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Company Appeal (AT) (Insolvency) No. 1304 of 2023

5. Learned Counsel for the Resolution Professional refuting the submissions of the Counsel for the Appellant submits that the shareholding structure of the Corporate Debtor and SEFL makes it clear that both the Corporate Debtor and SEFL were eventually held by Kanoria Foundation. Corporate Debtor in various transactions admitted SIFL is a related and connected party. The deep relationship between SEFL and Corporate Debtor had not been disputed by the Appellant, during the course of arguments before the Adjudicating Authority. The entire case before the Adjudicating Authority by the Appellant was that while SEFL may be related party to the Corporate Debtor, SEFL assigned the loan to Rare Trust which is controlled by Rare ARC as the trustee and that Rare ARC itself is not related to Corporate Debtor under Section 5(24)(h),(i),(j),(l) and (m) since it has no common shareholders/directors etc. with the Corporate Debtor. It is submitted that it is the duty of the Resolution Professional to ensure that no related party, directly or indirectly, has a representation on the CoC. Counsel for the Resolution Professional relying on the judgment of the Hon'ble Supreme Court in "Phoenix ARC Pvt. Ltd. vs. Spade Financial Services Ltd. & Anr.- (2021) 3 SCC 475" submits that the Hon'ble Supreme Court has held that not only those Financial Creditors that are related parties in praesenti would be debarred from the CoC, but those related party financial creditors that cease to the related parties in order to circumvent the exclusion under the first proviso to Section 21(2), should also be considered as being covered by the exclusion thereunder. Where the Company Appeal (AT) (Insolvency) No. 1304 of 2023 assignment has been undertaken in bad faith, with the intention of circumventing the disability under Section 21(2) of the Code, the assignee must be treated as akin to a related party. It is submitted that in the present case assignment was made on 09.09.2020 i.e. during the first CIRP of the Corporate Debtor. The filling of the claim on same day i.e. 09.09.2020 in the CIRP by the Appellant clearly indicate that the assignment was made by SEFL to get tag of related party transaction removed with regard to loan in question. The facts and circumstances under which the assignment was made by SEFL to the Appellant indicate that the assignment was in bad faith and to participate in the CoC of the Corporate Debtor indirectly through assignee which could not have been done by SEFL directly which being related party to the Corporate Debtor. The Resolution Professional asked for relevant details regarding assignment and other facts from the Appellant, on being satisfied that the Appellant is akin to a related party, declared that it is not entitled to any voting right in the CoC. It is submitted that the source of funds for acquisition of loan by the Appellant was also result of round-tripped by SIFL/SEFL. It is submitted that in the avoidance application filed by the Administrator in the CIRP of the SEFL/SIFL, it was pleaded by Administrator that Rs.25 Crores was received by Appellant through SIFL to pay for assignment which fact has been brought before the Adjudicating Authority. The amount of Rs.25 Crores was round tripped by SEFL/SIFL itself using two connected shell companies, namely 'Predicate Consultants' and 'Ambrelo Ventures Private Limited' which details were brought before the Adjudicating Authority. The Adjudicating Authority has Company Appeal (AT) (Insolvency) No. 1304 of 2023 after considering entire facts and circumstances of the case has rightly rejected the application filed by the Appellant.

"11.10. However, the Committee discussed that in certain cases, a related party creditor may assign its debts with the intention of circumventing the disability imposed under the first proviso to Section 21(2) by indirectly participating in the CoC through the assignee. As a related party is expressly prohibited from participating in the CoC, it cannot do so indirectly by assigning its debt to a third- party assignee for the purposes of circumventing this restriction. Therefore, in order to prevent any misuse, the Committee recommended that prior to including an assignee of a related party financial creditor within the CoC, the resolution professional should verify that the assignee is not a related party of the Company Appeal (AT) (Insolvency) No. 1304 of 2023 corporate debtor. In cases where it may be proved that a related party financial creditor had assigned or transferred its debts to a third party in bad faith or with a fraudulent intent to vitiate the proceedings under the Code, the assignee should be treated akin to a related party financial creditor under the first proviso to Section 21(2)."

20. Further in paragraph 6 (ix), Resolution Professional has clearly stated that the exclusion under the first proviso to Section 21(2) of the Code is not allowed to be circumvented by way of an assignment made by a related party financial creditor to a third party in bad faith or with a fraudulent intention to vitiate the proceedings under the Code. In paragraph 6 (ix), following has been pleaded:-

"(ix). Thus, as the RP, it is my duty to ensure that the exclusion under the first proviso to Section 21(2) of the Code is not allowed to be circumvented by way of an assignment made by a related party financial creditor to a third party in bad faith or with a fraudulent intention to vitiate the proceedings under the Code. If such is the case, then the third party assignee must be treated akin to a related party financial creditor and ought to be excluded from the CoC under the first proviso to Section 21 (2) of the Code."

11.10. However, the Committee discussed that in certain cases, a related party creditor may assign its debts with the intention of circumventing the disability imposed under the first proviso to Section 21(2) by indirectly participating in the CoC through the assignee. As a related party is expressly prohibited from participating in the CoC, it cannot do so indirectly by assigning its debt to a third-party assignee for the purposes of circumventing this restriction. Therefore, in order to prevent any misuse, the Committee recommended that prior to including an assignee of a related party financial creditor Company Appeal (AT) (Insolvency) No. 1304 of 2023 within the CoC, the resolution professional should verify that the assignee is not a related party of the corporate debtor. In cases where it may be proved that a related party financial creditor had assigned or transferred its debts to a third party in bad faith or with a fraudulent intent to vitiate the proceedings under the Code, the assignee should be treated akin to a related party financial creditor under the first proviso to Section 21(2)."