The NCLT, New Delhi opined that one of the criteria for related parties is set out in Section 5(24) of the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as “IBC”).
This includes controlling the composition which includes appointment and removal of directors. To ascertain whether the Committee of Creditors (CoC) Members had any control over the composition or not, the scheme of the Companies Ac, 2013 was examined regarding the appointment and removal of directors.
In the present case, the Tribunal observed that the members of the CoC were capable of controlling the composition of the Board and therefore, were related parties. The constitution of Coc was ruled to be erroneous. It was expounded that the Resolution plan approved by a CoC consisting of related parties is void ab initio.
Brief Facts:
The Resolution Professional of Kredo Beauty Pvt. Ltd (Applicant) has preferred the present application seeking approval of the resolution plan submitted jointly by the Resolution Applicants.
Brief Background:
On an application filed by the Operational Creditor, the Corporate Insolvency Resolution Process (CIRP) against the Corporate Debtor was initiated and a Resolution Professional was appointed.
As per the Applicant, a public announcement was made as per Regulation 6(1) of the Insolvency and Bankruptcy Board of India (Insolvency Process for Corporate Persons) Regulations, 2016. Pursuant to this, an Earnest Money Deposit (EMD) was received from one prospective Resolution Applicant (RA), however the same was returned.
With a 100% voting share, the CoC decided to reissue Form G and in response, EOI was received from the Resolution Applicants for submitting the resolution plan.
Observations of the Tribunal:
The NCLT observed that certain documents were not annexed by the RP and hence, an opportunity was given to cure the defects. In this regard affidavit and a compliance, certificate were submitted by the RP.
The basic features of the Resolution Plan were observed. As per the plan, the Financial Creditors were getting paid 0.99% only of their claim amounts. Further, the Successful Resolution Applicant (SRA) proposed paying Rs. 3.61 lakhs to the Financial Creditors.
It was noticed that the entire CoC of the Corporate Debtor comprised of the shareholders only. Further, none of the names of the shareholders was reflected under the category of “related party” and hence, they were not barred from voting rights.
The 2 CoC members held a 19% voting share each. Therefore, individually they were not related parties as per Section 5(25)(j) of the IBC.
It was opined that another criterion for related parties is set out in Section 5(24). This includes controlling the composition which includes appointment and removal of directors. To ascertain whether the Coc Members had any control over the composition or not, the scheme of the Companies Ac, 2013 was examined regarding the appointment and removal of directors.
In the present case, the Tribunal observed that the members of the CoC were capable of controlling the composition of the Board and therefore, were related parties. The constitution of Coc was ruled to be erroneous.
The decision of the Tribunal:
It was expounded that the Resolution plan approved by a CoC consisting of related parties is void ab initio and therefore, the present application was accordingly dismissed.
Case Title: M/s Punjabi Accessoriezz Private Limited v. M/s Kredo Beauty Private Limited
Coram: Coram: SH. Ashok Kumar Bhardwaj (Hon’ble Judicial Member), SH.L.N. Gupta (Hon’ble Technical Member)
Case No.: IA No. 611/ND/2021 IN Company Petition No. (IB)-1164 (ND)/2019
Advocates for RP: Advs. Mr. Vedant Chahal, Ms. Veenu Darall, Mr. Ravi Prasar
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