05 (24) (h)

Mere fact that one of Director is common in Financial Creditor as well as Corporate Debtor shall not ipso facto lead to prove fulfilment of Sec. 5(24)(h) of IBC | Filing of claim as authorised by the common Director cannot be treated advise, direction or instruction as referred under Sec. 5(24)(h) – ODAT GmbH Vs. CA Santanu Brahma, IRP of Darjeeling Organic Tea Estates Pvt. Ltd. – NCLAT New Delhi

In this important judgment on related party in CoC, Hon’ble NCLAT holds that:

(i) The word ‘a person’ as contained in Sub-clause (h) has to be read as per the definition of ‘person’ under Section 3(23) of the I&B Code. The definition of ‘person’ is an inclusive definition and the Appellant can be held to be a person.
(ii) For applying Section 5(24)(h) it has to be proved that on the advice of Appellant a Director, Partner or Manager of the Corporate Debtor is accustomed to act.
(iii) The mere fact that one of the Director i.e. Rembert Biemond is common in Appellant as well as the Corporate Debtor shall not ipso facto lead to prove fulfilment of Section 5(24)(h). It has to be pleaded and proved that on advise, direction or instruction of the Appellant, a Director, Promoter or Manager of the Corporate Debtor is accustomed to act.
(iv) Filing of the claim before the IRP which is required as per CIRP Regulations, 2016 cannot be treated to be an incident which can be referred to and relied under 5(24)(h).
(v) ODAT-Appellant being Financial Creditor has to file claim in the CIRP. Appellant being a German company has to authorise someone to file the claim and Rembert Biemond authorising one Raju Kumar Singh to file a claim cannot be said to be an act of the Appellant which is covered under Section 5(24)(h).
(vi) When there are more than one Managing Director, functions on behalf of the Appellant can be carried out at least by two Managing Directors. Present is not a case that there is any evidence that two Managing Directors did any action which may suggest or indicate participation in the policy making process of the Corporate Debtor, therefore, finding of the Adjudicating Authority with regard to Section 5(24)(m)(i) is without any basis and cannot be sustained.

Mere fact that one of Director is common in Financial Creditor as well as Corporate Debtor shall not ipso facto lead to prove fulfilment of Sec. 5(24)(h) of IBC | Filing of claim as authorised by the common Director cannot be treated advise, direction or instruction as referred under Sec. 5(24)(h) – ODAT GmbH Vs. CA Santanu Brahma, IRP of Darjeeling Organic Tea Estates Pvt. Ltd. – NCLAT New Delhi Read Post »

Raj Radhe Finance Ltd. Vs. Dinesh Kumar Mundada RP of Superdrawn Wire Industries Pvt. Ltd. – NCLT Ahmedabad Bench

The Adjudicating Authority held that it is further noted that the RP did not inquire on the issue regarding related party even after serious grievance was raised by the Applicant vide mail dated 03.07.2022. Instead of inquiring into the issue of related party, the RP relied upon the confirmation of erstwhile IRP in which it was stated that Respondent No.2 to 4 do not fall under the definition of ‘related party’ under section 5(24) and 5(24A) of IBC, 2016. Hence, we direct to replace the RP. We also direct fresh constitution of CoC of the Corporate Debtor in accordance with law. In view thereof, this application stands allowed.

Raj Radhe Finance Ltd. Vs. Dinesh Kumar Mundada RP of Superdrawn Wire Industries Pvt. Ltd. – NCLT Ahmedabad Bench Read Post »

Whether IRP(became IRP after admission of the CIRP) who had served the notice under Section 8 of the Code is a related party in terms of Section 5(24)(h) of the Code? – Nileshbhai Shantilal Patel Vs. Westin Resins and Ploymers Pvt. Ltd. & Anr. – NCLAT New Delhi

NCLAT held that a close scrutiny of the Section 5(24)(h) would show, firstly, that it relates to the Corporate Debtor and not to the Operational Creditor and secondly the Appellant was to lead evidence that the Director, Partner or Manager was accustomed to act on the directions or instructions of the said IP. Therefore, in our considered opinion, Section 5(24)(h) of the Code is not at all applicable to the facts and circumstances of the present case and thus the arguments raised in this regard, is hereby rejected. Since, we are dictating the order in the court, Sr. counsel for the Appellant has then referred to Section 5(24-A)(h) of the Code to submit that the related party in relation to an individual should also be looked into in regard to Section 5(24-A)(h). We have also referred to that provision but the same is not applicable because the dispute is between two corporate entities and not in respect of the individuals.

Whether IRP(became IRP after admission of the CIRP) who had served the notice under Section 8 of the Code is a related party in terms of Section 5(24)(h) of the Code? – Nileshbhai Shantilal Patel Vs. Westin Resins and Ploymers Pvt. Ltd. & Anr. – NCLAT New Delhi Read Post »

If there is a common source of control over both the entities, it cannot be denied that the two entities become associated for that reason – Dr. Gopal Krishnan MS Vs. Mr. Ravindra Beleyur RP of M/s Yashomati Hospitals Pvt. Ltd. – NCLAT Chennai

Issues before Appellate Tribunal

(I) Whether the debt claimed by appellants can be considered as financial debt u/s 5(8) of the Code 2016?

(II) Whether the impugned order passed by the Adjudicating Authority was incorrect holding the Appellants as related parties keeping in view provisions on Code 2016 and IBBI rules and regulations?

(III) Whether the Resolution Plan was approved correctly when no provision had been made for the claims of the Appellants?

If there is a common source of control over both the entities, it cannot be denied that the two entities become associated for that reason – Dr. Gopal Krishnan MS Vs. Mr. Ravindra Beleyur RP of M/s Yashomati Hospitals Pvt. Ltd. – NCLAT Chennai Read Post »

Only those Financial Creditors that are related parties in praesenti would be debarred from CoC under the first proviso to Section 21(2), those related party Financial Creditors that cease to be related parties in order to circumvent the exclusion under the first proviso to Section 21(2), should also be considered as being covered by the exclusion thereunder – Phoenix Arc Pvt. Ltd. Vs. Spade Financial Services Limited & Ors. – Supreme Court

An issue of interpretation in relation to the first proviso of Section 21(2) is whether the disqualification under the proviso would attach to a financial creditor only in praesenti, or if the disqualification also extends to those financial creditors who were related to the corporate debtor at the time of acquiring the debt. Thus, facially, it would appear that the use of the simple present tense in the first proviso to Section 21(2) indicates that the disqualification applies in praesenti. Furthermore, this interpretation would also be supported by a reading of the first proviso to Section 21(2), in light of the definition of ‘related party’ under Section 5(24), which uses phrases such as ‘is accustomed to act’ or ‘is associated’ to define a related party in the present tense.(p82 & 84).

While the default rule under the first proviso to Section 21(2) is that only those financial creditors that are related parties in praesenti would be debarred from the CoC, those related party financial creditors that cease to be related parties in order to circumvent the exclusion under the first proviso to Section 21(2), should also be considered as being covered by the exclusion thereunder. Mr Kaul has argued, correctly in our opinion, that if this interpretation is not given to the first proviso of Section 21(2), then a related party financial creditor can devise a mechanism to remove its label of a ‘related party’ before the Corporate Debtor undergoes CIRP, so as to be able to enter the CoC and influence its decision making at the cost of other financial creditors. (p95)

Only those Financial Creditors that are related parties in praesenti would be debarred from CoC under the first proviso to Section 21(2), those related party Financial Creditors that cease to be related parties in order to circumvent the exclusion under the first proviso to Section 21(2), should also be considered as being covered by the exclusion thereunder – Phoenix Arc Pvt. Ltd. Vs. Spade Financial Services Limited & Ors. – Supreme Court Read Post »

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