PHOENIX ARC PRIVATE LIMITED versus SPADE FINANCIAL SERVICES LIMITED & ORS.

Citation: [2021] 15 S.C.R. 1079 · Decided: 01-02-2021 · Supreme Court of India · Bench: D.Y. CHANDRACHUD · Disposal: Disposed off

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Judgment (excerpt)

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1079
PHOENIX ARC PRIVATE LIMITED
v.
SPADE FINANCIAL SERVICES LIMITED & ORS.
(Civil Appeal No. 2842 of 2020)
FEBRUARY 01, 2021
[DR. DHANANJAYA Y CHANDRACHUD,
INDU MALHOTRA AND INDIRA BANERJEE, JJ.]
Insolvency and Bankruptcy Code, 2016 – ss.5(7), (8) –
Financial creditor; financial debt – Sham/Collusive transactions, if
financial debts – Held: A person can be categorised as a financial
creditor if a financial debt is owed to it – s.5(8) stipulates that the
essential ingredient of a financial debt is disbursal against
consideration for the time value of money – Money advanced as
debt should be in the receipt of the borrower – Borrower is obligated
to return the money or its equivalent along with the consideration
for a time value of money, which is the compensation or price
payable for the period of time for which the money is lent – A
transaction which is sham or collusive would only create an illusion
that money has been disbursed to a borrower with the object of
receiving consideration in the form of time value of money, when in
fact the parties have entered into the transaction with a different or
an ulterior motive – The real agreement between the parties is
something other than advancing a financial debt – In the present
case, the transaction between AAA and the Corporate Debtor was
collusive in nature – Since the commercial arrangements between
Spade and AAA, and the Corporate Debtor were collusive in nature,
they would not constitute a ‘financial debt’ – Hence, Spade and
AAA are not financial creditors of the Corporate Debtor – Decision
of NCLAT, in as much as it referred to Spade and AAA as financial
creditors, is set aside – Due to the collusive nature of their
transactions alleged to be a financial debt u/s.5(8), Spade and AAA
cannot be labelled as financial creditors u/s.5(7) – The decision in
as much as it referred to Spade and AAA as related parties of the
Corporate Debtor u/s.5(24) and excluded Spade and AAA from the
CoC in accordance with the first proviso of s.21(2), is affirmed.
Res judicata – Insolvency and Bankruptcy Code, 2016 –
Corporate Insolvency Resolution Process – Order dtd.31 May 2018
   [2021] 15 S.C.R. 1079
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SUPREME COURT REPORTS
[2021] 15 S.C.R.
passed by the NCLT allowing AAA and Spade to submit their claims
as financial creditors – However, when the NCLT allowed AAA and
Spade to re-submit its claims as financial creditors, none of the
creditors on the Committee of Creditors (CoC) were represented in
the proceedings – Phoenix and YES Bank moved applications for
seeking the exclusion of AAA and Spade from the CoC on the ground
that they were related parties – Order of NCLT if operated as res
judicata – Held: Order of NCLT dtd. 31 May 2018 did not operate
as res judicata – The order was passed without hearing financial
creditors such as Phoenix and YES Bank – Hence, they were
legitimately within their rights in seeking a direction for the exclusion
of AAA and Spade from the CoC, if they were aggrieved by the
terms of that order.
Insolvency and Bankruptcy Code, 2016 – ss.43, 45(2), 49,
50 – “avoidable transactions” – Held: IBC has made provisions
for identifying, annulling or disregarding “avoidable transactions”
which distressed companies may have undertaken to hamper
recovery of creditors in the event of the initiation of Corporate
Insolvency Resolution Process (CIRP) – IBC recognizes that for the
success of an insolvency regime, the real nature of the transactions
has to be unearthed in order to prevent any person from taking
undue benefit of its provisions to the detriment of the rights of
legitimate creditors.
Insolvency and Bankruptcy Code, 2016 – s.5(24) – ‘related
party’ – Held: Definition of the expression ‘related party’ in s.5(24)
is exhaustive – The definition describes a commutative relationship
– The definition of ‘related party’ under IBC is significantly broad
– The intention of the legislature in adopting such a broad definition
was to capture all kinds of inter-relationships between the financial
creditor and the corporate debtor.
Insolvency and Bankruptcy Code, 2016 – First proviso to
s.21(2), s.5(24) – Exclusion under first proviso to s.21(2) –
Application of – Held: While the default rule under the first proviso
to s.21(2) is that only those financial creditors that are related parties
in praesenti would be debarred from the CoC, those related party
financial creditors that cease to be related parties in order to
circumvent the ex

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