Related Party under Insolvency and Bankruptcy Code 2016 – Legal Recourse

0
11


The Insolvency and Bankruptcy Code, 2016 (IBC) has been formulated for the purpose of rehabilitation and reconstruction of a corporate person. In the year 2018, IBC was amended and the definition of “Related Party” with respect to an individual under Section 5(24A) was introduced.  Before such amendment the IBC had defined the term “Related Party” only with respect to a corporate debtor under Section 5(24).  

Who is a related party under the IBC?

The definition of “Related Party” under the IBC is exhaustive in nature. A related party in terms of a corporate debtor is a person who can act in managerial or directorial capacity. Such a person can have a substantial amount of shareholding in the corporate debtor or be in a position to make decisions for the corporate debtor or its subsidiaries, holdings or associate company. IBC points out at the related party in the context of the company under corporate insolvency resolution process and mentions the relative of the director or partner of the corporate debtor, however, it does not clarify who falls under the definition of a “relative”

As per definition provided under the Section 5(24) IBC, a related party can be –

-Director or partner or key personnel of the corporate debtor or any their relative

– Holding, associate or subsidiary of the corporate debtor or a subsidiary of a holding company to which the corporate debtor is a subsidiary

-A private or public company in which a director, partner or manager of the corporate debtor is a director and holds along with relatives, more than two per cent. of its paid-up share capital

-A Limited Liability Partnership where a director, manager, partner of the corporate debtor or their relative is a partner

-Any person holding 20% voting share in the corporate debtor or the corporate debtor holding 20% voting share in any person

-A person on whose instructions a director, manager or partner is accustomed to act

-A person who can control the composition of the board of directors

-Any person who is associated with the corporate debtor on account of

a. participation in policy making processes of the corporate debtor; or

b. having more than two directors in common between the corporate debtor and such person; or

c. interchange of managerial personnel between the corporate debtor and such person; or

d. provision of essential technical information to, or from, the corporate debtor

Section 5(24) (m) can be interpreted widely.Simply put, two entities having more than two directors in common or have an interchange of managerial personnel or participation in policy making processes, will be considered to be related parties of each other. 

Related Party Transaction

Related party transactions are transactions between two parties having a pre-existing relationship/common interest with each other.

Related Party and their right to submit a resolution plan

Before understanding whether a related party is entitled to submit a resolution plan, let us understanding what actually does the term “resolution plan” mean. In simple words, a resolution plan is a unique combination of financial, legal, management and technical features which would provide a reasonable assurance of sustainable viability over the period of recovery and provide a solution to the problem of the corporate debtor’s insolvency and its consequent inability to pay off debts. 

The resolution professional calls for a resolution plan for the purpose of rehabilitation of company by the investors / resolution applicant (any person who submits a resolution plan to the resolution professional) which consists of proposals for buying out a company undergoing company insolvency resolution process as a going concern. The amount stated in the resolution plan is distributed among the creditors in accordance with the said plan.

Section 29A of IBC lays down multiple criteria and a comprehensive standard for ineligibility of resolution applicants. A person who is related to the person disqualified under Section 29A will also be rendered disqualified.

So for example – anyone in relation to the individual (defaulter promoter) or their spouse; partner in a partnership firm or trustee in a trust in which the defaulter individual is associated; a private company in which is the individual is a director and holds over 2% share capital including family and relatives, shall be ineligible to submit a resolution plan.

Conclusion

IBC has exhaustively covered all the aspects pertaining to related parties. However, being a relatively new legislation, several amendments are being made to cover all the loopholes. There is still nothing in the code as regards related party of a company or body corporate (other than corporate debtor). In such a case, the code under Section 3(37) has said that for the words not defined under the code, definitions given under the Companies Act, 2013 will be applicable.



Source link

LEAVE A REPLY

Please enter your comment!
Please enter your name here