# PHOENIX ARC PRIVATE LIMITED v. SPADE FINANCIAL SERVICES LIMITED & ORS

- **Citation:** [2021] 15 S.C.R. 1079
- **Court:** Supreme Court of India
- **Decided:** 2021-02-01
- **Case number:** Civil Appeal No. 2842 of 2020
- **Bench:** Dr. Dhananjaya Y Chandrachud, Indu Malhotra, Indira Banerjee
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/phoenix-arc-private-limited-v-spade-financial-services-limited-ors-35374
- **Pages:** 64

## Headnote

Insolvency and Bankruptcy Code, 2016 - ss.5(7), (8) -
Financial creditor; financial debt - Sham/Collusive transactions, if
financial debts - Held: A person can be categorised as a financial
creditor if a financial debt is owed to it - s.5(8) stipulates that the
essential ingredient of a financial debt is disbursal against
consideration for the time value of money - Money advanced as
debt should be in the receipt of the borrower - Borrower is obligated
to return the money or its equivalent along with the consideration
for a time value of money, which is the compensation or price
payable for the period of time for which the money is lent - A
transaction which is sham or collusive would only create an illusion
that money has been disbursed to a borrower with the object of
receiving consideration in the form of time value of money, when in
fact the parties have entered into the transaction with a different or
an ulterior motive - The real agreement between the parties is
something other than advancing a financial debt - In the present
case, the transaction between AAA and the Corporate Debtor was
collusive in nature - Since the commercial arrangements between
Spade and AAA, and the Corporate Debtor were collusive in nature,
they would not constitute a 'financial debt' - Hence, Spade and
AAA are not financial creditors of the Corporate Debtor - Decision
of NCLAT, in as much as it referred to Spade and AAA as financial
creditors, is set aside - Due to the collusive nature of their
transactions alleged to be a financial debt u/s.5(8), Spade and AAA
cannot be labelled as financial creditors u/s.5(7) - The decision in
as much as it referred to Spade and AAA as related parties of the
Corporate Debtor u/s.5(24) and excluded Spade and AAA from the
CoC 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
 [2021] 15 S.C.R. 1079
1079
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[2021] 15 S.C.R.
passed by the NCLT allowing AAA and Spade to submit their claims
as financial creditors - However, when the NCLT allowed AAA and
Spade to re-submit its claims as financial creditors, none of the
creditors on the Committee of Creditors (CoC) were represented in
the proceedings - Phoenix and YES Bank moved applications for
seeking the exclusion of AAA and Spade from the CoC on the ground
that they were related parties - Order of NCLT if operated as res
judicata - Held: Order of NCLT dtd. 31 May 2018 did not operate
as res judicata - The order was passed without hearing financial
creditors such as Phoenix and YES Bank - Hence, they were
legitimately within their rights in seeking a direction for the exclusion
of AAA and Spade from the CoC, if they were aggrieved by the
terms of that order.
Insolvency and Bankruptcy Code, 2016 - ss.43, 45(2), 49,
50 - "avoidable transactions" - Held: IBC has made provisions
for identifying, annulling or disregarding "avoidable transactions"
which distressed companies may have undertaken to hamper
recovery of creditors in the event of the initiation of Corporate
Insolvency Resolution Process (CIRP) - IBC recognizes that for the
success of an insolvency regime, the real nature of the transactions
has to be unearthed in order to prevent any person from taking
undue benefit of its provisions to the detriment of the rights of
legitimate creditors.
Insolvency and Bankruptcy Code, 2016 - s.5(24) - 'related
party' - 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 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.
Insolvency and Bankruptcy Code, 2016 - First proviso to
s.21(2), s.5(24) - Exclusion under first proviso to s.21(2) -
Appl

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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, if
financial debts - Held: A person can be categorised as a financial
creditor if a financial debt is owed to it - s.5(8) stipulates that the
essential ingredient of a financial debt is disbursal against
consideration for the time value of money - Money advanced as
debt should be in the receipt of the borrower - Borrower is obligated
to return the money or its equivalent along with the consideration
for a time value of money, which is the compensation or price
payable for the period of time for which the money is lent - A
transaction which is sham or collusive would only create an illusion
that money has been disbursed to a borrower with the object of
receiving consideration in the form of time value of money, when in
fact the parties have entered into the transaction with a different or
an ulterior motive - The real agreement between the parties is
something other than advancing a financial debt - In the present
case, the transaction between AAA and the Corporate Debtor was
collusive in nature - Since the commercial arrangements between
Spade and AAA, and the Corporate Debtor were collusive in nature,
they would not constitute a 'financial debt' - Hence, Spade and
AAA are not financial creditors of the Corporate Debtor - Decision
of NCLAT, in as much as it referred to Spade and AAA as financial
creditors, is set aside - Due to the collusive nature of their
transactions alleged to be a financial debt u/s.5(8), Spade and AAA
cannot be labelled as financial creditors u/s.5(7) - The decision in
as much as it referred to Spade and AAA as related parties of the
Corporate Debtor u/s.5(24) and excluded Spade and AAA from the
CoC 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
 [2021] 15 S.C.R. 1079
1079
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[2021] 15 S.C.R.
passed by the NCLT allowing AAA and Spade to submit their claims
as financial creditors - However, when the NCLT allowed AAA and
Spade to re-submit its claims as financial creditors, none of the
creditors on the Committee of Creditors (CoC) were represented in
the proceedings - Phoenix and YES Bank moved applications for
seeking the exclusion of AAA and Spade from the CoC on the ground
that they were related parties - Order of NCLT if operated as res
judicata - Held: Order of NCLT dtd. 31 May 2018 did not operate
as res judicata - The order was passed without hearing financial
creditors such as Phoenix and YES Bank - Hence, they were
legitimately within their rights in seeking a direction for the exclusion
of AAA and Spade from the CoC, if they were aggrieved by the
terms of that order.
Insolvency and Bankruptcy Code, 2016 - ss.43, 45(2), 49,
50 - "avoidable transactions" - Held: IBC has made provisions
for identifying, annulling or disregarding "avoidable transactions"
which distressed companies may have undertaken to hamper
recovery of creditors in the event of the initiation of Corporate
Insolvency Resolution Process (CIRP) - IBC recognizes that for the
success of an insolvency regime, the real nature of the transactions
has to be unearthed in order to prevent any person from taking
undue benefit of its provisions to the detriment of the rights of
legitimate creditors.
Insolvency and Bankruptcy Code, 2016 - s.5(24) - 'related
party' - 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 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.
Insolvency and Bankruptcy Code, 2016 - First proviso to
s.21(2), s.5(24) - Exclusion under first proviso to s.21(2) -
Application of - Held: While the default rule under the first proviso
to s.21(2) is that only those financial creditors that are related parties
in praesenti would be debarred from the CoC, those related party
financial creditors that cease to be related parties in order to
circumvent the exclusion under the first proviso to s.21(2), should
also be considered as being covered by the exclusion thereunder -
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In the present case, there is a finding that AAA and Spade were
related parties within the meaning of s.5(24) at the time when the
alleged financial debt on the basis of which they assert a claim to
be a part of the CoC was created - The transactions between Spade
and AAA on one hand, and the Corporate Debtor on the other hand,
which gave rise to their alleged financial debts were collusive in
nature - There existed a deeply entangled relationship between
Spade, AAA and Corporate Debtor, when the alleged financial debt
arose - While their status as related parties may no longer stand,
this was due to commercial contrivances through which these entities
seek to now enter the CoC - The pervasive influence of the promoter/
director of the Corporate Debtor over these entities is clear, and
allowing them in the CoC would definitely affect the other
independent financial creditors.
Insolvency and Bankruptcy Code, 2016 - First proviso to
s.21(2) - Object and purpose for enactment - Amendment to First
proviso 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 did
not operate as res judicata. The order was passed without hearing
financial creditors such as Phoenix and YES Bank. Hence, they
were legitimately within their rights in seeking a direction for
the exclusion of AAA Landmark Private Limited (AAA) and Spade
Financial Services Private Limited (Spade) from the CoC, if they
were aggrieved by the terms of that order. The earlier order was
passed 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 Spade
and AAA as financial creditors was never raised before the NCLT
is contrary to the material produced on record. The NCLT's order
dated 19 July 2019 was passed after arguments were led on the
real nature of transactions between the parties. [Para 32][1104B; 1104-D-E]
PHOENIX ARC PRIVATE LIMITED v. SPADE FINANCIAL SERVICES
LIMITED & ORS.
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1.3 Sub-section (2) of Section 21 stipulates that the CoC is
to comprise of all financial creditors of the corporate debtor. The
first proviso to Sub-section (2) has been amended by Act 26 of
2018 with effect from 6 June 2018. Having held that AAA and
Spade are not financial creditors, NCLT came to the conclusion
that they were not entitled to inclusion in the CoC. The
Adjudicating Authority was of the view that it was not really
necessary for it to consider what should be the 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. Arun Anand
and his various companies namely AAA and Spade were related
parties to the corporate debtor though after 2013, Mr Arun Anand
resigned from all the companies of the Anil Nanda Group. The
Adjudicating Authority observed that they are no longer related
to the corporate debtor at the time of the filing of the application
for initiation of the CIRP. It noted the deep entanglement of the
affairs of the corporate debtor and the Arun Anand group of
companies, the close business relationship of the past and the
fact that the accounts of the corporate debtor had not been
finalised, audited or filed with the Registrar of Companies since
2016. Reading the order of the NCLT as it stands, it is not possible
to accept the submission that the applications filed by YES Bank
and Phoenix were rejected only on the basis that they were not
financial creditors and that there was no determination in regard
to their status as related parties. In light of the above discussion,
the submission that NCLAT exceeded its jurisdiction by
considering the second issue relating to the determination of the
status of AAA and Spade as related parties not agreed with. Thus,
there is no reason to remand the matter to NCLAT for
reconsideration. An order of remand cannot be passed in a routine
manner, and it should be passed only if a re-consideration is
necessary. An unwarranted order of remand does not serve the
cause of justice and merely extends the life of litigation.
[Paras 38, 39][1108-A-C; 1108-C-G]
2. Under Section 5(7) of the IBC, a person can be
categorised as a financial creditor if a financial debt is owed to it.
Section 5(8) of the IBC stipulates that the essential ingredient of
a financial debt is disbursal against consideration for the time
value of money. [Para 43][1110-E-F]
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Swiss Ribbons Pvt. Ltd. v. Union of India (2019) 4 SCC
17 : [2019] 3 SCR 535; Pioneer Urban Land and
Infrastructure 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 the
borrower. The borrower is obligated to return the money or its
equivalent along with the consideration for a time value of money,
which is the compensation or price payable for the period of time
for which the money is lent. A transaction which is sham or
collusive would only create an illusion that money has been
disbursed to a borrower with the object of receiving consideration
in the form of time value of money, when in fact the parties have
entered into the transaction with a different or an ulterior motive.
In other words, the real agreement between the parties is
something other than advancing a financial debt. The IBC has
made provisions for identifying, annulling or disregarding
"avoidable transactions" which distressed companies may have
undertaken to hamper recovery of creditors in the event of the
initiation 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 order
to prevent any person from taking undue benefit of its provisions
to 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 a
detailed analysis of the transactions to arrive at a finding that the
transactions were collusive. The findings of the NCLT in its order
PHOENIX ARC PRIVATE LIMITED v. SPADE FINANCIAL SERVICES
LIMITED & ORS.
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dated 19 July 2019 are agreed with. As noted by NCLT, the
Memorandum of Understanding dated 12 August 2011, on the
basis of which Spade had filed its claim in Form C before the IRP,
was signed two years after the commencement of the purported
transaction. The execution of the Memorandum of Understanding
was sought to be explained on the basis that a formal document
was created for specifying the rate of interest on the Inter
Corporate Deposits (ICDs) given by Spade to the Corporate
Debtor. However, despite the creation of a formal document, the
rate of interest being charged on the ICDs was 12% as mentioned
in the claim before the IRP, which is half of the interest rate of
24% stipulated in the Memorandum of Understanding. During
the arguments, it was also brought to the notice of this Court
that the Memorandum of Understanding is unregistered and
unstamped. The IRP in his letter dated 25 May 2018 has noted
that as per the ledger provided by Spade, no interest was claimed
on the alleged debt and no adjustment was made regarding the
payment of principal or interest by the Corporate Debtor to Spade.
It has been submitted in the written submissions filed on behalf
of Spade and AAA that the auditors of the Corporate Debtor had
been putting a note in its balance sheets stating that the interest
of 12% was not being paid to Spade due to a dispute. This
submission in fact further fortifies the 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 of Understanding does not
stipulate the period of repayment. Hence, the consideration for
time value of money is absent, which is an essential ingredient of
a financial debt. The NCLT has also noted that a major portion of
the ICDs was credited in the account of Mr Arun Anand holding
that the entire amount was not "disbursed" to the Corporate
Debtor. NCLAT has also made a similar finding in paragraph 11(i)
of its judgement. Under Clause 2 of the Memorandum of
Understanding, the amount of Rs. 26.55 Crores has been
disbursed not only to the Corporate Debtor but also to "other
companies on behalf of AKME". In any event, the entirety of the
ICDs were not disbursed to Spade. Additionally, no Board
resolution was passed by Spade approving the grant of ICDs and
the charge created on the loan was not registered with the
Registrar of Companies. The Memorandum of Understanding was
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an eye-wash and collusive. NCLT in its order dated 19 July 2019
has noted that AAA and the Corporate Debtor had entered into
multiple agreements regarding the same property without giving
any explanation or rationale regarding variation in the
consideration. This showed that the transactions were collusive
in nature entered with the purpose of diverting properties of the
Corporate Debtor to AAA. Since the Development Agreement
could not 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 on 25 October 2012. The Agreement to
Sell was entered to purchase FSI/flats equivalent to 38.3% of the
total FSI in relation to specific units identified and allotted in the
agreement. Apparently, the sale consideration was re-negotiated
and enhanced from Rs 32.80 crores under the Development
Agreement to Rs 86.01 crores under the Agreement to Sell.
Clause 3 of the Side Letter dated 25 October 2012 shows that
the intent of the parties was to continue to co-develop the land.
It appears that the parties converted the Development
Agreement into an Agreement to Sell executed along with a Side
Letter to circumvent the legal prohibition on splitting a
development license in two parts. The transaction between AAA
and the Corporate Debtor was collusive in nature. Since the
commercial arrangements between Spade and AAA, and the
Corporate Debtor were collusive in nature, they would not
constitute a 'financial debt'. Hence, Spade and AAA are not
financial creditors of the Corporate Debtor. [Paras 49-52][1115F-H; 1116-A-H; 1117-A-G]
5. Whether Spade and AAA are related parties
The definition of the expression 'related party' in Section
5(24) is exhaustive, since the expression is defined to "mean"
what is set out in clauses (a) to (m). The expression 'related
party' is defined in Section 5(24) in relation to a corporate debtor.
Section 5(24A) provides a corresponding definition in relation to
an individual. 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 interPHOENIX ARC PRIVATE LIMITED v. SPADE FINANCIAL SERVICES
LIMITED & ORS.
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[2021] 15 S.C.R.
relationships between the financial creditor and the corporate
debtor. 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. It is not difficult
to accept the conclusion of the NCLAT that Mr Arun Anand would
be a related party of the Corporate Debtor in accordance with
Section 5(24)(h) and Sections 5(24)(m)(i). Presently, the court
has to determine whether the Corporate Debtor's board,
directors, etc, are accustomed to act on Mr Arun Anand's advice/
direction/instruction and if he participates in the policy-making
process of the Corporate Debtor. While a strict determination of
intent or mens rea may not always be possible by the NCLT and
NCLAT in summary proceedings, it is possible to draw the
inference from the facts at hand. These facts are that there was a
deep entanglement between the entities of Mr Arun Anand and
Mr Anil Nanda, and Mr Arun Anand did hold positions during
this period which could have been used by him to guide the affairs
of the Corporate Debtor. This finding is further supported by
conclusion that the transactions between the Corporate Debtor
and the entities led by Mr Arun Anand were collusive in nature.
The NCLAT's conclusion that Spade entered into two transactions
on the basis of the advice/instructions/directions of the board/
directors of the Corporate Debtor under Section 5(24)(f) is
accepted. As already held, the transactions between AAA and
the Corporate Debtor were collusive in nature. This supports
the findings of the NCLAT that the Agreement to Sell and Side
Letter dated 25 October 2012 were a mere eye-wash, through
which they sought to develop the AKME RAAGA project
together while circumventing government guidelines. Hence,
AAA would be a partner of the Corporate Debtor within the
meaning of Section 5(24)(a). Mr Arun Anand, Spade and AAA
were related parties of the Corporate Debtor during the relevant
period when the transactions on the basis of which Spade and
AAA claim their status as financial creditors took place.
[Paras 57-59, 62-65][1120-B-C; 1121-E-G; 1122-G-H; 1123-AH]
6. Amendment to First Proviso of Section 21(2)
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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 the corporate debtor. The introduction of the phrase "is" along
with related party was not a guiding factor behind the
Parliamentary amendment. [Para 81][1132-B-C]
7. Related Parties - Interpretation In Praesenti
The purpose of excluding a related party of a corporate
debtor from the CoC is to obviate conflicts of interest which are
likely to arise in the event that a related party is allowed to become
a part of the CoC. Where a financial creditor seeks a position on
the CoC on the basis of a debt which was created when it was a
related party of the corporate debtor, the exclusion which is
created by the first proviso to Section 21(2) must apply. For, it is
on 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 definition
of the expression 'related party' 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. However, if such
an interpretation is given to the first proviso of Section 21(2), all
financial creditors would stand excluded if they were a 'related
party' of the corporate debtor at the time when the financial debt
was created. This may lead to absurd conclusions for entities
which have legitimately taken over the debt of related parties, or
where the related party entity had stopped being a 'related party'
long ago. Thus, it has been clarified that the exclusion under the
first proviso to Section 21(2) is related not to the debt itself but
to the relationship existing between a related party financial
creditor and the corporate debtor. As such, the financial creditor
who in praesenti is not a related party, would not be debarred
from being a member of the CoC. However, in case where the
related party financial creditor divests itself of its shareholding
or ceases to become a related party in a business capacity with
the sole intention of participating the CoC and sabotage the 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 to
PHOENIX ARC PRIVATE LIMITED v. SPADE FINANCIAL SERVICES
LIMITED & ORS.
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[2021] 15 S.C.R.
Section 21(2), to consider the former related party creditor, as
one debarred under the first proviso. Hence, while the default
rule under the first proviso to Section 21(2) is that only those
financial creditors that are related parties in praesenti would be
debarred from the CoC, those related party financial creditors
that cease to be 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. In the
present case, there is a finding that AAA and Spade were related
parties within the meaning of Section 5(24) at the time when the
alleged financial debt on the basis of which they assert a claim to
be a part of the CoC was created. This was due to the longstanding relationship between Mr Arun Anand and Mr Anil Nanda,
and their respective corporations. Admittedly, such a relationship
still existed even in 2017, since Mr Anil Nanda's JIPL held
shareholding in Mr Arun Anand's Spade. Further, the transactions
between Spade and AAA on one hand, and the Corporate Debtor
on the other hand, which gave rise to their alleged financial debts
were collusive in nature. Therefore, it is evident that there
existed a deeply entangled relationship between Spade, AAA and
Corporate Debtor, when the alleged financial debt arose. While
their status as related parties may no longer stand, this was due
to commercial contrivances through which these entities seek
to now enter the CoC. The pervasive influence of Mr Anil Nanda
(the promoter/director of the Corporate Debtor) over these
entities is clear, and allowing them in the CoC would definitely
affect the other independent financial creditors. [Paras 90-92, 9496][1138-G-H; 1139-D-F; 1140-G-H; 1141-A-G]
8. The decision of the NCLAT, in as much as it referred to
Spade and AAA as financial creditors, is set aside. Due to the
collusive nature of their transactions alleged to be a financial debt
under Section 5(8), Spade and AAA cannot be labelled as financial
creditors under Section 5(7). The decision of the NCLAT, in as
much as it referred to Spade and AAA as related parties of the
Corporate Debtor under Section 5(24), is affirmed. The decision
of the NCLAT, in as much as it excluded Spade and AAA from
the CoC in accordance with the first proviso of Section 21(2), is
affirmed but for the reasons mentioned above. [Para 97][1141-GH; 1142-A-C]
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Arcelor Mittal India (P) Ltd. v. Satish Kumar Gupta
(2019) 2 SCC 1 : [2018] 12 SCR 362 - relied on.
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.
Richa Saraf, 'Concept of Related Party: Interpretation by
Letter 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) at
859-71; Medha Shekar and Anuradha Guru, Theoretical
Framework of Insolvency Law; Douglas G. Baird, 'A World
Without Bankruptcy', 50 Law & Contemporary Problems, Spring
1987; D.R. Korobkin, Rehabilitating values: A jurisprudence of
bankruptcy, 91 Columbia Law Review (1991), Bankruptcy Law
Reforms Committee, Volume I: Rationale and Design, of
November 2015; Report of the Insolvency Law Committee, March
2018; Vidhi Centre for Legal Policy, Understanding the Insolvency
and Bankruptcy Code, 2016: Analysing Developments in
Jurisprudence; UNCITRAL, Legislative Guide on Insolvency
Law, 2005; G.P. Singh, Principles of Statutory Interpretation (1st
edn., Lexis Nexis 2015); Insolvency Law Committee Report,
2020.
Case Law Reference
[2019] 3 SCR 535
relied on
Para 43
[2019] 10 SCR 381
relied on
Para 44
(1973) 2 SCC 366
relied on
Para 47
[2018] 12 SCR 362
relied on
Para 54(ii)
[ 2011] 10 SCR 949
referred to
Para 86
[1988] 1 Suppl. SCR 1
referred to
Para 88
CIVIL APPELLATE JURISDICTION: Civil Appeal No.2842 of
2020.
From the Order dated 19.07.2019 of the National Company Law
Appellate Tribunal, New Delhi, Bench-III in CP(IB)-55/ND/2018.
With
PHOENIX ARC PRIVATE LIMITED v. SPADE FINANCIAL SERVICES
LIMITED & ORS.
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Civil Appeal No.3063 of 2020.
Neeraj Kishan Kaul, K.V. Viswanathan, Sanjiv Sen, Sr. Advs.,
Gaurav Agrawal, Suresh Dutt Dobhal, Shikhar Kumar, Rohit Krishan
Naagpal, R. Venkatraman, Dipanshu Gaba, P.V. Yogeswaran, Abhishek
Anand, Ms. Mithu Jain, Mohak Sharma, Parthik Choudhary, Advs. for
the 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.
They are:
A
The appeals
B
CIRP for the Corporate Debtor
C
Proceedings before NCLT
D
Proceedings before NCLAT
E
Transactions of the Corporate Debtor
F
Relationship between Anil Nanda and Arun Anand
G
Whether Spade and AAA are financial creditors of the
Corporate Debtor
G.1 Submission of Counsel
G.2 Assessment of preliminary submissions
G.2.1 Res Judicata
G.2.2 Issues before NCLAT
G.2.3 Remand to NCLAT
G.3 Analysis
G.3.1 Statutory Provisions
G.3.2 Financial Creditor and Financial Debt
G.3.3 Collusive Transactions
G.3.4 Spade and AAA
H
Whether Spade and AAA are related parties
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B
C
D
E
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H.1
Submission of Counsel
H.2
Statutory provisions
H.3
Analysis
I
Whether Spade and AAA can be excluded from the CoC
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
J
Conclusion
A The appeals
1. This judgment would govern two sets of appeals arising from
the judgment of the National Company Law Appellate Tribunal
("NCLAT" or "Appellate Tribunal"). By a judgment dated 27 January
2020, NCLAT dismissed the appeal under Section 61 of the Insolvency
and Bankruptcy Code, 2016 ("IBC") preferred by AAA Landmark
Private Limited ("AAA") and Spade Financial Services Private Limited
("Spade") to assail the order dated 19 July 2019 of the National Company
Law Tribunal, New Delhi Bench -III ("NCLT" or "Adjudicating
Authority"). The NCLT had held that AAA and Spade have to be
excluded from the Committee of Creditors ("CoC") formed in relation
to the Corporate Insolvency Resolution Process ("CIRP") initiated
against AKME Projects Limited ("Corporate Debtor"). NCLT passed
its order dated 19 July 2019 on applications1 filed by Phoenix Arc Private
Limited ("Phoenix") and YES Bank under Section 60(5)(c) of the IBC.
2. Phoenix, in Civil Appeal No. 2842 of 2020, submits that though
the NCLAT correctly dismissed the appeal filed by Spade and AAA,
holding that they are related parties of the Corporate Debtor and are
hence to be excluded from the CoC, there is an erroneous finding that
they are financial creditors. In paragraph 11 of its judgment, the NCLAT
has observed that:
"...admittedly appellants are the financial creditors of the corporate
debtor 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).
PHOENIX ARC PRIVATE LIMITED v. SPADE FINANCIAL SERVICES
LIMITED & ORS. [DR. DHANANJAYA Y CHANDRACHUD, J.]
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It has been submitted that there was never any admission on the
part of Phoenix that AAA and Spade are financial creditors. The appeal
by 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 Spade
are not even creditors of the corporate debtor, much less
financial creditors.
Phoenix is thus in appeal under Section 62 of IBC, confined to the
finding that AAA and Spade are financial creditors.
3. Spade and AAA have independently filed an appeal under
Section 62, Civil Appeal No. 3063 of 2020, in order to assail the decision
of the NCLAT dated 27 January 2020 affirming their exclusion from
participating in the CoC on the ground that they are related parties of the
Corporate Debtor in terms of Section 5(24) and the first proviso to Section
21(2) of IBC.
4. Based on the above appeals, three issues have arisen for
consideration before this Court:
(i)
Whether Spade and AAA are financial creditors of the
Corporate Debtor;
(ii) Whether Spade and AAA are related parties of the Corporate
Debtor; and
(iii) Whether Spade and AAA have to be excluded from the CoC.
B CIRP for the Corporate Debtor
5. The brief facts of the case are that CIRP has been initiated
against the Corporate Debtor on 18 April 2018 on an application filed by
an operational creditor, Mr. Hari Krishan Sharma, under Section 9 of
IBC.
6. During the CIRP, claims were invited by the Interim Resolution
Professional ("IRP"). Spade filed its claim in Form C as a financial
creditor 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 May
2018. Spade had filed the form on the basis of an alleged Memorandum
of Understanding dated 12 August 2011 executed with the Corporate
Debtor, which stated that Inter Corporate Deposits ("ICDs") of Rs.
A
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26,55,00,000 have been granted to the Corporate Debtor by Spade
bearing interest of 24% repayable in terms of the mutual agreement
between the parties. However, Spade has submitted before this Court
that it has granted ICDs of Rs. 66,00,00,000 (approx.) to the Corporate
Debtor between June 2009 and January 2013. Out of this amount, Spade
is claiming a principal amount of Rs. 23,00,00,000. The balance amount
of Rs 43,06,00,000 was credited in the account of AAA, which is a
wholly owned subsidiary of Spade. The total claim of Spade has increased
to 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 creditor
other than a financial creditor or operational creditor for a sum of
Rs. 93,90,00,000 on 10 May 2018. Thereafter, AAA filed a revised claim
in Form C as a financial creditor for a sum of Rs. 109,72,00,000 on 23
May 2018. It had entered into a Development Agreement dated 1 March
2012 with the Corporate Debtor for a sale consideration of Rs.
32,80,00,000 to purchase development rights in a project. On 25 October
2012, the Development Agreement was terminated and an Agreement
to Sell, along with a Side Letter, was executed between AAA and the
Corporate Debtor for purchase of flats. The sale consideration for the
Agreement to Sell was enhanced to Rs. 86,01,00,000 from
Rs. 32,80,00,000 under the Development Agreement. AAA paid a sum
of 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 noted
above. The claim of AAA is with respect to the principal amount of
Rs. 43,06,00,000, which along with interest at the rate of 18% increased
to 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 the
claim was not in the nature of a financial debt in terms of Section 5(8) of
IBC since there was an absence of consideration for the time value of
money, i.e., the period of repayment of the claimed ICDs was not
stipulated. The IRP also rejected the claim of AAA on the ground that
its claim as a financial creditor in Form C was filed after the expiry of
the 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
PHOENIX ARC PRIVATE LIMITED v. SPADE FINANCIAL SERVICES
LIMITED & ORS. [DR. DHANANJAYA Y CHANDRACHUD, J.]
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the CoC. The NCLT by its order dated 30 May 2018 allowed the
applications. However, none of the other financial creditors, such as
Phoenix and YES Bank, were parties to these proceedings. The NCLT
observed that AAA's original claim in Form F was filed on time and it
has only amended its claim as one under Form C. The NCLT further
observed that the amount given by Spade in the form of ICDs has been
received as a deposit and is attracting interest as reflected in Form '26
AS', deducting TDS on interest. Thus, NCLT allowed Spade and AAA
to submit their claims as financial creditors with a direction to the IRP to
consider the claims.
10. Phoenix is also a financial creditor of the Corporate Debtor
and is a part of CoC. Its claim is based on a registered Deed of Assignment
in its favour dated 28 December 2015, pursuant to which, Karnataka
Bank Limited had assigned the non-performing assets relating to the
credit facilities granted to the Corporate Debtor. The voting share of
Phoenix was reduced to 4.28% on account of AAA and Spade being
included in the CoC.
11. On 1 June 2018, a meeting of the CoC took place which was
attended by YES Bank and Phoenix, and also by the newly approved
financial creditors, AAA and Spade. Following the meeting, YES Bank
and Phoenix filed applications in the NCLT for the exclusion of AAA
and Spade from the CoC on the ground that they are related parties.
Notice was issued by the NCLT in the two applications2.
12. The application moved on behalf of YES Bank under Section
60(5), on 28 June 2018, sought the following reliefs:
(i)
A direction to the IRP to reconstitute the CoC in terms of the
Insolvency and Bankruptcy (Amendment) Ordinance 2018
("IBC Ordinance 2018"); and
(ii) A direction prohibiting the IRP from allowing AAA and Spade
to participate and vote in the meeting of the COC.
13. The applications filed under Section 60(5) by Phoenix also
sought 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 IBC
Ordinance 2018.
2 Civil Appeal No. 267/2018 and Civil Appeal 368/2018
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14. NCLT in its judgment dated 19 July 2019 formulated two issues
for determination. These two issues were:
"i. What is the nature of the transaction between the parties and
does it qualify to be treated as financial debt as defined under
Section 5(8) of IBC, 2016.
ii.What is the date on which there should be relation between the
two parties for the alleged Financial Creditor to be included in the
definition "related party'."
15. In relation to the first issue, the NCLT held that:
"...the transactions between CD and both SPADE and AAA
Landmark are collusive in nature and do not qualify as financial
debt for the purpose of IBC."
Accordingly, NCLT held that Spade and AAA did not qualify to
be considered as financial creditors.
16. In relation to the second issue, NCLT held that it "does not
require a reply" in view of its above-mentioned finding. However, it
took note of the first proviso to Section 21(2) of the IBC, which was
introduced with effect from 6 June 2018. Under the first proviso, inter
alia, a financial creditor who is a related party of the corporate debtor
shall not have the right of representation, participation or voting in the
CoC. The Adjudicating Authority held that "there is no doubt in our
mind that Arun Anand and his company namely Spade and AAA
Landmark were related parties to the CD". However, the NCLT noted
that after 2013, soon after the execution to the Agreement to Sell of 25
October 2012, Arun Anand resigned from all the companies of the Anil
Nanda Group and was no longer related to the Corporate Debtor at the
time of the filing of the application for initiation of the CIRP. Ultimately,
the Adjudicating Authority held that there was a deep entanglement
between the affairs of the corporate debtor and the group representing
the Arun Anand companies which could not be unravelled in the summary
jurisdiction before the Tribunal. The ultimate decision of the NCLT was
to allow the applications filed by YES Bank and Phoenix for the exclusion
of 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 decision
to observe that "admittedly" Spade and AAA "are the financial
PHOENIX ARC PRIVATE LIMITED v. SPADE FINANCIAL SERVICES
LIMITED & ORS. [DR. DHANANJAYA Y CHANDRACHUD, J.]
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[2021] 15 S.C.R.
creditors of the corporate debtor". Having stated so, the Appellate
Tribunal proceeded to enquire into whether AAA and Spade are related
parties within the meaning of Section 5(24) of the IBC.
18. Answering the above issue in the affirmative, the NCLAT
held that Spade and AAA are related parties of the Corporate Debtor
since:
(i)
AAA was a partner of the Corporate Debtor in accordance
with Section 5(24)(a)3. The Appellate Tribunal held that since
even after the cancellation of Development Agreement dated
1 March 2012 between the parties, they had entered into an
Agreement to Sale and Side Letter dated 25 October 2012,
which was merely a camouflage under which they were
partners in developing a residential project to be sold to a
third party;
(ii) In accordance with Section 5(24)(f)4, during the transaction
period of 2010 to 2013, Spade led by Mr Arun Anand was
making substantial financial arrangements on the basis of
advice provided by the Corporate Debtor led by its
Management and Directors, i.e., Mr. Anil Nanda (a promoter
of the Corporate Debtor) and Mr Sonal Anand (Mr Arun
Anand's brother in-law). In particular, the Appellate Tribunal
noted the following two arrangements between Spade and
the 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 donated
Rs. 3 crores to another third-party trust; and
(b)
Between 16 and 17 January 2013, the Anil Nanda Group
of Companies (led by Mr. Sonal Anand) sought to settle
its debts with a third party (worth Rs. 2 crores) through
funds parked with Spade;
3 "(a) a director or partner of the corporate debtor or a relative of a director or partner
of the corporate debtor;"
4 "(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;"
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(iii) In accordance with Section 5(24)(h)5, the Corporate Debtor
was acting on the directions/instruction of Mr. Arun Anand
who, along with his family, is the majority shareholder in Spade,
of which AAA is a wholly-owned subsidiary. The Appellate
Tribunal came to this conclusion on the basis that:
(a)
on 1 June 2009, Spade was appointed as 'Consultant' to
the Corporate Debtor till 21 February 2011;
(b)
from 1 November 2011, Mr. Arun Anand was appointed
as a 'Strategic Advisor' to the Corporate Debtor;
(c)
from 26 November 2012, Mr.