PHOENIX ARC PRIVATE LIMITED versus SPADE FINANCIAL SERVICES LIMITED & ORS. on 1 February 2021

[2021] 15 S.C.R. 1079

PHOENIX ARC PRIVATE LIMITED

v.

SPADE FINANCIAL SERVICES LIMITED & ORS.

(Civil Appeal No. 2842 of 2020)

FEBRUARY 01, 2021

[DR. DHANANJAYA Y CHANDRACHUD,INDU MALHOTRA AND INDIRA BANERJEE, JJ.]

Insolvency and Bankruptcy Code, 2016 – ss.5(7), (8) –Financial creditor; financial debt – Sham/Collusive transactions, iffinancial debts – Held: A person can be categorised as a financialcreditor if a financial debt is owed to it – s.5(8) stipulates that theessential ingredient of a financial debt is disbursal againstconsideration for the time value of money – Money advanced asdebt should be in the receipt of the borrower – Borrower is obligatedto return the money or its equivalent along with the considerationfor a time value of money, which is the compensation or pricepayable for the period of time for which the money is lent – Atransaction which is sham or collusive would only create an illusionthat money has been disbursed to a borrower with the object ofreceiving consideration in the form of time value of money, when infact the parties have entered into the transaction with a different oran ulterior motive – The real agreement between the parties issomething other than advancing a financial debt – In the presentcase, the transaction between AAA and the Corporate Debtor wascollusive in nature – Since the commercial arrangements betweenSpade and AAA, and the Corporate Debtor were collusive in nature,they would not constitute a ‘financial debt’ – Hence, Spade andAAA are not financial creditors of the Corporate Debtor – Decisionof NCLAT, in as much as it referred to Spade and AAA as financialcreditors, is set aside – Due to the collusive nature of theirtransactions alleged to be a financial debt u/s.5(8), Spade and AAAcannot be labelled as financial creditors u/s.5(7) – The decision inas much as it referred to Spade and AAA as related parties of theCorporate Debtor u/s.5(24) and excluded Spade and AAA from theCoC 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

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Apassed by the NCLT allowing AAA and Spade to submit their claimsas financial creditors – However, when the NCLT allowed AAA andSpade to re-submit its claims as financial creditors, none of thecreditors on the Committee of Creditors (CoC) were represented inthe proceedings – Phoenix and YES Bank moved applications forseeking the exclusion of AAA and Spade from the CoC on the groundBthat they were related parties – Order of NCLT if operated as resjudicata – Held: Order of NCLT dtd. 31 May 2018 did not operateas res judicata – The order was passed without hearing financialcreditors such as Phoenix and YES Bank – Hence, they werelegitimately within their rights in seeking a direction for the exclusionCof AAA and Spade from the CoC, if they were aggrieved by theterms of that order.

Insolvency and Bankruptcy Code, 2016 – ss.43, 45(2), 49,50 – “avoidable transactions” – Held: IBC has made provisionsfor identifying, annulling or disregarding “avoidable transactions”Dwhich distressed companies may have undertaken to hamperrecovery of creditors in the event of the initiation of CorporateInsolvency Resolution Process (CIRP) – IBC recognizes that for thesuccess of an insolvency regime, the real nature of the transactionshas to be unearthed in order to prevent any person from takingundue benefit of its provisions to the detriment of the rights ofElegitimate creditors.

Insolvency and Bankruptcy Code, 2016 – s.5(24) – ‘relatedparty’ – 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 broadF– The intention of the legislature in adopting such a broad definitionwas to capture all kinds of inter-relationships between the financialcreditor and the corporate debtor.

Conclusion

Insolvency and Bankruptcy Code, 2016 – First proviso tos.21(2), s.5(24) – Exclusion under first proviso to s.21(2) –GApplication of – Held: While the default rule under the first provisoto s.21(2) is that only those financial creditors that are related partiesin praesenti would be debarred from the CoC, those related partyfinancial creditors that cease to be related parties in order tocircumvent the exclusion under the first proviso to s.21(2), shouldHalso be considered as being covered by the exclusion thereunder –

In the present case, there is a finding that AAA and Spade wererelated parties within the meaning of s.5(24) at the time when thealleged financial debt on the basis of which they assert a claim tobe a part of the CoC was created – The transactions between Spadeand AAA on one hand, and the Corporate Debtor on the other hand,which gave rise to their alleged financial debts were collusive innature – There existed a deeply entangled relationship betweenSpade, AAA and Corporate Debtor, when the alleged financial debtarose – While their status as related parties may no longer stand,this was due to commercial contrivances through which these entitiesseek to now enter the CoC – The pervasive influence of the promoter/director of the Corporate Debtor over these entities is clear, andallowing them in the CoC would definitely affect the otherindependent financial creditors.

Insolvency and Bankruptcy Code, 2016 – First proviso tos.21(2) – Object and purpose for enactment – Amendment to Firstproviso 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).

Disposing of the appeals, the Court

HELD: 1.1 The order of the NCLT dated 31 May 2018 didnot operate as res judicata. The order was passed without hearingfinancial creditors such as Phoenix and YES Bank. Hence, theywere legitimately within their rights in seeking a direction forthe exclusion of AAA Landmark Private Limited (AAA) and SpadeFinancial Services Private Limited (Spade) from the CoC, if theywere aggrieved by the terms of that order. The earlier order waspassed without furnishing them with an opportunity of being heard.[Para 31][1103-F; 1104-A-B]

1.2 The argument that the issue of the eligibility of Spadeand AAA as financial creditors was never raised before the NCLTis contrary to the material produced on record. The NCLT’s orderdated 19 July 2019 was passed after arguments were led on thereal nature of transactions between the parties. [Para 32][1104-B; 1104-D-E]

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A1.3 Sub-section (2) of Section 21 stipulates that the CoC isto comprise of all financial creditors of the corporate debtor. Thefirst proviso to Sub-section (2) has been amended by Act 26 of2018 with effect from 6 June 2018. Having held that AAA andSpade are not financial creditors, NCLT came to the conclusionthat they were not entitled to inclusion in the CoC. TheBAdjudicating Authority was of the view that it was not reallynecessary for it to consider what should be the date with referenceto which a related party should be determined. But it is evidentthat the NCLT did come to the conclusion that Mr. Arun Anandand his various companies namely AAA and Spade were relatedCparties to the corporate debtor though after 2013, Mr Arun Anandresigned from all the companies of the Anil Nanda Group. TheAdjudicating Authority observed that they are no longer relatedto the corporate debtor at the time of the filing of the applicationfor initiation of the CIRP. It noted the deep entanglement of theaffairs of the corporate debtor and the Arun Anand group ofDcompanies, the close business relationship of the past and thefact that the accounts of the corporate debtor had not beenfinalised, audited or filed with the Registrar of Companies since2016. Reading the order of the NCLT as it stands, it is not possibleto accept the submission that the applications filed by YES BankEand Phoenix were rejected only on the basis that they were notfinancial creditors and that there was no determination in regardto their status as related parties. In light of the above discussion,the submission that NCLAT exceeded its jurisdiction byconsidering the second issue relating to the determination of thestatus of AAA and Spade as related parties not agreed with. Thus,Fthere is no reason to remand the matter to NCLAT forreconsideration. An order of remand cannot be passed in a routinemanner, and it should be passed only if a re-consideration isnecessary. An unwarranted order of remand does not serve thecause of justice and merely extends the life of litigation.G[Paras 38, 39][1108-A-C; 1108-C-G]

2. Under Section 5(7) of the IBC, a person can becategorised as a financial creditor if a financial debt is owed to it.Section 5(8) of the IBC stipulates that the essential ingredient ofa financial debt is disbursal against consideration for the timeHvalue of money. [Para 43][1110-E-F]

PHOENIX ARC PRIVATE LIMITED v. SPADE FINANCIAL SERVICESLIMITED & ORS.

Swiss Ribbons Pvt. Ltd. v. Union of India (2019) 4 SCC17 : [2019] 3 SCR 535; Pioneer Urban Land andInfrastructure Ltd vs. Union of India (2019) 8 SCC 416: [2019] 10 SCR 381 – relied on.

3. Collusive Transactions

Money advanced as debt should be in the receipt of theborrower. The borrower is obligated to return the money or itsequivalent along with the consideration for a time value of money,which is the compensation or price payable for the period of timefor which the money is lent. A transaction which is sham orcollusive would only create an illusion that money has beendisbursed to a borrower with the object of receiving considerationin the form of time value of money, when in fact the parties haveentered into the transaction with a different or an ulterior motive.In other words, the real agreement between the parties issomething other than advancing a financial debt. The IBC hasmade provisions for identifying, annulling or disregarding“avoidable transactions” which distressed companies may haveundertaken to hamper recovery of creditors in the event of theinitiation of CIRP. Such avoidable transactions include: (i)preferential transactions under Section 43 of the IBC; (ii)undervalued transactions under Section 45(2) of the IBC; (iii)transactions defrauding creditors under Section 49 of the IBC;and (iv) extortionate transactions under Section 50 of the IBC.The IBC recognizes that for the success of an insolvency regime,the real nature of the transactions has to be unearthed in orderto prevent any person from taking undue benefit of its provisionsto the detriment of the rights of legitimate creditors.[Paras 46, 48][1112-B-C; 1114-A-C]

Prem Chand Tandon v. Krishna Chand Kapoor (1973)2 SCC 366 – relied on.

Snook v. London and West Riding Investments Ltd.[1967] 2 QB 786 – referred to.

4. Spade and AAA

NCLT in its order dated 19 July 2019 has undertaken adetailed analysis of the transactions to arrive at a finding that thetransactions were collusive. The findings of the NCLT in its order

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Adated 19 July 2019 are agreed with. As noted by NCLT, theMemorandum of Understanding dated 12 August 2011, on thebasis of which Spade had filed its claim in Form C before the IRP,was signed two years after the commencement of the purportedtransaction. The execution of the Memorandum of Understandingwas sought to be explained on the basis that a formal documentBwas created for specifying the rate of interest on the InterCorporate Deposits (ICDs) given by Spade to the CorporateDebtor. However, despite the creation of a formal document, therate of interest being charged on the ICDs was 12% as mentionedin the claim before the IRP, which is half of the interest rate ofC24% stipulated in the Memorandum of Understanding. Duringthe arguments, it was also brought to the notice of this Courtthat the Memorandum of Understanding is unregistered andunstamped. The IRP in his letter dated 25 May 2018 has notedthat as per the ledger provided by Spade, no interest was claimedon the alleged debt and no adjustment was made regarding theDpayment of principal or interest by the Corporate Debtor to Spade.It has been submitted in the written submissions filed on behalfof Spade and AAA that the auditors of the Corporate Debtor hadbeen putting a note in its balance sheets stating that the interestof 12% was not being paid to Spade due to a dispute. ThisEsubmission in fact further fortifies the finding of the IRP that nointerest has been paid on the alleged loan. The IRP has also notedin his letter that the Memorandum of Understanding does notstipulate the period of repayment. Hence, the consideration fortime value of money is absent, which is an essential ingredient ofa financial debt. The NCLT has also noted that a major portion ofFthe ICDs was credited in the account of Mr Arun Anand holdingthat the entire amount was not “disbursed” to the CorporateDebtor. NCLAT has also made a similar finding in paragraph 11(i)of its judgement. Under Clause 2 of the Memorandum ofUnderstanding, the amount of Rs. 26.55 Crores has beenGdisbursed not only to the Corporate Debtor but also to “othercompanies on behalf of AKME”. In any event, the entirety of theICDs were not disbursed to Spade. Additionally, no Boardresolution was passed by Spade approving the grant of ICDs andthe charge created on the loan was not registered with theRegistrar of Companies. The Memorandum of Understanding wasH

PHOENIX ARC PRIVATE LIMITED v. SPADE FINANCIAL SERVICESLIMITED & ORS.

PHOENIX ARC PRIVATE LIMITED v. SPADE FINANCIAL SERVICESLIMITED & ORS.

an eye-wash and collusive. NCLT in its order dated 19 July 2019has noted that AAA and the Corporate Debtor had entered intomultiple agreements regarding the same property without givingany explanation or rationale regarding variation in theconsideration. This showed that the transactions were collusivein nature entered with the purpose of diverting properties of theCorporate Debtor to AAA. Since the Development Agreementcould not be implemented because the license for the projectcould not be split into two parts, an Agreement to Sell and a SideLetter were executed on 25 October 2012. The Agreement toSell was entered to purchase FSI/flats equivalent to 38.3% of thetotal FSI in relation to specific units identified and allotted in theagreement. Apparently, the sale consideration was re-negotiatedand enhanced from Rs 32.80 crores under the DevelopmentAgreement to Rs 86.01 crores under the Agreement to Sell.Clause 3 of the Side Letter dated 25 October 2012 shows thatthe intent of the parties was to continue to co-develop the land.It appears that the parties converted the DevelopmentAgreement into an Agreement to Sell executed along with a SideLetter to circumvent the legal prohibition on splitting adevelopment license in two parts. The transaction between AAAand the Corporate Debtor was collusive in nature. Since thecommercial arrangements between Spade and AAA, and theCorporate Debtor were collusive in nature, they would notconstitute a ‘financial debt’. Hence, Spade and AAA are notfinancial creditors of the Corporate Debtor. [Paras 49-52][1115-F-H; 1116-A-H; 1117-A-G]

5. Whether Spade and AAA are related parties The definition of the expression ‘related party’ in Section5(24) is exhaustive, since the expression is defined to “mean”what is set out in clauses (a) to (m). The expression ‘relatedparty’ is defined in Section 5(24) in relation to a corporate debtor.Section 5(24A) provides a corresponding definition in relation toan individual. The definition describes a commutative relationship,meaning that X can be a related party of Y, if either X is related toY, or Y is related to X. The definition of ‘related party’ under theIBC is significantly broad. The intention of the legislature inadopting such a broad definition was to capture all kinds of inter-

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Arelationships between the financial creditor and the corporatedebtor. While understanding the meaning of ‘related party’ inthe context of the IBC, it is important to keep in mind that it wasdefined to ensure that those entities which are related to theCorporate Debtor can be identified clearly, since their presencecan often negatively affect the insolvency process. It is not difficultBto accept the conclusion of the NCLAT that Mr Arun Anand wouldbe a related party of the Corporate Debtor in accordance withSection 5(24)(h) and Sections 5(24)(m)(i). Presently, the courthas to determine whether the Corporate Debtor’s board,directors, etc, are accustomed to act on Mr Arun Anand’s advice/Cdirection/instruction and if he participates in the policy-makingprocess of the Corporate Debtor. While a strict determination ofintent or mens rea may not always be possible by the NCLT andNCLAT in summary proceedings, it is possible to draw theinference from the facts at hand. These facts are that there was adeep entanglement between the entities of Mr Arun Anand andDMr Anil Nanda, and Mr Arun Anand did hold positions duringthis period which could have been used by him to guide the affairsof the Corporate Debtor. This finding is further supported byconclusion that the transactions between the Corporate Debtorand the entities led by Mr Arun Anand were collusive in nature.EThe NCLAT’s conclusion that Spade entered into two transactionson the basis of the advice/instructions/directions of the board/directors of the Corporate Debtor under Section 5(24)(f) isaccepted. As already held, the transactions between AAA andthe Corporate Debtor were collusive in nature. This supportsthe findings of the NCLAT that the Agreement to Sell and SideFLetter dated 25 October 2012 were a mere eye-wash, throughwhich they sought to develop the AKME RAAGA projecttogether while circumventing government guidelines. Hence,AAA would be a partner of the Corporate Debtor within themeaning of Section 5(24)(a). Mr Arun Anand, Spade and AAAGwere related parties of the Corporate Debtor during the relevantperiod when the transactions on the basis of which Spade andAAA claim their status as financial creditors took place.[Paras 57-59, 62-65][1120-B-C; 1121-E-G; 1122-G-H; 1123-A-H]H6. Amendment to First Proviso of Section 21(2)

PHOENIX ARC PRIVATE LIMITED v. SPADE FINANCIAL SERVICES1087LIMITED & ORS.

The first proviso to Section 21(2) was amended, to extendthe disqualification to the specified authorised representatives,in case that these representatives happened to be related partiesof the corporate debtor. The introduction of the phrase “is” alongwith related party was not a guiding factor behind theParliamentary amendment. [Para 81][1132-B-C]

7. Related Parties - Interpretation In Praesenti

The purpose of excluding a related party of a corporatedebtor from the CoC is to obviate conflicts of interest which arelikely to arise in the event that a related party is allowed to becomea part of the CoC. Where a financial creditor seeks a position onthe CoC on the basis of a debt which was created when it was arelated party of the corporate debtor, the exclusion which iscreated by the first proviso to Section 21(2) must apply. For, it ison the strength of the financial debt as defined in Section 5(8)that an entity claiming as a financial creditor under Section 5(7)seeks a position on the CoC under Section 21(2). If the definitionof the expression ‘related party’ under section 5(24) applies atthe time when the debt was created, the exclusion in the firstproviso to Section 21(2) would stand attracted. However, if suchan interpretation is given to the first proviso of Section 21(2), allfinancial creditors would stand excluded if they were a ‘relatedparty’ of the corporate debtor at the time when the financial debtwas created. This may lead to absurd conclusions for entitieswhich have legitimately taken over the debt of related parties, orwhere the related party entity had stopped being a ‘related party’long ago. Thus, it has been clarified that the exclusion under thefirst proviso to Section 21(2) is related not to the debt itself butto the relationship existing between a related party financialcreditor and the corporate debtor. As such, the financial creditorwho in praesenti is not a related party, would not be debarredfrom being a member of the CoC. However, in case where therelated party financial creditor divests itself of its shareholdingor ceases to become a related party in a business capacity withthe sole intention of participating the CoC and sabotage the CIRP,by diluting the vote share of other creditors or otherwise, it wouldbe in keeping with the object and purpose of the first proviso to A

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ASection 21(2), to consider the former related party creditor, asone debarred under the first proviso. Hence, while the defaultrule under the first proviso to Section 21(2) is that only thosefinancial creditors that are related parties in praesenti would bedebarred from the CoC, those related party financial creditorsthat cease to be related parties in order to circumvent theBexclusion under the first proviso to Section 21(2), should also beconsidered as being covered by the exclusion thereunder. In thepresent case, there is a finding that AAA and Spade were relatedparties within the meaning of Section 5(24) at the time when thealleged financial debt on the basis of which they assert a claim toCbe a part of the CoC was created. This was due to the long-standing relationship between Mr Arun Anand and Mr Anil Nanda,and their respective corporations. Admittedly, such a relationshipstill existed even in 2017, since Mr Anil Nanda’s JIPL heldshareholding in Mr Arun Anand’s Spade. Further, the transactionsbetween Spade and AAA on one hand, and the Corporate DebtorDon the other hand, which gave rise to their alleged financial debtswere collusive in nature. Therefore, it is evident that thereexisted a deeply entangled relationship between Spade, AAA andCorporate Debtor, when the alleged financial debt arose. Whiletheir status as related parties may no longer stand, this was dueEto commercial contrivances through which these entities seekto now enter the CoC. The pervasive influence of Mr Anil Nanda(the promoter/director of the Corporate Debtor) over theseentities is clear, and allowing them in the CoC would definitelyaffect the other independent financial creditors. [Paras 90-92, 94-96][1138-G-H; 1139-D-F; 1140-G-H; 1141-A-G]F

8. The decision of the NCLAT, in as much as it referred toSpade and AAA as financial creditors, is set aside. Due to thecollusive nature of their transactions alleged to be a financial debtunder Section 5(8), Spade and AAA cannot be labelled as financialcreditors under Section 5(7). The decision of the NCLAT, in asGmuch as it referred to Spade and AAA as related parties of theCorporate Debtor under Section 5(24), is affirmed. The decisionof the NCLAT, in as much as it excluded Spade and AAA fromthe CoC in accordance with the first proviso of Section 21(2), isaffirmed but for the reasons mentioned above. [Para 97][1141-G-HH; 1142-A-C]

PHOENIX ARC PRIVATE LIMITED v. SPADE FINANCIAL SERVICESLIMITED & ORS.

Arcelor Mittal India (P) Ltd. v. Satish Kumar Gupta(2019) 2 SCC 1 : [2018] 12 SCR 362 – relied on.

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Abhay Singh Chautala v. C.B.I. (2011) 7 SCC 141 :[2011] 10 SCR 949; R.S. Nayak v. A.R. Antulay (1988)2 SCC 602 : [1988] 1 Suppl. SCR 1 – referred to.

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Richa Saraf, ‘Concept of Related Party: Interpretation byLetter or Spirit of the IBC?’, (IndiaCorpLaw, 11 August 2018);Thomas H. Jackson, ‘Bankruptcy, Non-Bankruptcy Entitlements,and the Creditors’ Bargain’, 91 Yale Law Journal 857, (1982) at859-71; Medha Shekar and Anuradha Guru, TheoreticalFramework of Insolvency Law; Douglas G. Baird, ‘A WorldWithout Bankruptcy’, 50 Law & Contemporary Problems, Spring1987; D.R. Korobkin, Rehabilitating values: A jurisprudence ofbankruptcy, 91 Columbia Law Review (1991), Bankruptcy LawReforms Committee, Volume I: Rationale and Design, ofNovember 2015; Report of the Insolvency Law Committee, March2018; Vidhi Centre for Legal Policy, Understanding the Insolvencyand Bankruptcy Code, 2016: Analysing Developments inJurisprudence; UNCITRAL, Legislative Guide on InsolvencyLaw, 2005; G.P. Singh, Principles of Statutory Interpretation (1stedn., Lexis Nexis 2015); Insolvency Law Committee Report,2020.

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From the Order dated 19.07.2019 of the National Company LawAppellate Tribunal, New Delhi, Bench-III in CP(IB)-55/ND/2018.

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ACivil Appeal No.3063 of 2020.

Neeraj Kishan Kaul, K.V. Viswanathan, Sanjiv Sen, Sr. Advs.,Gaurav Agrawal, Suresh Dutt Dobhal, Shikhar Kumar, Rohit KrishanNaagpal, R. Venkatraman, Dipanshu Gaba, P.V. Yogeswaran, AbhishekAnand, Ms. Mithu Jain, Mohak Sharma, Parthik Choudhary, Advs. forBthe appearing parties.

The Judgment of the Court was delivered by DR. DHANANJAYA Y CHANDRACHUD, J.

This judgment has been divided into sections to facilitate analysis.CThey are:

AThe appeals

BCIRP for the Corporate Debtor

CProceedings before NCLT

DProceedings before NCLAT

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ETransactions of the Corporate Debtor

FRelationship between Anil Nanda and Arun Anand GWhether Spade and AAA are financial creditors of theECorporate Debtor G.1 Submission of Counsel G.2 Assessment of preliminary submissions G.2.1 Res Judicata FG.2.2 Issues before NCLAT

G.2.3 Remand to NCLAT

G.3 Analysis

G.3.1 Statutory Provisions

GG.3.2 Financial Creditor and Financial Debt G.3.3 Collusive Transactions G.3.4 Spade and AAA

HWhether Spade and AAA are related parties H

PHOENIX ARC PRIVATE LIMITED v. SPADE FINANCIAL SERVICES1091LIMITED & ORS. [DR. DHANANJAYA Y CHANDRACHUD, J.]H.1Submission of CounselA

H.2Statutory provisions

H.3Analysis

IWhether Spade and AAA can be excluded from the CoC

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I.1 Submissions of Counsel

I.2 Related Parties and CoC

I.3 Amendment to First Proviso of Section 21(2)

I.4 Related Parties - Interpretation In Praesenti C

JConclusion

A The appeals

1. This judgment would govern two sets of appeals arising fromthe judgment of the National Company Law Appellate Tribunal(“NCLAT” or “Appellate Tribunal”). By a judgment dated 27 January2020, NCLAT dismissed the appeal under Section 61 of the Insolvencyand Bankruptcy Code, 2016 (“IBC”) preferred by AAA LandmarkPrivate Limited (“AAA”) and Spade Financial Services Private Limited(“Spade”) to assail the order dated 19 July 2019 of the National CompanyLaw Tribunal, New Delhi Bench -III (“NCLT” or “AdjudicatingAuthority”). The NCLT had held that AAA and Spade have to beexcluded from the Committee of Creditors (“CoC”) formed in relationto the Corporate Insolvency Resolution Process (“CIRP”) initiatedagainst AKME Projects Limited (“Corporate Debtor”). NCLT passedits order dated 19 July 2019 on applications[1]filed by Phoenix Arc PrivateLimited (“Phoenix”) and YES Bank under Section 60(5)(c) of the IBC.

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2. Phoenix, in Civil Appeal No. 2842 of 2020, submits that thoughthe NCLAT correctly dismissed the appeal filed by Spade and AAA,holding that they are related parties of the Corporate Debtor and arehence to be excluded from the CoC, there is an erroneous finding thatthey are financial creditors. In paragraph 11 of its judgment, the NCLAThas observed that:

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“…admittedly appellants are the financial creditors of the corporatedebtor AKME Projects Limited...”

1 CA No. 337/2018 and CA No. 338/2019 (Phoenix); CA No. 268/2018 and CA No. 269/2018 (Yes Bank).

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AIt has been submitted that there was never any admission on thepart of Phoenix that AAA and Spade are financial creditors. The appealby Phoenix seeks to challenge the above finding on the ground that:

(i) It is contrary to the record; and

(ii) The specific stand of Phoenix is that both AAA and SpadeBare not even creditors of the corporate debtor, much lessfinancial creditors.

Phoenix is thus in appeal under Section 62 of IBC, confined to thefinding that AAA and Spade are financial creditors.

C3. Spade and AAA have independently filed an appeal underSection 62, Civil Appeal No. 3063 of 2020, in order to assail the decisionof the NCLAT dated 27 January 2020 affirming their exclusion fromparticipating in the CoC on the ground that they are related parties of theCorporate Debtor in terms of Section 5(24) and the first proviso to Section21(2) of IBC.D4. Based on the above appeals, three issues have arisen forconsideration before this Court:

(i) Whether Spade and AAA are financial creditors of theCorporate Debtor; E(ii) Whether Spade and AAA are related parties of the CorporateDebtor; and

(iii) Whether Spade and AAA have to be excluded from the CoC.

B CIRP for the Corporate DebtorF5. The brief facts of the case are that CIRP has been initiatedagainst the Corporate Debtor on 18 April 2018 on an application filed byan operational creditor, Mr. Hari Krishan Sharma, under Section 9 ofIBC.

6. During the CIRP, claims were invited by the Interim ResolutionGProfessional (“IRP”). Spade filed its claim in Form C as a financialcreditor for a sum of Rs. 52,96,00,000 on 10 May 2018. Thereafter,Spade filed a revised Form C for a sum of Rs. 109,11,00,000 on 20 May2018. Spade had filed the form on the basis of an alleged Memorandumof Understanding dated 12 August 2011 executed with the CorporateDebtor, which stated that Inter Corporate Deposits (“ICDs”) of Rs.H

26,55,00,000 have been granted to the Corporate Debtor by Spadebearing interest of 24% repayable in terms of the mutual agreementbetween the parties. However, Spade has submitted before this Courtthat it has granted ICDs of Rs. 66,00,00,000 (approx.) to the CorporateDebtor between June 2009 and January 2013. Out of this amount, Spadeis claiming a principal amount of Rs. 23,00,00,000. The balance amountof Rs 43,06,00,000 was credited in the account of AAA, which is awholly owned subsidiary of Spade. The total claim of Spade has increasedto Rs. 109,11,00,000 in 7 years on account of interest at the rate of 24%.

7. AAA filed its claim before the IRP in Form F as a creditorother than a financial creditor or operational creditor for a sum ofRs. 93,90,00,000 on 10 May 2018. Thereafter, AAA filed a revised claimin Form C as a financial creditor for a sum of Rs. 109,72,00,000 on 23May 2018. It had entered into a Development Agreement dated 1 March2012 with the Corporate Debtor for a sale consideration of Rs.32,80,00,000 to purchase development rights in a project. On 25 October2012, the Development Agreement was terminated and an Agreementto Sell, along with a Side Letter, was executed between AAA and theCorporate Debtor for purchase of flats. The sale consideration for theAgreement to Sell was enhanced to Rs. 86,01,00,000 fromRs. 32,80,00,000 under the Development Agreement. AAA paid a sumof Rs. 43,06,00,000 as advance payment under the Agreement to Sell.This amount was adjusted out of the ICDs payable to Spade as notedabove. The claim of AAA is with respect to the principal amount ofRs. 43,06,00,000, which along with interest at the rate of 18% increasedto Rs. 109,72,00,000 in 5 years.

8. The CoC was constituted on 22 May 2018. On 25 May 2018,the IRP rejected the claim of Spade, inter alia, on the ground that theclaim was not in the nature of a financial debt in terms of Section 5(8) ofIBC since there was an absence of consideration for the time value ofmoney, i.e., the period of repayment of the claimed ICDs was notstipulated. The IRP also rejected the claim of AAA on the ground thatits claim as a financial creditor in Form C was filed after the expiry ofthe period for filing such a claim.

C Proceedings before NCLT

9. Aggrieved by the rejection of their claim as financial creditors,AAA and Spade filed applications before the NCLT to be included in AB

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Athe CoC. The NCLT by its order dated 30 May 2018 allowed theapplications. However, none of the other financial creditors, such asPhoenix and YES Bank, were parties to these proceedings. The NCLTobserved that AAA’s original claim in Form F was filed on time and ithas only amended its claim as one under Form C. The NCLT furtherobserved that the amount given by Spade in the form of ICDs has beenBreceived as a deposit and is attracting interest as reflected in Form ‘26AS’, deducting TDS on interest. Thus, NCLT allowed Spade and AAAto submit their claims as financial creditors with a direction to the IRP toconsider the claims.

10. Phoenix is also a financial creditor of the Corporate DebtorCand is a part of CoC. Its claim is based on a registered Deed of Assignmentin its favour dated 28 December 2015, pursuant to which, KarnatakaBank Limited had assigned the non-performing assets relating to thecredit facilities granted to the Corporate Debtor. The voting share ofPhoenix was reduced to 4.28% on account of AAA and Spade beingDincluded in the CoC.

11. On 1 June 2018, a meeting of the CoC took place which wasattended by YES Bank and Phoenix, and also by the newly approvedfinancial creditors, AAA and Spade. Following the meeting, YES Bankand Phoenix filed applications in the NCLT for the exclusion of AAAEand Spade from the CoC on the ground that they are related parties.Notice was issued by the NCLT in the two applications[2].

12. The application moved on behalf of YES Bank under Section60(5), on 28 June 2018, sought the following reliefs:

(i) A direction to the IRP to reconstitute the CoC in terms of theFInsolvency and Bankruptcy (Amendment) Ordinance 2018(“IBC Ordinance 2018”); and

(ii) A direction prohibiting the IRP from allowing AAA and Spadeto participate and vote in the meeting of the COC.

13. The applications filed under Section 60(5) by Phoenix alsoGsought similar reliefs for:

(i) The removal of Spade and AAA from the CoC; and

(ii) Directing the constitution of the CoC in terms of the IBCOrdinance 2018.H2 Civil Appeal No. 267/2018 and Civil Appeal 368/2018

14. NCLT in its judgment dated 19 July 2019 formulated two issuesfor determination. These two issues were:

“i. What is the nature of the transaction between the parties anddoes it qualify to be treated as financial debt as defined underSection 5(8) of IBC, 2016.

ii.What is the date on which there should be relation between thetwo parties for the alleged Financial Creditor to be included in thedefinition “related party’.”

15. In relation to the first issue, the NCLT held that:

“...the transactions between CD and both SPADE and AAALandmark are collusive in nature and do not qualify as financialdebt for the purpose of IBC.”

Accordingly, NCLT held that Spade and AAA did not qualify tobe considered as financial creditors.

16. In relation to the second issue, NCLT held that it “does notrequire a reply” in view of its above-mentioned finding. However, ittook note of the first proviso to Section 21(2) of the IBC, which wasintroduced with effect from 6 June 2018. Under the first proviso, interalia, a financial creditor who is a related party of the corporate debtorshall not have the right of representation, participation or voting in theCoC. The Adjudicating Authority held that “there is no doubt in ourmind that Arun Anand and his company namely Spade and AAALandmark were related parties to the CD”. However, the NCLT notedthat after 2013, soon after the execution to the Agreement to Sell of 25October 2012, Arun Anand resigned from all the companies of the AnilNanda Group and was no longer related to the Corporate Debtor at thetime of the filing of the application for initiation of the CIRP. Ultimately,the Adjudicating Authority held that there was a deep entanglementbetween the affairs of the corporate debtor and the group representingthe Arun Anand companies which could not be unravelled in the summaryjurisdiction before the Tribunal. The ultimate decision of the NCLT wasto allow the applications filed by YES Bank and Phoenix for the exclusionof AAA and Spade from the CoC based on its findings on the first issue.

D Proceedings before NCLAT

17. In appeal, the NCLAT proceeded in paragraph 11 of its decisionto observe that “admittedly” Spade and AAA “are the financial

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Acreditors of the corporate debtor”. Having stated so, the AppellateTribunal proceeded to enquire into whether AAA and Spade are relatedparties within the meaning of Section 5(24) of the IBC.

18. Answering the above issue in the affirmative, the NCLATheld that Spade and AAA are related parties of the Corporate DebtorBsince:

(i) AAA was a partner of the Corporate Debtor in accordancewith Section 5(24)(a)[3]. The Appellate Tribunal held that sinceeven after the cancellation of Development Agreement dated1 March 2012 between the parties, they had entered into anCAgreement to Sale and Side Letter dated 25 October 2012,which was merely a camouflage under which they werepartners in developing a residential project to be sold to athird party;

(ii) In accordance with Section 5(24)(f)[4], during the transactionDperiod of 2010 to 2013, Spade led by Mr Arun Anand wasmaking substantial financial arrangements on the basis ofadvice provided by the Corporate Debtor led by itsManagement and Directors, i.e., Mr. Anil Nanda (a promoterof the Corporate Debtor) and Mr Sonal Anand (Mr ArunAnand’s brother in-law). In particular, the Appellate TribunalEnoted the following two arrangements between Spade andthe Corporate Debtor:

(a) Memorandum of Understanding dated 2 December 2010,through which Spade, on behalf of the Corporate Debtor,paid a third party Rs. 22 crores as ICD and donatedFRs. 3 crores to another third-party trust; and (b)Between 16 and 17 January 2013, the Anil Nanda Groupof Companies (led by Mr. Sonal Anand) sought to settleits debts with a third party (worth Rs. 2 crores) throughfunds parked with Spade; G3 “(a) a director or partner of the corporate debtor or a relative of a director or partnerof the corporate debtor;”

4 “(f) anybody corporate whose board of directors, managing director or manager, inthe ordinary course of business, acts on the advice, directions or instructions ofa director, partner or manager of the corporate debtor;”

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(iii) In accordance with Section 5(24)(h)[5], the Corporate Debtorwas acting on the directions/instruction of Mr. Arun Anandwho, along with his family, is the majority shareholder in Spade,of which AAA is a wholly-owned subsidiary. The AppellateTribunal came to this conclusion on the basis that:

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(a) on 1 June 2009, Spade was appointed as ‘Consultant’ tothe Corporate Debtor till 21 February 2011; B

(b) from 1 November 2011, Mr. Arun Anand was appointedas a ‘Strategic Advisor’ to the Corporate Debtor;

(c) from 26 November 2012, Mr. Arun Anand wasCappointed as Group CEO of the Anil Nanda Group ofCompanies, which included the Corporate Debtor; and (d)during this period, the first ICD was given by Spade tothe Corporate Debtor;

(iv) On the basis of the same reasons as (iii), Mr. Arun Anandwas also held to be a person participating in the policy-makingprocess of the Corporate Debtor in accordance with Section5(24)(m)(i)[6]; D

(v) Mr. Arun Anand and Mr. Sonal Anand were directors of theCorporate Debtor till 2013. Hence, Mr. Arun Anand wouldEbe a related party under Section 5(24)(a) read with5(24A)(a)[7], being a relative of another director; and

(vi) A holding company of the Corporate Debtor, Joint InvestmentPrivate Limited(“JIPL”), holds shareholding in Spade.

19. Hence, NCLAT came to the conclusion that the AdjudicatingAuthority had rightly excluded both Spade and AAA from participationin the CoC since Mr. Anil Nanda, in concert with Mr. Arun Anand andhis family, had created a web of companies which were related partiesto the Corporate Debtor, and was now trying to gain a backdoor entryinto the CoC through them.

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5 “(h) any person on whose advice, directions or instructions, a director, partner ormanager of the corporate debtor is accustomed to act;”

6 “(m) any person who is associated with the corporate debtor on account of— (i)participation in policy-making processes of the corporate debtor;”

7 “(24-A) “related party”, in relation to an individual, means— (a) a person who is arelative of the individual or a relative of the spouse of the individual;”

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AE Transactions of the Corporate Debtor

20. Before we proceed with our analysis of the issues, it isimportant to note the relevant transactions between the Corporate Debtoron one hand and Spade and AAA on the other hand, which gives rise totheir claims as financial creditors.B21. The following transactions between the Corporate Debtor andSpade are relevant for our consideration:

(i) Memorandum of Understanding dated 12 August 2011, throughwhich Spade provided the Corporate Debtor with ICDs wortha net amount of Rs. 66 crores from 1 June 2009 till JanuaryC2013, which provided for 24% interest. However, Spade hasstated that in actuality only 12% interest was charged andhence its claim is on that basis;

(ii) Through this Memorandum of Understanding, the CorporateDebtor provided security for these ICDs through 37 flats worthDRs. 39.825 crores in their real estate project, AKME RAAGA.Further, through emails dated 16 and 17 January 2012, additionalsecurity was provided through 11 plotsworth Rs. 3 crores inthe Corporate Debtor’s real estate project, AKME POLIS.The charge was not registered; and

(iii) Out of the ICDs provided to the Corporate Debtor by Spade,ERs. 43.06 crores’ worth were credited to the account of Mr.Arun Anand by consent. However, this has been disputed bySpade.

22. The following transactions between the Corporate Debtor andAAA are relevant for our consideration:F

(i) Development Agreement dated 1 March 2012, through whichthe Corporate Debtor sold to 38.3% of its development rightsin its real estate project, AKME RAAGA, to AAA for aconsideration of Rs. 32.80 crores;

(ii) Agreement to Sell dated 25 October 2012, which supersededGthe Development Agreement dated 1 March 2012, throughwhich AAA bought a saleable area of 313,928 sq. ft. in AKMERAAGA at a price of Rs. 43.06 crores; and

(iii) Side Letter dated 25 October 2012, which was to be read asa part of the Agreement to Sell, which noted that the areaH

PHOENIX ARC PRIVATE LIMITED v. SPADE FINANCIAL SERVICES1099LIMITED & ORS. [DR. DHANANJAYA Y CHANDRACHUD, J.]

bought by AAA was 38.3% of AKME RAAGA, and AAAAwould provide for the cost of its development accordingly.

F Relationship between Anil Nanda and Arun Anand

23. It is also important to note the close relationship between thekey managerial personnel of the Corporate Debtor, Mr. Anil Nanda andthe director of Spade and AAA, Mr. Arun Anand:

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(i) Mr. Anil Nanda is the major shareholder of JIPL, which holds80% of the shareholding in the Corporate Debtor;

(ii) The Corporate Debtor is a part of the Nanda Group ofCompanies; C

(iii) Mr. Arun Anand was also a director of the Corporate Debtorup to 31 March 2002;

(iv) Mr. Arun Anand and his son, Mr. Aditya Anand, sold theirshareholding in the Corporate Debtor in the year 2004/2005; D

(v) Mr. Arun Anand was also closely related to one of the directorsof the Corporate Debtor, Mr. Sonal Anand, who is his brother-in-law. Sonal Anand was the director of the Corporate Debtorfrom November 2007 to 2013; and

(vi) Mr. Arun Anand has worked in different capacities forMr. Anil Nanda for about 25 years.

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24. The purported transactions took place when he was anemployee of Escorts Limited/Nanda Group of Companies, including theCorporate Debtor and also held key managerial posts in the saidcompanies. Spade and AAA, in their written submissions, have givendetails of Mr Arun Anand’s association with the Corporate Debtor duringthe relevant period (June 2009 to January 2013) and thereafter:

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G Whether Spade and AAA are financial creditors of theCorporate Debtor H

AG.1 Submission of Counsel

25. The learned Senior Counsel who appeared in these proceedingson behalf of the contesting parties are:srt

(i) Mr K.V. Viswanathan for AAA and Spade; B(ii) Mr Neeraj Kishan Kaul for Phoenix; and

(iii) Mr Sanjiv Sen for the Resolution Professional (“RP”).

26. The submission of Mr K V Viswanathan is that NCLT heldagainst AAA and Spade on the ground that they were not financialcreditors. In view of this finding, the NCLT held that it was not necessaryCto enter upon the second issue which it had formulated. On the otherhand, NLCAT in appeal proceeded on the basis that admittedly AAAand Spade are financial creditors but then went on to hold that they arerelated parties and are therefore liable to be excluded from the CoC.His submission is three-fold:

D(i)The issue as to whether Spade and AAA are financial creditorswas concluded by the earlier order of the NCLT dated 31May 2018 which operates as res judicata. NCLT havingallowed the applications of AAA and Spade for submittingtheir claims to the IRP as financial creditors, this finding couldnot have been altered in the subsequent order dated 19 JulyE2019. The NCLT in its order dated 31 May 2018 gave acategorical finding that the amount received by the CorporateDebtor in the form of deposits by Spade and AAA are financialdebts and the IRP’s rejection of their claim was unsustainable;

(ii) The subsequent applications filed by YES Bank and PhoenixFbefore the NCLT only sought a re-constitution of the CoCand to restrict Spade and AAA from representing, participatingor voting in the CoC. The issue in respect of the eligibility ofSpade and AAA as financial creditors was never raised intheir applications. The only issue raised before the NCLTGwas with respect to Spade and AAA being related parties ofthe Corporate Debtor. However, NCLT framed two issuesincluding the one relating to Spade and AAA’s eligibility asfinancial creditors which stood decided on 31 May 2018; and

(iii) In the appeal filed by AAA and Spade against the decision ofHthe NCLT to exclude them from the CoC, the only issue which fell for consideration was whether they were financialcreditors. In other words, it was only the correctness of thedetermination of the Adjudicating Authority that they werenot financial creditors which was moot, for being considered.The NCLAT proceeded to dismiss the appeal, despite itsfinding that “admittedly” AAA and Spade are financialcreditors by coming to the conclusion that they are relatedparties.

27. On the basis of the above submissions, Mr Viswanathan hassubmitted that the proceedings should be remanded back forreconsideration since the NCLAT has made an error of jurisdiction inrejecting the appeal filed by AAA and Spade despite having agreed withtheir submission that they are financial creditors.

28. The submission of Mr Neeraj Kishan Kaul is that AAA andSpade are not creditors of the Corporate Debtor, much less financialcreditors, in terms of Section 5(7) of the IBC. The submissions made inrelation to the transaction between AAA and the Corporate Debtor are:

(i) The Development Agreement dated 1 March 2012 enteredbetween AAA and the Corporate Debtor was collusive. AAAhad sought to purchase 38.3% of the development rights in aproject called AKME RAAGA as a co-developer/partner.However, the development license granted by the Governmentcould not be sub-divided. As a result, the Corporate Debtorand AAA converted the Development Agreement into anunregistered Agreement to Sell dated 25 October 2012;

(ii) AAA and the Corporate Debtor executed an unlawful SideLetter dated 25 October 2012 with the intention to co-developthe land and sell it in the market. The Side Letter containedterms akin to the terms which were a part of the DevelopmentAgreement. It contained terms for sharing of costs ofdevelopment of the project relating to cost of land, construction,license and approvals, manpower, liaison cost etc. and theassigning of responsibilities for compliance. The intent of theparties was to circumvent the laws, government policies andregulations to continue developing the project; and

(iii) Initially, Mr Arun Anand as a director of AAA had filed itsclaim before the IRP accepting that it is neither a financialcreditor nor an operational creditor. However, as an A

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1102SUPREME COURT REPORTS

Aafterthought, Mr. Arun Anand filed a baseless, unlawful, andaugmented revised claim as a financial creditor. AAA’s claimof being a financial creditor is mala fide and dishonest, andwas filed only with the intention of manipulating the votingpercentage of CoC.

B29. Mr Kaul’s submissions in relation to the eligibility of Spade tobe a financial creditor are:

(i) Spade has concealed the real nature of the collusivetransactions and had filed an unlawful claim as a financialcreditor for an amount of Rs. 52,96,00,000. Spade filed arevised claim as a financial creditor exaggerating the amountCit was claiming to Rs. 109,11,00,000 without any basis. The claim was filed by Spade on the basis of an allegedMemorandum of Understanding dated 12 August 2011. Clause2 of the Memorandum of Understanding provides:

“whereas Spade has granted inter-corporate loan to AKME andDother companies on behalf of AKME to the extent of Rs. 26.55Crores (ICD) bearing an interest of 24% repayable as per mutualagreement between parties.”

The Memorandum of Understanding is unenforceable, collusiveand is merely an eye-wash. An amount of only Rs. 26.55 Crores wasEallegedly advanced to Spade and “other companies”. No Board resolutionwas passed by Spade approving the grant of ICDs of Rs. 26.55 Crores.In any case, the alleged claim is grossly time barred; and

(ii) The claim of Spade was rejected by the IRP in a letter dated25 May 2018 on the following basis:

(a) The essential element of a financial debt in terms of Section5(8) of the IBC is absent, which is the consideration forthe time value of money. The exact period of repaymentof the ICDs has not been stipulated in the Memorandumof Understanding; F

(b) The calculation sheet provided by Spade to ascertain theGinterest rate and payment of interest does not reflectadjustment of any part of payment against the paymentof interest;

(c) The ledger provided by Spade does not stipulate theinterest claimed on the alleged debt;H

(d) ICDs were allegedly granted to the Corporate Debtor bySpade in 2013; however, no valid financial contract wasentered between the Corporate Debtor and Spade tostipulate the consideration in terms of the time value ofmoney against each transaction. A financial contract isessential for considering a debt as financial debt; (e)The calculation sheet reflects that the inflow and outflowof funds are in the nature of a running account, indicatingthat the debit and credit balances lack any commercialeffect of borrowing, which is an essential element in termsof Section 5(8)(f) of IBC; and (f)The emails relied on by Spade dated 16/17 January 2013mention that documents in relation to an extension of aloan of Rs. 2 Crores were to be executed. No suchdocuments have been produced on record.

G.2 Assessment of preliminary submissions G.2.1 Res Judicata

30. In order to appreciate the line of submissions carefullypropounded by Mr K V Viswanathan, it becomes necessary to sift throughthe facts. Initially, on 31 May 2018, an order was passed by the NCLTallowing AAA and Spade to submit their claims as financial creditorswith a direction to the IRP to consider the claims. However, when theNCLT allowed AAA and Spade to re-submit its claims as financialcreditors, none of the creditors on the CoC were represented in theproceedings. After the meeting on 1 June 2018, Phoenix and YES Bankmoved applications under Section 60(5)[8] of the IBC for seeking theexclusion of AAA and Spade from the CoC on the ground that theywere related parties.

31. In this backdrop, we are unable to subscribe to the submissionthat the order of the NCLT dated 31 May 2018 operated as res judicata.

8 “(5) Notwithstanding anything to the contrary contained in any other law for thetime being in force, the National Company Law Tribunal shall have jurisdictionto entertain or dispose of—

(a) any application or proceeding by or against the corporate debtor or corporateperson; (b)any claim made by or against the corporate debtor or corporate person, includingclaims by or against any of its subsidiaries situated in India; and

(c) any question of priorities or any question of law or facts, arising out of or inrelation to the insolvency resolution or liquidation proceedings of the corporatedebtor or corporate person under this Code.”

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Issues

AThe order was passed without hearing financial creditors such as Phoenixand YES Bank. Hence, they were legitimately within their rights in seekinga direction for the exclusion of AAA and Spade from the CoC, if theywere aggrieved by the terms of that order. The earlier order was passedwithout furnishing them with an opportunity of being heard.BG.2.2 Issues before NCLAT

32. Mr Viswanathan’s submission that the issue of the eligibilityof Spade and AAA as financial creditors was never raised before theNCLT is contrary to the material produced on record. The applicationfiled by Phoenix adverted to its submission that NCLT’s order dated 31CMay 2018 was obtained by Spade and AAA on a concealment of materialfacts, circumstances and the real nature of the transactions. In addition,Mr Anil Nanda, the suspended director of the Corporate Debtor, hadfiled an application[9] before the NCLT alleging that Spade and AAAhave not financed any amount to the Corporate Debtor. He submittedthat there was no loan facility against the time value of money. In addition,Dhe argued that the Agreement to Sell between the Corporate Debtorand AAA was a part of series of acts of fraud, and is null and void. TheNCLT’s order dated 19 July 2019 was passed after arguments were ledon the real nature of transactions between the parties.

G.2.3 Remand to NCLAT

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33. The submission that the NCLAT has acted beyond jurisdictionin the appeal filed by AAA and Spade in enquiring into whether they arerelated parties is the next aspect which needs to be considered. NCLTin its decision on 19 July 2019 had formulated two questions forconsideration. The first was whether the transactions between AAAFand Spade qualify to be treated as a financial debt under Section 5(8).The second pertained to the date with reference to which the relationshipbetween the parties needs to be considered for assessing whether theyare related parties. On the first aspect, the adjudicating authority cameto the conclusion that the transaction between the corporate debtor andGSpade is not a financial debt under Section 5(8) and Spade is not afinancial creditor under Section 5(7). The basis of this finding is containedin paragraph 11.2 of the decision, which is extracted below:

“11.2 Perusal of the documents pertaining to the inter corporatedeposit stated to have been given by Spade Financial ServicesH9 CA -224/ND/2018

Private Limited to the Corporate Debtor from 01.06.2009 toJanuary 2013 shows the following points of interest:

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��Though the loan was given from June 2009 to January 2013,the MOU regarding the same is dated 12.08.2011 The saidMOU provided for interest at the rate of 24°/o but it is statedthat only 12°/o interest was paid on mutual agreement.B

In the claim filed before the RP only 12% interest has beenclaimed Though securities were provided by way of flats and plots inthe real estate projects of the Corporate Debtor, the chargeof the “Secured loan” was not registered with the Registrarof Companies.

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No Board Resolutions approving deposit of such intercorporate deposits and their acceptance by the CorporateDebtor have been filed before us.

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Out of the ICD of Rs. 66 crores given by Spade to the CD,Rs. 43.06 crores are stated to have been credited to theaccount of Arun Anand, Director of CD, by consent.

The above facts show that the transaction pertaining to giving ofinter corporate deposits by Spade to CD appears to be collusive,as the MOU for the same has been signed more than two yearsafter the beginning of the transaction, and the rate of interestactually stated to be charged is half of the interest mentioned inthe MOU, as also a major portion of the ICD was credited to theaccount of Arun Anand, Director of Spade. Thus, it is seen thatthe entire amount was not disbursed to the CD as well as there isvariation in the consideration for the time value of money as perthe MOU and claim filed before the IRP. Accordingly, thistransaction does not qualify as a financial debt as defined underSection 5(8) of the Code, and Spade Financial Services Limiteddoes not qualify as a Financial Creditor under Section 5(7) of theCode.”

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Similarly, the transactions between corporate debtor and AAAwere discussed in paragraph 11.3 and a finding was arrived at to theeffect that they were collusive in nature, and did not qualify as a financialdebt. Paragraph 11.3 is extracted below:

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A“11.3 The details of transaction and entered by CD with AAALandmark have been discussed in detail in Para 4.3 above. It isseen that as regards to the same property the parties entered intoseveral agreements over a period of 3 years, including plot buyersAgreement, MOU, Development Agreement and finally,Agreement to Sell dated 25.10.2012. By the DevelopmentBAgreement dated 01.03.2012, 38.3% of the Development rightsof the Project named “AKME Raaga” were sold to AAA for32.80 crores and subsequently on 25.10.2012 the Agreement toSell was executed to superseding the development agreement withan enhanced value of Rs. 43.06 crores. The multiplicity ofCAgreements regarding the same property, with no explanation orrational reasoning regarding variation in values of transaction, showsthat these transactions are also collusive in nature and an attemptto divert the properties of the CD to AAA for reasons best knownto the parties. It is also noted that the transactions between theCD and AAA as well as Spade were done during the period whenDArun Anand, who along with his family members is the promoterand director of both Spade and AAA Landmark was associatedin various capacities from 1982 to 2013 with the CD and itsdirectors and the group of companies to which the CD belongs. Itis during this period only that Mr. Arun Anand promoted andEsubscribed to the memorandum of association of the CD, Spadeand AAA Landmark. Mr. Arun Anand and his family members atvarious points of time also had shareholding in the groupcompanies of the Mr. Anil Nanda group. It is also seen that thealleged financial transactions of Spade and AAA Landmark withthe CD occurred during the period 2009 to 2013, the time whenFhe was consultant (through Spade) to the CD, and was consultantand strategic advisor in his individual capacity to the CD and finallygroup CEO of the Mr. Anil Nanda group of companies.Considering the above facts, we are of the opinion that thetransactions between the CD and both Spade and AAA LandmarkGare collusive in nature and do not qualify as Financial Debt for thepurposes of IBC. Accordingly, we hold that Spade and AAALandmarks do not qualify to be considered as Financial Creditors.”

34. Having held that the transactions between the corporate debtoron one hand and AAA and Spade on the other did not qualify as a financialHdebt, the Adjudicating Authority commenced its discussion on the second

issue by stating that it “does not require a reply” in view of the findingon the first issue. However, it then noted that the first proviso to Section21(2) has been substituted with effect from 6 June 2018, the effect ofwhich is to exclude a financial creditor who is a related party of thecorporate debtor from being represented in and from participating orvoting in a meeting of the CoC. After adverting to the definition of theexpression ‘related party’ in Section 5(24), the Adjudicating Authorityheld:

“There is no doubt in our mind that Arun Anand and his companies,namely, Spade and AAA Landmark were related parties to theCD. However, after 2013 (soon after signing the Agreement toSell signed on 25.10.2012) Arun Anand resigned from all thecompanies of The Anil Nanda Group and so they are no longerrelated to the CD at the time of filing of application of CIRP.”

35. Eventually, the NCLT concluded that the applications filed byYES Bank and Phoenix would have to be allowed. Its conclusion isextracted below:

“13. Before parting with this application, we would like to observethat the affairs of the CD as well as the Group of Arun Anandcompanies are deeply entangled and it is difficult for the Tribunalin a summary jurisdiction to unravel-the same. Considering thatthe CD and Spade and AAA were Registrar of Companies since2016, we have no hesitation in allowing the instant applicationsfiled by Yes Bank Limited and Phoenix ARC Private Limited.”

36. The above analysis of the decision of the NCLT indicates thatits primary finding was that neither AAA nor Spade are financial creditorswithin the meaning of Section 5(8).

37. Sub-sections (1) and (2) of Section 21, insofar as is materialprovide as follows:

“21. Committee of Creditors.- (1) The interim resolutionprofessional shall after collation of all claims received against thecorporate debtor and determination of the financial position of thecorporate debtor, constitute a committee of creditors.

(2) The committee of creditors shall comprise all financial creditorsof the corporate debtor: Provided that a related partyto whom acorporate debtor owes a financial debt shall not have any right of A

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Arepresentation, participation or voting in a meeting of the committeeof creditors.”

38. Sub-section (2) of Section 21 stipulates that the CoC is tocomprise of all financial creditors of the corporate debtor. The first provisoto Sub-section (2) has been amended by Act 26 of 2018 with effectBfrom 6 June 2018. Having held that AAA and Spade are not financialcreditors, NCLT came to the conclusion that they were not entitled toinclusion in the CoC.

39. On the second issue, the Adjudicating Authority was of theview that it was not really necessary for it to consider what should beCthe date with reference to which a related party should be determined.But it is evident that the NCLT did come to the conclusion that Mr. ArunAnand and his various companies namely AAA and Spade were relatedparties to the corporate debtor though after 2013, Mr Arun Anand resignedfrom all the companies of the Anil Nanda Group. The AdjudicatingAuthority observed that they are no longer related to the corporate debtorDat the time of the filing of the application for initiation of the CIRP. Itnoted the deep entanglement of the affairs of the corporate debtor andthe Arun Anand group of companies, the close business relationship ofthe past and the fact that the accounts of the corporate debtor had notbeen finalised, audited or filed with the Registrar of Companies sinceE2016. Reading the order of the NCLT as it stands, it is not possible toaccept the submission that the applications filed by YES Bank and Phoenixwere rejected only on the basis that they were not financial creditorsand that there was no determination in regard to their status as relatedparties. In light of the above discussion, we do not agree with thesubmission that NCLAT exceeded its jurisdiction by considering theFsecond issue relating to the determination of the status of AAA andSpade as related parties. Thus, we hold that there is no reason to remandthe matter to NCLAT for reconsideration. An order of remand cannotbe passed in a routine manner, and it should be passed only if a re-consideration is necessary. An unwarranted order of remand does notGserve the cause of justice and merely extends the life of litigation.Remands in commercial matters should not become a ruse to subservelitigation luxuries.

40. The dispute fell into a quagmire when the NCLAT proceededon the basis that it was an admitted position that AAA and Spade arefinancial creditors. The finding of fact in paragraph 11 of the decision ofH

the NCLAT that this is the “admitted position” is plainly erroneoussince there was an express finding of the NCLT to the contrary. Thefact that it necessitated an appeal by AAA and Spade would indicatethat this was not an admitted position. It is also evident from the contentsof the appeal filed by Spade and AAA, and the reply filed by Phoenixbefore the NCLAT, that the status of Spade and AAA as financialcreditors was in dispute. Having said that, the issue that now falls forour consideration is whether AAA and Spade can be considered asfinancial creditors.

G.3 Analysis

G.3.1 Relevant Provisions

41. Section 5 (7) of the IBC defines a financial creditor :

“(7) “financial creditor” means any person to whom a financialdebt is owed and includes a person to whom such debt has beenlegally assigned or transferred to;”

42. Section 5(8) of the IBC provides a definition of financial debtin the following terms:

“(8) “financial debt” means a debt along with interest, if any, whichis disbursed against the consideration for the time value of moneyand includes—

(a) money borrowed against the payment of interest; (b) any amount raised by acceptance under any acceptance creditfacility or its de-materialised equivalent;

(c) any amount raised pursuant to any note purchase facility orthe issue of bonds, notes, debentures, loan stock or any similarinstrument;

(d) the amount of any liability in respect of any lease or hirepurchase contract which is deemed as a finance or capital leaseunder the Indian Accounting Standards or such other accountingstandards as may be prescribed; (e) receivables sold or discounted other than any receivables soldon non-recourse basis; (f) any amount raised under any other transaction, including anyforward sale or purchase agreement, having the commercial effectof a borrowing; A

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AExplanation.— For the purposes of this sub-clause,—

(i) any amount raised from an allottee under a real estate projectshall be deemed to be an amount having the commercial effect ofa borrowing; and

(ii) the expressions, “allottee” and “real estate project” shall haveBthe meanings respectively assigned to them in clauses (d) and(zn) of section 2 of the Real Estate (Regulation and Development)Act, 2016 (16 of 2016);]

(g) any derivative transaction entered into in connection withprotection against or benefit from fluctuation in any rate or priceCand for calculating the value of any derivative transaction, onlythe market value of such transaction shall be taken into account; (h) any counter-indemnity obligation in respect of a guarantee,indemnity, bond, documentary letter of credit or any other instrumentissued by a bank or financial institution; D(i) the amount of any liability in respect of any of the guarantee orindemnity for any of the items referred to in sub-clauses (a) to (h)of this clause;”

G.3.2 Financial Creditor and Financial Debt E43. Under Section 5(7) of the IBC, a person can be categorisedas a financial creditor if a financial debt is owed to it. Section 5(8) of theIBC stipulates that the essential ingredient of a financial debt is disbursalagainst consideration for the time value of money. This Court, speakingthrough Justice Rohinton F Nariman, in Swiss Ribbons Pvt. Ltd. v.Union of India[10] has held:F

“42. A perusal of the definition of “financial creditor” and“financial debt” makes it clear that a financial debt is a debttogether with interest, if any, which is disbursed againstthe consideration for time value of money. It may furtherbe money that is borrowed or raised in any of the mannersGprescribed in Section 5(8) or otherwise, as Section 5(8) isan inclusive definition. On the other hand, an “operational debt”would include a claim in respect of the provision of goods orservices, including employment, or a debt in respect of payment

of dues arising under any law and payable to the Government orany local authority.”

(emphasis supplied)

44. In this context, it would be relevant to discuss the meaning ofthe terms “disburse” and “time value of money” used in the principalclause of Section 5(8) of the IBC. This Court has interpreted the term“disbursal” in Pioneer Urban Land and Infrastructure Ltd vs. Unionof India[11] in the following terms:

“70. The definition of “financial debt” in Section 5(8) then goeson to state that a “debt” must be “disbursed” against theconsideration for time value of money. “Disbursement” is definedin Black’s Law Dictionary (10th Edn.) to mean:

“1. The act of paying out money, commonly from a fund or insettlement of a debt or account payable. 2. The money so paid;an amount of money given for a particular purpose.”

71. In the present context, it is clear that the expression “disburse”would refer to the payment of instalments by the allottee to thereal estate developer for the particular purpose of funding thereal estate project in which the allottee is to be allotted a flat/apartment. The expression “disbursed” refers to moneywhich has been paid against consideration for the “timevalue of money”. In short, the “disbursal” must be moneyand must be against consideration for the “time value ofmoney”, meaning thereby, the fact that such money is nowno longer with the lender, but is with the borrower, whothen utilises the money….”

45. The report of the Insolvency Law Committee dated 26 March2018 has discussed the interpretation of the term “time value of money”and stated:

“The current definition of ‘financial debt’ Under Section 5(8) ofthe Code uses the words “includes”, thus the kinds of financialdebts illustrated are not exhaustive. The phrase “disbursed againstthe consideration for the time value of money” has been the subjectof interpretation only in a handful of casesunder theCode.The 11 (2019) 8 SCC 416

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Awords “time value” have been interpreted to meancompensation or the price paid for the length of time forwhich the money has been disbursed. This may be in theform of interest paid on the money, or factoring of a discount”in the payment.

(emphasis supplied)

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G.3.3 Collusive Transactions

46. The above discussion shows that money advanced as debtshould be in the receipt of the borrower. The borrower is obligated toreturn the money or its equivalent along with the consideration for a timeCvalue of money, which is the compensation or price payable for theperiod of time for which the money is lent. A transaction which is shamor collusive would only create an illusion that money has been disbursedto a borrower with the object of receiving consideration in the form oftime value of money, when in fact the parties have entered into theDtransaction with a different or an ulterior motive. In other words, thereal agreement between the parties is something other than advancing afinancial debt. A useful elaboration of “sham transactions” can be foundin the opinion of Diplock LJ in Snook vs. London and West RidingInvestments Ltd.[12]:

E“As regards the contention of the plaintiff that the transactionsbetween himself, Auto Finance and the defendants were a “sham,”it is, I think, necessary to consider what, if any, legal concept isinvolved in the use of this popular and pejorative word. I apprehendthat, if it has any meaning in law, it means acts done ordocuments executed by the parties to the “sham” whichFare intended by them to give to third parties or to the courtthe appearance of creating between the parties legal rightsand obligations different from the actual legal rights andobligations (if any) which the parties intend to create.”

GDiplock LJ also stated:

“But one thing, I think, is clear in legal principle, morality and theauthorities (see Yorkshire Railway Wagon Co v Maclure andStoneleigh Finance Ltd. v Phillips), that for acts or documents to

PHOENIX ARC PRIVATE LIMITED v. SPADE FINANCIAL SERVICESLIMITED & ORS. [DR. DHANANJAYA Y CHANDRACHUD, J.]

be a “sham,” with whatever legal consequences follow from this,all the parties thereto must have a common intention thatthe acts or documents are not to create the legal rights andobligations which they give the appearance of creating. Nounexpressed intentions of a “shammer” affect the rights ofa party whom he deceived…”

47. This Court, in Prem Chand Tandon vs. Krishna ChandKapoor,[13] had to determine whether a usufructuary mortgage was asham transaction entered into by the respondent there (the borrower) toavoid payment to creditors. This Court examined the real nature of thetransaction to hold that the parties entered the transaction with an ulteriormotive. Justice A.N. Grover, speaking for this Court, held:

“As regards the consideration for the usufructuary mortgage thepromissory notes were never produced. It is true that there wassome evidence that Smt. Dhanta Devi [lender] had received certaininsurance monies on the death of her husband but the ‘aggregateof those amounts did not exceed, Rs. 13,000/-. Even if she waspossessed of some jewellery and other funds it is difficult to believethat she would have advanced such a substantial amount of Rs.25,000/- to the respondent [borrower] by means of two promissorynotes on December 10, 1919 and on March 17, 1920. It wouldfurther appear and some stress has been laid on this aspect byJagat Narain J., in his judgment that the financial , position of therespondent at the time the usufructuary mortgage deed wasexecuted was fairly good considering the various articles likediamonds and the car which he had purchased apart from theshares. The house at Ajmer and the Vile Parle land had beenmortgaged with possession for Rupees 25,000/- for a period of 60years. It was difficult to believe that the respondent would haveentered into such a transaction in view of his financial position inthe year 1921. It was equally not likely that a person dealing inshares who would require ready money would lock up his assetslike the property in dispute in a transaction which was such thatthe mortgage could not be redeemed before the expiry of theperiod of sixty years. The mortgage, therefore, was executedonly with an ulterior purpose, it being wholly fictitious.”

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A48. The IBC has made provisions for identifying, annulling ordisregarding “avoidable transactions” which distressed companies mayhave undertaken to hamper recovery of creditors in the event of theinitiation of CIRP. Such avoidable transactions include: (i) preferentialtransactions under Section 43 of the IBC; (ii) undervalued transactionsunder Section 45(2) of the IBC; (iii) transactions defrauding creditorsBunder Section 49 of the IBC; and (iv) extortionate transactions underSection 50 of the IBC. The IBC recognizes that for the success of aninsolvency regime, the real nature of the transactions has to be unearthedin order to prevent any person from taking undue benefit of its provisionsto the detriment of the rights of legitimate creditors.CG.3.4 Spade and AAA

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49. Mr Kaul argued that the transactions entered into betweenthe Corporate Debtor and Spade and AAA are collusive in nature anddo not constitute a financial debt. Mr Viswanathan has urged that theeligibility of Spade and AAA as financial creditors has conclusively beenDdetermined by the NCLT in its order dated 31 May 2018. We havealready concluded that the above order would not operate as res judicataand it was within the jurisdiction of the NCLT to consider this issueafresh. NCLT in its order dated 19 July 2019 has undertaken a detailedanalysis of the transactions to arrive at a finding that the transactionsEwere collusive. We are inclined to agree with the findings of the NCLTin its order dated 19 July 2019. NCLAT has also made an observationthat “we are of the considered opinion that Mr Anil Nanda, Mr ArunAnand had created a web of companies in which both along withnear and dear ones including Ms Renu Anand (Wife of Mr. ArunAnand) and Mr Sonal Anand (Brother-in-law of Mr. Arun Anand)F”[14]acted in concert with each other. It is to be noted that M/s Ernst &Young were appointed as forensic/transactional auditors by the RP on19 November 2019. Their report contains significant findings:

“Considering the above transactions, we were unable tounderstand the business rational of:GPurchase and sale transaction with Spade Financial resulting in aloss of approx. INR 2.12 Cores to CD

Rent paid to Arun Anand and Aditya Anand ICD balance of Spade Financial being transferred to AAALandmark against which sale agreement was executed Basis of valuation of the land transaction and sale of property toAAA Landmark EY Comments:

Reference to Section 66 of the Insolvency and BankruptcyCode, 2016

Section 66 of the Insolvency and Bankruptcy Code, 2016

Section 66 (1) if during the corporate insolvency resolution processor liquidation process, it is found that any business of the corporatedebtor has been carried on with intent to defraud the creditors ofthe corporate debtor or for any fraudulent purposes, theAdjudicating Authority may on the application of the resolutionprofessional pass an order that any person who were knowinglyparties to carrying on of the business in such manner shall beliable to make such contributions to the assets of the corporatedebtor as it may deem fit.

Considering the above facts and when read in referencewith Section 66 of the Insolvency and Bankruptcy Code,2016, indicates an intent to defraud the creditors and maybe categorized as potentially fraudulent. However, the RPshall make an independent assessment whether it intends to filean application for the same with the Adjudicating Authority asmentioned in the Insolvency and Bankruptcy Code.”

50. As noted by NCLT, the Memorandum of Understanding dated12 August 2011, on the basis of which Spade had filed its claim in FormC before the IRP, was signed two years after the commencement of thepurported transaction. The execution of the Memorandum ofUnderstanding was sought to be explained on the basis that a formaldocument was created for specifying the rate of interest on the ICDsgiven by Spade to the Corporate Debtor. However, despite the creationof a formal document, the rate of interest being charged on the ICDswas 12% as mentioned in the claim before the IRP, which is half of theinterest rate of 24% stipulated in the Memorandum of Understanding.During the arguments, Mr Kaul and Mr Sen have also brought to the

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Anotice of this Court that the Memorandum of Understanding isunregistered and unstamped. The IRP in his letter dated 25 May 2018has noted that as per the ledger provided by Spade, no interest wasclaimed on the alleged debt and no adjustment was made regarding thepayment of principal or interest by the Corporate Debtor to Spade. Ithas been submitted in the written submissions filed on behalf of SpadeBand AAA that the auditors of the Corporate Debtor had been putting anote in its balance sheets stating that the interest of 12% was not beingpaid to Spade due to a dispute. This submission in fact further fortifiesthe finding of the IRP that no interest has been paid on the alleged loan.The IRP has also noted in his letter that the Memorandum ofCUnderstanding does not stipulate the period of repayment. Hence, theconsideration for time value of money is absent, which is an essentialingredient of a financial debt. The NCLT has also noted that a majorportion of the ICDs was credited in the account of Mr Arun Anandholding that the entire amount was not “disbursed” to the CorporateDebtor. NCLAT has also made a similar finding in paragraph 11(i) of itsDjudgement. This finding has been disputed by Mr Vishwanathan whoargued that no amount of the ICDs has been credited to the account ofMr Arun Anand and such an allegation has not been made by any of theparties including the RP. However, it is to be noted under Clause 2 of theMemorandum of Understanding, the amount of Rs. 26.55 Crores hasEbeen disbursed not only to the Corporate Debtor but also to “othercompanies on behalf of AKME”. In any event, the entirety of theICDs were not disbursed to Spade. Additionally, no Board resolutionwas passed by Spade approving the grant of ICDs and the charge createdon the loan was not registered with the Registrar of Companies. In viewof the above, we are inclined to agree with Mr Kaul that the MemorandumFof Understanding was an eye-wash and collusive.

51. NCLT in its order dated 19 July 2019 has noted that AAA andthe Corporate Debtor had entered into multiple agreements regardingthe same property without giving any explanation or rationale regardingvariation in the consideration. This showed that the transactions wereGcollusive in nature entered with the purpose of diverting properties ofthe Corporate Debtor to AAA. Mr Viswanathan sought to explain themultiple agreements, and argued that AAA entered into a DevelopmentAgreement dated 1 January 2012 with the Corporate Debtor to obtain38.3% of development rights. Since the Development Agreement couldHnot be implemented because the license for the project could not be split into two parts, an Agreement to Sell and a Side Letter were executed on25 October 2012. The Agreement to Sell was entered to purchase FSI/flats equivalent to 38.3% of the total FSI in relation to specific unitsidentified and allotted in the agreement. Apparently, the sale considerationwas re-negotiated and enhanced from Rs 32.80 crores under theDevelopment Agreement to Rs 86.01 crores under the Agreement toSell. Mr Viswanathan has submitted that there was no partnership clausein the Agreement to Sell. However, Clause 3 of the Side Letter dated 25October 2012 shows that the intent of the parties was to continue to co-develop the land. Clause 3 of the Side Letter provides:

“3. It is agreed that ALPL shall share the cost of the Project inthe same ratio as the share of respective development in theProperty (i.e. Villas- 50% and other developments (group housingetc.) – 36.33%). The cost of the Project shall include:

a. Land cost

b. License and approval costs

c. Construction cost

d. Direct project management costs (people at the site)

e. Marketing & sales promotion cost

f. Liaison cost

g. Maintenance cost for unsold inventory

h. Government levies and charges including EDS & IDC and anyenhancement thereof.”

It appears that the parties converted the Development Agreementinto an Agreement to Sell executed along with a Side Letter to circumventthe legal prohibition on splitting a development license in two parts. Thetransaction between AAA and the Corporate Debtor was collusive innature.

52. Since the commercial arrangements between Spade and AAA,and the Corporate Debtor were collusive in nature, they would notconstitute a ‘financial debt’. Hence, Spade and AAA are not financialcreditors of the Corporate Debtor.

H Whether Spade and AAA are related parties

53. The Appellate Tribunal has affirmed the decision of the NCLTto exclude Spade and AAA from the CoC on the ground that they are A

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Arelated parties. As we have seen earlier, there was a specific finding inthe decision of the NCLT on the close business relationship betweenAAA and Spade on one hand and the Corporate Debtor on the other, interms of the provisions contained in Section 5(24). The decision of theNCLT spoke of a deep entanglement in the business affairs. The NCLTcame to the specific finding that Spade and AAA “were related parties”Bof the corporate debtor but, that the relationship had ended by the timethe initiation of the CIRP took place. It is this aspect which now meritsconsideration. We shall first analyse whether Spade and AAA are relatedparties of the Corporate Debtor.

H.1 Submissions of CounselC

54. Assailing the judgment of the NCLAT, Mr Viswanathan submits:

(i) There were no common key managerial personnel ordirectors between the Corporate Debtor and Spade andAAA during the relevant period of the transactions betweenD2010 to 2013;

(ii) The Appellate Tribunal has incorrectly held that Mr ArunAnand was in a position to influence the decision making ofthe Corporate Debtor, without satisfying the test of “control”established in Arcelor Mittal India (P) Ltd. vs SatishEKumar Gupta[15];

(iii) Mr Arun Anand was a mere salaried employee without anyability to influence the decision-making process. He did notattend any Board Meetings, and did not give any directionsto the directors or individuals in the Corporate Debtor; F(iv)Mr Arun Anand was Group CEO of Anil Anand Group ofCompanies for only 81 days, which was also a titular positionand not a statutory position since there was no approvalfrom the Board of Directors. Hence, he could not haveinfluenced any policy making process of the CorporateDebtor in accordance with Section 5(24)(m)(i);G

(v) JIPL, and through it the Corporate Debtor, holds only 1.45%shareholding in Spade, which is below the 2% threshold inSection 5(24)(d); 15 (2019) 2 SCC 1

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(vi) The Corporate Debtor and AAA are incorrectly assumedAto be ‘partners’ in accordance with Section 5(24)(a);

(vii) The two transactions mentioned in order to prove arelationship under Section 5(24)(f) were commercialtransactions where the Corporate Debtor borrowed moneyfrom Spade to pay third parties, which would have beenpaid back with interest; and B

(viii) Section 5(24A) has no application, since it applies to theinsolvency resolution and liquidation process for individualsand partnerships.

55. Supporting the judgment of the NCLAT, Mr Kaul submits:

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(i) Mr Arun Anand incorporated the Corporate Debtor on 15December 2003, following which it was acquired by MrAnil Nanda in 2007. Mr Arun Anand has also held numerouspositions in the Anil Nanda Group of Companies, and has along-standing relationship with Mr Anil Nanda; D

(ii) During the relevant transactions with Spade and AAA, MrArun Anand held the position of Consultant or StrategicAdvisor to the Corporate Debtor, and later became theGroup CEO of the Anil Nanda Group of Companies (ofwhich the Corporate Debtor is also a part); E

(iii) During this period, Mr Arun Anand’s brother in-law, MrSonal Anand, was a director and COO of the CorporateDebtor. Further, he was also the Whole Time Director ofJIPL, which is a wholly-owned subsidiary of the CorporateDebtor, and holds shareholding in Spade; F

(iv) During this period, Mr Anil Nanda was the promoter/directorof the Corporate Debtor; and

(v) The ongoing litigation between Spade and the CorporateDebtor was only started after the IBC came into force, tocreate a notion of dispute.

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56. The submissions of Mr Kaul are supported by Mr Sen. Hesubmits:

(i) Two of the original shareholders of the Corporate Debtor,along with Mr Arun Anand, now have shareholding andpositions in Spade; and H

A(ii)There have been fraudulent transactions between Spadeand JIPL, in which JIPL paid a sum to Spade for transferof shares, which never occurred. This is a subject ofproceedings under Section 66 of the IBC initiated by theRP.

BH.2 Statutory provisions

57. The definition of the expression ‘related party’ in Section 5(24)is exhaustive, since the expression is defined to “mean” what is set outin clauses (a) to (m). The expression ‘related party’ is defined in Section5 (24) as follows:C

“(24) “related party”, in relation to a corporate debtor, means—(a) a director or partner of the corporate debtor or a relative of adirector or partner of the corporate debtor; (b) a key managerial personnel of the corporate debtor or a relativeDof a key managerial personnel of the corporate debtor;

(c) a limited liability partnership or a partnership firm in which adirector, partner, or manager of the corporate debtor or his relativeis a partner; (d) a private company in which a director, partner or manager ofEthe corporate debtor is a director and holds along with his relatives,more than two per cent. of its share capital; (e) a public company in which a director, partner or manager ofthe corporate debtor is a director and holds along with relatives,more than two per cent. of its paid-up share capital; F(f) anybody corporate whose board of directors, managing directoror manager, in the ordinary course of business, acts on the advice,directions or instructions of a director, partner or manager of thecorporate debtor; (g) any limited liability partnership or a partnership firm whoseGpartners or employees in the ordinary course of business, acts onthe advice, directions or instructions of a director, partner ormanager of the corporate debtor; (h) any person on whose advice, directions or instructions, adirector, partner or manager of the corporate debtor is accustomedHto act;

(i) a body corporate which is a holding, subsidiary or an associatecompany of the corporate debtor, or a subsidiary of a holdingcompany to which the corporate debtor is a subsidiary; (j) any person who controls more than twenty per cent. of votingrights in the corporate debtor on account of ownership or a votingagreement; (k) any person in whom the corporate debtor controls more thantwenty per cent. of voting rights on account of ownership or avoting agreement;

(l) any person who can control the composition of the board ofdirectors or corresponding governing body of the corporate debtor; (m) any person who is associated with the corporate debtor onaccount of—

(i) participation in policy making processes of the corporatedebtor; or

(ii) having more than two directors in common between thecorporate debtor and such person; or (iii) interchange ofmanagerial personnel between the corporate debtor andsuch person; or

(iv) provision of essential technical information to, or from, thecorporate debtor;”

The expression ‘related party’ is defined in Section 5(24) in relationto a corporate debtor. Section 5(24A) provides a corresponding definitionin relation to an individual.

58. The definition describes a commutative relationship, meaningthat X can be a related party of Y, if either X is related to Y, or Y isrelated to X. The definition of ‘related party’ under the IBC is significantlybroad. The intention of the legislature in adopting such a broad definitionwas to capture all kinds of inter-relationships between the financialcreditor and the corporate debtor[16].

59. The term ‘related party’ has also been defined by Parliamentin the Companies Act, 2013 for all corporations. The definition of the 16 Richa Saraf, ‘Concept of Related Party: Interpretation by Letter or Spirit of theIBC?’, (IndiaCorpLaw, 11 August 2018) available at <https://indiacorplaw.in/2018/08/concept-related-party-interpretation-letter-spirit-ibc.html>.

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Aexpression has also been expanded for listed entities by the SecuritiesExchange Board of India by amendment to the Equity Listing Agreementto include elements mentioned under applicable accounting standards.However, in the present case, we are assessing its definition only underthe IBC, which is exhaustive. The purpose of defining the term separatelyunder different statutes is not to avoid inconsistency but because theBpurpose of each of them is different. Hence, while understanding themeaning of ‘related party’ in the context of the IBC, it is important tokeep in mind that it was defined to ensure that those entities which arerelated to the Corporate Debtor can be identified clearly, since theirpresence can often negatively affect the insolvency process.CH.3 Analysis

60. Crucial to the understanding of whether Spade and AAA wererelated parties of the Corporate Debtor during the relevant period is therelationship between Mr Arun Anand and Mr Anil Nanda. It isMr Viswanathan’s argument that these individuals shared no priorDrelationship, which has been opposed by Mr Kaul and Mr Sen. We notedthat Mr Arun Anand has held multiple positions in companies whichform part of Anil Nanda Group of Companies. Further, Mr Anil Nandahas himself invested in companies owned by Mr Arun Anand, and hadcommercial transactions with them. Through Spade and AAA’s ownEadmission, Mr Arun Anand was appointed as the Group CEO of the AnilNanda Group of Companies (for however short a period) on circularapproval by Mr Anil Nanda himself. Finally, Mr Arun Anand’s brotherin-law, Mr Sonal Anand, has also been consistently associated withcompanies in the Anil Nanda Group of Companies, including theCorporate Debtor and JIPL. This deep entanglement between theseFindividuals was noted by the NCLT and the NCLAT.

61. Admittedly, Mr Arun Anand was in control of Spade and AAAduring the relevant period. Further, he held positions in the CorporateDebtor or the Anil Nanda Group of Companies, which included theCorporate Debtor. Mr Anil Nanda and Mr Sonal Anand also held positionsGin the Corporate Debtor and JIPL during this period.

62. Based on the above, it is not difficult for us to accept theconclusion of the NCLAT that Mr Arun Anand would be a related partyof the Corporate Debtor in accordance with Section 5(24)(h) and Sections5(24)(m)(i). Mr Viswanathan has tried to refute this argument by relyingHon the definition of ‘control’ in Arcelor Mittal India (P) Ltd. vs Satish

Kumar Gupta (supra). However, it is important to note that thediscussion there was in the context of ineligible resolution applicantsunder Sub-section (c) of Section 29-A of the IBC, which specificallyprescribes this test. Presently, we have to determine whether theCorporate Debtor’s board, directors, etc, are accustomed to act on MrArun Anand’s advice/direction/instruction and if he participates in thepolicy-making process of the Corporate Debtor. While a strictdetermination of intent or mens rea may not always be possible by theNCLT and NCLAT in summary proceedings, it is possible to draw theinference from the facts at hand. These facts are that there was a deepentanglement between the entities of Mr Arun Anand and Mr Anil Nanda,and Mr Arun Anand did hold positions during this period which couldhave been used by him to guide the affairs of the Corporate Debtor.This finding is further supported by our conclusion that the transactionsbetween the Corporate Debtor and the entities led by Mr Arun Anandwere collusive in nature.

63. Similarly, we have no hesitation in accepting the NCLAT’sconclusion that Spade entered into two transactions on the basis of theadvice/instructions/directions of the board/directors of the CorporateDebtor under Section 5(24)(f). Mr Viswanathan’s submission that thesewere purely commercial transactions between the parties cannot beaccepted, given the extensive history demonstrating the interrelationshipbetween the individuals associated with these corporations. While thetransactions may have indeed been commercial, it cannot be doubtedthat Spade undertook them due to the pervasive influence of Mr AnilNanda. In our analysis above, we have similarly come to the conclusionthat other past transactions between these entities have been collusive.

64. Finally, we have already held that the transactions betweenAAA and the Corporate Debtor were collusive in nature. This supportsthe findings of the NCLAT that the Agreement to Sell and Side Letterdated 25 October 2012 were a mere eye-wash, through which theysought to develop the AKME RAAGA project together whilecircumventing government guidelines. Hence, AAA would be a partnerof the Corporate Debtor within the meaning of Section 5(24)(a).

65. Therefore, we come to the conclusion that Mr Arun Anand,Spade and AAA were related parties of the Corporate Debtor duringthe relevant period when the transactions on the basis of which Spadeand AAA claim their status as financial creditors took place.

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AI Whether Spade and AAA can be excluded from the CoC

66. Section 21(1) of the IBC requires the IRP to form the CoCfor the CIRP of the Corporate Debtor. The membership of the CoC isdetermined in accordance with Section 21(2), which reads thus:

“(2) The committee of creditors shall comprise all financial creditorsBof the corporate debtor:

Provided that a financial creditor or the authorised representativeof the financial creditor referred to in sub-section (6) or sub-section(6-A) or sub-section (5) of Section 24, if it is a related party of thecorporate debtor, shall not have any right of representation,Cparticipation or voting in a meeting of the committee of creditors:

Provided further that the first proviso shall not apply to a financialcreditor, regulated by a financial sector regulator, if it is a relatedparty of the corporate debtor solely on account of conversion orsubstitution of debt into equity shares or instruments convertibleDinto equity shares or completion of such transactions as may beprescribed, prior to the insolvency commencement date.”

Hence, the first proviso states that any financial creditor, barringthe exceptions provided in the second proviso, shall not have any right ofrepresentation, participation and voting in the meeting of the CoC, if it isEa related party of the Corporate Debtor.

67. The controversy in the present case is on the interpretation ofthe phrase “is” a related party in the first proviso, since the submission isthat Spade and AAA are no longer related parties of the CorporateDebtor (even though in terms of the earlier finding they were so duringFthe relevant period when the transactions constituting their alleged financialdebt took place).

I.1 Submissions of Counsel

68. Mr Viswanathan sought to urge that the first proviso to Sub-section (2) of Section 21 denies the right of representation, participationGor voting in a meeting of the CoC to a financial creditor or an authorisedrepresentative of the financial creditor referred to inter alia in Sub-section (5) of Section 24, if it “is a related party of the corporatedebtor”. Laying stress on the expression ‘is’ a related party of thecorporate debtor, the submission is that the statute applies in praesentiHon the date of the admission of an application seeking the initiation of the CIRP. This submission is sought to be supported by urging that if theexpression is a related party is not construed in its literal sense inpraesenti, it will result in an ambiguity without a yardstick on how farback in point of time the relationship should be assessed. The use of thatexpression in the first proviso to Sub-section (2) of Section 24 has beencontrasted with other provisions of the IBC. For instance, it has beensubmitted that in Section 29A, which elucidates when a person is noteligible to be a resolution applicant, there is a reference to both “is” and“has been”. Clause (a) refers to a situation where a person “is anundischarged insolvent”; Clause (b) refers a person who “is a wilfuldefaulter”; Clause (d) adverts to a situation where a person “has beenconvicted”; and Clause (g) refers to a person who “has beena promoter”.Hence, it is been submitted that clause 29A uses the expression “is” asdistinct from “has been” in the application of various sub-clauses.Reference has been made to Section 43(4) which deals with preferentialtransactions and incorporates a look back period of two years. Referencehas also been made in the course of the submission to Section 5(24)(m)which uses the expression “is associated” with the corporate debtor.Based on the above submissions, it has been urged that where the statuteintends to consider situations as they existed in the past, it has utilisedexpression “has been”. Consequently, it has been urged that when in thefirst proviso to Section 21(2), the expression “is a related party” is used,this must clearly be a reference to the present and not to an uncertainpast. In essence, it has been urged that the existence of a live link ofbeing a related party in the present is a requirement of the statutoryprovision.

69. While opposing the submissions which have been urged byMr Viswanathan, Mr Kaul, submitted that the provisions of Section 21(2)must receive a purposive interpretation. Mr Kaul has urged that if thiswere not done the provisions of the IBC will be defeated by adoptingcommercial artifices and contrivances. He urged that the interpretationwhich the court adopts must facilitate and not defeat the fulfilment ofthe objects of the legislation. We are inclined to agree with this submissionfor the reasons which we proceed to elaborate.

I.2 Related Parties and CoC

I.2 Related Parties and CoC

Section 21(1) requires the IRP to constitute a CoC, after collatingof the claims which are received against and determining the financialposition of the corporate debtor. The CoC has to comprise of all financial AB

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Acreditors of the corporate debtor. The expression ‘financial creditor’ isdefined in Section 5(7) to mean any person to whom a financial debt isowed and to include a person to whom such a debt has been legallyassigned or transferred. The expression ‘financial debt’ is defined inSection 5(8). Under Section 28, the Resolution Professional is requiredto take the prior approval of the CoC specifically on certain aspects.BSection 28(1) provides as follows:

“28. (1) Notwithstanding anything contained in any other law forthe time being in force, the resolution professional, during thecorporate insolvency resolution process, shall not take any of thefollowing actions without the prior approval of the committee ofCcreditors namely:—

(a) raise any interim finance in excess of the amount as may bedecided by the committee of creditors in their meeting; (b) create any security interest over the assets of the corporatedebtor;D(c) change the capital structure of the corporate debtor, includingby way of issuance of additional securities, creating a new classof securities or buying back or redemption of issued securities incase the corporate debtor is a company; (d) record any change in the ownership interest of the corporateEdebtor; (e) give instructions to financial institutions maintaining accountsof the corporate debtor for a debit transaction from any suchaccounts in excess of the amount as may be decided by thecommittee of creditors in their meeting;F

(f) undertake any related party transaction; (g) amend any constitutional documents of the corporate debtor; (h) delegate its authority to any other person;

(i) dispose of or permit the disposal of shares of any shareholderGof the corporate debtor or their nominees to third parties; (j) make any change in the management of the corporate debtoror its subsidiary; (k) transfer rights or financial debts or operational debts undermaterial contracts otherwise than in the ordinary course of business;H

(l) make changes in the appointment or terms of contract of suchpersonnel as specified by the committee of creditors; or (m) make changes in the appointment or terms of contract ofstatutory auditors or internal auditors of the corporate debtor.”

70. In an instructive article published in the Yale Law Journal,titled ‘Bankruptcy, Non-Bankruptcy Entitlements, and the Creditors’Bargain’, Thomas H. Jackson, argues that creditors prefer a collectiveprocess as opposed to a race to grab as many assets, which often leadsultimately to the demise of the corporate debtor[17]. The reason why acollective process is considered superior is because individual creditors,left to their own whims, are motivated to act solely in their own interests,even when their interests may directly conflict with the creditors’collective interests as a group. This self-interest creates a collectiveaction problem, such that creditors eventually enter a grab race, operatingunder the belief that they would have recourse to fewer or no assets, ifthey delay their actions in the hope that creditors will be able to coordinateand agree to act collectively[18]. Bankruptcy law seeks to resolve this bypreventing individual creditor action. The creditor’s bargain theorytherefore, operates to maximise group welfare through collectivisation[19].

71. In India, the IBC adopts a CIRP operationalised through theCoC once the CIRP commences[20]. In addition to the creditor’s bargaintheory, the design of the IBC is also influenced by the value-based theorypostulated by Korobkin[21], in an influential piece of academic writing inthe Columbia Law review, whereunder insolvency law considers thedistributional impact of winding up on those who may not have formallegal rights to the assets of the business. The aim of bankruptcy lawunder this theory is to take into account the multidimensional but conflictinginterests of various claimants, and provide for a solution whereundereach claimant derives optimal value[22].

17 Thomas H. Jackson, ‘Bankruptcy, Non-Bankruptcy Entitlements, and the Creditors’Bargain’, 91 Yale Law Journal 857, (1982) at 859-71.

18 Supra at note 18, pgs 1855-1856.

19 Medha Shekar and Anuradha Guru, Theoretical Framework of Insolvency Law,available at <https://www.ibbi.gov.in/uploads/resources/9ce9ccf9f114750879b68c8a33235ca6.pdf>, at page 52.

20 Douglas G. Baird, ‘A World Without Bankruptcy’, 50 Law & ContemporaryProblems, Spring 1987, at 184.

21 D.R. Korobkin, Rehabilitating values: A jurisprudence of bankruptcy, 91 ColumbiaLaw Review (1991), at p. 717.

22 Supra at note 20.

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A72. The CoC is comprised of financial creditors, under loan anddebt contracts, who have the right to vote on decisions and operationalcreditors such as employees, rental obligations, utilities payments andtrade credit, who can participate in the CoC, but do not have the right tovote. The aim of the CoC is to enable coordination between variouscreditors so as to ensure that the interests of all stakeholders are balanced,Band the value of the assets of the entity in financial distress is maximised.

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73. The report of the Bankruptcy Law Reforms Committee(Volume I: Rationale and Design) of November 2015, has underscoredthe need to meet the liabilities of all creditors, who are not part of theCIRP, and that of treating the rights of all creditors fairly, through theCcollective insolvency resolution process, operationalised by the CoC[23].The report recognised this in the following terms:

“[The] three core features that most well developed bankruptcyand insolvency resolution regimes share: a linear process that bothcreditors and debtors follow when insolvency is triggered; aDcollective mechanism for resolving insolvency within a frameworkof equity and fairness to all stakeholders to preserve economicvalue in the process; a time bound process either ends in keepingthe firm as a going enterprise, or liquidates and distributes theassets to the various stakeholders. These features are commonEacross widespread differences in structure and content, presenteither through statutory provisions or their implementation inpractice ….

These features ensure certainty in the process, starting from whatFconstitutes insolvency, and the processes to be followed to resolvethe insolvency, or the process to resolve bankruptcy once it hasbeen determined. Done correctly, such a framework canincentivise all stakeholders to behave rationally in negotiationstowards determination of viability, or in bankruptcy resolution. Inturn, this will lead to shorter times to recovery and better recoveryGunder insolvency, and a greater certainty about creditors rights indeveloping a corporate debt market.”

74. The long title of the IBC outlines the importance of a collectiveprocess aimed at value maximisation. The IBC has been enacted as:

23 Bankruptcy Law Reforms Committee, Volume I: Rationale and Design, of NovemberH2015, page 29.

“An Act to consolidate and amend the laws relating toreorganisation and insolvency resolution of corporate persons,partnership firms and individuals in a time bound manner formaximization of value of assets of such persons, to promoteentrepreneurship, availability of credit and balance the interestsof all the stakeholders including alteration in the order of priorityof payment of Government dues and to establish an Insolvencyand Bankruptcy Board of India, and for matters connectedtherewith or incidental thereto.”

75. These objects underscore the composition of the CoC, guidedby Section 21 of the IBC. The objects and purposes of the Code arebest served when the CIRP is driven by external creditors, so as ensurethat the CoC is not sabotaged by related parties of the corporate debtor[24].This is the intent behind the first proviso to Section 21(2) which disqualifiesa financial creditor or the authorised representative of the financial creditorunder sub-section (6) or sub-section (6A) or sub-section (5) of section24, if it is a related party of the corporate debtor, from having any rightof representation, participation or voting in a meeting of the committeeof creditors.

76. Since the IBC attempts to balance the interests of allstakeholders, such that some stakeholders are not able to benefit at theexpense of others, related party financial creditors are disqualified frombeing represented, participating or voting in the CoC, so as to preventthem from controlling the CoC to unfairly benefit the corporate debtor[25].

77. It is pertinent to note that disqualification of related partiesfrom being members of the CoC, has also been recommended in theUNCITRAL Legislative Guide on Insolvency law[26]:

“The insolvency law should specify the creditors that are eligibleto be appointed to a committee. Creditors who may not be appointed to a creditor committee would include related persons 24 Report of the Insolvency Law Committee, March 2018, p 23, para 1.25.

25 Vidhi Centre for Legal Policy, Understanding the Insolvency and Bankruptcy Code,2016: Analysing Developments in Jurisprudence, available at <https://vidhilegalpolicy.in/research/understanding-the-insolvency-and-bankruptcy-code-2016-analysing-developments-in-jurisprudence/>, at page 34.

26 UNCITRAL, Legislative Guide on Insolvency Law, 2005, available at <https://uncitral.un.org/sites/uncitral.un.org/files/media-documents/uncitral/en/05-80722_ebook.pdf>, at page 204.

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Aand others who for any reason might not be impartial. Theinsolvency law should specify whether or not a creditor’s claimmust be admitted before the creditor is entitled to be appointed toa committee.”

In interpreting the legislation, which represents a ParliamentaryBeffort to bring about structural changes in the resolution of corporateinsolvencies, the effort of the court must be to aid the fulfilment of theobjects of the IBC.

I.3 Amendment to First Proviso of Section 21(2)

78. Originally, the first proviso to Section 21(2) read as follows:C

“Provided that a related party to whom a corporate debtor owesa financial debt shall not have any right of representation,participation or voting in a meeting of the committee of creditors.”

79. The language was subsequently amended by the AmendmentDAct, 2018 and at present the first proviso reads as follows:

“Provided that a financial creditor or the authorised representativeof the financial creditor referred to in sub-section (6) or sub-section(6A) or sub-section (5) of section 24, if it is a related party of thecorporate debtor, shall not have any right of representation,participation or voting in a meeting of the committee of creditors.”E

80. The reason for the amendment appears to be the need toextend the disqualification in the first proviso of Section 21(2) to authorisedrepresentatives of financial creditors mentioned in Sections 21(6), 21(6A)and Section 24(5) as well. This was recommended by the InsolvencyLaw Committee, in its Report of March 2018, where it was observed:F

“10. 6 For certain securities, a trustee or an agent may already beappointed as per the terms of the security instrument. For example,a debenture trustee would be appointed if debentures exceeding500 have been issued or if secured debentures are issued. Suchcreditors may be represented through such pre-appointed trusteesGor agents. For other classes of creditors which exceed a certainthreshold in number, like home buyers or security holders for whomno trustee or agent has already been appointed under a debtinstrument or otherwise, an insolvency professional (other thanthe IRP) shall be appointed by the NCLT on the request of theHIRP. It is to be noted that as the agent or trustee or insolvency professional, i.e., the authorised representativefor the creditors discussed above and executors,guarantors, etc. as discussed in paragraph 9 of this Report,shall be a part of the CoC, they cannot be related parties tothe corporate debtor in line with the spirit of proviso tosection 21(2).

10.7 Section 71(6) of the CA 2013 obliges the debenture trusteeto take steps to protect the interests of the debenture holders andredress their grievances. The provisions regarding meetings ofthe debenture trustee and debenture holders is as per the trustdeed. The Companies (Acceptance of Deposit) Rules, 2014(“Deposit Rules”) provide that the deposit trustee may call ameeting of the deposit holders as and when required and providesspecific power to call a meeting on the happening of any event ofdefault. Though broad powers are already given to trustees, therespective rules for debentures and deposits under CA 2013 mayneed to be modified corresponding to the amendments in the Codeand CIRP Rules / CIRP Regulations to provide clarity onempowering debenture trustees to file for initiation of CIRP onbehalf of the creditors and vote on their behalf.

10.8 In light of the deliberation above, the Committee felt that amechanism requires to be provided in the Code to mandaterepresentation in meetings of security holders, deposit holders,and all other classes of financial creditors which exceed a certainnumber, through an authorised representative. This can be doneby adding a new provision to section 21 of the Code. Such arepresentative may either be a trustee or an agent appointed underthe terms of the debt agreement of such creditors, otherwise aninsolvency professional may be appointed by the NCLT for eachsuch class of financial creditors. Additionally, the representativeshall act and attend the meetings on behalf of the respective classof financial creditors and shall vote on behalf of each of thefinancial creditor to the extent of the voting share of each suchcreditor, and as per their instructions. To ensure adequaterepresentation by the authorised representative of the financialcreditors, a specific provision laying down the rights and duties ofsuch authorised representatives may be inserted. Further, therequisite threshold for the number of creditors and manner of A

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voting may be specified by IBBI through regulations to enableefficient voting by the representative. Also, regulation 25 mayalso be amended to enable voting through electronic means suchas e-mail, to address any technical issues which may arise due toa large number of creditors voting at the same time.”

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81. Consequently, the first proviso to Section 21(2) was amended,to extend the disqualification to the specified authorised representatives,in case that these representatives happened to be related parties of thecorporate debtor. The introduction of the phrase “is” along with relatedCparty was not a guiding factor behind the Parliamentary amendment.

I.4 Related Parties - Interpretation In Praesenti

82. An issue of interpretation in relation to the first proviso ofSection 21(2) is whether the disqualification under the proviso wouldattach to a financial creditor only in praesenti, or if the disqualificationDalso extends to those financial creditors who were related to the corporatedebtor at the time of acquiring the debt.

83. In Arcelor Mittal India Private Limited vs. Satish KumarGupta (supra), the issue was whether ineligibility of the resolutionapplicant under Section 29-A(c) of the Code attached to an applicant atEthe date of commencement of the CIRP or at the time when the resolutionplan is submitted by the resolution applicant. Speaking for this Court,Justice Rohinton F Nariman interpreted the pre-2018 amendment,framing of Section 29-A(c), in the following terms:

“46. According to us, it is clear that the opening words of SectionF29-A furnish a clue as to the time at which clause (c) is to operate.The opening words of Section 29-A state: “a person shall not beeligible to submit a resolution plan…”. It is clear therefore thatthe stage of ineligibility attaches when the resolution plan issubmitted by a resolution applicant. The contrary view expressedby Shri Rohatgi is obviously incorrect, as the date ofGcommencement of the corporate insolvency resolution process isonly relevant for the purpose of calculating whether one year haslapsed from the date of classification of a person as a non-performing asset. Further, the expression used is “has”, which asDr Singhvi has correctly argued, is in praesenti. This is to be H

contrasted with the expression “has been”, which is used in clauses(d) and (g), which refers to an anterior point of time. Consequently,the amendment of 2018 introducing the words “at the time ofsubmission of the resolution plan” is clarificatory, as this wasalways the correct interpretation as to the point of time at whichthe disqualification in clause (c) of Section 29-A will attach.”

84. Thus, facially, it would appear that the use of the simple presenttense in the first proviso to Section 21(2) indicates that the disqualificationapplies in praesenti. Furthermore, this interpretation would also besupported by a reading of the first proviso to Section 21(2), in light of thedefinition of ‘related party’ under Section 5(24), which uses phrasessuch as ‘is accustomed to act’ or ‘is associated’ to define a related partyin the present tense.

85. However, it is relevant to examine whether the object andpurpose for which the proviso was enacted, are fulfilled by the literalinterpretation of the first proviso. Justice G.P. Singh in his authoritativecommentary on the interpretation of statutes, Principles of StatutoryInterpretation[27], has stated that:

“The intention of the Legislature thus assimilates two aspects: Inone aspect it carries the concept of ‘meaning’, i.e., what the wordsmean and in another aspect, it conveys the concept of ‘purposeand object’ or the ‘reason and spirit’ pervading through the statute.The process of construction, therefore, combines both literal andpurposive approaches. In other words the legislative intention, i.e.,the true or legal meaning of an enactment is derived by consideringthe meaning of the words used in the enactment in the light of anydiscernible purpose or object which comprehends the mischiefand its remedy to which the enactment is directed. This formulationlater received the approval of the Supreme Court and was calledthe “cardinal principle of construction”.”

He notes that certain enactments require a liberal construction togive effect to its objects and purpose:

“A bare mechanical interpretation of the words and application ofa legislative intent devoid of concept of purpose will reduce mostof the remedial and beneficent legislation to futility. As stated by 27 G.P. Singh, Principles of Statutory Interpretation (1st edn., Lexis Nexis 2015)

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AIyer, J. “to be literal in meaning is to see the skin and miss thesoul. The judicial key to construction is the composite perceptionof the deha and the dehi of the provision.” Even in construingenactments such as those prescribing a period of limitation forinitiation of proceedings where the purpose is only to intimate thepeople that after lapse of a certain time from a certain event aBproceeding will not be entertained and where a strict grammaticalconstruction is normally the only safe guide, a literal and mechanicalconstruction may have to be disregarded if it conflicts with someessential requirement of fair play and natural justice which theLegislature never intended to throw overboard. Similarly, in aCtaxing statute provisions enacted to prevent tax evasion are givena liberal construction to effectuate the purpose of suppressing taxevasion although provisions imposing a charge are construedstrictly there being no a priori liability to pay a tax and the purposeof a charging section being only to levy a charge on persons andactivities brought within its clear terms. For the same reason, in aDlegislation relating to defence services “the considerations of thesecurity of the state and enforcement of high degree of disciplineadditionally intervene and have to be assigned weightage whiledealing with any expression needing to be defined or any provisionneeding to be interpreted.”

ESimilar words used in different parts of the enactment can havedifferent meanings. As Justice G P Singh notes:

“The rule is of general application as even plainest terms may becontrolled by the context, and “it is conceivable,” as Lord Watsonsaid, “that the Legislature whilst enacting one clause in plain terms,Fmight introduce into the same statute other enactments which tosome extent qualify or neutralise its effect”. The same wordmay mean one thing in one context and another in a differentcontext. For this reason the same word used in differentsections of a statute or even when used at different placesGin the same clause or section of a statute may bear differentmeanings. The conclusion that the language used by theLegislature is plain or ambiguous can only be truly arrived at bystudying the statute as a whole. How far and to what extent eachcomponent part of the statute influences the meaning of the otherpart would be different in each given case. But the effect of the H

PHOENIX ARC PRIVATE LIMITED v. SPADE FINANCIAL SERVICES1135LIMITED & ORS. [DR. DHANANJAYA Y CHANDRACHUD, J.]

application of the rule to a particular case, should not be confoundedwith the legitimacy of applying it. “

(emphasis added)

86. In this context, it would be useful to refer to an earlier decisionof this Court in Abhay Singh Chautala vs C.B.I.[28], where the court didnot interpret the word “is” in praesenti because that would lead to anabsurd result, defeating the purpose of the concerned provision. In thatcase this Court had to interpret Section 19(1) of the Prevention ofCorruption Act, 1947, which provided:

“19. Previous sanction necessary for prosecution.

(1) No court shall take cognizance of an offence punishable underSections 7, 10, 11, 13 and 15 alleged to have been committed by apublic servant, except with the previous sanction, - (a) In the case of a person who is employed in connection withthe affairs of the Union and is not removable from his office saveby or with the sanction of the Central Government, of thatGovernment; (b) In the case of a person who is employed in connection withthe affairs of a State and is not removable from his office save byor with the sanction of the State Government, of that Government;

(c) In the case of any other person, of the authority competent toremove him from his office.”

87. It was argued before this Court that a literal interpretationshould be given to Section 19(1). Since the word “is” has been used insub-sections (a), (b) and (c), it was urged that this would exclude apublic servant who had abused office at an earlier point in time and hasnow ceased to occupy that office. This Court speaking through JusticeSirpurkar rejected the argument and held:

“44…we reject the argument based on the word “is” in Sub-sections (a), (b) and (c). It is true that the Section operates inpraesenti; however, the Section contemplates a person whocontinues to be a public servant on the date of taking cognizance.However, as per the interpretation, it excludes a person who has 28 (2011) 7 SCC 141

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Aabused some other office than the one which he is holding on thedate of taking cognizance, by necessary implication. Once that isclear, the necessity of the literal interpretation would not be therein the present case. Therefore, while we agree with the principleslaid down in Robert Wigram Crawford v. Richard Spooner 4 MIA179, Re Bedia v. Genreal Accident, Fir and Life AssuranceBCorporation Ltd. 1948 (2) All ER 995 and Bourne (Inspector ofTaxes) v. Norwich Crematorium Ltd.1967 (2) All ER 576, wespecifically hold that giving the literal interpretation to the Sectionwould lead to absurdity and some unwanted results, as had alreadybeen pointed out in Antulay’s case (cited supra) (see the emphasisCsupplied to para 24 of Antulay’s judgment).”

88. This Court relied on the judgement in R S Nayak v. A RAntulay to fortify its interpretation of Section 19(1) of the Prevention ofCorruption Act, 1947:

“24 .... An illustration was posed to the learned Counsel that aDMinister who is indisputably a public servant greased his palms byabusing his office as Minister, and then ceased to hold the officebefore the court was called upon to take cognizance of the offenceagainst him and therefore, sanction as contemplated by Section 6would not be necessary; but if after committing the offence andEbefore the date of taking of cognizance of the offence, he waselected as a Municipal President in which capacity he was a publicservant under the relevant Municipal law, and was holding thatoffice on the date on which court proceeded to take cognizanceof the offence committed by him as a Minister, would a sanctionbe necessary and that too of that authority competent to removeFhim from the office of the Municipal President. The answer was-in affirmative. But the very illustration would show that suchcannot be the law. Such an interpretation of Section 6 wouldrender it as a shield to an unscrupulous public servant.Someone interested in protecting may shift him from oneGoffice of public servant to another and thereby defeat theprocess of law. One can legitimately envisage a situation whereina person may hold a dozen different offices, each one clothinghim with the status of a public servant under Section 21 IPC andeven if he has abused only one office for which either there is avalid sanction to prosecute him or he has ceased to hold that office H

by the time court was called upon to take cognizance, yet on thisassumption, sanction of 11 different competent authorities eachof which was entitled to remove him from 11 different public officeswould be necessary before the court can take cognizance of theoffence committed by such public servant/while abusing one officewhich he may have ceased to hold. Such an interpretation incontrary to all canons of construction and leads to an absurdand product which of necessity must be avoided. Legislationmust at all costs be interpreted in such a way that it would notoperate as a rougue’s charter.”

89. This court has approved of a purposive interpretation of Section29-A of the IBC in Arcelor Mittal India Private Limited v. SatishKumar Gupta (supra), where it was observed that:

“29…In Ms. Eera Through Dr. Manjula Krippendorf v. State(Govt. of NCT of Delhi) and Anr., (2017) 15 SCC 133, this Court,after referring to the golden Rule of literal construction, and itsolder counterpart the “object rule” in Heydon’s case, referred tothe theory of creative interpretation as follows:

122. Instances of creative interpretation are when the Court looksat both the literal language as well as the purpose or object of thestatute in order to better determine what the words used by thedraftsman of legislation mean. In D.R. Venkatachalam v. TransportCommr. [D.R. Venkatachalam v. Transport Commr., (1977) 2 SCC273, an early instance of this is found in the concurring judgmentof Beg, J. The learned Judge put it rather well when he said:(SCC p. 287, para 28):

“28. It is, however, becoming increasingly fashionable to start withsome theory of what is basic to a provision or a chapter or in astatute or even to our Constitution in order to interpret anddetermine the meaning of a particular provision or Rule made tosubserve an assumed “basic” requirement. I think that this novelmethod of construction puts, if I may say so, the cart before thehorse. It is apt to seriously mislead us unless the tendency to usesuch a mode of construction is checked or corrected by this Court.What is basic for a Section or a chapter in a statute is provided:firstly, by the words used in the statute itself; secondly, by the

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Acontext in which a provision occurs, or, in other words, by readingthe statute as a whole; thirdly, by the Preamble which could supplythe “key” to the meaning of the statute in cases of uncertainty ordoubt; and, fourthly, where some further aid to construction maystill be needed to resolve an uncertainty, by the legislative historywhich discloses the wider context or perspective in which aBprovision was made to meet a particular need or to satisfy aparticular purpose. The last mentioned method consists of anapplication of the mischief Rule laid down in Heydon case[Heydon case, (1584) 3 Co Rep 7a: 76 ER 637] long ago.”

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127. It is thus clear on a reading of English, US, Australianand our own Supreme Court judgments that the “LakshmanRekha” has in fact been extended to move away from thestrictly literal Rule of interpretation back to the Rule ofthe old English case of Heydon [Heydon case, (1584) 3 CoDRep 7a: 76 ER 637], where the Court must have recourseto the purpose, object, text and context of a particularprovision before arriving at a judicial result. In fact, the wheelhas turned full circle. It started out by the Rule as stated in 1584in Heydon case [Heydon case, (1584) 3 Co Rep 7a : 76 ER 637],Ewhich was then waylaid by the literal interpretation Rule laid downby the Privy Council and the House of Lords in the mid-1800s,and has come back to restate the Rule somewhat in terms ofwhat was most felicitously put over 400 years ago in Heydoncase [Heydon case, (1584) 3 Co Rep 7a : 76 ER 637].

F30. A purposive interpretation of Section 29A, depending both onthe text and the context in which the provision was enacted, must,therefore, inform our interpretation of the same.”

90. Hence, we would need to consider the meaning of the firstGproviso in the light of the context, object and purpose for which it wasenacted. The purpose of excluding a related party of a corporate debtorfrom the CoC is to obviate conflicts of interest which are likely to arisein the event that a related party is allowed to become a part of the CoC.The logic underlying the exclusion has been summarised as follows[29]:H29 Insolvency Law Committee Report, 2020, pp 47-48, para 11.9.

“The Committee was of the view that the disability under the firstproviso to Section 21(2) is aimed at removing any conflict of interestwithin the CoC, to prevent erstwhile promoters and other relatedparties of the corporate debtor from gaining control of thecorporate debtor during the CIRP by virtue of any loan that mayhave been provided by them.”

Accepting the submission of Mr Viswanathan would allow thestatutory provision to be defeated by a related party of a corporate debtorcreating commercial contrivances which have the effect of denuding itsstatus as a related party, by the time that the CIRP is initiated. The truetest for determining whether the exclusion in the first proviso to Section21(2) applies must be formulated in a manner which would advance theobject and purpose of the statute and not lead to its provisions beingdefeated by disingenuous strategies.

91. Therefore, it could be stated that where a financial creditorseeks a position on the CoC on the basis of a debt which was createdwhen it was a related party of the corporate debtor, the exclusion whichis created by the first proviso to Section 21(2) must apply. For, it is on thestrength of the financial debt as defined in Section 5(8) that an entityclaiming as a financial creditor under Section 5(7) seeks a position onthe CoC under Section 21(2). If the definition of the expression ‘relatedparty’ under section 5(24) applies at the time when the debt was created,the exclusion in the first proviso to Section 21(2) would stand attracted.

92. However, if such an interpretation is given to the first provisoof Section 21(2), all financial creditors would stand excluded if theywere a ‘related party’ of the corporate debtor at the time when thefinancial debt was created. This may arguably lead to absurd conclusionsfor entities which have legitimately taken over the debt of related parties,or where the related party entity had stopped being a ‘related party’ longago.

93. In this regard, it is relevant to note the observations in theInsolvency Law Committee Report of 2020 clarifying the eligibility ofthird-party assignees of the debt of a related party creditor, to be membersof the CoC. It was observed:

“11.09 … As a third-party assignee, who by itself is not a relatedparty, would not have any such conflict of interest, it should not bedisabled from participating in the CoC. Further, the aforesaid

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Adisability is not related to the debt itself but is based on therelationship existing between a related party creditor andthe corporate debtor. Therefore, as the disability imposed underthe first proviso to Section 21(2) pertains to the related partyfinancial creditor and not to the debt it is owed, the Committeeagreed that it is clear that when a related party financial creditorBassigns her debt to a third party in good faith, such third partyshould not be disqualified from participating, voting or beingrepresented in a meeting of the CoC.

11.10. However, the Committee discussed that in certaincases, a related party creditor may assign its debts withCthe intention of circumventing the disability imposed underthe first proviso to Section 21(2) by indirectly participatingin the CoC through the assignee. As a related party isexpressly prohibited from participating in the CoC, it cannotdo so indirectly by assigning its debt to a third-party assigneeDfor the purposes of circumventing this restriction.Therefore, in order to prevent any misuse, the Committeerecommended that prior to including an assignee of arelated party financial creditor within the CoC, theresolution professional should verify that the assignee isnot a related party of the corporate debtor. In cases whereEit may be proved that a related party financial creditor hadassigned or transferred its debts to a third party in badfaith or with a fraudulent intent to vitiate the proceedingsunder the Code, the assignee should be treated akin to arelated party financial creditor under the first proviso toFSection 21(2).”

94. Thus, it has been clarified that the exclusion under the firstproviso to Section 21(2) is related not to the debt itself but to therelationship existing between a related party financial creditor and theGcorporate debtor. As such, the financial creditor who in praesenti is nota related party, would not be debarred from being a member of the CoC.However, in case where the related party financial creditor divests itselfof its shareholding or ceases to become a related party in a businesscapacity with the sole intention of participating the CoC and sabotageHthe CIRP, by diluting the vote share of other creditors or otherwise, it would be in keeping with the object and purpose of the first proviso toSection 21(2), to consider the former related party creditor, as onedebarred under the first proviso.

95. Hence, while the default rule under the first proviso to Section21(2) is that only those financial creditors that are related parties inpraesenti would be debarred from the CoC, those related party financialcreditors that cease to be related parties in order to circumvent theexclusion under the first proviso to Section 21(2), should also be consideredas being covered by the exclusion thereunder. Mr Kaul has argued,correctly in our opinion, that if this interpretation is not given to the firstproviso of Section 21(2), then a related party financial creditor can devisea mechanism to remove its label of a ‘related party’ before the CorporateDebtor undergoes CIRP, so as to be able to enter the CoC and influenceits decision making at the cost of other financial creditors.

96. In the present case, there is a finding that AAA and Spadewere related parties within the meaning of Section 5(24) at the timewhen the alleged financial debt on the basis of which they assert a claimto be a part of the CoC was created. This was due to the long-standingrelationship between Mr Arun Anand and Mr Anil Nanda, and theirrespective corporations. Admittedly, such a relationship still existed evenin 2017, since Mr Anil Nanda’s JIPL held shareholding in Mr ArunAnand’s Spade. Further, we have also concluded that the transactionsbetween Spade and AAA on one hand, and the Corporate Debtor on theother hand, which gave rise to their alleged financial debts were collusivein nature. Therefore, it is evident that there existed a deeply entangledrelationship between Spade, AAA and Corporate Debtor, when thealleged financial debt arose. While their status as related parties may nolonger stand, we are inclined to agree with Mr Kaul that this was due tocommercial contrivances through which these entities seek to now enterthe CoC. The pervasive influence of Mr Anil Nanda (the promoter/director of the Corporate Debtor) over these entities is clear, and allowingthem in the CoC would definitely affect the other independent financialcreditors.

J Conclusion

97. In conclusion, we hold that:

(i) The decision of the NCLAT, in as much as it referred toSpade and AAA as financial creditors, is set aside. Due to A

B

C

D

E

F

G

H

1142SUPREME COURT REPORTS

Athe collusive nature of their transactions alleged to be afinancial debt under Section 5(8), Spade and AAA cannotbe labelled as financial creditors under Section 5(7);

(ii) The decision of the NCLAT, in as much as it referred toSpade and AAA as related parties of the Corporate DebtorBunder Section 5(24), is affirmed; and

(iii) The decision of the NCLAT, in as much as it excluded Spadeand AAA from the CoC in accordance with the first provisoof Section 21(2), is affirmed but for the reasons mentionedabove.

C98. The appeals are accordingly disposed of.

99. Pending application(s), if any, stand disposed of.

D

Divya Pandey

END OF 2021

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Appeals disposed of.

E

F

G

H