In the case of Phoenix Arc Pvt. Ltd. v. Spade Financial Service Ltd (2021), a three-judge bench of the Supreme Court held that a collusive transaction does not result in the creation of financial debt under the Code. A transacting party who is not a financial creditor is likewise not permitted to sit at the table of the Committee of Creditors, according to the Court (CoC). It also defines the term 'related party' in relation to the corporate debtor, as such parties are not allowed to participate in the CoC procedure. To that end, the Court placed a strong emphasis on the Code's purposeful interpretation, as well as its goals and philosophy.
In the instant case titled Phoenix Arc Private Ltd. v. Spade Financial Service Ltd the issues raised before the Supreme Court is:
Whether Spade and AAA are the corporate debtor's financial creditors as defined by law?
Whether Spade and AAA are tied to the corporate debtor?
Whether it is necessary to ban Spade and AAA from CoC meetings?
With regard to the first issue, The Supreme Court cited the decision of Pioneer Urban Land and Infrastructure Ltd. v. Union of India (2019), in which the emphasis was placed on the expression "time worth of money." The Court explained that when a transaction is collusive, it gives the impression that money has been paid to a borrower in exchange for time worth of money. The truth is that the parties entered the deal with a different or ulterior objective in mind. In other words, the true agreement between the people transacting is something other than a financial debt advance. As a result, this violates the Code's principle since it deprives the bona fide recipient of benefits.
With regard to the second issue, When discussing the related party issue under the Code, it was noted that the provision has a broader interpretation. Any party who is related to or has a close relationship with the corporate debtor is not permitted to participate in the CoC deliberations. As a result, Section 5(24) establishes a list of relationships to describe various inter-relationships between financial creditors and corporate debtors. The relationship between Mr Arun Anand and Mr Anil Nanda, in this situation, is based on the influence each party has over the other's group of enterprises. The corporate debtor's affairs were viewed to be guided by Mr Arun Anand's collusive nature. Spade and AAA have linked parties to the corporate debtor, according to the court.
With regard to the third issue, The Court said that the exclusion under Section 21(2) of the Code is not only related to the debt but also to the existing relationship between a related party financial creditor and the corporate debtor, citing the IBC's principle, object, and purpose. It's worth noting that the default rule stipulates that only financial creditors who are connected parties in the present are excluded from the CoC. The parties' relationship did not attract the restriction as stated in the provision in this instance, but the Court upheld the NCLAT's decision to disqualify Spade and AAA from the CoC due to their unfair practices.
Accordingly, the Supreme Court dismissed the appeal.