Case Brief Phoenix Arc Private Limited vs. Spade Financial Services Limited.

Sreelekha. N, Intern

Case: Phoenix Arc Private Limited vs Spade Financial Services Limited on 1 February, 2021

Court: Supreme Court of India

Citation: Civil Appeal No. 2842 of 2020

Quorum: Division Bench

Author: Hon'Ble Dr. Chandrachud

Bench: Hon'Ble Dr. Chandrachud, M.R. Shah

Date of Decision: 01.02.2021

Facts of the case:

Phoenix Arc Pvt. Ltd. (hereafter referred to as ‘Phoenix’) is the Financial Creditor(FC) of one AKME Projects Ltd. (Corporate Debtor or ‘CD’) against which insolvency proceedings or Corporate Insolvency Resolution Process(CIRP) had been initiated under Section 9 of the Insolvency and Bankruptcy Code(IBC). The Committee of Creditors(CoC) was formed, and one Spade Financial Services Ltd.(‘Spade’) and AAA Landmark Pvt. Ltd. (‘AAA’) also put in claims to be included in it. It is pertinent to mention that AAA is a wholly-owned subsidiary of Spade. Although the Interim Resolution Professional(IRP) rejected Spade’s claim because it did not involve financial debt(section 5(8) IBC), the National Company Law Tribunal(NCLT) allowed the claim even though no other Financial Creditor of the CoC was part of the proceedings. As a result of both Spade and AAA entering the CoC, Phoenix’s voting share was reduced to 4.28%. Phoenix, along with YES Bank(another Financial Creditor), filed for exclusion of Spade and AAA from the CoC in the NCLT under Section 60(5)(c) of IBC, which was successful. Subsequently, Spade and AAA filed an appeal in the National Company Law Appellate Tribunal(NCLAT), challenging the NCLT’s decision to exclude them from the CoC. However, the NCALT upheld the NCLT’s judgment and agreed that Spade and AAA are related parties of the CD and are to be excluded from the CoC according to Section 5(24) and the first provision of Section 21(2) of the IBC. It also stated that Spade and AAA were “admittedly” also financial creditors of the CD. The current appeal was filed by Phoenix with the contention that Spade and AAA are not even Financial Creditors, and as such, the NCLAT’s erroneous observation must be struck down.

Issues:

1. Whether Spade and AAA are financial creditors of the Corporate Debtor

2. Whether Spade and AAA are related parties of the Corporate Debtor

3. Whether Spade and AAA have to be excluded from the CoC.

Laws Applied:

Insolvency and Bankruptcy Code (“IBC”):

1. Section 61- Appeals and Appellate Authority

2. Section 60(5) - Adjudicating authority for corporate persons

3. Section 62 - Appeal to Supreme Court for a person aggrieved by order of the National Company Appellate Tribunal

4. Section 5(24) - Definition of “related party.”

5. Section 21 - Committee of creditors and who can comprise that

6. Section 9 - Application for initiation of corporate insolvency resolution process by operational creditor

7. Section 5(8) - Definition of “financial debt.”

8. Section 5(7) - Definition of “financial creditor.”

9. Section 66 - Fraudulent trading or wrongful trading.

10. Section 29-A - Persons not eligible to be a resolution applicant.

11. Section 24 - Meeting of committee of creditors.

12. Section 28 - Approval of committee of creditors for certain actions.

Analysis and Conclusion:

The main matter of this case lies in whether Spade and AAA are the financial creditors of the Corporate Debtor or not. For Spade and AAA to qualify as such, they must certainly not be related parties to the CD. The Learned Counsel for the Respondents had also stated that the legal proceedings should be remanded back to the NCLAT since the Tribunal had made a mistake by dismissing the Respondent’s appeal upon exclusion from the CoC when it had already agreed that the Respondents were “admittedly” financial creditors of the CD. On the other hand, the contention of the Appellant’s Learned Counsel was that Spade and AAA are not and were never the Financial Creditors of the CD. Rather, they were partners/co-developers in a Development Agreement for the rights in a project, namely “AKME RAAGA.” However, the Agreement was not approved by the Government, which led to AAA and the CD converting the said Development Agreement into an unregistered Agreement to Sell. It is also alleged that AAA, through its Director, Arun Anand, revised its claim as a financial creditor stating an exaggerated due amount with the malicious intention of manipulating the voting share in the CoC even though it had not filed the same before.

It is apposite to mention here that the IRP had rejected Spade’s claim with lawful justification because of a number of reasons, including the prerequisite elements of a financial debt not being there under Section 5(8) of the IBC, which is the fixed time period for repayment of due amount; calculation sheet, ledgers, and relevant records showing the flow of funds provided by Spade not reflecting all transactions like the adjustment for payment of interest or borrowings.

The Court relied on the NCLT’s judgment to establish that the relationship between Spade and AKME is not that of a Financial Creditor and a Corporate Debtor, for reasons already discussed in the IRP’s rejection of Spade’s claim. In addition to this, the Court quoted relevant parts, finding that the Memorandum of Understanding(MoU) between the two parties was unregistered and unstamped, providing an interest rate of 24% but only 12% of interest for the amount was paid. Therefore, the claim before the IRP reflected as such amounts, and the ‘Secured Loan’ had not been registered with the Registrar of Companies. Moreover, there were no resolutions approving the said Inter-corporate Deposits(ICD) and their consequent receipt by the CD, which was filed. A large portion of the said ICDs were also credited to Spade’s Director, Arun Anand. An important factor here was that Arun Anand was involved(in different capacities, including shareholding) with the CD, its Directors, and the Parent group of the CD. It is pertinent to mention that Arun Anand was a consultant, a strategic advisor, and even the group CEO of the Parent Group of the CD, which is the Nanda Group. The facts above provided enough grounds for the Court to conclude that there was a collusive relationship between Spade and AKME, i.e., the Corporate Debtor, and they are related parties. As a result of the above, the Learned Court held that there was no reason for the matter to be remanded back to the NCLAT.

When it comes to the determination of whether Spade and AAA are financial creditors, the Court first examines the definitions of the various key terms like Financial Creditor, Financial Debt, Disburse, and Time value of money. Keeping the above discussion in mind, the Court declares that the business transactions between AAA and the CD were of a collusive nature which provides the further foundation to support the findings of NCLAT that the Agreement to Sell and Side Letter were mere ruses in an attempt to continue co-developing the AKME RAAGA project together while getting around the government regulations which had become a hurdle. Thus, AAA would technically be the CD’s partner, going by the definition given in Section 5(24)(a) of the IBC.

The question of whether Spade and AAA should be included in the CoC was decided with the help of Section 21(2) of the IBC, which states that a financial creditor who is a related party of the Corporate Debtor shall not have the right to vote, represent themselves or participate in the Committee of Creditors. Although the Learned Counsel contended that since Arun Anand resigned from his positions within the Anil Nanda Group after 2013, they are not affiliated anymore, it is clear that this claim does not hold water when we recollect the prominent role Arun Anand had in the business transactions between the two parties. The Learned Counsel for the Respondents argued that the interpretation of “is” in Section 21(2) means a present tense, which necessitates that the two parties should still have the same relationship at the time of legal proceedings. However, the Court cited Justice G.P Singh in his commentary on how statutes can be interpreted, “A bare mechanical interpretation of the words and application of a legislative intent devoid of the concept of purpose will reduce most of the remedial and beneficent legislation to futility.” So the argument about the literal interpretation of the word “is” in the statute was rejected on the grounds that it excludes a person who has held some designation other than the one they are currently holding and that the creative interpretation of the statute must be taken as the whole purpose of it was that there should not be a veritable conflict of interest because a related party of the Corporate Debtor was allowed in the Committee of Creditors.

The Court correctly deduced that due to the complicated web of relationships between Arun Anand and Anil Nanda, which led to the collusive business transactions between Spade, AAA, and the CD, there is reasonable justification for thinking that even though the parties are no longer related on account of Arun Anand’s resignation, allowing Spade and AAA into the CoC would adversely affect the other financial creditors. In conclusion, the decision of the NCLAT in declaring Spade and AAA as related parties and not being included as financial creditors in the CoC was supported by the Supreme Court and accordingly disposed of.