NCLAT Affirms ‘Related Party’ Status Under IBC: Binding Utility Agreement Overrides Flawed Termination Claim
- REEDLAW
- 2 days ago
- 3 min read
The NCLAT affirmed the 'related party' status of the Appellant under the IBC, holding that the binding Utility Operation and Management Agreement remained in force, rendering the Appellant’s flawed termination claim ineffective.
The National Company Law Appellate Tribunal (NCLAT), New Delhi Bench, comprising Justice Rakesh Kumar Jain (Judicial Member) and Mr. Naresh Salecha (Technical Member), reviewed the appeal and the connected interlocutory application, and held that the Appellant was rightly classified as a related party under Section 5(24)(m)(iv) of the Insolvency and Bankruptcy Code (IBC), owing to its operational control, financial investment, and joint management rights under the UOMA, which remained binding as of the CIRP commencement date due to the invalid and non-compliant termination notice.
The appeal before the National Company Law Appellate Tribunal (NCLAT) challenged the order dated 28.08.2023 passed by the NCLT, Chandigarh Bench, which dismissed I.A. No. 59 of 2021 filed by the Appellant. The Appellant had questioned the Resolution Professional’s decision dated 23.09.2019, categorising it as a related party of the Corporate Debtor, International Mega Food Park Ltd. (IMFPL), under Section 5(24)(m)(iv) of the Insolvency and Bankruptcy Code, 2016 (IBC). The Appellant, a subsidiary of Schreiber Foods Inc. (USA), had entered into a lease deed and subsequently a Utility Services Agreement with the Corporate Debtor. Due to failure by the Corporate Debtor to ensure timely provision of utilities, the parties executed a Utility Operation and Management Agreement (UOMA) in 2017, which granted the Appellant operational control over utility infrastructure, along with rights and obligations relating to investments, profit sharing, and governance through a joint Project Steering Committee.
The Appellant contended that it had terminated the UOMA with effect from 31.01.2019, before the commencement of the Corporate Insolvency Resolution Process (CIRP) on 28.02.2019. On this basis, the Appellant submitted its claim to the Resolution Professional (RP), which was rejected on the grounds of related party classification. Earlier, the Appellant had filed CA No. 466 of 2019, in which the NCLT allowed the Appellant to place termination documents on record. Despite this, the RP reiterated its earlier stance. The subsequent challenge by way of I.A. No. 59 of 2021 was dismissed, prompting the present appeal.
Upon examination of the agreements and surrounding circumstances, the NCLAT affirmed that the Appellant retained substantial control over the utility assets, actively participated in operational decision-making, and shared profits arising from utility services. The UOMA established a joint mechanism for utility management and contained a lock-in period along with a clause mandating a three-month written notice for termination. The Appellant’s notice dated 31.12.2018, seeking termination effective 31.01.2019, was found to be inconsistent with this requirement. The Tribunal noted that the termination clause could not be unilaterally modified or waived, as express consent in writing from both parties was necessary. The Tribunal also noted that the alleged termination was disputed by the Respondent, who asserted that the notice was defective and not acted upon.
Ultimately, the NCLAT upheld the findings of the NCLT and RP, concluding that the Appellant continued to be bound by the terms of the UOMA as of the insolvency commencement date. The Tribunal found no merit in the Appellant’s argument that the UOMA was mischaracterised or that the exact sub-clause under Section 5(24) was not specified, since the conduct and contractual framework clearly established the related party relationship under the statutory definition. The appeal was dismissed, with no order as to costs, and all pending applications were closed accordingly.
Mr. Udit Mendiratta, Mr. Shivkrit Rai and Mr. Prithvi Sinha, Advocates, represented the Appellant.
Dr. Rajansh Thukral, Dr. Surekha Thukral and Mr. Sidharth Thukral, Advocates, appeared for the Respondent.
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