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Phoenix Arc Private Limited vs . Spade Financial Services Limited and Ors. - (Supreme Court) (01 Feb 2021)

Collusive or sham transactions with a corporate debtor will not amount to "financial debt" within the meaning of the Insolvency and Bankruptcy Code 2016(IBC)



CIRP has been initiated against the Corporate Debtor on an application filed by an Operational Creditor under section 9 of Insolvency and Bankruptcy Code, 2016. During the process, claims were invited by the Interim Resolution Professional. Spade filed its claim in Form C as a financial creditor on 10th May,2018 and again on 28th May,2018 a revised claim was filed under Form C for certain sum of money on the basis of an alleged Memorandum of Understanding.

AAA, a wholly owned subsidiary of Spade, also filed a claim before the IRP in Form F as a creditor other than a financial creditor or operational creditor for a certain amount and then again filed a revised claim in Form C as a financial creditor for certain sum of money.

The CoC was constituted and the IRP rejected the claim of Spade, inter alia on the ground that the claim was not in the nature of a financial debt in terms of Section 5(8) of IBC since there was an absence of consideration for the time value of money i.e. the period of repayment of the claimed ICD was not stipulated. The IRP also rejected the claim of AAA on the ground that its claim as a financial creditor in Form C was filed after the expiry of the rejection of their claim as financial creditors, AAA and Spade filed applications before NCLT to be included in CoC to which NCLT allowed but none of the other financial creditors were parties to these proceedings.

Later in June 2018, a meeting of CoC took place which was attended by other financial creditors and newly approved financial creditors(Spade and AAA). An application was filed by other creditors in NCLT for exclusion of AAA and Spade from CoC in the ground that they are related parties. NCLT in its judgement held that Spade and AAA did not qualify to be considered as financial creditors and the transaction between CD and both Spade & AAA are collusive in nature and do not qualify as financial debt for the purpose of IBC. In appeal, the NCLAT held that Spade and AAA are related parties of the Corporate Debtor within the meaning of Section 5(24) of the IBC and hence it came to the conclusion that the Adjudicating Authority had rightly excluded Spade and AAA from participation in the CoC.

The Supreme Court was hearing appeals challenging the orders of the NCLAT and the NCLT which excluded two entities (AAA & Spade) from the Committee of Creditors constituted for the insolvency resolution of a corporate debtor. The NCLT held that the entities were not "financial creditors" as their transactions with the corporate debtor were collusive in nature and excluded them from the CoC. In appeal, the NCLATreversed the finding that they were not financial creditors. The NCLAT held that the entities were financial creditorsbut disqualified them from the CoC on the ground that they were "related parties" of the corporate debtor.

While considering the matter in issue the bench discussed meaning of financial debt and collusive transactions. The Supreme Court has held that collusive or sham transactions with a corporate debtor will not amount to "financial debt" within the meaning of the Insolvency and Bankruptcy Code 2016(IBC).


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