsustainable and rejected by the NCLT for the following reasons:

  1. they are bereft of any tangible evidence, but only based on presumptions and apprehensions;
  2. the mere fact that Mr. Prithvi Raj Jindal holds a key managerial position in Siddeshwari, which funded the assignment of the financial debts of the Corporate Debtor from the original financial creditors in favour of the CoC, does not substantiate the aforesaid allegations;
  3. Siddeshwari has been duly constituted under the provisions of the Companies Act, 2013, and the debts were duly assigned in a duly conducted e-auction adopting the "swiss challenge" method;
  4. the presumptions and apprehensions are beyond the ambit of this adjudicating authority under the IBC, or does not withstand legal scrutiny; and
  5. in accordance with Section 21 of the IBC, the CoC as the assignee of the original financial creditors is not a related party of Corporate Debtor.

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Article by Vijay Pal Dalmia, Advocate, Supreme Court of India and Delhi High Court, Partner & Head of Intellectual Property Laws Division, Vaish Associates Advocates, India

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