DK Swan Limited (DK) was subject to Corporate Insolvency Resolution Process (CIRP) initiated by an Operational Creditor under Section 9 of Insolvency Bankruptcy Code, 2016 (IBC). During the CIRP, claims were invited by t

DK Swan Limited (DK) was subject to Corporate Insolvency Resolution Process (CIRP) initiated by an Operational Creditor under Section 9 of Insolvency Bankruptcy Code, 2016 (IBC). During the CIRP, claims were invited by the Interim Resolution Professional (IRP). Sunrise filed its claim in Form C as a financial creditor for a sum of ₹62.60 lakh on 15th June, 2017. Thereafter, Sunrise filed a revised Form C for a sum of ₹119.11 lakh on 25th June, 2017. Sunrise had filed the revised claim Form on the basis of an alleged Memorandum of Understanding dated 17th September, 2010 executed with the Corporate Debtor, which stated that Inter Corporate Deposits (ICDs) of ₹36.55 lakh have been granted to the Corporate Debtor by Sunrise bearing interest of 24% repayable in terms of the mutual agreement between the parties. However, Sunrise has submitted that it has granted ICDs of ₹76.00 lakh (approx.) to the Corporate Debtor between July, 2008 and February, 2012. Out of this amount, Sunrise is claiming a principal amount of ₹33.00 lakh. The balance amount of ₹53.60 lakh was credited in the account of XYZ, which is a wholly owned subsidiary of Sunrise. The total claim of Sunrise has increased to ₹119.11 lakh in 7 years on account of interest at the rate of 24%. XYZ filed its claim before the IRP in Form F as a creditor other than a financial creditor or operational creditor for a sum of ₹103.90 lakh on 15th June, 2017. Thereafter, XYZ filed a revised claim in Form C as a financial creditor for a sum of ₹119.72 lakh on 28th June, 2017. It had entered into a Development Agreement dated 6th April, 2011 with the Corporate Debtor for a sale consideration of ₹42.80 lakh to purchase development rights in a project. On 30th November, 2011, the Development Agreement was terminated and an Agreement to sell, along with a Side Letter, was executed between XYZ and the Corporate Debtor for purchase of flats. The sale consideration for the Agreement to sell was enhanced to ₹96.01 lakh from ₹42.80 lakh under the Development Agreement. XYZ paid a sum of ₹53.06 lakh as advance payment under the Agreement to Sell. This amount was adjusted out of the ICDs payable to Sunrise as noted above. The claim of XYZ is with respect to the principal amount of ₹53.06 lakh, which along with interest at the rate of 18% increased to ₹119.72 lakh in 5 years. Phantom is also a financial creditor of the Corporate Debtor and is a part of Committee of Creditors (CoC). Its claim is based on a registered Deed of Assignment in its favour dated 2nd January, 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 Phantom was reduced to 3.58% on account of XYZ and Sunrise being included in the CoC. The CoC was constituted on 27th June, 2017. On 30th June, 2017, the IRP rejected the claim of Sunrise, inter alia, on the ground that the 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 XYZ on the ground that its claim as a financial creditor in Form C was filed after the expiry of the period for filing such a claim. The IRP in his letter dated 30th June, 2017 has noted that as per the ledger provided by Sunrise, 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 Sunrise. It has been submitted in the written submissions filed on behalf of Sunrise and XYZ 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 Sunrise due to a dispute. Aggrieved by the rejection of their claim as financial creditors, XYZ and Sunrise filed applications before the National Company Law Tribunal (NCLT) to be included in the CoC. The NCLT by its order dated 5th July, 2017 allowed the applications. However, none of the other financial creditors, such as Phantom and YES Bank, were parties to these proceedings. The NCLT observed that XYZ'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 Sunrise in the form of ICDs has been received as a deposit and is attracting interest as reflected in Form '26AS', deducting TDS on interest. Thus, NCLT allowed Sunrise and XYZ to submit their claims as financial creditors with a direction to the IRP to consider the claims. On 6th July, 2017, a meeting of the CoC took place which was attended by YES Bank and Phantom, and also by the newly approved financial creditors, XYZ and Sunrise. Following the meeting, YES Bank and Phantom filed applications in the NCLT for the exclusion of XYZ and Sunrise from the CoC on the ground that they are related parties. The applications filed under Section 60(5) by Phantom also sought similar reliefs for: The removal of Sunrise and XYZ from the CoC; and Directing the constitution of the CoC in terms of the Insolvency and Bankruptcy (Amendment) Ordinance 2018 (IBC Ordinance 2018). As noted by NCLT, the Memorandum of Understanding dated 17th September, 2010, on the basis of which Sunrise 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 given by Sunrise 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. NCLT in its judgement dated 24th August, 2018 said: That Sunrise and XYZ did not qualify to be considered as financial creditors. In relation to the second issue, NCLT held that it "does not 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 6th 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 CoC. In appeal, the National Company Law Appellate Tribunal (NCLAT) proceeded of its decision to observe that admittedly Sunrise and XYZ are the financial creditors of the corporate debtor. Having stated so, the Appellate Tribunal proceeded to enquire into whether XYZ and Sunrise are related parties within the meaning of Section 5(24) of the IBC. Answering the above issue in the affirmative, the NCLAT held that Sunrise and XYZ are related parties of the Corporate Debtor since: XYZ was a partner of the Corporate Debtor. During the transaction period of 2009 to 2012, Sunrise led by Kunal Kumar was making substantial financial arrangements on the basis of advice provided by the Corporate Debtor led by its Management and Directors. The Corporate Debtor was acting on the directions/instructions of Kunal Kumar who, along with his family, is the majority shareholder in Sunrise, of which XYZ is a wholly-owned subsidiary. On the basis of the same reasons, Kunal Kumar was also held to be a person participating in the policy-making process of the Corporate Debtor. Aggrieved by order of NCLAT, Phantom approached the Hon'ble Supreme Court. Referring the relevant case and relevant provisions of IBC, its Rules and Regulations made thereunder, answer the following questions: Whether Sunrise and XYZ have to be excluded from the CoC?