G. S. Constro & Infra Pvt. Ltd vs Mr. Gajesh Labhchand Jain

National Company Law Appellate Tribunal Principal Bench, New Delhi COMPANY APPEAL (AT) (INSOLVENCY) No. 587 of 2021 (Arising out of Order dated 03rd December, 2020 passed by National Company Law Tribunal, Court No. 5, Mumbai Bench, in IA 1148/2020 in C.P. No. 2995/I&B/MB/2019). IN THE MATTER OF:

1. G.S. Constro & Infra Pvt. Ltd. Through Director/Authorised Signatory Mr. Sushil Govindrao Uttarwar, R/o A-664, APMC Shopping Centre, 2nd Floor, Dindori Road, Panchvati, Nasik, Maharashtra - 422005 ...Appellant No. 1

2. Mr. Sushil Govindrao Uttarwar, Residing at 11/A Wing, Priyanka Hill, Near Water Tank, Mahatma Nagar, Nasik Maharashtra - 422007. ...Appellant No. 2

3. Mrs. Kalpana Sushil Uttarwar, Residing at 11/A Wing, Priyanka Hill, Near Water Tank, Mahatma Nagar, Nasik Maharashtra - 422007. ...Appellant No. 3

Versus

1. Mr. Gajesh Labhchand Jain, Resolution Professional of M/s. E&G Global Estates Limited. IP Regn No. IBBI/IPA-001/IP-P01697/2019- 2020/12588. D-501, Clifton Soc. Raviraj Oberoi Marg, Shastri Nagar, Andheri (W), Mumbai 400053 (Address registered with Board) 502, Brookfield Society, Old Lokhandwala Complex Road, Opp. Ashok Academy, Andheri West, Mumbai - 400053. (Address for correspondence). ...Respondent No. 1

2. Small Industrial Development Bank of India, R/o. Specialized Asset Recovery, -2-

Branch (SARB), Samrudhi Venture Park, Upper Ground Floor, MIDC Road, MIDC, Marol, Andheri (E), Mumbai - 400093. ...Respondent No. 2

For Appellants: Mr. Ranit Basu, Ms. Maitri Male, Advocates. For Respondent No.1: Ms. Khushboo Shah Rajani, Advocate for RP/R- 1.

JUDGEMENT

[Per; Shreesha Merla, Member (T)]

1. This Appeal is preferred under Section 61 of the Insolvency and

Bankruptcy Code, 2016, (hereinafter referred to as 'The Code'), against the

Impugned Order dated 03/12/2020 passed by the Learned Adjudicating

Authority (National Company Law Tribunal, Court No. 5, Mumbai Bench), in

I.A.1148 of 2020 in C.P. No. 2995 of 2019, by which Order, the Adjudicating

Authority has dismissed the Application filed by the Appellants/Applicants on

the ground that the Appellants were 'Related Parties' and cannot be treated

as 'Financial Creditors' within the meaning of Section 5(7) of the Code.

2. Facts in brief are that the Appellants are the Investors and

Shareholders of 'M/s. E&G Global Estates Limited' (hereinafter referred to as

the 'Corporate Debtor') having 48% of the shareholding of the Company. It is

stated that the 'Corporate Debtor' was in dire need of funds to complete the

construction of the 'Resort Project' and therefore the Appellants have infused

funds into the Company on the understanding that 100% shares would be

transferred to them. Accordingly, an MoU dated 10/12/2018 was entered into

between the parties, whereby the Appellants paid Rs.75 Lakhs/- to SIDBI

towards part payment of the loan amount, thereby saving the Company from

becoming an NPA. A Loan Agreement dated 12/02/2019 was also executed

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between the 'Corporate Debtor' and the Appellants, whereunder it was agreed

that out of the total loan amount of Rs.1,60,00,000/-, Rs.1,00,00,000 would

be utilised for repayment of overdue instalments of SIDBI. It was also decided

by the Directors of the 'Corporate Debtor Company' that a further loan of

Rs.25,00,00,000/- would be borrowed from the Appellants with interest @

12% per annum and likewise a Resolution dated 18/01/2020 was passed to

facilitate borrowings of Rs.5,00,00,000/- from the Appellants, to discharge

the loan taken from SIDBI. Subsequently, the Appellants were inducted as

the Additional Directors of the 'Corporate Debtor' in February, 2019 and were

made signatory to operating the Bank Accounts of the 'Corporate Debtor'. It

was averred that the Appellants had vacated the posts of 'Additional Director'

since an AGM was never conducted inducting them as a Director, but the RoC

portal was not updated and they continued to remain as Additional Directors.

It was stated that the Appellants had followed up with the Directors of the

'Corporate Debtor' regarding the acquisition of 100% shares as they had

infused huge amounts towards construction activity, but there was no

response. It was further averred that the Appellants came to know about some

transactions entered into by the Directors of the 'Corporate Debtor' in

September, 2019 and also came to know about the filing of the C.P. (IB) No.

2995 of 2019 by SIDBI against the 'Corporate Debtor'. At this juncture, the

Appellants had filed a Miscellaneous Application No. 3182 of 2019 seeking to

intervene on the ground that they are the owners of the Company and have

entered into an MoU for purchasing 40% shares of the 'Corporate Debtor' and

that they are in possession of the property and looking after all the day-to-

day expense of the 'Corporate Debtor' Company. The Adjudicating Authority

Company Appeal (AT) (Insolvency) No. 587 of 2021 -4-

dismissed this M.A. giving the Appellants herein ample time to settle the dues

of SIDBI as was agreed by them during the hearing.

3. Submissions of the Learned Counsel appearing on behalf of the

Appellants:

• Learned Counsel appearing for the Appellants submitted that they have

deposited Rs.50 Lakhs/- with SIDBI without prejudice to their rights

and contentions and pending settlement talks with the Directors and

SIDBI; but despite all efforts, the Adjudicating Authority has admitted

the said Company Petition and dismissed the M.A. filed by them

opposing the 'Admission' of the Company Petition.

• It is submitted that the issue raised by SIDBI regarding 'Related Party'

is factually incorrect; that as per the provision of Section 161(1) of the

Companies Act, 2013, (hereinafter referred to as 'The Act'), the post of

the Additional Director would be automatically vacated if the AGM of

the Company is not conducted within six months from the end of the

respective Financial Year; that Section 96 of the Act compels any

Company to hold an AGM within six months from the date of closing of

the Financial Year and the said fact was also confirmed by way of a

Notice dated 10/12/2019 and therefore it cannot be said that they are

'Related Parties' as the AGM never took place and hence they were never

made Directors of the Company.

• The shareholding of two of the Appellants is only 4.09% and 7.48%

which is below 20% and therefore the bar provided by the Code under

Section 5(24)(j) does not apply.

Company Appeal (AT) (Insolvency) No. 587 of 2021 -5-

• It was strenuously contended that as substantial sum of money was

infused by the Appellants amounting to Rs.8,00,00,000/-, not giving

them an opportunity to file their 'Claim' vitiates the process of law.

• I.A.1148 of 2020 was preferred by the Appellants seeking following

reliefs:-

(a) That they have not been made part of the COC as they have

been considered as a 'Related Party' nor was their amount

invested, considered as 'Financial Debt' and therefore they have

been denied proportionate Voting Share in the Company.

(b) The Minutes of the COC Meeting held on 24/07/2020 be

quashed and the existing COC be set aside.

(c) Demanding for a Forensic Audit for a 'Corporate Debtor'

Company.

• Learned Counsel further submitted that the Learned Adjudicating

Authority has erroneously construed the amount of Rs.50 Lakhs/- paid

directly to SIDBI as an amount paid on behalf of the 'Corporate Debtor',

in return for which, the Appellants would have got acquisition of further

shares in the Companies, and therefore the amount is not a 'Financial

Debt'.

4. Submissions of the Learned Counsel appearing on behalf of the

Respondent/Resolution Professinal:

• Learned Counsel appearing for the Respondent submitted that the

Resolution Plan was already approved by a majority of the Members of

the CoC on 11/03/2022 and an Application was preferred under

Company Appeal (AT) (Insolvency) No. 587 of 2021 -6- Section 30 by the RP before the Adjudicating Authority, which

Application has been heard and reserved for Orders.

• It is submitted that being the Shareholders, the Appellants are 'Related

Parties' of the 'Corporate Debtor' and have previously filed an M.A. 3182

of 2019 with similar prayers, arraying themselves as Directors of the

'Corporate Debtor Company', which Application was dismissed by the

Adjudicating Authority.

• They were not only the Directors but were also controlling the affairs of

the Company and are squarely covered under Section 5(24)(a) of the

Code.

• The claim amount which the Appellant wants to be treated as 'Financial

Debt' was paid by them on behalf of the 'Corporate Debtor' to SIDBI

towards settlement of dues of the 'Corporate Debtor Company' for

furthering their own interest of acquiring more shares in the Company

and therefore have to necessarily be treated as 'Related Parties'.

Assessments/Findings:

5. The main issue which arises for consideration in this Appeal is whether

the Appellants herein fall within the definition of 'Related Parties' and whether

their 'Claims' can be considered as 'Financial Debt' as defined under Section

5(8) of the Code.

6. It is an undisputed fact that the Appellants together hold about 48% of

the shareholding of the Company. It is the main contention of the Appellants

that the Master Data of the 'Corporate Debtor' was not updated in the Ministry

of Corporate Affairs 'MCA' Website and that they were never Directors of the

Company Appeal (AT) (Insolvency) No. 587 of 2021 -7-

Company and were only Additional Directors, which designation, also ceased

as the Annual General Meeting contemplated under Section 161(1) of the Act

was never conducted inducting them as Directors. The Hon'ble Apex Court in

'Phoenix Arc Private Limited' Vs. 'Spade Financial Services Limited and Ors.',

(2021) 3 SCC 475, has described the term 'Related Party' in detail in paras 62

& 63 as hereunder:

"62. The definition describes a commutative relationship, meaning that X can be a related party of Y, if either X is related to Y, or Y is related to X. The definition of 'related party' under the IBC is significantly broad. The intention of the legislature in adopting such a broad definition was to capture all kinds of inter-relationships between the financial creditor and the corporate debtor.

63. The term 'related party' has also been defined by Parliament in the Companies Act, 2013 for all corporations. The definition of the expression has also been expanded for listed entities by the Securities Exchange Board of India by amendment to the Equity Listing Agreement to include elements mentioned under applicable accounting standards. However, in the present case, we are assessing its definition only under the IBC, which is exhaustive. The purpose of defining the term separately under different statutes is not to avoid inconsistency but because the purpose of each of them is different. Hence, while understanding the meaning of 'related party' in the context of the IBC, it is important to keep in mind that it was defined to ensure that those entities which are related to the Corporate Debtor can be identified clearly, since their presence can often negatively affect the insolvency process."

7. A brief perusal of the Master Data of the 'Corporate Debtor' reflects the

fact that Appellants 2 & 3 continue to be Directors. It is also seen that the

second Appellant Mr. Sushil Govindrao Uttarwar is the common Director of

Company Appeal (AT) (Insolvency) No. 587 of 2021 -8-

the 'Corporate Debtor' as well as the present Appellant No. 1 Company.

Further in the Application M.A. No. 3182 of 2019 filed by the Appellants

herein seeking intervention in the Section 7 Petition filed by SIDBI, it is

submitted that they have acquired 44% shareholding of the 'Corporate Debtor

Company' in November 2018 and arrayed themselves as 'Directors'. It is

significant to mention that a copy of the Master Data of the 'Corporate Debtor

Company' as per the records of the MCA Website was annexed to the said

Application M.A. 3162/2019, in support of their 'locus standi' for intervening

in the matter. Therefore, the contention of the Appellants herein that they

were not Directors of the 'Corporate Debtor Company', is untenable.

8. This Tribunal is of the considered view that the Appellants herein are

the 'Related Parties' of the 'Corporate Debtor Company' as defined under

Section 5(24) of the Code for the following reasons:-

"5(24) "related party", in relation to a corporate debtor, means--

(a) a director or partner of the corporate debtor or a relative of a director or partner of the corporate debtor;

(b) a key managerial personnel of the corporate debtor or a relative of a key managerial personnel of the corporate debtor;

(c) a limited liability partnership or a partnership firm in which a director, partner, or manager of the corporate debtor or his relative is a partner;

(d) a private company in which a director, partner or manager of the 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 of the corporate debtor is a director and holds along with relatives, more than two per cent. of its paid-up share capital;

Company Appeal (AT) (Insolvency) No. 587 of 2021 -9-

(f) anybody corporate whose board of directors, managing director or manager, in the ordinary course of business, acts on the advice, directions or instructions of a director, partner or manager of the corporate debtor;

(g) any limited liability partnership or a partnership firm whose partners or employees in the ordinary course of business, acts on the advice, directions or instructions of a director, partner or manager of the corporate debtor;

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

(i) a body corporate which is a holding, subsidiary or an associate company of the corporate debtor, or a subsidiary of a holding company to which the corporate debtor is a subsidiary;

(j) any person who controls more than twenty per cent of voting rights in the corporate debtor on account of ownership or a voting agreement;

(k) any person in whom the corporate debtor controls more than twenty per cent. of voting rights on account of ownership or a voting agreement;

(l) any person who can control the composition of the board of directors or corresponding governing body of the corporate debtor;

(m) any person who is associated with the corporate debtor on account of--

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

(ii) having more than two directors in common between the corporate debtor and such person; or

(iii) interchange of managerial personnel between the corporate debtor and such person; or

(iv) provision of essential technical information to, or from, the corporate debtor;"

Company Appeal (AT) (Insolvency) No. 587 of 2021 -10-

• The Appellants were Directors of the Company and were also managing

the day-to-day affairs of the Company as per their own submissions in

M.A. 3182 of 2019, which is part of the record.

• It is significant to mention that the second Appellant in his capacity as

the 'Suspended Directors' has accepted the Notices, Agenda and the

Minutes of the CoC Meetings which is against the provisions of Section

21(1) of the Code:

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

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

Provided that a financial creditor or the authorised representative of 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 the corporate debtor, shall not have any right of representation, participation or voting in a meeting of the committee of creditors:

Provided further that the first proviso shall not apply to a financial creditor, regulated by a financial sector regulator, if it is a related party of the corporate debtor solely on account of conversion or substitution of debt into equity shares or instruments convertible into equity shares or completion of such transactions as may be prescribed, prior to the insolvency commencement date."

• Therefore, any financial creditor, shall not have any right of

representation, participation and voting in the meeting of the CoC, if it

is a related party of the Corporate Debtor.

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• It is not in dispute that Rs.50 Lakhs/- was directly paid by the

Appellant herein to SIDBI to discharge the loan seeking to enhance their

equity in the 'Corporate Debtor Company'. This establishes that the

amount infused was not in the nature of financial disbursement with

'Time Value of Money' which is a pre-requisite for a 'Debt' to be covered

under Section 5(8) of the Code.

• The Appellants being Shareholders of the Company chose to file an

Application before the Adjudicating Authority claiming to be 'Directors'

and now again preferred this I.A.1148 of 2020 stating that they are 'not

Directors' which is completely contrary to their own stand taken in the

earlier MA.

• The documentary evidence on record shows that on 22/02/2019, a

Board Resolution was passed approving the conversion of loan to

equity. A Notice for holding an AGM and Board Resolution dated

11/02/2019 was also annexed. It is evident from these documents that

the loan amount for Rs.1.6Crs./- was actually 'equity' and hence the

claim for the amount be treated as a 'Financial Debt' does not survive.

• It is not denied that the Appellants have attended the first CoC Meeting

held on 24/06/2020 in their capacity as 'Suspended Directors' and

have even annexed the Minutes of the CoC Meetings which shows that

they had access to the Minutes of the CoC Meetings.

• It is their own case that the Appellants agreed and entered into an MoU

for acquiring 100% equity of the 'Corporate Debtor' and are incurring

expenses towards construction activity and the daily wages which

Company Appeal (AT) (Insolvency) No. 587 of 2021 -12-

establishes their role in managing the day-to-day affairs of the

Company.

9. For all the aforenoted reasons, this Tribunal is of the considered view

that the documentary evidence on record clearly establishes that the entire

loan was converted into equity and hence no claim is maintainable under the

guise that this amount be treated as a 'Financial Debt'.

10. For the foregoing reasons, this Tribunal holds that the Appellants are

'Related Parties' and there are no substantial grounds to interfere with the

well-reasoned Order of the Adjudicating Authority. Hence this Appeal fails and

is accordingly dismissed. No Order as to costs.

[Justice Ashok Bhushan] (Chairperson)

[Ms. Shreesha Merla] (Member Technical)

NEW DELHI 18th May, 2022

himanshu

Company Appeal (AT) (Insolvency) No. 587 of 2021