In M/s. Asset Reconstruction Company (India) Limited v. Mr Gopal Krishna Raju and Others (decided on March 5, 2019), the National Company Law Tribunal ("NCLT"), Chennai ruled that certain unsecured creditors would be barred from participating in the committee of creditors due to a business agreement between the corporate debtor and those creditors.
In the instant case titled M/s. Asset Reconstruction Company (India) Limited v. Mr Gopal Krishna Raju and Others the issue raised for clarification before the NCLT was:
How closely related are the Claimants to the Corporate Debtor under the proviso of Section 21(2) read in conjunction with Section 5(24)?
With regard to this issue, After reviewing the deeds of assignment, the NCLT in Chennai reached the opinion that, in light of the JDA, the elements of a partnership between the Claimants and the suspended directors of the Corporate Debtor were well proven. The assignment deeds referred to the JDA between the Claimants and the Corporate Debtor and were comparable to assignments cum partnership deeds. As a result, there is a partnership between the assignors—the suspended directors and former shareholders of the corporate debtor—and the assignees—the claimants—for the goal of sharing ownership and development of the land. As owners of the property and business partners who have a say in the Corporate Debtor's operations, the Claimants were thus in a position to influence decision-making, which is covered by the definition of "associated party" provided under Section 5(24). (a). Additionally, the allocation of equity shares in the capital of Respondent 2 served as the assignors' compensation under the deeds of assignment, plainly designating Respondent 2 as a connected party to the Corporate Debtor.
The Claimants were disqualified from the CoC because it was determined that they were connected to the Corporate Debtor.
The NCLT categorically stated that,
“In relation to the Second issue, the factual detail deduced from the pleadings and the documents placed on record goes to show that the Managing Director of the Corporate Debtor viz., Mr K.Bapaiah is the father of Mrs A.Padma Manohar and grandfather of Mr A. Anand Prasad, who are the shareholders and directors of the 2nd Respondent as on date. Therefore, the interest of 2nd Respondent through its shareholders-cum-directors has a direct concern with the Corporate Debtor, whose Managing Director is Mr K.Bapaiah. This relationship between the Managing Director of the Corporate Debtor and the shareholders-cum- directors of the 2nd Respondent will have a direct effect on the decisions of the CoC, as the 2nd Respondent is holding the majority of voting right in the CoC, which certainly will be lacking bona fide and good faith, which will have adverse effects on the rights of the minority financial creditors.”