On 5 November 2024, the National Company Law Appellate Tribunal ("NCLAT") passed an important judgment in Hari Vitthal Mission v. Ravi Sethia & Ors. [Company Appeal (Ins.) No. 1206/2022] ("Judgment") explaining the scope of Section 5(24) of the Insolvency and Bankruptcy Code, 2016 ("IBC") which defines "'related party', in relation to a corporate debtor". The corporate debtor is Suasth Healthcare Foundation ("Corporate Debtor") which is part of the SREI group of companies. The National Company Law Tribunal, Kolkata ("Adjudicating Authority") had decided that Hari Vitthal Mission, the Appellant and one of the financial creditors, was a related party of the Corporate Debtor under Sections 5(24)(h), (i) and (j) of the IBC as both the Corporate Debtor and the Appellant were controlled by the Kanoria Foundation, a trust. Consequently, the Appellant was excluded from the committee of creditors.
The primary issue before the NCLAT was regarding the interpretation of Sections 5(24)(h), (i) and (j) of the IBC, which are as follows:
"(24) "related party", in relation to a corporate debtor, means-
...
(h) any person on whose advice, directions or instructions, a director, partner or manager of the corporate debtor is accustomed to act;
(i) a body corporate which is a holding, subsidiary or an associate company of the corporate debtor, or a subsidiary of a holding company to which the corporate debtor is a subsidiary;
(j) any person who controls more than twenty per cent. of voting rights in the corporate debtor on account of ownership or a voting agreement; ..."
I. The Judgment
Briefly, the NCLAT held, among other things, that:
- Section 5(24)(h) is triggered as the Kanoria Foundation exercised substantial influence over both the Corporate Debtor and the Appellant given various factors including the shareholding of Kanoria Foundation in these entities, the trustee and beneficiary of the Kanoria Foundation had been directors of the Corporate Debtor etc.
- The Appellant is a related party of the Corporate Debtor under section 5(24)(i) as both entities are subsidiaries of the Kanoria Foundation.
- The tests for section 5(24)(j) are met and the Appellant is a related party of the Corporate Debtor as the Kanoria Foundation holds more than 20% voting rights in the Corporate Debtor and the Appellant.
II. Analysis of the Judgment:
A well settled principle while interpreting the provisions of a statute is that a court "can neither add nor subtract even a single word ... especially when a literal reading of the same produces intelligible results." Further, the literal meaning of a statute may not be given effect only if the literal meaning is ambiguous or not clear, or would nullify the purpose of the statute. Additionally, if a definition uses the term "means" then the definition is exhaustive. Section 5(24) of the IBC uses "means", and thus, is exhaustive. Keeping the above in mind, our analysis is below:
1. Section 5(24)(h): A person is a related party of a corporate debtor if, on her advice, the management of the corporate debtor is accustomed to act. Notably, the scope of this section does not extend to persons controlled by or related to the person classified as a related party.
This scope of section 5(24)(h) becomes further clear when we compare it with section 5(24)(a). On a literal reading, section 5(24)(a) classifies as related parties (i) directors or partners of a corporate debtor; and (ii) relatives of such directors and partners. Hence, under section 5(24)(a), a person who may not have a direct connection with the corporate debtor may be classified as a related party solely because of her relationship with a director / partner of a corporate debtor. Section 5(24)(h), in contrast, is limited to persons who directly exert control over the corporate debtor's management and does not extend to entities controlled by such persons.
In the present case, the NCLAT holds that (i) Kanoria Foundation is a related party of the Corporate Debtor under section 5(24)(h); and (ii) the Appellant is a related party of the Corporate Debtor since Kanoria Foundation holds substantial influence over it. Such a finding is not supported by the language of section 5(24)(h) as the Appellant, a company incorporated under section 8 of the Companies Act, 2013, is a separate legal person from Kanoria Foundation. Further, the NCLAT does not consider the question of lifting of the corporate veil. Therefore, in our view, the NCLAT's interpretation of section 5(24)(h) of the IBC traverses beyond its plain and ordinary meaning.
2. Section 5(24)(i): The section states that a related party is (i) a body corporate which is a holding, subsidiary or an associate company of the corporate debtor; or (ii) a subsidiary of a holding company to which the corporate debtor is a subsidiary. The term 'holding company' is not defined in the IBC. However, the Companies Act, 2013 ("Companies Act") defines this phrase as follows:
"2(46) "holding company", in relation to one or more other companies, means a company of which such companies are subsidiary companies;
Explanation – For the purposes of this clause, the expression "company" includes any body corporate"
In view of Section 3(37) of the IBC, the meaning assigned to the phrase 'holding company' under the Companies Act is to be assigned to the phrase in the IBC.
In the Judgment, the NCLAT has considered the phrase 'holding company' to mean "holding company / trust" and has thereafter concluded that the Appellant is a subsidiary of Kanoria Foundation (a trust) and hence a related party of the Corporate Debtor.
It is settled law that a trust is not a body corporate[1]and, therefore, cannot be a 'holding company' under Section 5(24)(i) of the IBC. Given that the NCLAT has gone beyond the literal meaning of 'holding company' and added "trust" to Section 5(24)(i) of the IBC without providing any reasons, in our view, the Judgment to this extent is erroneous.
3. Section 5(24)(j): This subsection states that any person who controls more than 20% of voting rights in a corporate debtor on account of ownership or a voting agreement is a related party of the corporate debtor. The NCLAT has held that since Kanoria Foundation owns 31% in the Corporate Debtor and 99.9% in the Appellant, the tests for holding that the Appellant is a related party of the Corporate Debtor stand satisfied vis-à-vis the Appellant.
The NCLAT has not considered that the Appellant does not control any voting rights in the Corporate Debtor either directly or indirectly through the Kanoria Foundation. The Appellant could be said to be a related party of the Corporate Debtor if it was established that the Appellant controlled the decision making in the Kanoria Foundation, which in turn, controlled 31% voting rights in the Corporate Debtor. As such a finding is not made by the NCLAT, in our view, it cannot be said that the Appellant is a related a party of the Corporate Debtor under Section 5(24)(j) of the IBC.
III. Conclusion:
The Supreme Court has held that Section 5(24) of the IBC "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." However, the NCLAT has significantly expanded the scope of section 5(24), proceeding on an understanding that it is a transitive provision, meaning that if A is related to B and B is related to C, then A is related to C.
The definition of 'related party' as provided in section 5(24) is similar to definitions of 'related party' in other enactments, such as, the Companies Act, 2013 and SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015. Further, the usage of the concept of 'related party' and 'related party transactions' is widespread, and typically entails restrictions, disclosure requirements and due diligence given the likelihood of circumvention of regulatory frameworks by related parties. On a reading of the Judgment, it appears that the NCLAT seeks to prevent circumvention of provisions of the IBC by the Kanoria Foundation (promoters). However, the expansion of the scope of the definition of related party, as provided in Section 5(24), may have wide and unintended consequences. As on 13 March 2025, there is no appeal pending before the Supreme Court.
Footnote
1. Duli Chand v. Mahabir Pershad Trilok Chand Charitable Trust, AIR 1984 Del 145, para. 16 holds that "Trust is not a legal entity as such. In fact, a Trust may be defined as an obligation imposed on the ostensible owner of property to use the same for a particular object for the benefit of a named beneficiary or a charity. ... It is not like a Corporation which has a legal existence of its own ..."; Ashoka Marketing Ltd. and Anr. v. Punjab National Bank and Ors., (1990) 4 SCC 406, para. 19 holds that "the expression 'body corporate' is used in legal parlance to mean 'a public or private corporation'.
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