Can Resolution Professional terminate related party agreements during the CIRP and Can a Resolution Applicant also put a condition in submitted Resolution Plan to terminate the existing agreements with related party? – Hemalata Hospitals Ltd. Vs. Sh. Siba Kumar Mohapatra RP of Medirad Tech India Ltd. – NCLT New Delhi Bench Court-II

In this case, the Applicant has challenged the termination of Agreements that the RP terminated the lease without the written consent of both parties in violation of the Agreement. The RP has contended that the Applicant is a Related Party of the Corporate Debtor. NCLT New Delhi Bench Court-II held that: (i) In terms of Section 28(1)(f) read with Section 28(3) of IBC 2016, the “related party transactions” cannot be undertaken by the RP during the period of CIRP without the approval of the CoC with 66% of the votes. In the instant case, the CoC instead of giving approval to continue with “the related party transactions in terms of Lease Deed and Service Agreements” gave its consent to terminate or did not object to termination of those related party agreements, in its commercial wisdom; and (ii) In view of the settled position, related party contracts can be sought to be terminated via the relevant Clauses in the Resolution Plan. Therefore, we find no illegality committed by the RP in terminating the Service Agreement dated 01.09.2006, Lease Agreement dated 31.12.2013 along with Supplementary Agreement dated 01.01.2014. (iii) The application is Dismissed, being devoid of merits.

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I. Case Reference

Case Citation : (2023) ibclaw.in 489 NCLT
Case Name : Hemalata Hospitals Ltd. Vs. Sh. Siba Kumar Mohapatra RP
Corporate Debtor : Medirad Tech India Ltd.
Application/Appeal No. : IA. No. 2750/ND/2022 and IA. NO. 5617/ND/2022  in (IB)-1243/(ND)/2018
Judgment Date : 09-Aug-23
Court/Bench : NCLT New Delhi Bench Court-II
Member (Judicial) : Shri Bachu Venkat Balaram Das
Member (Technical) : Shri L.N. Gupta

II. Brief about the decision

IA. NO. 2750/ND/2022

Facts of the case

  • In this IA, the Applicant has challenged the termination of the Service Agreement dated 01.09.2006, the Lease Agreement dated 31.12.2013, and the Supplementary Agreement dated 01.01.2014.
  • The Respondent/RP terminated the Lease Agreement vide its termination notice dated 30.05.2022.
  • The Applicant has contended that the RP terminated the lease without the written consent of both parties in violation of Clause 6 of the Lease Agreement dated 31.12.2013.
  • Per Contra, the RP has contended that the Applicant is a Related Party of the Corporate Debtor. He has further contended that the PRAs made a condition that for submission of the Resolution Plan, such related party Agreements need to be terminated. Hence, in the interest of the Corporate Debtor, the Agreements under reference were terminated.

Decision of the Adjudicating Authority

A. Can Resolution Professional terminate the agreements of related party during the CIRP?

  • On perusal of the contents of Section 25 of IBC 2016, we do not find any explicit provision in the duties of RP dealing with the related party transaction. On the bare perusal of the provision contained in Section 28(1)(f) read with the provision under Section 28(3) of IBC 2016, we find that the “related party transactions” cannot be undertaken or carried out by the RP during the period of CIRP without the knowledge and approval of CoC with 66% of the votes.(p10)
  • From the record, it is seen that both the CoC members had either issued expressed NOC or not objected to the termination of the aforesaid Agreements. Further, the other member of the CoC i.e., TDB (having 33.46% voting shares in the CoC) had also responded vide its e-mail dated 26/25.05.2022 stating that they had not given any consent for either of the Agreements and hence, the termination/cancellation of the Agreements can be done by RP.(p12)
  • In a nutshell, in terms of Section 28(1)(f) read with Section 28(3) of IBC 2016, the “related party transactions” cannot be undertaken by the RP without the approval of the CoC with 66% of the votes. In the instant case, the CoC instead of giving approval to continue with “the related party transactions in terms of Lease Deed and Service Agreements” has given its consent to terminate those related party agreements, in its commercial wisdom. Hence, we find no illegality committed by the RP in terminating the Service Agreement dated 01.09.2006, the Lease Agreement dated 31.12.2013 along with Supplementary Agreement dated 01.01.2014.(p13)

B. Whether on approval of the Resolution Plan, the SRA is empowered to terminate the “related party contracts/Agreements”?

  • Even otherwise, on a perusal of Clause XIII of the Resolution Plan approved by the CoC, it is noticed that the Resolution Applicant has sought termination of the Lease and Service Agreements.
  • In view of the Judgement in IDBI Bank Vs. Jaypee Infratech Limited (2023) ibclaw.in 91 NCLT and State Bank of India Vs. Bhushan Steel Limited dated, (2018) ibclaw.in 274 NCLT, dated 15.05.2018, it is evident that the Related Party Contract/Agreement can be sought to be terminated via the relevant Clauses in the Resolution Plan.
  • Hence, even if we consider the prayer of the Applicant for restoring the Agreements, then also they will stand terminated vide the provision made/sought by the SRA under the Resolution Plan duly approved by the Committee of Creditors (CoC).(p18-19)

C. Conclusion

The Adjudicating Authority concluded that:

  • (a) In terms of Section 28(1)(f) read with Section 28(3) of IBC 2016, the “related party transactions” cannot be undertaken by the RP during the period of CIRP without the approval of the CoC with 66% of the votes. In the instant case, the CoC instead of giving approval to continue with “the related party transactions in terms of Lease Deed and Service Agreements” gave its consent to terminate or did not object to termination of those related party agreements, in its commercial wisdom; and
  • (b) In view of the settled position, related party contracts can be sought to be terminated via the relevant Clauses in the Resolution Plan. Therefore, we find no illegality committed by the RP in terminating the Service Agreement dated 01.09.2006, Lease Agreement dated 31.12.2013 along with Supplementary Agreement dated 01.01.2014.
  • Hence, the application is Dismissed, being devoid of merits.(p21-22)

D. IA. NO. 5617/ND/2022

The present IA No. 5617 of 2022 has been filed by India SME Asset Reconstruction Company Limited (Applicant) under Section 30(6) of IBC, 2016.

The Adjudicating Authority concluded that it is a well-settled principle of law that the Adjudicating Authority is not required to interfere with the decision taken by the CoC in its commercial wisdom, save and except the circumstances referred to in Section 30(2) of the IBC, 2016. In terms of the Compliance Certificate filed in Form-H by the Applicant/RP, the Resolution Plan does not contravene any of the provisions of the law for the time being in force. In the sequel to the above, we have no other option but to approve the Resolution Plan as approved by the CoC and as placed by the Applicant before this Adjudicating Authority. We, therefore, allow the present Application and approve the COC-approved Resolution Plan placed before us by the Applicant/RP.(p35-36)

 

III. Full text of the judgment

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