Insolvency and Bankruptcy Code Case: Clarification on Related Party Status
Background:
In the recent case involving the Insolvency and Bankruptcy Code (IBC), Sections 5(24) and 60 were under scrutiny. The central issue revolved around determining the related party status of the appellant, a foreign financial lender, in relation to a corporate debtor, as defined by Section 5(24)(h) of the IBC.
Before understanding the case, it is necessary to understand Section 5(24)(h) of the IBC:
Any person on whose advice, direction or institution, a director, partner or manager of the corporate debtor is accustomed to act falls under the definition of a related party.
Details:
The appellant, a foreign financial lender, extended a loan and advance to the corporate debtor.
A director was common to both the appellant and the corporate debtor.
Common Directorship Arguments:
Despite a common director between the appellant and the corporate debtor, it was argued that this alone does not establish compliance with Section 5(24)(h).
The appellant emphasized that more than common directorship was required to prove related-party status.
Lack of Influence Claim:
The key contention was the absence of evidence demonstrating that the appellant provided advice, direction, or instruction to the director, promoter, or manager of the corporate debtor.
The appellant maintained that such influence was necessary for the related-party classification.
NCLT Decision:
The National Company Law Tribunal (NCLT) initially labeled the appellant as a related party.
The rationale was based on shared directorship and the premise that a director of the corporate debtor was also one of the managing directors of the appellant.
Court’s Emphasis:
The court emphasized the lack of evidence showing that the appellant, a financial lender, had provided advice, direction, or instruction to the corporate debtor’s management.
Stress on the need for concrete proof of the appellant’s influence over the corporate debtor’s decision-making processes.
Court Ruling:
The appellate court held that the NCLT had erred in categorizing the financial lender as a related party.
The decision underscores the importance of clear and substantial evidence when determining related-party status under the IBC.
Conclusions:
This case sets a precedent, emphasizing the need for tangible evidence of influence for related-party classification under the IBC, beyond the presence of a common director.
SW Point of View: The court’s recognition of the lack of evidence on the appellant’s influence over the corporate debtor highlights a rigorous approach to related-party classifications. The acknowledgment of role distinction between directors reinforces a nice interpretation, ensuring fairness in insolvency proceedings. This precedent underscores the importance of clear evidentiary standards for establishing related-party status under the Insolvency and Bankruptcy Code.
