Exclusion of Related Party Financial Creditors from the Committee of Creditors under IBC: Jayanta Banerjee v. Sashi Agarwal

Introduction

The case of Jayanta Banerjee v. Sashi Agarwal adjudicated by the National Company Law Appellate Tribunal (NCLAT) on June 4, 2021, marks a significant landmark in Indian insolvency jurisprudence. This case revolves around the initiation of liquidation proceedings against INCAB Industries Limited under the Insolvency and Bankruptcy Code, 2016 (IBC). The appellants, primarily employees and operational creditors of the corporate debtor, challenged the constitution and decisions of the Committee of Creditors (CoC), arguing that the inclusion of certain financial creditors as related parties violated the provisions of the IBC. The core issues centered on the relatedness of CoC members and the validity of debt assignment under prevailing regulatory frameworks.

Summary of the Judgment

The NCLAT, after a thorough examination, set aside the liquidation order passed by the Adjudicating Authority/NCLT, Kolkata Bench. The tribunal found that the CoC included related party financial creditors, namely Kamla Mills Private Limited and Fasqua Investment Private Limited, which constituted a majority voting share of 77.20%. This inclusion was in direct contravention of the first proviso to Section 21(2) of the IBC, which prohibits related parties from having representation, participation, or voting rights in the CoC. Consequently, the entire Corporate Insolvency Resolution Process (CIRP) was deemed vitiated, leading to the quashing of the liquidation proceedings and directives to reinstate and properly constitution the CoC.

Analysis

Precedents Cited

The judgment extensively referenced the landmark Supreme Court case Phoenix ARC (P) Ltd. v. Spade Financial Services Ltd. (2021) 3 SCC 475, which elucidated the exhaustive definition of "related party" under Section 5(24) of the IBC. The Supreme Court in Phoenix ARC emphasized that the broad definition aims to capture all interrelationships that could potentially undermine the fairness and objectivity of the insolvency process. This precedent underscored the necessity to exclude related parties from the CoC to prevent undue influence and ensure impartial decision-making during CIRP.

Legal Reasoning

The NCLAT's reasoning hinged on the strict adherence to the IBC's provisions regarding the constitution of the CoC. It was determined that Kamla Mills Private Limited and Fasqua Investment Private Limited, being related parties through Mr. Ramesh Ghamandiram Gowani—a director of both the corporate debtor and the financial creditors—automatically barred them from participation in the CoC. The Tribunal scrutinized the registrarial records and master data, which confirmed Mr. Gowani's directorship until November 2019, thereby validating the appellants' contention of relatedness. Furthermore, the Tribunal highlighted procedural lapses, such as the absence of claim verification and the premature decision to liquidate without preparing an Information Memorandum, which contravened the IBC's stipulated CIRP protocols.

Impact

This judgment reinforces the IBC's safeguards against conflicts of interest within the CIRP framework. By invalidating the CoC constituted with related parties, the Tribunal emphasizes the importance of impartiality and adherence to procedural norms. Future insolvency proceedings will be necessitated to meticulously evaluate the relatedness of potential CoC members, ensuring that only eligible financial creditors are included. This decision acts as a deterrent against manipulative tactics aimed at skewing the insolvency process, thereby protecting the interests of independent creditors and operational stakeholders.

Complex Concepts Simplified

Committee of Creditors (CoC): A group comprising all financial creditors of a corporate debtor, empowered to make key decisions during the insolvency resolution process, such as approving or rejecting resolution plans.
Related Party (IBC Context): As defined under Section 5(24) of the IBC, a related party includes directors, key managerial personnel, and entities that have significant control or influence over the corporate debtor. Related parties are excluded from the CoC to prevent conflicts of interest.
Corporate Insolvency Resolution Process (CIRP): A legal framework under the IBC aimed at restructuring the debts of a financially distressed company to revive it and maximize returns to creditors.
Liquidation: The process of winding up a company's operations, selling off its assets, and distributing the proceeds to creditors and stakeholders as per legal priorities.

Conclusion

The NCLAT’s decision in Jayanta Banerjee v. Sashi Agarwal underscores the judiciary's commitment to upholding the integrity of the Insolvency and Bankruptcy Code, 2016. By invalidating the CoC due to the inclusion of related parties, the Tribunal reinforced the necessity for unbiased and transparent insolvency proceedings. This precedent serves as a crucial reminder to insolvency practitioners and financial institutions to diligently assess the relatedness of creditors and adhere strictly to procedural mandates. Ultimately, the judgment fosters a more equitable and effective insolvency resolution landscape, safeguarding the interests of all legitimate stakeholders involved.