NCLAT Rules That Related Party Status Cannot Be Changed By Termination Notice Contravening Agreement Terms
NCLAT Rules That Related Party Status Cannot Be Changed By Termination Notice Contravening Agreement Terms
The National Company Law Appellate Tribunal (NCLAT), New Delhi bench, comprising Justice Rakesh Kumar Jain (Judicial Member) and Mr. Naresh Salecha (Technical Member), has ruled that related party status established through an agreement under Section 5(24) of the Insolvency and Bankruptcy Code, 2016 (Code), cannot be altered by sending a termination notice that contravenes the express terms of the agreement.
The Corporate Debtor invited manufacturers to establish their units at a mega food park and promised utilities such as power, steam, water, refrigeration, and cold storage. Schreiber Dynamix Dairies Pvt. Ltd. (Appellant) entered into a lease agreement with the Corporate Debtor on 06.11.2015, later registered on 09.03.2016. The lease was for 20 years, with a lock-in period of 10 years, expiring on 28.02.2026.
In addition, the Appellant and the Corporate Debtor entered into a Utility Services and Common Facilities Agreement (Utility Services Agreement) on 08.02.2016. The Corporate Debtor was responsible for providing uninterrupted utilities, including warehousing, refrigeration, cold storage, etc. Under the Utility Operation and Management Agreement (UOMA) of 08.12.2017, the Appellant operated some utility assets and shared the profits from utility operations with the Corporate Debtor.
In 2019, the Small Industries Development Bank of India filed an application under Section 7 of the Code against the Corporate Debtor, and the Appellant was not included in the Committee of Creditors (CoC), as it was identified as a related party of the Corporate Debtor under Section 5(24)(m)(iv) of the Code.
The Appellant argued that the Tribunal did not specify the relevant sub-section of Section 5(24) under which it was deemed a related party of the Corporate Debtor. It also claimed that the termination notice sent before the Corporate Insolvency Resolution Process (CIRP) should have altered its related party status. Furthermore, the Appellant contended that profit-sharing through the UOMA did not qualify it as a related party.
In response, the Corporate Debtor argued that Clause XXI(b) of the UOMA required a written agreement to amend or waive any provision, and the letter sent on 31.12.2018, which allegedly terminated the agreement, was not valid due to its failure to follow the required procedure. The Respondent further emphasized that profit-sharing under the UOMA was a strong indicator of the Appellant's related party status.
The Tribunal observed that the terms of the UOMA explicitly required a three-month notice for termination, and the letter sent on 31.12.2018, which terminated the agreement after just one month, was not in compliance. It also noted that the terms of the UOMA could not be amended or waived without the written consent of both parties, making the termination notice invalid.
Based on these observations, the Tribunal upheld the Resolution Professional's decision to classify the Appellant as a related party of the Corporate Debtor. The appeal was therefore dismissed.
The NCLAT affirmed that related party status, once established through an agreement, cannot be altered by a termination notice that fails to follow the contractual terms, ensuring that the principles of the Insolvency and Bankruptcy Code are upheld.
