Holding

Collusive transactions that lack genuine disbursement and consideration for the time value of money cannot be treated as financial debt, and entities that were related parties when such debt arose are disqualified from the Committee of Creditors.

Summary

The Supreme Court examined whether Spade Financial Services Ltd. and AAA Landmark Pvt. Ltd. could be treated as financial creditors of AKME Projects Ltd. during its corporate insolvency resolution process. It held that the transactions between the corporate debtor and the two entities were collusive, lacking genuine disbursement and consideration for the time value of money, and therefore did not constitute a financial debt under s.5(8) of the IBC. Consequently, they could not be classified as financial creditors under s.5(7). The Court also affirmed that both entities were related parties of the corporate debtor at the time the alleged debt arose, invoking the definition in s.5(24). Accordingly, they were disqualified from the Committee of Creditors under the first proviso to s.21(2). The earlier NCLAT finding that they were financial creditors was set aside, while its finding on related‑party status and exclusion from the CoC was upheld. The appeal was dismissed.

Issues considered

Whether Spade and AAA are financial creditors of the corporate debtor under s.5(7) and s.5(8) of the IBC.
Whether the transactions between the corporate debtor and Spade/AAA are collusive and therefore not financial debts.
Whether Spade and AAA qualify as ‘related parties’ of the corporate debtor under s.5(24).
Whether the first proviso to s.21(2) disqualifies them from the Committee of Creditors, and how the term ‘is’ should be interpreted.
Whether the NCLT order of 31 May 2018 operates as res judicata.

Legislation cited

Companies Act, 2013
Insolvency and Bankruptcy Code, 2016s. 21(2), s. 28, s. 29A, s. 43, s. 45(2), s. 49, s. 50, s. 5(24), s. 5(7), s. 5(8), s. 66
Real Estate (Regulation and Development) Act, 2016

Subjects

InsolvencyBankruptcyFinancial creditorFinancial debtRelated partyCommittee of CreditorsCollusive transactionRes judicataIBCSection 5(7)Section 5(8)Section 21(2)

Judgment

[2021] 15 S.C.R. 1079 1079

PHOENIX ARC PRIVATE LIMITED A
v.
SPADE FINANCIAL SERVICES LIMITED & ORS.
(Civil Appeal No. 2842 of 2020)
FEBRUARY 01, 2021 B
[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 C
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 D
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 E
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 F
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 G
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 H
1079
1080 SUPREME COURT REPORTS [2021] 15 S.C.R.

A 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
B
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
C 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”
D 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
E 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
F – 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) –
G 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 exclusion under the first proviso to s.21(2), should
H also be considered as being covered by the exclusion thereunder –
PHOENIX ARC PRIVATE LIMITED v. SPADE FINANCIAL SERVICES 1081
LIMITED & ORS.

In the present case, there is a finding that AAA and Spade were A
related parties within the meaning of s.5(24) at the time when the
alleged financial debt on the basis of which they assert a claim to
be a part of the CoC was created – The transactions between Spade
and AAA on one hand, and the Corporate Debtor on the other hand,
which gave rise to their alleged financial debts were collusive in
B
nature – There existed a deeply entangled relationship between
Spade, AAA and Corporate Debtor, when the alleged financial debt
arose – While their status as related parties may no longer stand,
this was due to commercial contrivances through which these entities
seek to now enter the CoC – The pervasive influence of the promoter/
director of the Corporate Debtor over these entities is clear, and C
allowing them in the CoC would definitely affect the other
independent financial creditors.
Insolvency and Bankruptcy Code, 2016 – First proviso to
s.21(2) – Object and purpose for enactment – Amendment to First
proviso to s.21(2) – Reason for – Discussed. D
Words & Phrases – “disburse”, “time value of money” –
Meaning of – Discussed – Insolvency and Bankruptcy Code, 2016
– s.5(8).
Disposing of the appeals, the Court
E
HELD: 1.1 The order of the NCLT dated 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 Landmark Private Limited (AAA) and Spade
Financial Services Private Limited (Spade) from the CoC, if they F
were aggrieved by the terms of that order. The earlier order was
passed without furnishing them with an opportunity of being heard.
[Para 31][1103-F; 1104-A-B]
1.2 The argument that the issue of the eligibility of Spade
and AAA as financial creditors was never raised before the NCLT G
is contrary to the material produced on record. The NCLT’s order
dated 19 July 2019 was passed after arguments were led on the
real nature of transactions between the parties. [Para 32][1104-
B; 1104-D-E]
H
1082 SUPREME COURT REPORTS [2021] 15 S.C.R.

A 1.3 Sub-section (2) of Section 21 stipulates that the CoC is
to comprise of all financial creditors of the corporate debtor. The
first proviso to Sub-section (2) has been amended by Act 26 of
2018 with effect from 6 June 2018. Having held that AAA and
Spade are not financial creditors, NCLT came to the conclusion
that they were not entitled to inclusion in the CoC. The
B
Adjudicating Authority was of the view that it was not really
necessary for it to consider what should be the date with reference
to which a related party should be determined. But it is evident
that the NCLT did come to the conclusion that Mr. Arun Anand
and his various companies namely AAA and Spade were related
C parties to the corporate debtor though after 2013, Mr Arun Anand
resigned from all the companies of the Anil Nanda Group. The
Adjudicating Authority observed that they are no longer related
to the corporate debtor at the time of the filing of the application
for initiation of the CIRP. It noted the deep entanglement of the
affairs of the corporate debtor and the Arun Anand group of
D
companies, the close business relationship of the past and the
fact that the accounts of the corporate debtor had not been
finalised, audited or filed with the Registrar of Companies since
2016. Reading the order of the NCLT as it stands, it is not possible
to accept the submission that the applications filed by YES Bank
E and Phoenix were rejected only on the basis that they were not
financial creditors and that there was no determination in regard
to their status as related parties. In light of the above discussion,
the submission that NCLAT exceeded its jurisdiction by
considering the second issue relating to the determination of the
status of AAA and Spade as related parties not agreed with. Thus,
F
there is no reason to remand the matter to NCLAT for
reconsideration. An order of remand cannot be passed in a routine
manner, and it should be passed only if a re-consideration is
necessary. An unwarranted order of remand does not serve the
cause of justice and merely extends the life of litigation.
G [Paras 38, 39][1108-A-C; 1108-C-G]
2. Under Section 5(7) of the IBC, a person can be
categorised as a financial creditor if a financial debt is owed to it.
Section 5(8) of the IBC stipulates that the essential ingredient of
a financial debt is disbursal against consideration for the time
H value of money. [Para 43][1110-E-F]
PHOENIX ARC PRIVATE LIMITED v. SPADE FINANCIAL SERVICES 1083
LIMITED & ORS.

Swiss Ribbons Pvt. Ltd. v. Union of India (2019) 4 SCC A
17 : [2019] 3 SCR 535; Pioneer Urban Land and
Infrastructure Ltd vs. Union of India (2019) 8 SCC 416
: [2019] 10 SCR 381 – relied on.
3. Collusive Transactions
Money advanced as debt should be in the receipt of the B
borrower. The 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 C
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.
In other words, the real agreement between the parties is
something other than advancing a financial debt. The IBC has
made provisions for identifying, annulling or disregarding D
“avoidable transactions” which distressed companies may have
undertaken to hamper recovery of creditors in the event of the
initiation of CIRP. Such avoidable transactions include: (i)
preferential transactions under Section 43 of the IBC; (ii)
undervalued transactions under Section 45(2) of the IBC; (iii) E
transactions defrauding creditors under Section 49 of the IBC;
and (iv) extortionate transactions under Section 50 of the IBC.
The 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. F
[Paras 46, 48][1112-B-C; 1114-A-C]
Prem Chand Tandon v. Krishna Chand Kapoor (1973)
2 SCC 366 – relied on.
Snook v. London and West Riding Investments Ltd. G
[1967] 2 QB 786 – referred to.
4. Spade and AAA
NCLT in its order dated 19 July 2019 has undertaken a
detailed analysis of the transactions to arrive at a finding that the
transactions were collusive. The findings of the NCLT in its order H
1084 SUPREME COURT REPORTS [2021] 15 S.C.R.

A dated 19 July 2019 are agreed with. As noted by NCLT, the
Memorandum of Understanding dated 12 August 2011, on the
basis of which Spade had filed its claim in Form C before the IRP,
was signed two years after the commencement of the purported
transaction. The execution of the Memorandum of Understanding
was sought to be explained on the basis that a formal document
B
was created for specifying the rate of interest on the Inter
Corporate Deposits (ICDs) given by Spade to the Corporate
Debtor. However, despite the creation of a formal document, the
rate of interest being charged on the ICDs was 12% as mentioned
in the claim before the IRP, which is half of the interest rate of
C 24% stipulated in the Memorandum of Understanding. During
the arguments, it was also brought to the notice of this Court
that the Memorandum of Understanding is unregistered and
unstamped. The IRP in his letter dated 25 May 2018 has noted
that as per the ledger provided by Spade, no interest was claimed
on the alleged debt and no adjustment was made regarding the
D
payment of principal or interest by the Corporate Debtor to Spade.
It has been submitted in the written submissions filed on behalf
of Spade and AAA that the auditors of the Corporate Debtor had
been putting a note in its balance sheets stating that the interest
of 12% was not being paid to Spade due to a dispute. This
E submission in fact further fortifies the finding of the IRP that no
interest has been paid on the alleged loan. The IRP has also noted
in his letter that the Memorandum of Understanding does not
stipulate the period of repayment. Hence, the consideration for
time value of money is absent, which is an essential ingredient of
a financial debt. The NCLT has also noted that a major portion of
F
the ICDs was credited in the account of Mr Arun Anand holding
that the entire amount was not “disbursed” to the Corporate
Debtor. NCLAT has also made a similar finding in paragraph 11(i)
of its judgement. Under Clause 2 of the Memorandum of
Understanding, the amount of Rs. 26.55 Crores has been
G disbursed not only to the Corporate Debtor but also to “other
companies on behalf of AKME”. In any event, the entirety of the
ICDs were not disbursed to Spade. Additionally, no Board
resolution was passed by Spade approving the grant of ICDs and
the charge created on the loan was not registered with the
Registrar of Companies. The Memorandum of Understanding was
H
PHOENIX ARC PRIVATE LIMITED v. SPADE FINANCIAL SERVICES 1085
LIMITED & ORS.

an eye-wash and collusive. NCLT in its order dated 19 July 2019 A
has noted that AAA and the Corporate Debtor had entered into
multiple agreements regarding the same property without giving
any explanation or rationale regarding variation in the
consideration. This showed that the transactions were collusive
in nature entered with the purpose of diverting properties of the
B
Corporate Debtor to AAA. Since the Development Agreement
could not be implemented because the license for the project
could not be split into two parts, an Agreement to Sell and a Side
Letter were executed on 25 October 2012. The Agreement to
Sell was entered to purchase FSI/flats equivalent to 38.3% of the
total FSI in relation to specific units identified and allotted in the C
agreement. Apparently, the sale consideration was re-negotiated
and enhanced from Rs 32.80 crores under the Development
Agreement to Rs 86.01 crores under the Agreement to Sell.
Clause 3 of the Side Letter dated 25 October 2012 shows that
the intent of the parties was to continue to co-develop the land.
D
It appears that the parties converted the Development
Agreement into an Agreement to Sell executed along with a Side
Letter to circumvent the legal prohibition on splitting a
development license in two parts. The transaction between AAA
and the Corporate Debtor was collusive in nature. Since the
commercial arrangements between Spade and AAA, and the E
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. [Paras 49-52][1115-
F-H; 1116-A-H; 1117-A-G]
5. Whether Spade and AAA are related parties F
The definition of the expression ‘related party’ in Section
5(24) is exhaustive, since the expression is defined to “mean”
what is set out in clauses (a) to (m). The expression ‘related
party’ is defined in Section 5(24) in relation to a corporate debtor.
Section 5(24A) provides a corresponding definition in relation to G
an individual. The definition describes a commutative relationship,
meaning that X can be a related party of Y, if either X is related to
Y, or Y is related to X. The definition of ‘related party’ under the
IBC is significantly broad. The intention of the legislature in
adopting such a broad definition was to capture all kinds of inter-
H
1086 SUPREME COURT REPORTS [2021] 15 S.C.R.

A relationships between the financial creditor and the corporate
debtor. While understanding the meaning of ‘related party’ in
the context of the IBC, it is important to keep in mind that it was
defined to ensure that those entities which are related to the
Corporate Debtor can be identified clearly, since their presence
can often negatively affect the insolvency process. It is not difficult
B
to accept the conclusion of the NCLAT that Mr Arun Anand would
be a related party of the Corporate Debtor in accordance with
Section 5(24)(h) and Sections 5(24)(m)(i). Presently, the court
has to determine whether the Corporate Debtor’s board,
directors, etc, are accustomed to act on Mr Arun Anand’s advice/
C direction/instruction and if he participates in the policy-making
process of the Corporate Debtor. While a strict determination of
intent or mens rea may not always be possible by the NCLT and
NCLAT in summary proceedings, it is possible to draw the
inference from the facts at hand. These facts are that there was a
deep entanglement between the entities of Mr Arun Anand and
D
Mr Anil Nanda, and Mr Arun Anand did hold positions during
this period which could have been used by him to guide the affairs
of the Corporate Debtor. This finding is further supported by
conclusion that the transactions between the Corporate Debtor
and the entities led by Mr Arun Anand were collusive in nature.
E The NCLAT’s conclusion that Spade entered into two transactions
on the basis of the advice/instructions/directions of the board/
directors of the Corporate Debtor under Section 5(24)(f) is
accepted. As already held, the transactions between AAA and
the Corporate Debtor were collusive in nature. This supports
the findings of the NCLAT that the Agreement to Sell and Side
F
Letter dated 25 October 2012 were a mere eye-wash, through
which they sought to develop the AKME RAAGA project
together while circumventing government guidelines. Hence,
AAA would be a partner of the Corporate Debtor within the
meaning of Section 5(24)(a). Mr Arun Anand, Spade and AAA
G were related parties of the Corporate Debtor during the relevant
period when the transactions on the basis of which Spade and
AAA claim their status as financial creditors took place.
[Paras 57-59, 62-65][1120-B-C; 1121-E-G; 1122-G-H; 1123-A-
H]
H 6. Amendment to First Proviso of Section 21(2)
PHOENIX ARC PRIVATE LIMITED v. SPADE FINANCIAL SERVICES 1087
LIMITED & ORS.

The first proviso to Section 21(2) was amended, to extend A
the disqualification to the specified authorised representatives,
in case that these representatives happened to be related parties
of the corporate debtor. The introduction of the phrase “is” along
with related party was not a guiding factor behind the
Parliamentary amendment. [Para 81][1132-B-C]
B
7. Related Parties - Interpretation In Praesenti
The purpose of excluding a related party of a corporate
debtor from the CoC is to obviate conflicts of interest which are
likely to arise in the event that a related party is allowed to become
a part of the CoC. Where a financial creditor seeks a position on C
the CoC on the basis of a debt which was created when it was a
related party of the corporate debtor, the exclusion which is
created by the first proviso to Section 21(2) must apply. For, it is
on the strength of the financial debt as defined in Section 5(8)
that an entity claiming as a financial creditor under Section 5(7)
seeks a position on the CoC under Section 21(2). If the definition D
of the expression ‘related party’ under section 5(24) applies at
the time when the debt was created, the exclusion in the first
proviso to Section 21(2) would stand attracted. However, if such
an interpretation is given to the first proviso of Section 21(2), all
financial creditors would stand excluded if they were a ‘related E
party’ of the corporate debtor at the time when the financial debt
was created. This may lead to absurd conclusions for entities
which have legitimately taken over the debt of related parties, or
where the related party entity had stopped being a ‘related party’
long ago. Thus, it has been clarified that the exclusion under the
first proviso to Section 21(2) is related not to the debt itself but F
to the relationship existing between a related party financial
creditor and the corporate debtor. As such, the financial creditor
who in praesenti is not a related party, would not be debarred
from being a member of the CoC. However, in case where the
related party financial creditor divests itself of its shareholding G
or ceases to become a related party in a business capacity with
the sole intention of participating the CoC and sabotage the CIRP,
by diluting the vote share of other creditors or otherwise, it would
be in keeping with the object and purpose of the first proviso to

H
1088 SUPREME COURT REPORTS [2021] 15 S.C.R.

A Section 21(2), to consider the former related party creditor, as
one debarred under the first proviso. Hence, while the default
rule under the first proviso to Section 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
B
exclusion under the first proviso to Section 21(2), should also be
considered as being covered by the exclusion thereunder. In the
present case, there is a finding that AAA and Spade were related
parties within the meaning of Section 5(24) at the time when the
alleged financial debt on the basis of which they assert a claim to
C be a part of the CoC was created. This was due to the long-
standing relationship between Mr Arun Anand and Mr Anil Nanda,
and their respective corporations. Admittedly, such a relationship
still existed even in 2017, since Mr Anil Nanda’s JIPL held
shareholding in Mr Arun Anand’s Spade. Further, the transactions
between Spade and AAA on one hand, and the Corporate Debtor
D
on the other hand, which gave rise to their alleged financial debts
were collusive in nature. Therefore, it is evident that there
existed a deeply entangled relationship between Spade, AAA and
Corporate Debtor, when the alleged financial debt arose. While
their status as related parties may no longer stand, this was due
E to commercial contrivances through which these entities seek
to now enter the CoC. The pervasive influence of Mr Anil Nanda
(the promoter/director of the Corporate Debtor) over these
entities is clear, and allowing them in the CoC would definitely
affect the other independent financial creditors. [Paras 90-92, 94-
96][1138-G-H; 1139-D-F; 1140-G-H; 1141-A-G]
F
8. The decision of the 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
under Section 5(8), Spade and AAA cannot be labelled as financial
creditors under Section 5(7). The decision of the NCLAT, in as
G much as it referred to Spade and AAA as related parties of the
Corporate Debtor under Section 5(24), is affirmed. The decision
of the NCLAT, in as much as it excluded Spade and AAA from
the CoC in accordance with the first proviso of Section 21(2), is
affirmed but for the reasons mentioned above. [Para 97][1141-G-
H H; 1142-A-C]
PHOENIX ARC PRIVATE LIMITED v. SPADE FINANCIAL SERVICES 1089
LIMITED & ORS.

Arcelor Mittal India (P) Ltd. v. Satish Kumar Gupta A
(2019) 2 SCC 1 : [2018] 12 SCR 362 – relied on.
Abhay Singh Chautala v. C.B.I. (2011) 7 SCC 141 :
[2011] 10 SCR 949; R.S. Nayak v. A.R. Antulay (1988)
2 SCC 602 : [1988] 1 Suppl. SCR 1 – referred to.
Richa Saraf, ‘Concept of Related Party: Interpretation by B
Letter or Spirit of the IBC?’, (IndiaCorpLaw, 11 August 2018);
Thomas H. Jackson, ‘Bankruptcy, Non-Bankruptcy Entitlements,
and the Creditors’ Bargain’, 91 Yale Law Journal 857, (1982) at
859-71; Medha Shekar and Anuradha Guru, Theoretical
Framework of Insolvency Law; Douglas G. Baird, ‘A World C
Without Bankruptcy’, 50 Law & Contemporary Problems, Spring
1987; D.R. Korobkin, Rehabilitating values: A jurisprudence of
bankruptcy, 91 Columbia Law Review (1991), Bankruptcy Law
Reforms Committee, Volume I: Rationale and Design, of
November 2015; Report of the Insolvency Law Committee, March
2018; Vidhi Centre for Legal Policy, Understanding the Insolvency D
and Bankruptcy Code, 2016: Analysing Developments in
Jurisprudence; UNCITRAL, Legislative Guide on Insolvency
Law, 2005; G.P. Singh, Principles of Statutory Interpretation (1st
edn., Lexis Nexis 2015); Insolvency Law Committee Report,
2020. E
Case Law Reference
[2019] 3 SCR 535 relied on Para 43
[2019] 10 SCR 381 relied on Para 44
(1973) 2 SCC 366 relied on Para 47 F
[2018] 12 SCR 362 relied on Para 54(ii)
[ 2011] 10 SCR 949 referred to Para 86
[1988] 1 Suppl. SCR 1 referred to Para 88
CIVIL APPELLATE JURISDICTION: Civil Appeal No.2842 of G
2020.
From the Order dated 19.07.2019 of the National Company Law
Appellate Tribunal, New Delhi, Bench-III in CP(IB)-55/ND/2018.
With
H
1090 SUPREME COURT REPORTS [2021] 15 S.C.R.

A Civil Appeal No.3063 of 2020.
Neeraj Kishan Kaul, K.V. Viswanathan, Sanjiv Sen, Sr. Advs.,
Gaurav Agrawal, Suresh Dutt Dobhal, Shikhar Kumar, Rohit Krishan
Naagpal, R. Venkatraman, Dipanshu Gaba, P.V. Yogeswaran, Abhishek
Anand, Ms. Mithu Jain, Mohak Sharma, Parthik Choudhary, Advs. for
B the appearing parties.
The Judgment of the Court was delivered by
DR. DHANANJAYA Y CHANDRACHUD, J.
This judgment has been divided into sections to facilitate analysis.
C They are:
A The appeals
B CIRP for the Corporate Debtor
C Proceedings before NCLT
D D Proceedings before NCLAT
E Transactions of the Corporate Debtor
F Relationship between Anil Nanda and Arun Anand
G Whether Spade and AAA are financial creditors of the
E Corporate Debtor
G.1 Submission of Counsel
G.2 Assessment of preliminary submissions
G.2.1 Res Judicata
F G.2.2 Issues before NCLAT
G.2.3 Remand to NCLAT
G.3 Analysis
G.3.1 Statutory Provisions
G G.3.2 Financial Creditor and Financial Debt
G.3.3 Collusive Transactions
G.3.4 Spade and AAA
H Whether Spade and AAA are related parties
H
PHOENIX ARC PRIVATE LIMITED v. SPADE FINANCIAL SERVICES 1091
LIMITED & ORS. [DR. DHANANJAYA Y CHANDRACHUD, J.]

H.1 Submission of Counsel A
H.2 Statutory provisions
H.3 Analysis
I Whether Spade and AAA can be excluded from the CoC
I.1 Submissions of Counsel B
I.2 Related Parties and CoC
I.3 Amendment to First Proviso of Section 21(2)
I.4 Related Parties - Interpretation In Praesenti
C
J Conclusion
A The appeals
1. This judgment would govern two sets of appeals arising from
the judgment of the National Company Law Appellate Tribunal
(“NCLAT” or “Appellate Tribunal”). By a judgment dated 27 January D
2020, NCLAT dismissed the appeal under Section 61 of the Insolvency
and Bankruptcy Code, 2016 (“IBC”) preferred by AAA Landmark
Private Limited (“AAA”) and Spade Financial Services Private Limited
(“Spade”) to assail the order dated 19 July 2019 of the National Company
Law Tribunal, New Delhi Bench -III (“NCLT” or “Adjudicating
Authority”). The NCLT had held that AAA and Spade have to be E
excluded from the Committee of Creditors (“CoC”) formed in relation
to the Corporate Insolvency Resolution Process (“CIRP”) initiated
against AKME Projects Limited (“Corporate Debtor”). NCLT passed
its order dated 19 July 2019 on applications1 filed by Phoenix Arc Private
Limited (“Phoenix”) and YES Bank under Section 60(5)(c) of the IBC. F
2. Phoenix, in Civil Appeal No. 2842 of 2020, submits that though
the NCLAT correctly dismissed the appeal filed by Spade and AAA,
holding that they are related parties of the Corporate Debtor and are
hence to be excluded from the CoC, there is an erroneous finding that
they are financial creditors. In paragraph 11 of its judgment, the NCLAT G
has observed that:
“…admittedly appellants are the financial creditors of the corporate
debtor AKME Projects Limited...”
1
CA No. 337/2018 and CA No. 338/2019 (Phoenix); CA No. 268/2018 and CA No. 269/
2018 (Yes Bank). H
1092 SUPREME COURT REPORTS [2021] 15 S.C.R.

A It has been submitted that there was never any admission on the
part of Phoenix that AAA and Spade are financial creditors. The appeal
by Phoenix seeks to challenge the above finding on the ground that:
(i) It is contrary to the record; and
(ii) The specific stand of Phoenix is that both AAA and Spade
B are not even creditors of the corporate debtor, much less
financial creditors.
Phoenix is thus in appeal under Section 62 of IBC, confined to the
finding that AAA and Spade are financial creditors.

C 3. Spade and AAA have independently filed an appeal under
Section 62, Civil Appeal No. 3063 of 2020, in order to assail the decision
of the NCLAT dated 27 January 2020 affirming their exclusion from
participating in the CoC on the ground that they are related parties of the
Corporate Debtor in terms of Section 5(24) and the first proviso to Section
21(2) of IBC.
D
4. Based on the above appeals, three issues have arisen for
consideration before this Court:
(i) Whether Spade and AAA are financial creditors of the
Corporate Debtor;
E (ii) Whether Spade and AAA are related parties of the Corporate
Debtor; and
(iii) Whether Spade and AAA have to be excluded from the CoC.
B CIRP for the Corporate Debtor

F 5. The brief facts of the case are that CIRP has been initiated
against the Corporate Debtor on 18 April 2018 on an application filed by
an operational creditor, Mr. Hari Krishan Sharma, under Section 9 of
IBC.
6. During the CIRP, claims were invited by the Interim Resolution
G Professional (“IRP”). Spade filed its claim in Form C as a financial
creditor for a sum of Rs. 52,96,00,000 on 10 May 2018. Thereafter,
Spade filed a revised Form C for a sum of Rs. 109,11,00,000 on 20 May
2018. Spade had filed the form on the basis of an alleged Memorandum
of Understanding dated 12 August 2011 executed with the Corporate
Debtor, which stated that Inter Corporate Deposits (“ICDs”) of Rs.
H
PHOENIX ARC PRIVATE LIMITED v. SPADE FINANCIAL SERVICES 1093
LIMITED & ORS. [DR. DHANANJAYA Y CHANDRACHUD, J.]

26,55,00,000 have been granted to the Corporate Debtor by Spade A
bearing interest of 24% repayable in terms of the mutual agreement
between the parties. However, Spade has submitted before this Court
that it has granted ICDs of Rs. 66,00,00,000 (approx.) to the Corporate
Debtor between June 2009 and January 2013. Out of this amount, Spade
is claiming a principal amount of Rs. 23,00,00,000. The balance amount
B
of Rs 43,06,00,000 was credited in the account of AAA, which is a
wholly owned subsidiary of Spade. The total claim of Spade has increased
to Rs. 109,11,00,000 in 7 years on account of interest at the rate of 24%.
7. AAA filed its claim before the IRP in Form F as a creditor
other than a financial creditor or operational creditor for a sum of
Rs. 93,90,00,000 on 10 May 2018. Thereafter, AAA filed a revised claim C
in Form C as a financial creditor for a sum of Rs. 109,72,00,000 on 23
May 2018. It had entered into a Development Agreement dated 1 March
2012 with the Corporate Debtor for a sale consideration of Rs.
32,80,00,000 to purchase development rights in a project. On 25 October
2012, the Development Agreement was terminated and an Agreement D
to Sell, along with a Side Letter, was executed between AAA and the
Corporate Debtor for purchase of flats. The sale consideration for the
Agreement to Sell was enhanced to Rs. 86,01,00,000 from
Rs. 32,80,00,000 under the Development Agreement. AAA paid a sum
of Rs. 43,06,00,000 as advance payment under the Agreement to Sell.
This amount was adjusted out of the ICDs payable to Spade as noted E
above. The claim of AAA is with respect to the principal amount of
Rs. 43,06,00,000, which along with interest at the rate of 18% increased
to Rs. 109,72,00,000 in 5 years.
8. The CoC was constituted on 22 May 2018. On 25 May 2018,
the IRP rejected the claim of Spade, inter alia, on the ground that the F
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 ICDs 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 G
the period for filing such a claim.
C Proceedings before NCLT
9. Aggrieved by the rejection of their claim as financial creditors,
AAA and Spade filed applications before the NCLT to be included in
H
1094 SUPREME COURT REPORTS [2021] 15 S.C.R.

A the CoC. The NCLT by its order dated 30 May 2018 allowed the
applications. However, none of the other financial creditors, such as
Phoenix and YES Bank, were parties to these proceedings. The NCLT
observed that AAA’s original claim in Form F was filed on time and it
has only amended its claim as one under Form C. The NCLT further
observed that the amount given by Spade in the form of ICDs has been
B
received as a deposit and is attracting interest as reflected in Form ‘26
AS’, deducting TDS on interest. Thus, NCLT allowed Spade and AAA
to submit their claims as financial creditors with a direction to the IRP to
consider the claims.
10. Phoenix is also a financial creditor of the Corporate Debtor
C and is a part of CoC. Its claim is based on a registered Deed of Assignment
in its favour dated 28 December 2015, pursuant to which, Karnataka
Bank Limited had assigned the non-performing assets relating to the
credit facilities granted to the Corporate Debtor. The voting share of
Phoenix was reduced to 4.28% on account of AAA and Spade being
D included in the CoC.
11. On 1 June 2018, a meeting of the CoC took place which was
attended by YES Bank and Phoenix, and also by the newly approved
financial creditors, AAA and Spade. Following the meeting, YES Bank
and Phoenix filed applications in the NCLT for the exclusion of AAA
E and Spade from the CoC on the ground that they are related parties.
Notice was issued by the NCLT in the two applications 2.
12. The application moved on behalf of YES Bank under Section
60(5), on 28 June 2018, sought the following reliefs:
(i) A direction to the IRP to reconstitute the CoC in terms of the
F Insolvency and Bankruptcy (Amendment) Ordinance 2018
(“IBC Ordinance 2018”); and
(ii) A direction prohibiting the IRP from allowing AAA and Spade
to participate and vote in the meeting of the COC.
13. The applications filed under Section 60(5) by Phoenix also
G
sought similar reliefs for:
(i) The removal of Spade and AAA from the CoC; and
(ii) Directing the constitution of the CoC in terms of the IBC
Ordinance 2018.
H 2
Civil Appeal No. 267/2018 and Civil Appeal 368/2018
PHOENIX ARC PRIVATE LIMITED v. SPADE FINANCIAL SERVICES 1095
LIMITED & ORS. [DR. DHANANJAYA Y CHANDRACHUD, J.]

14. NCLT in its judgment dated 19 July 2019 formulated two issues A
for determination. These two issues were:
“i. What is the nature of the transaction between the parties and
does it qualify to be treated as financial debt as defined under
Section 5(8) of IBC, 2016.
ii.What is the date on which there should be relation between the B
two parties for the alleged Financial Creditor to be included in the
definition “related party’.”
15. In relation to the first issue, the NCLT held that:
“...the transactions between CD and both SPADE and AAA C
Landmark are collusive in nature and do not qualify as financial
debt for the purpose of IBC.”
Accordingly, NCLT held that Spade and AAA did not qualify to
be considered as financial creditors.
16. In relation to the second issue, NCLT held that it “does not D
require a reply” in view of its above-mentioned finding. However, it
took note of the first proviso to Section 21(2) of the IBC, which was
introduced with effect from 6 June 2018. Under the first proviso, inter
alia, a financial creditor who is a related party of the corporate debtor
shall not have the right of representation, participation or voting in the
E
CoC. The Adjudicating Authority held that “there is no doubt in our
mind that Arun Anand and his company namely Spade and AAA
Landmark were related parties to the CD”. However, the NCLT noted
that after 2013, soon after the execution to the Agreement to Sell of 25
October 2012, Arun Anand resigned from all the companies of the Anil
Nanda Group and was no longer related to the Corporate Debtor at the F
time of the filing of the application for initiation of the CIRP. Ultimately,
the Adjudicating Authority held that there was a deep entanglement
between the affairs of the corporate debtor and the group representing
the Arun Anand companies which could not be unravelled in the summary
jurisdiction before the Tribunal. The ultimate decision of the NCLT was
G
to allow the applications filed by YES Bank and Phoenix for the exclusion
of AAA and Spade from the CoC based on its findings on the first issue.
D Proceedings before NCLAT
17. In appeal, the NCLAT proceeded in paragraph 11 of its decision
to observe that “admittedly” Spade and AAA “are the financial H
1096 SUPREME COURT REPORTS [2021] 15 S.C.R.

A creditors of the corporate debtor”. Having stated so, the Appellate
Tribunal proceeded to enquire into whether AAA and Spade are related
parties within the meaning of Section 5(24) of the IBC.
18. Answering the above issue in the affirmative, the NCLAT
held that Spade and AAA are related parties of the Corporate Debtor
B since:
(i) AAA was a partner of the Corporate Debtor in accordance
with Section 5(24)(a)3. The Appellate Tribunal held that since
even after the cancellation of Development Agreement dated
1 March 2012 between the parties, they had entered into an
C Agreement to Sale and Side Letter dated 25 October 2012,
which was merely a camouflage under which they were
partners in developing a residential project to be sold to a
third party;
(ii) In accordance with Section 5(24)(f)4, during the transaction
D period of 2010 to 2013, Spade led by Mr Arun Anand was
making substantial financial arrangements on the basis of
advice provided by the Corporate Debtor led by its
Management and Directors, i.e., Mr. Anil Nanda (a promoter
of the Corporate Debtor) and Mr Sonal Anand (Mr Arun
Anand’s brother in-law). In particular, the Appellate Tribunal
E noted the following two arrangements between Spade and
the Corporate Debtor:
(a) Memorandum of Understanding dated 2 December 2010,
through which Spade, on behalf of the Corporate Debtor,
paid a third party Rs. 22 crores as ICD and donated
F Rs. 3 crores to another third-party trust; and
(b) Between 16 and 17 January 2013, the Anil Nanda Group
of Companies (led by Mr. Sonal Anand) sought to settle
its debts with a third party (worth Rs. 2 crores) through
funds parked with Spade;
G 3
“(a) a director or partner of the corporate debtor or a relative of a director or partner
of the corporate debtor;”
4
“(f) anybody corporate whose board of directors, managing director or manager, in
the ordinary course of business, acts on the advice, directions or instructions of
a director, partner or manager of the corporate debtor;”

H
PHOENIX ARC PRIVATE LIMITED v. SPADE FINANCIAL SERVICES 1097
LIMITED & ORS. [DR. DHANANJAYA Y CHANDRACHUD, J.]

(iii) In accordance with Section 5(24)(h)5, the Corporate Debtor A
was acting on the directions/instruction of Mr. Arun Anand
who, along with his family, is the majority shareholder in Spade,
of which AAA is a wholly-owned subsidiary. The Appellate
Tribunal came to this conclusion on the basis that:
(a) on 1 June 2009, Spade was appointed as ‘Consultant’ to B
the Corporate Debtor till 21 February 2011;
(b) from 1 November 2011, Mr. Arun Anand was appointed
as a ‘Strategic Advisor’ to the Corporate Debtor;
(c) from 26 November 2012, Mr. Arun Anand was
appointed as Group CEO of the Anil Nanda Group of C
Companies, which included the Corporate Debtor; and
(d) during this period, the first ICD was given by Spade to
the Corporate Debtor;
(iv) On the basis of the same reasons as (iii), Mr. Arun Anand D
was also held to be a person participating in the policy-making
process of the Corporate Debtor in accordance with Section
5(24)(m)(i)6;
(v) Mr. Arun Anand and Mr. Sonal Anand were directors of the
Corporate Debtor till 2013. Hence, Mr. Arun Anand would
E
be a related party under Section 5(24)(a) read with
5(24A)(a)7, being a relative of another director; and
(vi) A holding company of the Corporate Debtor, Joint Investment
Private Limited (“JIPL”), holds shareholding in Spade.
19. Hence, NCLAT came to the conclusion that the Adjudicating F
Authority had rightly excluded both Spade and AAA from participation
in the CoC since Mr. Anil Nanda, in concert with Mr. Arun Anand and
his family, had created a web of companies which were related parties
to the Corporate Debtor, and was now trying to gain a backdoor entry
into the CoC through them.
5
“(h) any person on whose advice, directions or instructions, a director, partner or G
manager of the corporate debtor is accustomed to act;”
6
“(m) any person who is associated with the corporate debtor on account of— (i)
participation in policy-making processes of the corporate debtor;”
7
“(24-A) “related party”, in relation to an individual, means— (a) a person who is a
relative of the individual or a relative of the spouse of the individual;”
H
1098 SUPREME COURT REPORTS [2021] 15 S.C.R.

A E Transactions of the Corporate Debtor
20. Before we proceed with our analysis of the issues, it is
important to note the relevant transactions between the Corporate Debtor
on one hand and Spade and AAA on the other hand, which gives rise to
their claims as financial creditors.
B 21. The following transactions between the Corporate Debtor and
Spade are relevant for our consideration:
(i) Memorandum of Understanding dated 12 August 2011, through
which Spade provided the Corporate Debtor with ICDs worth
a net amount of Rs. 66 crores from 1 June 2009 till January
C 2013, which provided for 24% interest. However, Spade has
stated that in actuality only 12% interest was charged and
hence its claim is on that basis;
(ii) Through this Memorandum of Understanding, the Corporate
Debtor provided security for these ICDs through 37 flats worth
D Rs. 39.825 crores in their real estate project, AKME RAAGA.
Further, through emails dated 16 and 17 January 2012, additional
security was provided through 11 plots worth Rs. 3 crores in
the Corporate Debtor’s real estate project, AKME POLIS.
The charge was not registered; and
(iii) Out of the ICDs provided to the Corporate Debtor by Spade,
E
Rs. 43.06 crores’ worth were credited to the account of Mr.
Arun Anand by consent. However, this has been disputed by
Spade.
22. The following transactions between the Corporate Debtor and
AAA are relevant for our consideration:
F
(i) Development Agreement dated 1 March 2012, through which
the Corporate Debtor sold to 38.3% of its development rights
in its real estate project, AKME RAAGA, to AAA for a
consideration of Rs. 32.80 crores;
(ii) Agreement to Sell dated 25 October 2012, which superseded
G
the Development Agreement dated 1 March 2012, through
which AAA bought a saleable area of 313,928 sq. ft. in AKME
RAAGA at a price of Rs. 43.06 crores; and
(iii) Side Letter dated 25 October 2012, which was to be read as
a part of the Agreement to Sell, which noted that the area
H
PHOENIX ARC PRIVATE LIMITED v. SPADE FINANCIAL SERVICES 1099
LIMITED & ORS. [DR. DHANANJAYA Y CHANDRACHUD, J.]

bought by AAA was 38.3% of AKME RAAGA, and AAA A
would provide for the cost of its development accordingly.
F Relationship between Anil Nanda and Arun Anand
23. It is also important to note the close relationship between the
key managerial personnel of the Corporate Debtor, Mr. Anil Nanda and
the director of Spade and AAA, Mr. Arun Anand: B

(i) Mr. Anil Nanda is the major shareholder of JIPL, which holds
80% of the shareholding in the Corporate Debtor;
(ii) The Corporate Debtor is a part of the Nanda Group of
Companies; C
(iii) Mr. Arun Anand was also a director of the Corporate Debtor
up to 31 March 2002;
(iv) Mr. Arun Anand and his son, Mr. Aditya Anand, sold their
shareholding in the Corporate Debtor in the year 2004/2005;
D
(v) Mr. Arun Anand was also closely related to one of the directors
of the Corporate Debtor, Mr. Sonal Anand, who is his brother-
in-law. Sonal Anand was the director of the Corporate Debtor
from November 2007 to 2013; and
(vi) Mr. Arun Anand has worked in different capacities for
Mr. Anil Nanda for about 25 years. E

24. The purported transactions took place when he was an
employee of Escorts Limited/Nanda Group of Companies, including the
Corporate Debtor and also held key managerial posts in the said
companies. Spade and AAA, in their written submissions, have given
details of Mr Arun Anand’s association with the Corporate Debtor during F
the relevant period (June 2009 to January 2013) and thereafter:

G

G Whether Spade and AAA are financial creditors of the
Corporate Debtor H
1100 SUPREME COURT REPORTS [2021] 15 S.C.R.

A G.1 Submission of Counsel
25. The learned Senior Counsel who appeared in these proceedings
on behalf of the contesting parties are:srt
(i) Mr K.V. Viswanathan for AAA and Spade;
B (ii) Mr Neeraj Kishan Kaul for Phoenix; and
(iii) Mr Sanjiv Sen for the Resolution Professional (“RP”).
26. The submission of Mr K V Viswanathan is that NCLT held
against AAA and Spade on the ground that they were not financial
creditors. In view of this finding, the NCLT held that it was not necessary
C to enter upon the second issue which it had formulated. On the other
hand, NLCAT in appeal proceeded on the basis that admittedly AAA
and Spade are financial creditors but then went on to hold that they are
related parties and are therefore liable to be excluded from the CoC.
His submission is three-fold:
D (i) The issue as to whether Spade and AAA are financial creditors
was concluded by the earlier order of the NCLT dated 31
May 2018 which operates as res judicata. NCLT having
allowed the applications of AAA and Spade for submitting
their claims to the IRP as financial creditors, this finding could
not have been altered in the subsequent order dated 19 July
E
2019. The NCLT in its order dated 31 May 2018 gave a
categorical finding that the amount received by the Corporate
Debtor in the form of deposits by Spade and AAA are financial
debts and the IRP’s rejection of their claim was unsustainable;
(ii) The subsequent applications filed by YES Bank and Phoenix
F
before the NCLT only sought a re-constitution of the CoC
and to restrict Spade and AAA from representing, participating
or voting in the CoC. The issue in respect of the eligibility of
Spade and AAA as financial creditors was never raised in
their applications. The only issue raised before the NCLT
G was with respect to Spade and AAA being related parties of
the Corporate Debtor. However, NCLT framed two issues
including the one relating to Spade and AAA’s eligibility as
financial creditors which stood decided on 31 May 2018; and
(iii) In the appeal filed by AAA and Spade against the decision of
H the NCLT to exclude them from the CoC, the only issue which
PHOENIX ARC PRIVATE LIMITED v. SPADE FINANCIAL SERVICES 1101
LIMITED & ORS. [DR. DHANANJAYA Y CHANDRACHUD, J.]

fell for consideration was whether they were financial A
creditors. In other words, it was only the correctness of the
determination of the Adjudicating Authority that they were
not financial creditors which was moot, for being considered.
The NCLAT proceeded to dismiss the appeal, despite its
finding that “admittedly” AAA and Spade are financial
B
creditors by coming to the conclusion that they are related
parties.
27. On the basis of the above submissions, Mr Viswanathan has
submitted that the proceedings should be remanded back for
reconsideration since the NCLAT has made an error of jurisdiction in
rejecting the appeal filed by AAA and Spade despite having agreed with C
their submission that they are financial creditors.
28.The submission of Mr Neeraj Kishan Kaul is that AAA and
Spade are not creditors of the Corporate Debtor, much less financial
creditors, in terms of Section 5(7) of the IBC. The submissions made in
relation to the transaction between AAA and the Corporate Debtor are: D
(i) The Development Agreement dated 1 March 2012 entered
between AAA and the Corporate Debtor was collusive. AAA
had sought to purchase 38.3% of the development rights in a
project called AKME RAAGA as a co-developer/partner.
However, the development license granted by the Government E
could not be sub-divided. As a result, the Corporate Debtor
and AAA converted the Development Agreement into an
unregistered Agreement to Sell dated 25 October 2012;
(ii) AAA and the Corporate Debtor executed an unlawful Side
Letter dated 25 October 2012 with the intention to co-develop
the land and sell it in the market. The Side Letter contained F
terms akin to the terms which were a part of the Development
Agreement. It contained terms for sharing of costs of
development of the project relating to cost of land, construction,
license and approvals, manpower, liaison cost etc. and the
assigning of responsibilities for compliance. The intent of the G
parties was to circumvent the laws, government policies and
regulations to continue developing the project; and
(iii) Initially, Mr Arun Anand as a director of AAA had filed its
claim before the IRP accepting that it is neither a financial
creditor nor an operational creditor. However, as an
H
1102 SUPREME COURT REPORTS [2021] 15 S.C.R.

A afterthought, Mr. Arun Anand filed a baseless, unlawful, and
augmented revised claim as a financial creditor. AAA’s claim
of being a financial creditor is mala fide and dishonest, and
was filed only with the intention of manipulating the voting
percentage of CoC.
B 29. Mr Kaul’s submissions in relation to the eligibility of Spade to
be a financial creditor are:
(i) Spade has concealed the real nature of the collusive
transactions and had filed an unlawful claim as a financial
creditor for an amount of Rs. 52,96,00,000. Spade filed a
revised claim as a financial creditor exaggerating the amount
C it was claiming to Rs. 109,11,00,000 without any basis. The
claim was filed by Spade on the basis of an alleged
Memorandum of Understanding dated 12 August 2011. Clause
2 of the Memorandum of Understanding provides:
“whereas Spade has granted inter-corporate loan to AKME and
D other companies on behalf of AKME to the extent of Rs. 26.55
Crores (ICD) bearing an interest of 24% repayable as per mutual
agreement between parties.”
The Memorandum of Understanding is unenforceable, collusive
and is merely an eye-wash. An amount of only Rs. 26.55 Crores was
E allegedly advanced to Spade and “other companies”. No Board resolution
was passed by Spade approving the grant of ICDs of Rs. 26.55 Crores.
In any case, the alleged claim is grossly time barred; and
(ii) The claim of Spade was rejected by the IRP in a letter dated
25 May 2018 on the following basis:
F (a) The essential element of a financial debt in terms of Section
5(8) of the IBC is absent, which is the consideration for
the time value of money. The exact period of repayment
of the ICDs has not been stipulated in the Memorandum
of Understanding;
(b) The calculation sheet provided by Spade to ascertain the
G
interest rate and payment of interest does not reflect
adjustment of any part of payment against the payment
of interest;
(c) The ledger provided by Spade does not stipulate the
interest claimed on the alleged debt;
H
PHOENIX ARC PRIVATE LIMITED v. SPADE FINANCIAL SERVICES 1103
LIMITED & ORS. [DR. DHANANJAYA Y CHANDRACHUD, J.]

(d) ICDs were allegedly granted to the Corporate Debtor by A
Spade in 2013; however, no valid financial contract was
entered between the Corporate Debtor and Spade to
stipulate the consideration in terms of the time value of
money against each transaction. A financial contract is
essential for considering a debt as financial debt;
B
(e) The calculation sheet reflects that the inflow and outflow
of funds are in the nature of a running account, indicating
that the debit and credit balances lack any commercial
effect of borrowing, which is an essential element in terms
of Section 5(8)(f) of IBC; and
(f) The emails relied on by Spade dated 16/17 January 2013 C
mention that documents in relation to an extension of a
loan of Rs. 2 Crores were to be executed. No such
documents have been produced on record.
G.2 Assessment of preliminary submissions
G.2.1 Res Judicata D
30. In order to appreciate the line of submissions carefully
propounded by Mr K V Viswanathan, it becomes necessary to sift through
the facts. Initially, on 31 May 2018, an order was passed by the NCLT
allowing AAA and Spade to submit their claims as financial creditors
with a direction to the IRP to consider the claims. However, when the E
NCLT allowed AAA and Spade to re-submit its claims as financial
creditors, none of the creditors on the CoC were represented in the
proceedings. After the meeting on 1 June 2018, Phoenix and YES Bank
moved applications under Section 60(5)8 of the IBC for seeking the
exclusion of AAA and Spade from the CoC on the ground that they
were related parties. F
31. In this backdrop, we are unable to subscribe to the submission
that the order of the NCLT dated 31 May 2018 operated as res judicata.
8
“(5) Notwithstanding anything to the contrary contained in any other law for the
time being in force, the National Company Law Tribunal shall have jurisdiction
to entertain or dispose of—
G
(a) any application or proceeding by or against the corporate debtor or corporate
person;
(b) any claim made by or against the corporate debtor or corporate person, including
claims by or against any of its subsidiaries situated in India; and
(c) any question of priorities or any question of law or facts, arising out of or in
relation to the insolvency resolution or liquidation proceedings of the corporate
debtor or corporate person under this Code.” H
1104 SUPREME COURT REPORTS [2021] 15 S.C.R.

A 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. The earlier order was passed
without furnishing them with an opportunity of being heard.
B G.2.2 Issues before NCLAT
32. Mr Viswanathan’s submission that the issue of the eligibility
of Spade and AAA as financial creditors was never raised before the
NCLT is contrary to the material produced on record. The application
filed by Phoenix adverted to its submission that NCLT’s order dated 31
C May 2018 was obtained by Spade and AAA on a concealment of material
facts, circumstances and the real nature of the transactions. In addition,
Mr Anil Nanda, the suspended director of the Corporate Debtor, had
filed an application9 before the NCLT alleging that Spade and AAA
have not financed any amount to the Corporate Debtor. He submitted
that there was no loan facility against the time value of money. In addition,
D he argued that the Agreement to Sell between the Corporate Debtor
and AAA was a part of series of acts of fraud, and is null and void. The
NCLT’s order dated 19 July 2019 was passed after arguments were led
on the real nature of transactions between the parties.
G.2.3 Remand to NCLAT
E
33. The submission that the NCLAT has acted beyond jurisdiction
in the appeal filed by AAA and Spade in enquiring into whether they are
related parties is the next aspect which needs to be considered. NCLT
in its decision on 19 July 2019 had formulated two questions for
consideration. The first was whether the transactions between AAA
F and Spade qualify to be treated as a financial debt under Section 5(8).
The second pertained to the date with reference to which the relationship
between the parties needs to be considered for assessing whether they
are related parties. On the first aspect, the adjudicating authority came
to the conclusion that the transaction between the corporate debtor and
G Spade is not a financial debt under Section 5(8) and Spade is not a
financial creditor under Section 5(7). The basis of this finding is contained
in paragraph 11.2 of the decision, which is extracted below:
“11.2 Perusal of the documents pertaining to the inter corporate
deposit stated to have been given by Spade Financial Services
9
H CA -224/ND/2018
PHOENIX ARC PRIVATE LIMITED v. SPADE FINANCIAL SERVICES 1105
LIMITED & ORS. [DR. DHANANJAYA Y CHANDRACHUD, J.]

Private Limited to the Corporate Debtor from 01.06.2009 to A
January 2013 shows the following points of interest:
Though the loan was given from June 2009 to January 2013,
the MOU regarding the same is dated 12.08.2011 The said
MOU provided for interest at the rate of 24°/o but it is stated
that only 12°/o interest was paid on mutual agreement. B
In the claim filed before the RP only 12% interest has been
claimed
Though securities were provided by way of flats and plots in
the real estate projects of the Corporate Debtor, the charge
of the “Secured loan” was not registered with the Registrar C
of Companies.
No Board Resolutions approving deposit of such inter
corporate deposits and their acceptance by the Corporate
Debtor have been filed before us.
D
Out of the ICD of Rs. 66 crores given by Spade to the CD,
Rs. 43.06 crores are stated to have been credited to the
account of Arun Anand, Director of CD, by consent.
The above facts show that the transaction pertaining to giving of
inter corporate deposits by Spade to CD appears to be collusive,
E
as the MOU for the same has been signed more than two years
after the beginning of the transaction, and the rate of interest
actually stated to be charged is half of the interest mentioned in
the MOU, as also a major portion of the ICD was credited to the
account of Arun Anand, Director of Spade. Thus, it is seen that
the entire amount was not disbursed to the CD as well as there is F
variation in the consideration for the time value of money as per
the MOU and claim filed before the IRP. Accordingly, this
transaction does not qualify as a financial debt as defined under
Section 5(8) of the Code, and Spade Financial Services Limited
does not qualify as a Financial Creditor under Section 5(7) of the
G
Code.”
Similarly, the transactions between corporate debtor and AAA
were discussed in paragraph 11.3 and a finding was arrived at to the
effect that they were collusive in nature, and did not qualify as a financial
debt. Paragraph 11.3 is extracted below:
H
1106 SUPREME COURT REPORTS [2021] 15 S.C.R.

A “11.3 The details of transaction and entered by CD with AAA
Landmark have been discussed in detail in Para 4.3 above. It is
seen that as regards to the same property the parties entered into
several agreements over a period of 3 years, including plot buyers
Agreement, MOU, Development Agreement and finally,
Agreement to Sell dated 25.10.2012. By the Development
B
Agreement dated 01.03.2012, 38.3% of the Development rights
of the Project named “AKME Raaga” were sold to AAA for
32.80 crores and subsequently on 25.10.2012 the Agreement to
Sell was executed to superseding the development agreement with
an enhanced value of Rs. 43.06 crores. The multiplicity of
C Agreements regarding the same property, with no explanation or
rational reasoning regarding variation in values of transaction, shows
that these transactions are also collusive in nature and an attempt
to divert the properties of the CD to AAA for reasons best known
to the parties. It is also noted that the transactions between the
CD and AAA as well as Spade were done during the period when
D
Arun Anand, who along with his family members is the promoter
and director of both Spade and AAA Landmark was associated
in various capacities from 1982 to 2013 with the CD and its
directors and the group of companies to which the CD belongs. It
is during this period only that Mr. Arun Anand promoted and
E subscribed to the memorandum of association of the CD, Spade
and AAA Landmark. Mr. Arun Anand and his family members at
various points of time also had shareholding in the group
companies of the Mr. Anil Nanda group. It is also seen that the
alleged financial transactions of Spade and AAA Landmark with
the CD occurred during the period 2009 to 2013, the time when
F
he was consultant (through Spade) to the CD, and was consultant
and strategic advisor in his individual capacity to the CD and finally
group CEO of the Mr. Anil Nanda group of companies.
Considering the above facts, we are of the opinion that the
transactions between the CD and both Spade and AAA Landmark
G are collusive in nature and do not qualify as Financial Debt for the
purposes of IBC. Accordingly, we hold that Spade and AAA
Landmarks do not qualify to be considered as Financial Creditors.”
34. Having held that the transactions between the corporate debtor
on one hand and AAA and Spade on the other did not qualify as a financial
H debt, the Adjudicating Authority commenced its discussion on the second
PHOENIX ARC PRIVATE LIMITED v. SPADE FINANCIAL SERVICES 1107
LIMITED & ORS. [DR. DHANANJAYA Y CHANDRACHUD, J.]

issue by stating that it “does not require a reply” in view of the finding A
on the first issue. However, it then noted that the first proviso to Section
21(2) has been substituted with effect from 6 June 2018, the effect of
which is to exclude a financial creditor who is a related party of the
corporate debtor from being represented in and from participating or
voting in a meeting of the CoC. After adverting to the definition of the
B
expression ‘related party’ in Section 5(24), the Adjudicating Authority
held:
“There is no doubt in our mind that Arun Anand and his companies,
namely, Spade and AAA Landmark were related parties to the
CD. However, after 2013 (soon after signing the Agreement to
Sell signed on 25.10.2012) Arun Anand resigned from all the C
companies of The Anil Nanda Group and so they are no longer
related to the CD at the time of filing of application of CIRP.”
35. Eventually, the NCLT concluded that the applications filed by
YES Bank and Phoenix would have to be allowed. Its conclusion is
extracted below: D

“13. Before parting with this application, we would like to observe
that the affairs of the CD as well as the Group of Arun Anand
companies are deeply entangled and it is difficult for the Tribunal
in a summary jurisdiction to unravel-the same. Considering that
the CD and Spade and AAA were Registrar of Companies since E
2016, we have no hesitation in allowing the instant applications
filed by Yes Bank Limited and Phoenix ARC Private Limited.”
36. The above analysis of the decision of the NCLT indicates that
its primary finding was that neither AAA nor Spade are financial creditors
within the meaning of Section 5(8). F
37. Sub-sections (1) and (2) of Section 21, insofar as is material
provide as follows:
“21. Committee of Creditors.- (1) The interim resolution
professional shall after collation of all claims received against the
G
corporate debtor and determination of the financial position of the
corporate debtor, constitute a committee of creditors.
(2) The committee of creditors shall comprise all financial creditors
of the corporate debtor: Provided that a related partyto whom a
corporate debtor owes a financial debt shall not have any right of
H
1108 SUPREME COURT REPORTS [2021] 15 S.C.R.

A representation, participation or voting in a meeting of the committee
of creditors.”
38. Sub-section (2) of Section 21 stipulates that the CoC is to
comprise of all financial creditors of the corporate debtor. The first proviso
to Sub-section (2) has been amended by Act 26 of 2018 with effect
B from 6 June 2018. Having held that AAA and Spade are not financial
creditors, NCLT came to the conclusion that they were not entitled to
inclusion in the CoC.
39. On the second issue, the Adjudicating Authority was of the
view that it was not really necessary for it to consider what should be
C the date with reference to which a related party should be determined.
But it is evident that the NCLT did come to the conclusion that Mr. Arun
Anand and his various companies namely AAA and Spade were related
parties to the corporate debtor though after 2013, Mr Arun Anand resigned
from all the companies of the Anil Nanda Group. The Adjudicating
Authority observed that they are no longer related to the corporate debtor
D at the time of the filing of the application for initiation of the CIRP. It
noted the deep entanglement of the affairs of the corporate debtor and
the Arun Anand group of companies, the close business relationship of
the past and the fact that the accounts of the corporate debtor had not
been finalised, audited or filed with the Registrar of Companies since
E 2016. Reading the order of the NCLT as it stands, it is not possible to
accept the submission that the applications filed by YES Bank and Phoenix
were rejected only on the basis that they were not financial creditors
and that there was no determination in regard to their status as related
parties. In light of the above discussion, we do not agree with the
submission that NCLAT exceeded its jurisdiction by considering the
F second issue relating to the determination of the status of AAA and
Spade as related parties. Thus, we hold that there is no reason to remand
the matter to NCLAT for reconsideration. An order of remand cannot
be passed in a routine manner, and it should be passed only if a re-
consideration is necessary. An unwarranted order of remand does not
G serve the cause of justice and merely extends the life of litigation.
Remands in commercial matters should not become a ruse to subserve
litigation luxuries.
40. The dispute fell into a quagmire when the NCLAT proceeded
on the basis that it was an admitted position that AAA and Spade are
financial creditors. The finding of fact in paragraph 11 of the decision of
H
PHOENIX ARC PRIVATE LIMITED v. SPADE FINANCIAL SERVICES 1109
LIMITED & ORS. [DR. DHANANJAYA Y CHANDRACHUD, J.]

the NCLAT that this is the “admitted position” is plainly erroneous A
since there was an express finding of the NCLT to the contrary. The
fact that it necessitated an appeal by AAA and Spade would indicate
that this was not an admitted position. It is also evident from the contents
of the appeal filed by Spade and AAA, and the reply filed by Phoenix
before the NCLAT, that the status of Spade and AAA as financial
B
creditors was in dispute. Having said that, the issue that now falls for
our consideration is whether AAA and Spade can be considered as
financial creditors.
G.3 Analysis
G.3.1 Relevant Provisions C
41. Section 5 (7) of the IBC defines a financial creditor :
“(7) “financial creditor” means any person to whom a financial
debt is owed and includes a person to whom such debt has been
legally assigned or transferred to;”
42. Section 5(8) of the IBC provides a definition of financial debt D
in the following terms:
“(8) “financial debt” means a debt along with interest, if any, which
is disbursed against the consideration for the time value of money
and includes—
(a) money borrowed against the payment of interest; E
(b) any amount raised by acceptance under any acceptance credit
facility or its de-materialised equivalent;
(c) any amount raised pursuant to any note purchase facility or
the issue of bonds, notes, debentures, loan stock or any similar
instrument; F
(d) the amount of any liability in respect of any lease or hire
purchase contract which is deemed as a finance or capital lease
under the Indian Accounting Standards or such other accounting
standards as may be prescribed;
G
(e) receivables sold or discounted other than any receivables sold
on non-recourse basis;
(f) any amount raised under any other transaction, including any
forward sale or purchase agreement, having the commercial effect
of a borrowing;
H
1110 SUPREME COURT REPORTS [2021] 15 S.C.R.

A Explanation.— For the purposes of this sub-clause,—
(i) any amount raised from an allottee under a real estate project
shall be deemed to be an amount having the commercial effect of
a borrowing; and
(ii) the expressions, “allottee” and “real estate project” shall have
B the meanings respectively assigned to them in clauses (d) and
(zn) of section 2 of the Real Estate (Regulation and Development)
Act, 2016 (16 of 2016);]
(g) any derivative transaction entered into in connection with
protection against or benefit from fluctuation in any rate or price
C and for calculating the value of any derivative transaction, only
the market value of such transaction shall be taken into account;
(h) any counter-indemnity obligation in respect of a guarantee,
indemnity, bond, documentary letter of credit or any other instrument
issued by a bank or financial institution;
D
(i) the amount of any liability in respect of any of the guarantee or
indemnity for any of the items referred to in sub-clauses (a) to (h)
of this clause;”
G.3.2 Financial Creditor and Financial Debt
E 43. Under Section 5(7) of the IBC, a person can be categorised
as a financial creditor if a financial debt is owed to it. Section 5(8) of the
IBC stipulates that the essential ingredient of a financial debt is disbursal
against consideration for the time value of money. This Court, speaking
through Justice Rohinton F Nariman, in Swiss Ribbons Pvt. Ltd. v.
Union of India10 has held:
F
“42. A perusal of the definition of “financial creditor” and
“financial debt” makes it clear that a financial debt is a debt
together with interest, if any, which is disbursed against
the consideration for time value of money. It may further
be money that is borrowed or raised in any of the manners
G prescribed in Section 5(8) or otherwise, as Section 5(8) is
an inclusive definition. On the other hand, an “operational debt”
would include a claim in respect of the provision of goods or
services, including employment, or a debt in respect of payment
10
(2019) 4 SCC 17
H
PHOENIX ARC PRIVATE LIMITED v. SPADE FINANCIAL SERVICES 1111
LIMITED & ORS. [DR. DHANANJAYA Y CHANDRACHUD, J.]

of dues arising under any law and payable to the Government or A
any local authority.”
(emphasis supplied)
44. In this context, it would be relevant to discuss the meaning of
the terms “disburse” and “time value of money” used in the principal
clause of Section 5(8) of the IBC. This Court has interpreted the term B
“disbursal” in Pioneer Urban Land and Infrastructure Ltd vs. Union
of India11 in the following terms:
“70. The definition of “financial debt” in Section 5(8) then goes
on to state that a “debt” must be “disbursed” against the
consideration for time value of money. “Disbursement” is defined C
in Black’s Law Dictionary (10th Edn.) to mean:
“1. The act of paying out money, commonly from a fund or in
settlement of a debt or account payable. 2. The money so paid;
an amount of money given for a particular purpose.”
D
71. In the present context, it is clear that the expression “disburse”
would refer to the payment of instalments by the allottee to the
real estate developer for the particular purpose of funding the
real estate project in which the allottee is to be allotted a flat/
apartment. The expression “disbursed” refers to money
which has been paid against consideration for the “time E
value of money”. In short, the “disbursal” must be money
and must be against consideration for the “time value of
money”, meaning thereby, the fact that such money is now
no longer with the lender, but is with the borrower, who
then utilises the money….” F
(emphasis supplied)
45. The report of the Insolvency Law Committee dated 26 March
2018 has discussed the interpretation of the term “time value of money”
and stated:
“The current definition of ‘financial debt’ Under Section 5(8) of G
the Code uses the words “includes”, thus the kinds of financial
debts illustrated are not exhaustive. The phrase “disbursed against
the consideration for the time value of money” has been the subject
of interpretation only in a handful of cases under the Code. The
11
(2019) 8 SCC 416 H
1112 SUPREME COURT REPORTS [2021] 15 S.C.R.

A words “time value” have been interpreted to mean
compensation or the price paid for the length of time for
which the money has been disbursed. This may be in the
form of interest paid on the money, or factoring of a discount
in the payment.”
B (emphasis supplied)
G.3.3 Collusive Transactions
46. The above discussion shows that money advanced as debt
should be in the receipt of the borrower. The borrower is obligated to
return the money or its equivalent along with the consideration for a time
C 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
D transaction with a different or an ulterior motive. In other words, the
real agreement between the parties is something other than advancing a
financial debt. A useful elaboration of “sham transactions” can be found
in the opinion of Diplock LJ in Snook vs. London and West Riding
Investments Ltd. 12:

E “As regards the contention of the plaintiff that the transactions
between himself, Auto Finance and the defendants were a “sham,”
it is, I think, necessary to consider what, if any, legal concept is
involved in the use of this popular and pejorative word. I apprehend
that, if it has any meaning in law, it means acts done or
documents executed by the parties to the “sham” which
F are intended by them to give to third parties or to the court
the appearance of creating between the parties legal rights
and obligations different from the actual legal rights and
obligations (if any) which the parties intend to create.”
(emphasis supplied)
G
Diplock LJ also stated:
“But one thing, I think, is clear in legal principle, morality and the
authorities (see Yorkshire Railway Wagon Co v Maclure and
Stoneleigh Finance Ltd. v Phillips), that for acts or documents to
12
H [1967] 2 QB 786
PHOENIX ARC PRIVATE LIMITED v. SPADE FINANCIAL SERVICES 1113
LIMITED & ORS. [DR. DHANANJAYA Y CHANDRACHUD, J.]

be a “sham,” with whatever legal consequences follow from this, A
all the parties thereto must have a common intention that
the acts or documents are not to create the legal rights and
obligations which they give the appearance of creating. No
unexpressed intentions of a “shammer” affect the rights of
a party whom he deceived…”
B
(emphasis supplied)
47. This Court, in Prem Chand Tandon vs. Krishna Chand
Kapoor,13 had to determine whether a usufructuary mortgage was a
sham transaction entered into by the respondent there (the borrower) to
avoid payment to creditors. This Court examined the real nature of the
transaction to hold that the parties entered the transaction with an ulterior C
motive. Justice A.N. Grover, speaking for this Court, held:
“As regards the consideration for the usufructuary mortgage the
promissory notes were never produced. It is true that there was
some evidence that Smt. Dhanta Devi [lender] had received certain
insurance monies on the death of her husband but the ‘aggregate D
of those amounts did not exceed, Rs. 13,000/-. Even if she was
possessed of some jewellery and other funds it is difficult to believe
that she would have advanced such a substantial amount of Rs.
25,000/- to the respondent [borrower] by means of two promissory
notes on December 10, 1919 and on March 17, 1920. It would
further appear and some stress has been laid on this aspect by E
Jagat Narain J., in his judgment that the financial , position of the
respondent at the time the usufructuary mortgage deed was
executed was fairly good considering the various articles like
diamonds and the car which he had purchased apart from the
shares. The house at Ajmer and the Vile Parle land had been F
mortgaged with possession for Rupees 25,000/- for a period of 60
years. It was difficult to believe that the respondent would have
entered into such a transaction in view of his financial position in
the year 1921. It was equally not likely that a person dealing in
shares who would require ready money would lock up his assets
like the property in dispute in a transaction which was such that G
the mortgage could not be redeemed before the expiry of the
period of sixty years. The mortgage, therefore, was executed
only with an ulterior purpose, it being wholly fictitious.”
(emphasis supplied)
13
(1973) 2 SCC 366 H
1114 SUPREME COURT REPORTS [2021] 15 S.C.R.

A 48. The 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 CIRP. Such avoidable transactions include: (i) preferential
transactions under Section 43 of the IBC; (ii) undervalued transactions
under Section 45(2) of the IBC; (iii) transactions defrauding creditors
B
under Section 49 of the IBC; and (iv) extortionate transactions under
Section 50 of the IBC. The 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.
C G.3.4 Spade and AAA
49. Mr Kaul argued that the transactions entered into between
the Corporate Debtor and Spade and AAA are collusive in nature and
do not constitute a financial debt. Mr Viswanathan has urged that the
eligibility of Spade and AAA as financial creditors has conclusively been
D determined by the NCLT in its order dated 31 May 2018. We have
already concluded that the above order would not operate as res judicata
and it was within the jurisdiction of the NCLT to consider this issue
afresh. NCLT in its order dated 19 July 2019 has undertaken a detailed
analysis of the transactions to arrive at a finding that the transactions
E were collusive. We are inclined to agree with the findings of the NCLT
in its order dated 19 July 2019. NCLAT has also made an observation
that “we are of the considered opinion that Mr Anil Nanda, Mr Arun
Anand had created a web of companies in which both along with
near and dear ones including Ms Renu Anand (Wife of Mr. Arun
Anand) and Mr Sonal Anand (Brother-in-law of Mr. Arun Anand)
F acted in concert with each other”14. It is to be noted that M/s Ernst &
Young were appointed as forensic/transactional auditors by the RP on
19 November 2019. Their report contains significant findings:
“Considering the above transactions, we were unable to
understand the business rational of:
G
Purchase and sale transaction with Spade Financial resulting in a
loss of approx. INR 2.12 Cores to CD
Rent paid to Arun Anand and Aditya Anand
14
Paragraph 18
H
PHOENIX ARC PRIVATE LIMITED v. SPADE FINANCIAL SERVICES 1115
LIMITED & ORS. [DR. DHANANJAYA Y CHANDRACHUD, J.]

ICD balance of Spade Financial being transferred to AAA A
Landmark against which sale agreement was executed
Basis of valuation of the land transaction and sale of property to
AAA Landmark
EY Comments:
B
Reference to Section 66 of the Insolvency and Bankruptcy
Code, 2016
Section 66 of the Insolvency and Bankruptcy Code, 2016
Section 66 (1) if during the corporate insolvency resolution process
or liquidation process, it is found that any business of the corporate C
debtor has been carried on with intent to defraud the creditors of
the corporate debtor or for any fraudulent purposes, the
Adjudicating Authority may on the application of the resolution
professional pass an order that any person who were knowingly
parties to carrying on of the business in such manner shall be D
liable to make such contributions to the assets of the corporate
debtor as it may deem fit.
Considering the above facts and when read in reference
with Section 66 of the Insolvency and Bankruptcy Code,
2016, indicates an intent to defraud the creditors and may
E
be categorized as potentially fraudulent. However, the RP
shall make an independent assessment whether it intends to file
an application for the same with the Adjudicating Authority as
mentioned in the Insolvency and Bankruptcy Code.”
(emphasis supplied)
F
50. As noted by NCLT, the Memorandum of Understanding dated
12 August 2011, on the basis of which Spade had filed its claim in Form
C before the IRP, was signed two years after the commencement of the
purported transaction. The execution of the Memorandum of
Understanding was sought to be explained on the basis that a formal
document was created for specifying the rate of interest on the ICDs G
given by Spade to the Corporate Debtor. However, despite the creation
of a formal document, the rate of interest being charged on the ICDs
was 12% as mentioned in the claim before the IRP, which is half of the
interest rate of 24% stipulated in the Memorandum of Understanding.
During the arguments, Mr Kaul and Mr Sen have also brought to the H
1116 SUPREME COURT REPORTS [2021] 15 S.C.R.

A notice of this Court that the Memorandum of Understanding is
unregistered and unstamped. The IRP in his letter dated 25 May 2018
has noted that as per the ledger provided by Spade, no interest was
claimed on the alleged debt and no adjustment was made regarding the
payment of principal or interest by the Corporate Debtor to Spade. It
has been submitted in the written submissions filed on behalf of Spade
B
and AAA that the auditors of the Corporate Debtor had been putting a
note in its balance sheets stating that the interest of 12% was not being
paid to Spade due to a dispute. This submission in fact further fortifies
the finding of the IRP that no interest has been paid on the alleged loan.
The IRP has also noted in his letter that the Memorandum of
C Understanding does not stipulate the period of repayment. Hence, the
consideration for time value of money is absent, which is an essential
ingredient of a financial debt. The NCLT has also noted that a major
portion of the ICDs was credited in the account of Mr Arun Anand
holding that the entire amount was not “disbursed” to the Corporate
Debtor. NCLAT has also made a similar finding in paragraph 11(i) of its
D
judgement. This finding has been disputed by Mr Vishwanathan who
argued that no amount of the ICDs has been credited to the account of
Mr Arun Anand and such an allegation has not been made by any of the
parties including the RP. However, it is to be noted under Clause 2 of the
Memorandum of Understanding, the amount of Rs. 26.55 Crores has
E been disbursed not only to the Corporate Debtor but also to “other
companies on behalf of AKME”. In any event, the entirety of the
ICDs were not disbursed to Spade. Additionally, no Board resolution
was passed by Spade approving the grant of ICDs and the charge created
on the loan was not registered with the Registrar of Companies. In view
of the above, we are inclined to agree with Mr Kaul that the Memorandum
F
of Understanding was an eye-wash and collusive.
51. NCLT in its order dated 19 July 2019 has noted that AAA and
the Corporate Debtor had entered into multiple agreements regarding
the same property without giving any explanation or rationale regarding
variation in the consideration. This showed that the transactions were
G collusive in nature entered with the purpose of diverting properties of
the Corporate Debtor to AAA. Mr Viswanathan sought to explain the
multiple agreements, and argued that AAA entered into a Development
Agreement dated 1 January 2012 with the Corporate Debtor to obtain
38.3% of development rights. Since the Development Agreement could
H not be implemented because the license for the project could not be split
PHOENIX ARC PRIVATE LIMITED v. SPADE FINANCIAL SERVICES 1117
LIMITED & ORS. [DR. DHANANJAYA Y CHANDRACHUD, J.]

into two parts, an Agreement to Sell and a Side Letter were executed on A
25 October 2012. The Agreement to Sell was entered to purchase FSI/
flats equivalent to 38.3% of the total FSI in relation to specific units
identified and allotted in the agreement. Apparently, the sale consideration
was re-negotiated and enhanced from Rs 32.80 crores under the
Development Agreement to Rs 86.01 crores under the Agreement to
B
Sell. Mr Viswanathan has submitted that there was no partnership clause
in the Agreement to Sell. However, Clause 3 of the Side Letter dated 25
October 2012 shows that the intent of the parties was to continue to co-
develop the land. Clause 3 of the Side Letter provides:
“3. It is agreed that ALPL shall share the cost of the Project in
the same ratio as the share of respective development in the C
Property (i.e. Villas- 50% and other developments (group housing
etc.) – 36.33%). The cost of the Project shall include:
a. Land cost
b. License and approval costs
D
c. Construction cost
d. Direct project management costs (people at the site)
e. Marketing & sales promotion cost
f. Liaison cost
E
g. Maintenance cost for unsold inventory
h. Government levies and charges including EDS & IDC and any
enhancement thereof.”
It appears that the parties converted the Development Agreement
into an Agreement to Sell executed along with a Side Letter to circumvent F
the legal prohibition on splitting a development license in two parts. The
transaction between AAA and the Corporate Debtor was collusive in
nature.
52. Since the commercial arrangements between Spade and AAA,
and the Corporate Debtor were collusive in nature, they would not
G
constitute a ‘financial debt’. Hence, Spade and AAA are not financial
creditors of the Corporate Debtor.
H Whether Spade and AAA are related parties
53. The Appellate Tribunal has affirmed the decision of the NCLT
to exclude Spade and AAA from the CoC on the ground that they are
H
1118 SUPREME COURT REPORTS [2021] 15 S.C.R.

A related parties. As we have seen earlier, there was a specific finding in
the decision of the NCLT on the close business relationship between
AAA and Spade on one hand and the Corporate Debtor on the other, in
terms of the provisions contained in Section 5(24). The decision of the
NCLT spoke of a deep entanglement in the business affairs. The NCLT
came to the specific finding that Spade and AAA “were related parties”
B
of the corporate debtor but, that the relationship had ended by the time
the initiation of the CIRP took place. It is this aspect which now merits
consideration. We shall first analyse whether Spade and AAA are related
parties of the Corporate Debtor.
H.1 Submissions of Counsel
C
54. Assailing the judgment of the NCLAT, Mr Viswanathan submits:
(i) There were no common key managerial personnel or
directors between the Corporate Debtor and Spade and
AAA during the relevant period of the transactions between
D 2010 to 2013;
(ii) The Appellate Tribunal has incorrectly held that Mr Arun
Anand was in a position to influence the decision making of
the Corporate Debtor, without satisfying the test of “control”
established in Arcelor Mittal India (P) Ltd. vs Satish
E Kumar Gupta15;
(iii) Mr Arun Anand was a mere salaried employee without any
ability to influence the decision-making process. He did not
attend any Board Meetings, and did not give any directions
to the directors or individuals in the Corporate Debtor;
F (iv) Mr Arun Anand was Group CEO of Anil Anand Group of
Companies for only 81 days, which was also a titular position
and not a statutory position since there was no approval
from the Board of Directors. Hence, he could not have
influenced any policy making process of the Corporate
Debtor in accordance with Section 5(24)(m)(i);
G
(v) JIPL, and through it the Corporate Debtor, holds only 1.45%
shareholding in Spade, which is below the 2% threshold in
Section 5(24)(d);
15
(2019) 2 SCC 1
H
PHOENIX ARC PRIVATE LIMITED v. SPADE FINANCIAL SERVICES 1119
LIMITED & ORS. [DR. DHANANJAYA Y CHANDRACHUD, J.]

(vi) The Corporate Debtor and AAA are incorrectly assumed A
to be ‘partners’ in accordance with Section 5(24)(a);
(vii) The two transactions mentioned in order to prove a
relationship under Section 5(24)(f) were commercial
transactions where the Corporate Debtor borrowed money
from Spade to pay third parties, which would have been B
paid back with interest; and
(viii) Section 5(24A) has no application, since it applies to the
insolvency resolution and liquidation process for individuals
and partnerships.
55. Supporting the judgment of the NCLAT, Mr Kaul submits: C
(i) Mr Arun Anand incorporated the Corporate Debtor on 15
December 2003, following which it was acquired by Mr
Anil Nanda in 2007. Mr Arun Anand has also held numerous
positions in the Anil Nanda Group of Companies, and has a
long-standing relationship with Mr Anil Nanda; D
(ii) During the relevant transactions with Spade and AAA, Mr
Arun Anand held the position of Consultant or Strategic
Advisor to the Corporate Debtor, and later became the
Group CEO of the Anil Nanda Group of Companies (of
which the Corporate Debtor is also a part);
E
(iii) During this period, Mr Arun Anand’s brother in-law, Mr
Sonal Anand, was a director and COO of the Corporate
Debtor. Further, he was also the Whole Time Director of
JIPL, which is a wholly-owned subsidiary of the Corporate
Debtor, and holds shareholding in Spade;
F
(iv) During this period, Mr Anil Nanda was the promoter/director
of the Corporate Debtor; and
(v) The ongoing litigation between Spade and the Corporate
Debtor was only started after the IBC came into force, to
create a notion of dispute.
G
56. The submissions of Mr Kaul are supported by Mr Sen. He
submits:
(i) Two of the original shareholders of the Corporate Debtor,
along with Mr Arun Anand, now have shareholding and
positions in Spade; and
H
1120 SUPREME COURT REPORTS [2021] 15 S.C.R.

A (ii) There have been fraudulent transactions between Spade
and JIPL, in which JIPL paid a sum to Spade for transfer
of shares, which never occurred. This is a subject of
proceedings under Section 66 of the IBC initiated by the
RP.
B H.2 Statutory provisions
57. The definition of the expression ‘related party’ in Section 5(24)
is exhaustive, since the expression is defined to “mean” what is set out
in clauses (a) to (m). The expression ‘related party’ is defined in Section
5 (24) as follows:
C “(24) “related party”, in relation to a corporate debtor, means—
(a) a director or partner of the corporate debtor or a relative of a
director or partner of the corporate debtor;
(b) a key managerial personnel of the corporate debtor or a relative
D of a key managerial personnel of the corporate debtor;
(c) a limited liability partnership or a partnership firm in which a
director, partner, or manager of the corporate debtor or his relative
is a partner;
(d) a private company in which a director, partner or manager of
E the corporate debtor is a director and holds along with his relatives,
more than two per cent. of its share capital;
(e) a 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;
F (f) anybody corporate whose board of directors, managing director
or manager, in the ordinary course of business, acts on the advice,
directions or instructions of a director, partner or manager of the
corporate debtor;
(g) any limited liability partnership or a partnership firm whose
G partners or employees in the ordinary course of business, acts on
the advice, directions or instructions of a director, partner or
manager of the corporate debtor;
(h) any person on whose advice, directions or instructions, a
director, partner or manager of the corporate debtor is accustomed
H to act;
PHOENIX ARC PRIVATE LIMITED v. SPADE FINANCIAL SERVICES 1121
LIMITED & ORS. [DR. DHANANJAYA Y CHANDRACHUD, J.]

(i) a body corporate which is a holding, subsidiary or an associate A
company of the corporate debtor, or a subsidiary of a holding
company to which the corporate debtor is a subsidiary;
(j) any person who controls more than twenty per cent. of voting
rights in the corporate debtor on account of ownership or a voting
agreement; B
(k) any person in whom the corporate debtor controls more than
twenty per cent. of voting rights on account of ownership or a
voting agreement;
(l) any person who can control the composition of the board of
directors or corresponding governing body of the corporate debtor; C

(m) any person who is associated with the corporate debtor on
account of—
(i) participation in policy making processes of the corporate
debtor; or D
(ii) having more than two directors in common between the
corporate debtor and such person; or (iii) interchange of
managerial personnel between the corporate debtor and
such person; or
(iv) provision of essential technical information to, or from, the E
corporate debtor;”
The expression ‘related party’ is defined in Section 5(24) in relation
to a corporate debtor. Section 5(24A) provides a corresponding definition
in relation to an individual.
58. The definition describes a commutative relationship, meaning F
that X can be a related party of Y, if either X is related to Y, or Y is
related to X. The definition of ‘related party’ under the 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 debtor16. G
59. The term ‘related party’ has also been defined by Parliament
in the Companies Act, 2013 for all corporations. The definition of the
16
Richa Saraf, ‘Concept of Related Party: Interpretation by Letter or Spirit of the
IBC?’, (IndiaCorpLaw, 11 August 2018) available at <https://indiacorplaw.in/2018/08/
concept-related-party-interpretation-letter-spirit-ibc.html>.
H
1122 SUPREME COURT REPORTS [2021] 15 S.C.R.

A expression has also been expanded for listed entities by the Securities
Exchange Board of India by amendment to the Equity Listing Agreement
to include elements mentioned under applicable accounting standards.
However, in the present case, we are assessing its definition only under
the IBC, which is exhaustive. The purpose of defining the term separately
under different statutes is not to avoid inconsistency but because the
B
purpose of each of them is different. Hence, while understanding the
meaning of ‘related party’ in the context of the IBC, it is important to
keep in mind that it was defined to ensure that those entities which are
related to the Corporate Debtor can be identified clearly, since their
presence can often negatively affect the insolvency process.
C H.3 Analysis
60. Crucial to the understanding of whether Spade and AAA were
related parties of the Corporate Debtor during the relevant period is the
relationship between Mr Arun Anand and Mr Anil Nanda. It is
Mr Viswanathan’s argument that these individuals shared no prior
D relationship, which has been opposed by Mr Kaul and Mr Sen. We noted
that Mr Arun Anand has held multiple positions in companies which
form part of Anil Nanda Group of Companies. Further, Mr Anil Nanda
has himself invested in companies owned by Mr Arun Anand, and had
commercial transactions with them. Through Spade and AAA’s own
E admission, Mr Arun Anand was appointed as the Group CEO of the Anil
Nanda Group of Companies (for however short a period) on circular
approval by Mr Anil Nanda himself. Finally, Mr Arun Anand’s brother
in-law, Mr Sonal Anand, has also been consistently associated with
companies in the Anil Nanda Group of Companies, including the
Corporate Debtor and JIPL. This deep entanglement between these
F individuals was noted by the NCLT and the NCLAT.
61. Admittedly, Mr Arun Anand was in control of Spade and AAA
during the relevant period. Further, he held positions in the Corporate
Debtor or the Anil Nanda Group of Companies, which included the
Corporate Debtor. Mr Anil Nanda and Mr Sonal Anand also held positions
G in the Corporate Debtor and JIPL during this period.
62. Based on the above, it is not difficult for us to accept the
conclusion of the NCLAT that Mr Arun Anand would be a related party
of the Corporate Debtor in accordance with Section 5(24)(h) and Sections
5(24)(m)(i). Mr Viswanathan has tried to refute this argument by relying
H on the definition of ‘control’ in Arcelor Mittal India (P) Ltd. vs Satish
PHOENIX ARC PRIVATE LIMITED v. SPADE FINANCIAL SERVICES 1123
LIMITED & ORS. [DR. DHANANJAYA Y CHANDRACHUD, J.]

Kumar Gupta (supra). However, it is important to note that the A
discussion there was in the context of ineligible resolution applicants
under Sub-section (c) of Section 29-A of the IBC, which specifically
prescribes this test. Presently, we have to determine whether the
Corporate Debtor’s board, directors, etc, are accustomed to act on Mr
Arun Anand’s advice/direction/instruction and if he participates in the
B
policy-making process of the Corporate Debtor. While a strict
determination of intent or mens rea may not always be possible by the
NCLT and NCLAT in summary proceedings, it is possible to draw the
inference from the facts at hand. These facts are that there was a deep
entanglement between the entities of Mr Arun Anand and Mr Anil Nanda,
and Mr Arun Anand did hold positions during this period which could C
have been used by him to guide the affairs of the Corporate Debtor.
This finding is further supported by our conclusion that the transactions
between the Corporate Debtor and the entities led by Mr Arun Anand
were collusive in nature.
63. Similarly, we have no hesitation in accepting the NCLAT’s D
conclusion that Spade entered into two transactions on the basis of the
advice/instructions/directions of the board/directors of the Corporate
Debtor under Section 5(24)(f). Mr Viswanathan’s submission that these
were purely commercial transactions between the parties cannot be
accepted, given the extensive history demonstrating the interrelationship
between the individuals associated with these corporations. While the E
transactions may have indeed been commercial, it cannot be doubted
that Spade undertook them due to the pervasive influence of Mr Anil
Nanda. In our analysis above, we have similarly come to the conclusion
that other past transactions between these entities have been collusive.
64. Finally, we have already held that the transactions between F
AAA and the Corporate Debtor were collusive in nature. This supports
the findings of the NCLAT that the Agreement to Sell and Side Letter
dated 25 October 2012 were a mere eye-wash, through which they
sought to develop the AKME RAAGA project together while
circumventing government guidelines. Hence, AAA would be a partner G
of the Corporate Debtor within the meaning of Section 5(24)(a).
65. Therefore, we come to the conclusion that Mr Arun Anand,
Spade and AAA were related parties of the Corporate Debtor during
the relevant period when the transactions on the basis of which Spade
and AAA claim their status as financial creditors took place. H
1124 SUPREME COURT REPORTS [2021] 15 S.C.R.

A I Whether Spade and AAA can be excluded from the CoC
66. Section 21(1) of the IBC requires the IRP to form the CoC
for the CIRP of the Corporate Debtor. The membership of the CoC is
determined in accordance with Section 21(2), which reads thus:
“(2) The committee of creditors shall comprise all financial creditors
B of the corporate debtor:
Provided that a financial creditor or the authorised representative
of the financial creditor referred to in sub-section (6) or sub-section
(6-A) or sub-section (5) of Section 24, if it is a related party of the
corporate debtor, shall not have any right of representation,
C participation or voting in a meeting of the committee of creditors:
Provided further that the first proviso shall not apply to a financial
creditor, regulated by a financial sector regulator, if it is a related
party of the corporate debtor solely on account of conversion or
substitution of debt into equity shares or instruments convertible
D into equity shares or completion of such transactions as may be
prescribed, prior to the insolvency commencement date.”
Hence, the first proviso states that any financial creditor, barring
the exceptions provided in the second proviso, shall not have any right of
representation, participation and voting in the meeting of the CoC, if it is
E a related party of the Corporate Debtor.
67. The controversy in the present case is on the interpretation of
the phrase “is” a related party in the first proviso, since the submission is
that Spade and AAA are no longer related parties of the Corporate
Debtor (even though in terms of the earlier finding they were so during
F the relevant period when the transactions constituting their alleged financial
debt took place).
I.1 Submissions of Counsel
68. Mr Viswanathan sought to urge that the first proviso to Sub-
section (2) of Section 21 denies the right of representation, participation
G or voting in a meeting of the CoC to a financial creditor or an authorised
representative of the financial creditor referred to inter alia in Sub-
section (5) of Section 24, if it “is a related party of the corporate
debtor”. Laying stress on the expression ‘is’ a related party of the
corporate debtor, the submission is that the statute applies in praesenti
H on the date of the admission of an application seeking the initiation of the
PHOENIX ARC PRIVATE LIMITED v. SPADE FINANCIAL SERVICES 1125
LIMITED & ORS. [DR. DHANANJAYA Y CHANDRACHUD, J.]

CIRP. This submission is sought to be supported by urging that if the A
expression is a related party is not construed in its literal sense in
praesenti, it will result in an ambiguity without a yardstick on how far
back in point of time the relationship should be assessed. The use of that
expression in the first proviso to Sub-section (2) of Section 24 has been
contrasted with other provisions of the IBC. For instance, it has been
B
submitted that in Section 29A, which elucidates when a person is not
eligible to be a resolution applicant, there is a reference to both “is” and
“has been”. Clause (a) refers to a situation where a person “is an
undischarged insolvent”; Clause (b) refers a person who “is a wilful
defaulter”; Clause (d) adverts to a situation where a person “has been
convicted”; and Clause (g) refers to a person who “has been a promoter”. C
Hence, it is been submitted that clause 29A uses the expression “is” as
distinct from “has been” in the application of various sub-clauses.
Reference has been made to Section 43(4) which deals with preferential
transactions and incorporates a look back period of two years. Reference
has also been made in the course of the submission to Section 5(24)(m)
D
which uses the expression “is associated” with the corporate debtor.
Based on the above submissions, it has been urged that where the statute
intends to consider situations as they existed in the past, it has utilised
expression “has been”. Consequently, it has been urged that when in the
first proviso to Section 21(2), the expression “is a related party” is used,
this must clearly be a reference to the present and not to an uncertain E
past. In essence, it has been urged that the existence of a live link of
being a related party in the present is a requirement of the statutory
provision.
69. While opposing the submissions which have been urged by
Mr Viswanathan, Mr Kaul, submitted that the provisions of Section 21(2) F
must receive a purposive interpretation. Mr Kaul has urged that if this
were not done the provisions of the IBC will be defeated by adopting
commercial artifices and contrivances. He urged that the interpretation
which the court adopts must facilitate and not defeat the fulfilment of
the objects of the legislation. We are inclined to agree with this submission
for the reasons which we proceed to elaborate. G

I.2 Related Parties and CoC
Section 21(1) requires the IRP to constitute a CoC, after collating
of the claims which are received against and determining the financial
position of the corporate debtor. The CoC has to comprise of all financial H
1126 SUPREME COURT REPORTS [2021] 15 S.C.R.

A creditors of the corporate debtor. The expression ‘financial creditor’ is
defined in Section 5(7) to mean any person to whom a financial debt is
owed and to include a person to whom such a debt has been legally
assigned or transferred. The expression ‘financial debt’ is defined in
Section 5(8). Under Section 28, the Resolution Professional is required
to take the prior approval of the CoC specifically on certain aspects.
B
Section 28(1) provides as follows:
“28. (1) Notwithstanding anything contained in any other law for
the time being in force, the resolution professional, during the
corporate insolvency resolution process, shall not take any of the
following actions without the prior approval of the committee of
C creditors namely:—
(a) raise any interim finance in excess of the amount as may be
decided by the committee of creditors in their meeting;
(b) create any security interest over the assets of the corporate
debtor;
D
(c) change the capital structure of the corporate debtor, including
by way of issuance of additional securities, creating a new class
of securities or buying back or redemption of issued securities in
case the corporate debtor is a company;
(d) record any change in the ownership interest of the corporate
E
debtor;
(e) give instructions to financial institutions maintaining accounts
of the corporate debtor for a debit transaction from any such
accounts in excess of the amount as may be decided by the
committee of creditors in their meeting;
F
(f) undertake any related party transaction;
(g) amend any constitutional documents of the corporate debtor;
(h) delegate its authority to any other person;
(i) dispose of or permit the disposal of shares of any shareholder
G of the corporate debtor or their nominees to third parties;
(j) make any change in the management of the corporate debtor
or its subsidiary;
(k) transfer rights or financial debts or operational debts under
material contracts otherwise than in the ordinary course of business;
H
PHOENIX ARC PRIVATE LIMITED v. SPADE FINANCIAL SERVICES 1127
LIMITED & ORS. [DR. DHANANJAYA Y CHANDRACHUD, J.]

(l) make changes in the appointment or terms of contract of such A
personnel as specified by the committee of creditors; or
(m) make changes in the appointment or terms of contract of
statutory auditors or internal auditors of the corporate debtor.”
70. In an instructive article published in the Yale Law Journal,
titled ‘Bankruptcy, Non-Bankruptcy Entitlements, and the Creditors’ B
Bargain’, Thomas H. Jackson, argues that creditors prefer a collective
process as opposed to a race to grab as many assets, which often leads
ultimately to the demise of the corporate debtor17. The reason why a
collective process is considered superior is because individual creditors,
left to their own whims, are motivated to act solely in their own interests, C
even when their interests may directly conflict with the creditors’
collective interests as a group. This self-interest creates a collective
action problem, such that creditors eventually enter a grab race, operating
under the belief that they would have recourse to fewer or no assets, if
they delay their actions in the hope that creditors will be able to coordinate
and agree to act collectively18. Bankruptcy law seeks to resolve this by D
preventing individual creditor action. The creditor’s bargain theory
therefore, operates to maximise group welfare through collectivisation19.
71. In India, the IBC adopts a CIRP operationalised through the
CoC once the CIRP commences20. In addition to the creditor’s bargain
theory, the design of the IBC is also influenced by the value-based theory E
postulated by Korobkin21, in an influential piece of academic writing in
the Columbia Law review, whereunder insolvency law considers the
distributional impact of winding up on those who may not have formal
legal rights to the assets of the business. The aim of bankruptcy law
under this theory is to take into account the multidimensional but conflicting
interests of various claimants, and provide for a solution whereunder F
each claimant derives optimal value22.
17
Thomas H. Jackson, ‘Bankruptcy, Non-Bankruptcy Entitlements, and the Creditors’
Bargain’, 91 Yale Law Journal 857, (1982) at 859-71.
18
Supra at note 18, pgs 1855-1856.
19
Medha Shekar and Anuradha Guru, Theoretical Framework of Insolvency Law,
available at <https://www.ibbi.gov.in/uploads/resources/9ce9ccf9f114750879b6
G
8c8a33235ca6.pdf>, at page 52.
20
Douglas G. Baird, ‘A World Without Bankruptcy’, 50 Law & Contemporary
Problems, Spring 1987, at 184.
21
D.R. Korobkin, Rehabilitating values: A jurisprudence of bankruptcy, 91 Columbia
Law Review (1991), at p. 717.
22
Supra at note 20. H
1128 SUPREME COURT REPORTS [2021] 15 S.C.R.

A 72. The CoC is comprised of financial creditors, under loan and
debt contracts, who have the right to vote on decisions and operational
creditors such as employees, rental obligations, utilities payments and
trade credit, who can participate in the CoC, but do not have the right to
vote. The aim of the CoC is to enable coordination between various
creditors so as to ensure that the interests of all stakeholders are balanced,
B
and the value of the assets of the entity in financial distress is maximised.
73. The report of the Bankruptcy Law Reforms Committee
(Volume I: Rationale and Design) of November 2015, has underscored
the need to meet the liabilities of all creditors, who are not part of the
CIRP, and that of treating the rights of all creditors fairly, through the
C collective insolvency resolution process, operationalised by the CoC23.
The report recognised this in the following terms:
“[The] three core features that most well developed bankruptcy
and insolvency resolution regimes share: a linear process that both
creditors and debtors follow when insolvency is triggered; a
D collective mechanism for resolving insolvency within a framework
of equity and fairness to all stakeholders to preserve economic
value in the process; a time bound process either ends in keeping
the firm as a going enterprise, or liquidates and distributes the
assets to the various stakeholders. These features are common
E across widespread differences in structure and content, present
either through statutory provisions or their implementation in
practice
….
These features ensure certainty in the process, starting from what
F constitutes insolvency, and the processes to be followed to resolve
the insolvency, or the process to resolve bankruptcy once it has
been determined. Done correctly, such a framework can
incentivise all stakeholders to behave rationally in negotiations
towards determination of viability, or in bankruptcy resolution. In
turn, this will lead to shorter times to recovery and better recovery
G under insolvency, and a greater certainty about creditors rights in
developing a corporate debt market.”
74. The long title of the IBC outlines the importance of a collective
process aimed at value maximisation. The IBC has been enacted as:
23
Bankruptcy Law Reforms Committee, Volume I: Rationale and Design, of November
H 2015, page 29.
PHOENIX ARC PRIVATE LIMITED v. SPADE FINANCIAL SERVICES 1129
LIMITED & ORS. [DR. DHANANJAYA Y CHANDRACHUD, J.]

“An Act to consolidate and amend the laws relating to A
reorganisation and insolvency resolution of corporate persons,
partnership firms and individuals in a time bound manner for
maximization of value of assets of such persons, to promote
entrepreneurship, availability of credit and balance the interests
of all the stakeholders including alteration in the order of priority
B
of payment of Government dues and to establish an Insolvency
and Bankruptcy Board of India, and for matters connected
therewith or incidental thereto.”
75. These objects underscore the composition of the CoC, guided
by Section 21 of the IBC. The objects and purposes of the Code are
best served when the CIRP is driven by external creditors, so as ensure C
that the CoC is not sabotaged by related parties of the corporate debtor24.
This is the intent behind the first proviso to Section 21(2) which disqualifies
a financial creditor or the authorised representative of the financial creditor
under sub-section (6) or sub-section (6A) or sub-section (5) of section
24, if it is a related party of the corporate debtor, from having any right D
of representation, participation or voting in a meeting of the committee
of creditors.
76. Since the IBC attempts to balance the interests of all
stakeholders, such that some stakeholders are not able to benefit at the
expense of others, related party financial creditors are disqualified from E
being represented, participating or voting in the CoC, so as to prevent
them from controlling the CoC to unfairly benefit the corporate debtor25.
77. It is pertinent to note that disqualification of related parties
from being members of the CoC, has also been recommended in the
UNCITRAL Legislative Guide on Insolvency law26: F
“The insolvency law should specify the creditors that are eligible
to be appointed to a committee. Creditors who may not be
appointed to a creditor committee would include related persons
24
Report of the Insolvency Law Committee, March 2018, p 23, para 1.25.
25
Vidhi Centre for Legal Policy, Understanding the Insolvency and Bankruptcy Code, G
2016: Analysing Developments in Jurisprudence, available at <https://vidhilegalpolicy.in/
research/understanding-the-insolvency-and-bankruptcy-code-2016-analysing-
developments-in-jurisprudence/>, at page 34.
26
UNCITRAL, Legislative Guide on Insolvency Law, 2005, available at <https://
uncitral.un.org/sites/uncitral.un.org/files/media-documents/uncitral/en/05-
80722_ebook.pdf>, at page 204.
H
1130 SUPREME COURT REPORTS [2021] 15 S.C.R.

A and others who for any reason might not be impartial. The
insolvency law should specify whether or not a creditor’s claim
must be admitted before the creditor is entitled to be appointed to
a committee.”
In interpreting the legislation, which represents a Parliamentary
B effort to bring about structural changes in the resolution of corporate
insolvencies, the effort of the court must be to aid the fulfilment of the
objects of the IBC.
I.3 Amendment to First Proviso of Section 21(2)
78. Originally, the first proviso to Section 21(2) read as follows:
C
“Provided that a related party to whom a corporate debtor owes
a financial debt shall not have any right of representation,
participation or voting in a meeting of the committee of creditors.”
79. The language was subsequently amended by the Amendment
D Act, 2018 and at present the first proviso reads as follows:
“Provided that a financial creditor or the authorised representative
of the financial creditor referred to in sub-section (6) or sub-section
(6A) or sub-section (5) of section 24, if it is a related party of the
corporate debtor, shall not have any right of representation,
participation or voting in a meeting of the committee of creditors.”
E
80. The reason for the amendment appears to be the need to
extend the disqualification in the first proviso of Section 21(2) to authorised
representatives of financial creditors mentioned in Sections 21(6), 21(6A)
and Section 24(5) as well. This was recommended by the Insolvency
Law Committee, in its Report of March 2018, where it was observed:
F
“10. 6 For certain securities, a trustee or an agent may already be
appointed as per the terms of the security instrument. For example,
a debenture trustee would be appointed if debentures exceeding
500 have been issued or if secured debentures are issued. Such
creditors may be represented through such pre-appointed trustees
G or agents. For other classes of creditors which exceed a certain
threshold in number, like home buyers or security holders for whom
no trustee or agent has already been appointed under a debt
instrument or otherwise, an insolvency professional (other than
the IRP) shall be appointed by the NCLT on the request of the
H IRP. It is to be noted that as the agent or trustee or
PHOENIX ARC PRIVATE LIMITED v. SPADE FINANCIAL SERVICES 1131
LIMITED & ORS. [DR. DHANANJAYA Y CHANDRACHUD, J.]

insolvency professional, i.e., the authorised representative A
for the creditors discussed above and executors,
guarantors, etc. as discussed in paragraph 9 of this Report,
shall be a part of the CoC, they cannot be related parties to
the corporate debtor in line with the spirit of proviso to
section 21(2).
B
10.7 Section 71(6) of the CA 2013 obliges the debenture trustee
to take steps to protect the interests of the debenture holders and
redress their grievances. The provisions regarding meetings of
the debenture trustee and debenture holders is as per the trust
deed. The Companies (Acceptance of Deposit) Rules, 2014
(“Deposit Rules”) provide that the deposit trustee may call a C
meeting of the deposit holders as and when required and provides
specific power to call a meeting on the happening of any event of
default. Though broad powers are already given to trustees, the
respective rules for debentures and deposits under CA 2013 may
need to be modified corresponding to the amendments in the Code D
and CIRP Rules / CIRP Regulations to provide clarity on
empowering debenture trustees to file for initiation of CIRP on
behalf of the creditors and vote on their behalf.
10.8 In light of the deliberation above, the Committee felt that a
mechanism requires to be provided in the Code to mandate E
representation in meetings of security holders, deposit holders,
and all other classes of financial creditors which exceed a certain
number, through an authorised representative. This can be done
by adding a new provision to section 21 of the Code. Such a
representative may either be a trustee or an agent appointed under
the terms of the debt agreement of such creditors, otherwise an F
insolvency professional may be appointed by the NCLT for each
such class of financial creditors. Additionally, the representative
shall act and attend the meetings on behalf of the respective class
of financial creditors and shall vote on behalf of each of the
financial creditor to the extent of the voting share of each such G
creditor, and as per their instructions. To ensure adequate
representation by the authorised representative of the financial
creditors, a specific provision laying down the rights and duties of
such authorised representatives may be inserted. Further, the
requisite threshold for the number of creditors and manner of
H
1132 SUPREME COURT REPORTS [2021] 15 S.C.R.

A voting may be specified by IBBI through regulations to enable
efficient voting by the representative. Also, regulation 25 may
also be amended to enable voting through electronic means such
as e-mail, to address any technical issues which may arise due to
a large number of creditors voting at the same time.”
B (emphasis supplied)
81. Consequently, the first proviso to Section 21(2) was amended,
to extend the disqualification to the specified authorised representatives,
in case that these representatives happened to be related parties of the
corporate debtor. The introduction of the phrase “is” along with related
C party was not a guiding factor behind the Parliamentary amendment.
I.4 Related Parties - Interpretation In Praesenti
82. An issue of interpretation in relation to the first proviso of
Section 21(2) is whether the disqualification under the proviso would
attach to a financial creditor only in praesenti, or if the disqualification
D also extends to those financial creditors who were related to the corporate
debtor at the time of acquiring the debt.
83. In Arcelor Mittal India Private Limited vs. Satish Kumar
Gupta (supra), the issue was whether ineligibility of the resolution
applicant under Section 29-A(c) of the Code attached to an applicant at
E the date of commencement of the CIRP or at the time when the resolution
plan is submitted by the resolution applicant. Speaking for this Court,
Justice Rohinton F Nariman interpreted the pre-2018 amendment,
framing of Section 29-A(c), in the following terms:
“46. According to us, it is clear that the opening words of Section
F 29-A furnish a clue as to the time at which clause (c) is to operate.
The opening words of Section 29-A state: “a person shall not be
eligible to submit a resolution plan…”. It is clear therefore that
the stage of ineligibility attaches when the resolution plan is
submitted by a resolution applicant. The contrary view expressed
by Shri Rohatgi is obviously incorrect, as the date of
G
commencement of the corporate insolvency resolution process is
only relevant for the purpose of calculating whether one year has
lapsed from the date of classification of a person as a non-
performing asset. Further, the expression used is “has”, which as
Dr Singhvi has correctly argued, is in praesenti. This is to be
H
PHOENIX ARC PRIVATE LIMITED v. SPADE FINANCIAL SERVICES 1133
LIMITED & ORS. [DR. DHANANJAYA Y CHANDRACHUD, J.]

contrasted with the expression “has been”, which is used in clauses A
(d) and (g), which refers to an anterior point of time. Consequently,
the amendment of 2018 introducing the words “at the time of
submission of the resolution plan” is clarificatory, as this was
always the correct interpretation as to the point of time at which
the disqualification in clause (c) of Section 29-A will attach.”
B
84. Thus, facially, it would appear that the use of the simple present
tense in the first proviso to Section 21(2) indicates that the disqualification
applies in praesenti. Furthermore, this interpretation would also be
supported by a reading of the first proviso to Section 21(2), in light of the
definition of ‘related party’ under Section 5(24), which uses phrases
such as ‘is accustomed to act’ or ‘is associated’ to define a related party C
in the present tense.
85. However, it is relevant to examine whether the object and
purpose for which the proviso was enacted, are fulfilled by the literal
interpretation of the first proviso. Justice G.P. Singh in his authoritative
commentary on the interpretation of statutes, Principles of Statutory D
Interpretation27, has stated that:
“The intention of the Legislature thus assimilates two aspects: In
one aspect it carries the concept of ‘meaning’, i.e., what the words
mean and in another aspect, it conveys the concept of ‘purpose
and object’ or the ‘reason and spirit’ pervading through the statute. E
The process of construction, therefore, combines both literal and
purposive approaches. In other words the legislative intention, i.e.,
the true or legal meaning of an enactment is derived by considering
the meaning of the words used in the enactment in the light of any
discernible purpose or object which comprehends the mischief F
and its remedy to which the enactment is directed. This formulation
later received the approval of the Supreme Court and was called
the “cardinal principle of construction”.”
He notes that certain enactments require a liberal construction to
give effect to its objects and purpose: G
“A bare mechanical interpretation of the words and application of
a legislative intent devoid of concept of purpose will reduce most
of the remedial and beneficent legislation to futility. As stated by
27
G.P. Singh, Principles of Statutory Interpretation (1st edn., Lexis Nexis 2015)
H
1134 SUPREME COURT REPORTS [2021] 15 S.C.R.

A Iyer, J. “to be literal in meaning is to see the skin and miss the
soul. The judicial key to construction is the composite perception
of the deha and the dehi of the provision.” Even in construing
enactments such as those prescribing a period of limitation for
initiation of proceedings where the purpose is only to intimate the
people that after lapse of a certain time from a certain event a
B
proceeding will not be entertained and where a strict grammatical
construction is normally the only safe guide, a literal and mechanical
construction may have to be disregarded if it conflicts with some
essential requirement of fair play and natural justice which the
Legislature never intended to throw overboard. Similarly, in a
C taxing statute provisions enacted to prevent tax evasion are given
a liberal construction to effectuate the purpose of suppressing tax
evasion although provisions imposing a charge are construed
strictly there being no a priori liability to pay a tax and the purpose
of a charging section being only to levy a charge on persons and
activities brought within its clear terms. For the same reason, in a
D
legislation relating to defence services “the considerations of the
security of the state and enforcement of high degree of discipline
additionally intervene and have to be assigned weightage while
dealing with any expression needing to be defined or any provision
needing to be interpreted.”
E Similar words used in different parts of the enactment can have
different meanings. As Justice G P Singh notes:
“The rule is of general application as even plainest terms may be
controlled by the context, and “it is conceivable,” as Lord Watson
said, “that the Legislature whilst enacting one clause in plain terms,
F might introduce into the same statute other enactments which to
some extent qualify or neutralise its effect”. The same word
may mean one thing in one context and another in a different
context. For this reason the same word used in different
sections of a statute or even when used at different places
G in the same clause or section of a statute may bear different
meanings. The conclusion that the language used by the
Legislature is plain or ambiguous can only be truly arrived at by
studying the statute as a whole. How far and to what extent each
component part of the statute influences the meaning of the other
part would be different in each given case. But the effect of the
H
PHOENIX ARC PRIVATE LIMITED v. SPADE FINANCIAL SERVICES 1135
LIMITED & ORS. [DR. DHANANJAYA Y CHANDRACHUD, J.]

application of the rule to a particular case, should not be confounded A
with the legitimacy of applying it. “
(emphasis added)
86. In this context, it would be useful to refer to an earlier decision
of this Court in Abhay Singh Chautala vs C.B.I.28, where the court did
not interpret the word “is” in praesenti because that would lead to an B
absurd result, defeating the purpose of the concerned provision. In that
case this Court had to interpret Section 19(1) of the Prevention of
Corruption Act, 1947, which provided:
“19. Previous sanction necessary for prosecution.
C
(1) No court shall take cognizance of an offence punishable under
Sections 7, 10, 11, 13 and 15 alleged to have been committed by a
public servant, except with the previous sanction, -
(a) In the case of a person who is employed in connection with
the affairs of the Union and is not removable from his office save D
by or with the sanction of the Central Government, of that
Government;
(b) In the case of a person who is employed in connection with
the affairs of a State and is not removable from his office save by
or with the sanction of the State Government, of that Government;
E
(c) In the case of any other person, of the authority competent to
remove him from his office.”
(emphasis supplied)
87. It was argued before this Court that a literal interpretation
should be given to Section 19(1). Since the word “is” has been used in F
sub-sections (a), (b) and (c), it was urged that this would exclude a
public servant who had abused office at an earlier point in time and has
now ceased to occupy that office. This Court speaking through Justice
Sirpurkar rejected the argument and held:
“44…we reject the argument based on the word “is” in Sub- G
sections (a), (b) and (c). It is true that the Section operates in
praesenti; however, the Section contemplates a person who
continues to be a public servant on the date of taking cognizance.
However, as per the interpretation, it excludes a person who has
28
(2011) 7 SCC 141 H
1136 SUPREME COURT REPORTS [2021] 15 S.C.R.

A abused some other office than the one which he is holding on the
date of taking cognizance, by necessary implication. Once that is
clear, the necessity of the literal interpretation would not be there
in the present case. Therefore, while we agree with the principles
laid down in Robert Wigram Crawford v. Richard Spooner 4 MIA
179, Re Bedia v. Genreal Accident, Fir and Life Assurance
B
Corporation Ltd. 1948 (2) All ER 995 and Bourne (Inspector of
Taxes) v. Norwich Crematorium Ltd.1967 (2) All ER 576, we
specifically hold that giving the literal interpretation to the Section
would lead to absurdity and some unwanted results, as had already
been pointed out in Antulay’s case (cited supra) (see the emphasis
C supplied to para 24 of Antulay’s judgment).”
88. This Court relied on the judgement in R S Nayak v. A R
Antulay to fortify its interpretation of Section 19(1) of the Prevention of
Corruption Act, 1947:
“24 .... An illustration was posed to the learned Counsel that a
D Minister who is indisputably a public servant greased his palms by
abusing his office as Minister, and then ceased to hold the office
before the court was called upon to take cognizance of the offence
against him and therefore, sanction as contemplated by Section 6
would not be necessary; but if after committing the offence and
E before the date of taking of cognizance of the offence, he was
elected as a Municipal President in which capacity he was a public
servant under the relevant Municipal law, and was holding that
office on the date on which court proceeded to take cognizance
of the offence committed by him as a Minister, would a sanction
be necessary and that too of that authority competent to remove
F him from the office of the Municipal President. The answer was-
in affirmative. But the very illustration would show that such
cannot be the law. Such an interpretation of Section 6 would
render it as a shield to an unscrupulous public servant.
Someone interested in protecting may shift him from one
G office of public servant to another and thereby defeat the
process of law. One can legitimately envisage a situation wherein
a person may hold a dozen different offices, each one clothing
him with the status of a public servant under Section 21 IPC and
even if he has abused only one office for which either there is a
valid sanction to prosecute him or he has ceased to hold that office
H
PHOENIX ARC PRIVATE LIMITED v. SPADE FINANCIAL SERVICES 1137
LIMITED & ORS. [DR. DHANANJAYA Y CHANDRACHUD, J.]

by the time court was called upon to take cognizance, yet on this A
assumption, sanction of 11 different competent authorities each
of which was entitled to remove him from 11 different public offices
would be necessary before the court can take cognizance of the
offence committed by such public servant/while abusing one office
which he may have ceased to hold. Such an interpretation in
B
contrary to all canons of construction and leads to an absurd
and product which of necessity must be avoided. Legislation
must at all costs be interpreted in such a way that it would not
operate as a rougue’s charter.”
(emphasis supplied)
C
89. This court has approved of a purposive interpretation of Section
29-A of the IBC in Arcelor Mittal India Private Limited v. Satish
Kumar Gupta (supra), where it was observed that:
“29…In Ms. Eera Through Dr. Manjula Krippendorf v. State
(Govt. of NCT of Delhi) and Anr., (2017) 15 SCC 133, this Court, D
after referring to the golden Rule of literal construction, and its
older counterpart the “object rule” in Heydon’s case, referred to
the theory of creative interpretation as follows:
122. Instances of creative interpretation are when the Court looks
at both the literal language as well as the purpose or object of the E
statute in order to better determine what the words used by the
draftsman of legislation mean. In D.R. Venkatachalam v. Transport
Commr. [D.R. Venkatachalam v. Transport Commr., (1977) 2 SCC
273, an early instance of this is found in the concurring judgment
of Beg, J. The learned Judge put it rather well when he said:
(SCC p. 287, para 28): F
“28. It is, however, becoming increasingly fashionable to start with
some theory of what is basic to a provision or a chapter or in a
statute or even to our Constitution in order to interpret and
determine the meaning of a particular provision or Rule made to
subserve an assumed “basic” requirement. I think that this novel G
method of construction puts, if I may say so, the cart before the
horse. It is apt to seriously mislead us unless the tendency to use
such a mode of construction is checked or corrected by this Court.
What is basic for a Section or a chapter in a statute is provided:
firstly, by the words used in the statute itself; secondly, by the
H
1138 SUPREME COURT REPORTS [2021] 15 S.C.R.

A context in which a provision occurs, or, in other words, by reading
the statute as a whole; thirdly, by the Preamble which could supply
the “key” to the meaning of the statute in cases of uncertainty or
doubt; and, fourthly, where some further aid to construction may
still be needed to resolve an uncertainty, by the legislative history
which discloses the wider context or perspective in which a
B
provision was made to meet a particular need or to satisfy a
particular purpose. The last mentioned method consists of an
application of the mischief Rule laid down in Heydon case
[Heydon case, (1584) 3 Co Rep 7a: 76 ER 637] long ago.”
….
C
127. It is thus clear on a reading of English, US, Australian
and our own Supreme Court judgments that the “Lakshman
Rekha” has in fact been extended to move away from the
strictly literal Rule of interpretation back to the Rule of
the old English case of Heydon [Heydon case, (1584) 3 Co
D Rep 7a: 76 ER 637], where the Court must have recourse
to the purpose, object, text and context of a particular
provision before arriving at a judicial result. In fact, the wheel
has turned full circle. It started out by the Rule as stated in 1584
in Heydon case [Heydon case, (1584) 3 Co Rep 7a : 76 ER 637],
E which was then waylaid by the literal interpretation Rule laid down
by the Privy Council and the House of Lords in the mid-1800s,
and has come back to restate the Rule somewhat in terms of
what was most felicitously put over 400 years ago in Heydon
case [Heydon case, (1584) 3 Co Rep 7a : 76 ER 637].

F 30. A purposive interpretation of Section 29A, depending both on
the text and the context in which the provision was enacted, must,
therefore, inform our interpretation of the same.”
(emphasis supplied)
90. Hence, we would need to consider the meaning of the first
G proviso in the light of the context, object and purpose for which it was
enacted. The purpose of excluding a related party of a corporate debtor
from the CoC is to obviate conflicts of interest which are likely to arise
in the event that a related party is allowed to become a part of the CoC.
The logic underlying the exclusion has been summarised as follows 29:
29
Insolvency Law Committee Report, 2020, pp 47-48, para 11.9.
H
PHOENIX ARC PRIVATE LIMITED v. SPADE FINANCIAL SERVICES 1139
LIMITED & ORS. [DR. DHANANJAYA Y CHANDRACHUD, J.]

“The Committee was of the view that the disability under the first A
proviso to Section 21(2) is aimed at removing any conflict of interest
within the CoC, to prevent erstwhile promoters and other related
parties of the corporate debtor from gaining control of the
corporate debtor during the CIRP by virtue of any loan that may
have been provided by them.”
B
Accepting the submission of Mr Viswanathan would allow the
statutory provision to be defeated by a related party of a corporate debtor
creating commercial contrivances which have the effect of denuding its
status as a related party, by the time that the CIRP is initiated. The true
test for determining whether the exclusion in the first proviso to Section
21(2) applies must be formulated in a manner which would advance the C
object and purpose of the statute and not lead to its provisions being
defeated by disingenuous strategies.
91. Therefore, it could be stated that where a financial creditor
seeks a position on the CoC on the basis of a debt which was created
when it was a related party of the corporate debtor, the exclusion which D
is created by the first proviso to Section 21(2) must apply. For, it is on the
strength of the financial debt as defined in Section 5(8) that an entity
claiming as a financial creditor under Section 5(7) seeks a position on
the CoC under Section 21(2). If the definition of the expression ‘related
party’ under section 5(24) applies at the time when the debt was created, E
the exclusion in the first proviso to Section 21(2) would stand attracted.
92. However, if such an interpretation is given to the first proviso
of Section 21(2), all financial creditors would stand excluded if they
were a ‘related party’ of the corporate debtor at the time when the
financial debt was created. This may arguably lead to absurd conclusions F
for entities which have legitimately taken over the debt of related parties,
or where the related party entity had stopped being a ‘related party’ long
ago.
93. In this regard, it is relevant to note the observations in the
Insolvency Law Committee Report of 2020 clarifying the eligibility of G
third-party assignees of the debt of a related party creditor, to be members
of the CoC. It was observed:
“11.09 … As a third-party assignee, who by itself is not a related
party, would not have any such conflict of interest, it should not be
disabled from participating in the CoC. Further, the aforesaid
H
1140 SUPREME COURT REPORTS [2021] 15 S.C.R.

A disability is not related to the debt itself but is based on the
relationship existing between a related party creditor and
the corporate debtor. Therefore, as the disability imposed under
the first proviso to Section 21(2) pertains to the related party
financial creditor and not to the debt it is owed, the Committee
agreed that it is clear that when a related party financial creditor
B
assigns her debt to a third party in good faith, such third party
should not be disqualified from participating, voting or being
represented in a meeting of the CoC.
11.10. However, the Committee discussed that in certain
cases, a related party creditor may assign its debts with
C the intention of circumventing the disability imposed under
the first proviso to Section 21(2) by indirectly participating
in the CoC through the assignee. As a related party is
expressly prohibited from participating in the CoC, it cannot
do so indirectly by assigning its debt to a third-party assignee
D for the purposes of circumventing this restriction.
Therefore, in order to prevent any misuse, the Committee
recommended that prior to including an assignee of a
related party financial creditor within the CoC, the
resolution professional should verify that the assignee is
not a related party of the corporate debtor. In cases where
E it may be proved that a related party financial creditor had
assigned or transferred its debts to a third party in bad
faith or with a fraudulent intent to vitiate the proceedings
under the Code, the assignee should be treated akin to a
related party financial creditor under the first proviso to
F Section 21(2).”
(emphasis supplied)
94. Thus, it has been clarified that the exclusion under the first
proviso to Section 21(2) is related not to the debt itself but to the
relationship existing between a related party financial creditor and the
G corporate debtor. As such, the financial creditor who in praesenti is not
a related party, would not be debarred from being a member of the CoC.
However, in case where the related party financial creditor divests itself
of its shareholding or ceases to become a related party in a business
capacity with the sole intention of participating the CoC and sabotage
H the CIRP, by diluting the vote share of other creditors or otherwise, it
PHOENIX ARC PRIVATE LIMITED v. SPADE FINANCIAL SERVICES 1141
LIMITED & ORS. [DR. DHANANJAYA Y CHANDRACHUD, J.]

would be in keeping with the object and purpose of the first proviso to A
Section 21(2), to consider the former related party creditor, as one
debarred under the first proviso.
95. Hence, while the default rule under the first proviso to Section
21(2) is that only those financial creditors that are related parties in
praesenti would be debarred from the CoC, those related party financial B
creditors that cease to be related parties in order to circumvent the
exclusion under the first proviso to Section 21(2), should also be considered
as being covered by the exclusion thereunder. Mr Kaul has argued,
correctly in our opinion, that if this interpretation is not given to the first
proviso of Section 21(2), then a related party financial creditor can devise
a mechanism to remove its label of a ‘related party’ before the Corporate C
Debtor undergoes CIRP, so as to be able to enter the CoC and influence
its decision making at the cost of other financial creditors.
96. In the present case, there is a finding that AAA and Spade
were related parties within the meaning of Section 5(24) at the time
when the alleged financial debt on the basis of which they assert a claim D
to be a part of the CoC was created. This was due to the long-standing
relationship between Mr Arun Anand and Mr Anil Nanda, and their
respective corporations. Admittedly, such a relationship still existed even
in 2017, since Mr Anil Nanda’s JIPL held shareholding in Mr Arun
Anand’s Spade. Further, we have also concluded that the transactions E
between Spade and AAA on one hand, and the Corporate Debtor on the
other hand, which gave rise to their alleged financial debts were collusive
in nature. Therefore, it is evident that there existed a deeply entangled
relationship between Spade, AAA and Corporate Debtor, when the
alleged financial debt arose. While their status as related parties may no
longer stand, we are inclined to agree with Mr Kaul that this was due to F
commercial contrivances through which these entities seek to now enter
the CoC. The pervasive influence of Mr Anil Nanda (the promoter/
director of the Corporate Debtor) over these entities is clear, and allowing
them in the CoC would definitely affect the other independent financial
creditors. G
J Conclusion
97. In conclusion, we hold that:
(i) The decision of the NCLAT, in as much as it referred to
Spade and AAA as financial creditors, is set aside. Due to
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1142 SUPREME COURT REPORTS [2021] 15 S.C.R.

A the collusive nature of their transactions alleged to be a
financial debt under Section 5(8), Spade and AAA cannot
be labelled as financial creditors under Section 5(7);
(ii) The decision of the NCLAT, in as much as it referred to
Spade and AAA as related parties of the Corporate Debtor
B under Section 5(24), is affirmed; and
(iii) The decision of the NCLAT, in as much as it excluded Spade
and AAA from the CoC in accordance with the first proviso
of Section 21(2), is affirmed but for the reasons mentioned
above.
C 98. The appeals are accordingly disposed of.
99. Pending application(s), if any, stand disposed of.

Divya Pandey Appeals disposed of.
D
END OF 2021
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