| Headnote |
Insolvency and Bankruptcy Code, 2016 – ss.5(7), (8) – Financial creditor; financial debt – Sham/Collusive transactions, if financial debts – Held: A person can be categorised as a financial creditor if a financial debt is owed to it – s.5(8) stipulates that the essential ingredient of a financial debt is disbursal against consideration for the time value of money – Money advanced as debt should be in the receipt of the borrower – Borrower is obligated to return the money or its equivalent along with the consideration for a time value of money, which is the compensation or price payable for the period of time for which the money is lent – A transaction which is sham or collusive would only create an illusion that money has been disbursed to a borrower with the object of receiving consideration in the form of time value of money, when in fact the parties have entered into the transaction with a different or an ulterior motive – The real agreement between the parties is something other than advancing a financial debt – In the present case, the transaction between AAA and the Corporate Debtor was collusive in nature – Since the commercial arrangements between Spade and AAA, and the Corporate Debtor were collusive in nature, they would not constitute a ‘financial debt’ – Hence, Spade and AAA are not financial creditors of the Corporate Debtor – Decision of NCLAT, in as much as it referred to Spade and AAA as financial creditors, is set aside – Due to the collusive nature of their transactions alleged to be a financial debt u/s.5(8), Spade and AAA cannot be labelled as financial creditors u/s.5(7) – The decision in as much as it referred to Spade and AAA as related parties of the Corporate Debtor u/s.5(24) and excluded Spade and AAA from the CoC in accordance with the first proviso of s.21(2), is affirmed. Res judicata – Insolvency and Bankruptcy Code, 2016 – Corporate Insolvency Resolution Process – Order dtd.31 May 2018 passed by the NCLT allowing AAA and Spade to submit their claims as financial creditors – However, when the NCLT allowed AAA and Spade to re-submit its claims as financial creditors, none of the creditors on the Committee of Creditors (CoC) were represented in the proceedings – Phoenix and YES Bank moved applications for seeking the exclusion of AAA and Spade from the CoC on the ground that they were related parties – Order of NCLT if operated as res judicata – Held: Order of NCLT dtd. 31 May 2018 did not operate as res judicata – The order was passed without hearing financial creditors such as Phoenix and YES Bank – Hence, they were legitimately within their rights in seeking a direction for the exclusion of AAA and Spade from the CoC, if they were aggrieved by the terms of that order. Insolvency and Bankruptcy Code, 2016 – ss.43, 45(2), 49, 50 – “avoidable transactions” – Held: IBC has made provisions for identifying, annulling or disregarding “avoidable transactions” which distressed companies may have undertaken to hamper recovery of creditors in the event of the initiation of Corporate Insolvency Resolution Process (CIRP) – IBC recognizes that for the success of an insolvency regime, the real nature of the transactions has to be unearthed in order to prevent any person from taking undue benefit of its provisions to the detriment of the rights of legitimate creditors. Insolvency and Bankruptcy Code, 2016 – s.5(24) – ‘related party’ – Held: Definition of the expression ‘related party’ in s.5(24) is exhaustive – The definition describes a commutative relationship – The definition of ‘related party’ under IBC is significantly broad – The intention of the legislature in adopting such a broad definition was to capture all kinds of inter-relationships between the financial creditor and the corporate debtor. Insolvency and Bankruptcy Code, 2016 – First proviso to s.21(2), s.5(24) – Exclusion under first proviso to s.21(2) – Application of – Held: While the default rule under the first proviso to s.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 s.21(2), should also be considered as being covered by the exclusion thereunder – In the present case, there is a finding that AAA and Spade were related parties within the meaning of s.5(24) at the time when the alleged financial debt on the basis of which they assert a claim to be a part of the CoC was created – The transactions between Spade and AAA on one hand, and the Corporate Debtor on the other hand, which gave rise to their alleged financial debts were collusive in nature – There existed a deeply entangled relationship between Spade, AAA and Corporate Debtor, when the alleged financial debt arose – While their status as related parties may no longer stand, this was due to commercial contrivances through which these entities seek to now enter the CoC – The pervasive influence of the promoter/ director of the Corporate Debtor over these entities is clear, and allowing them in the CoC would definitely affect the other independent financial creditors. Insolvency and Bankruptcy Code, 2016 – First proviso to s.21(2) – Object and purpose for enactment – Amendment to First proviso to s.21(2) – Reason for – Discussed. Words & Phrases – “disburse”, “time value of money” – Meaning of – Discussed – Insolvency and Bankruptcy Code, 2016 – s.5(8). |
