Palani Periyasamy has won a reprieve in the insolvency case of the company he promoted, Appu Hotels, which owns the Le Meridien hotel in Chennai. The MGM Healthcare group wanted to take it over for ₹423 crore. While its resolution plan was approved by the National Company Law Tribunal, the Appellate Tribunal, NCLAT, has set aside the NCLT order approving the resolution plan. The verdict of NCLAT provides some interesting insights into an aspect of the law, viz., treatment of related parties.

Periyasamy himself had submitted two claims – one as a financial creditor for ₹4.81 crore and another as an operational creditor, for ₹1.94 crore. But the Resolution Professional (RP), Radhakrishnan Dharmarajan, rejecting the claim, refused to place it before the Committee of Creditors (CoC), because Periyasamy was a “related party”.

The question before NCLAT was whether this was consistent with the law or not. Periyasamy’s argued that a related party could only not be a ‘resolution applicant’, but he cannot be dis-entitled from getting his payments as a creditor, just like anyone else. He argued that the IBC “only creates related party as a separate class for exclusion from the CoC and disentitling related parties from filing resolution plans.”

The RP felt otherwise. He argued that he didn’t have to include Periyasamy’s claim and take it to the CoC. He argued that “merely because the code does not prohibit the payment to related parties cannot lead to the conclusion that payment to related parties is mandatory in a resolution plan.”

The RP cited the case of Phoenix ARC Vs Spade Financial Services, in which the Supreme Court had held that “those entities in the CoC, who are related parties, can often negatively affect the insolvency process”. It further went on to hold that the objects and purposes of the code are best served when the CIRP is driven by external creditors to ensure that related parties of the corporate debtor do not sabotage the CoC.

Tribunal’s ruling

Ruling against the RP, the Appellate Tribunal said, “It is well-settled that a ‘related party’ can be treated as a separate class independent of an unrelated party. Such ‘related party’ ought to be equated with the promoters as ‘equity shareholders’ as partners.” It further stressed that the IBC treats related parties as a separate category for specific purposes, excluding them from the CoC under Section 21 and disqualifying them from being resolution applicants under section 29A.

“However, the IBC does not treat related party as a separate class for any other purpose. Therefore, a rationale nexus must exist for any classification between the object sought to achieve the classification and sub-classification. Therefore, the related party’s financial or operational creditor cannot be discriminated against under the resolution plan, denying their right to get payments under the resolution plan only because they are a related party. It is also made clear that by getting only payment under the resolution plan, related party creditors could in no way sabotage the CIRP,” the Appellate Tribunal said.

Not including Periyasamy’s claims among the claims and placing them before the CoC was one of the grounds on which the NCLAT set aside the NCLT order.