Trusts Included In Definition Of ‘Related party’ Under IBC Rules NCLAT

NCLAT in its judgment dated November 05, 2024, passed in Hari Vitthal Mission v Ravi Sethia & Ors , CA(AT)(Ins) No. 1206 of 2022 has clarified that ‘trust’ falls under the definition of ‘person’ under Section 2(23) of the Insolvency and Bankruptcy Code, 2016 (“IBC”)  and thus, looking at the definition of ‘Related Party’ under Section 5(24) (h) and (j) of the IBC makes it evident that in all the cases where the Corporate Debtor is controlled by a trust in the manner prescribed by aforesaid Sections, then the said trust, qualifying as a ‘person’, would fall under the category of related party.  Further, the Hon’ble NCLAT held if the ‘Related Party’ and the Corporate Debtor are held to be controlled by the same entity, then a related party relationship can clearly be established between the ‘Related party’ and the Corporate Debtor in terms of Section 5(24) of the IBC.

By way of this judgment, the Hon’ble NCLAT upheld the decision of the Hon’ble NCLT, Kolkata Bench vide order dated 3.09.2022, in I.A. No. 390 of 2022, part of C.P. (IB) (KB) No. 204 of 2021, whereby Hari Vitthal Mission (“HVM”) was held to be a related party of the Corporate Debtor i.e. Suasth Healthcare Foundation (“Corporate Debtor”/ “CD”). 

In its judgement, NCLAT noted that even though Hari Vitthal Mission did not directly own or control shares in the Corporate Debtor, the substantial influence exercised by Kanoria Foundation as holding trust over both Hari Vitthal Mission’s and the Corporate Debtor’s management was sufficient to establish a related party relationship. 

With respect to satisfying the criteria under Section 5(24) of the IBC, the Hon’ble NCLAT held as follows:

1. Section 5(24) (h) of the IBC: It is seen that Kanoria Foundation is at the apex, holding 99.9% shares of appellant (Hari Vitthal Mission) which is a Section 8 company and also controlling the Corporate Debtor through a chain of entities. The shareholding of Kanoria Foundation in the CD is approximately 31% (layered shareholding). It has also been seen that Dr. Sanjeev Kanoria (beneficiary of the Kanoria Foundation) was the director of the Corporate Debtor till April 20, 2019 and Mr. Hari Prasad Kanoria (trustee of the Kanoria Foundation) was a director at the Corporate Debtor till November 28, 2019. The Adjudicating Authority found that Suasth Healthcare Foundation had historically been accustomed to acting on the advice, directions, and instructions of Kanoria Foundation. This satisfies the conditions under Section 5(24)(h) of the IBC, which deals with entities influencing or advising the management of the Corporate Debtor.

1. Section 5(24)(i) of the IBC:  Section 5(24)(i) states that a related party may be any body corporate that is a holding, subsidiary, or associate company of the Corporate Debtor, or a subsidiary of a holding company to which the Corporate Debtor is also a subsidiary. In the present case, Kanoria Foundation is the equivalent of the holding company, which owns 99.9% of the appellant (Hari Vitthal Mission). The appellant is a Section 8 company, which, while engaged in charitable work, is still subjected to the same ownership structures that connect it to Kanoria Foundation. On the other Branch the Kanoria Foundation, indirectly controls 31% of Suasth Healthcare Foundation (CD) through entities like SIFL and TAIML. Kanoria Foundation holds 99.9% of Adisri Commercial Private Limited (Adisri). Adisri, in turn, holds 60.36% of the shares in SREI Infrastructure Finance Limited (SIFL). SIFL, along with Sunil Kanoria (0.04%), Hari Prasad Kanoria (0.04%), and Hemant Kanoria (0.04%), holds 50.88% of the shares in Trinity Alternative Investment Managers Limited (TAIML). TAIML is the settlor, contributor and investment manager of SREI Alternative Investment Trust (SAIT). SAIT in turn holds 99.99% of shares in SIPL and PCPL. The contention of the appellant is that the chain is broken on this side of organogram due to presence of a Trust- SAIT in between. However, it is clear that TAIML as Investment Manager, controls both the subsidiaries of SAIT viz. SIPL and PCPL. SIPL in turn holds 51% in CD and PCPL holds 49% in CD. The investment Manager for SAIT is TAIML which exercises control over CD through SIPL and PCPL. 

This multi-tier shareholding structure establishes a clear chain of control from the Kanoria Foundation down to the Corporate Debtor, with the Appellant falling within this chain of control. This network of shareholding establishes a clear connection between the Corporate Debtor and Hari Vitthal Mission, with both entities being subsidiaries or affiliates under the broader umbrella of Kanoria Foundation. Given this relationship, Hari Vitthal Mission is not only indirectly linked to the Corporate Debtor, but is effectively part of the same corporate group. Therefore, under Section 5(24)(i), Hari Vitthal Mission qualifies as a related party by virtue of its position as a subsidiary of Kanoria Foundation, the holding company/trust that controls the Corporate Debtor. 

1. Section 5(24)(j) of the IBC: This Section defines a related party as any person or entity that controls more than 20% of the voting rights in the Corporate Debtor. Kanoria Foundation holds 99.9% in HVM, who is a Financial Creditor. On the other side the Kanoria Foundation through a series of entities holds a 31% stake in Corporate Debtor. The control of Kanoria Foundation on the Corporate Debtor is through several intermediary entities including Adisri, SIFL, TAIML, SAIT, SIPL and PCPL. This layered ownership has been clearly shown and even though there may be intermediary entities between Kanoria Foundation and the Corporate Debtor, the overall control through shareholding and appointment of Directors through the clauses of trust deed and investment agreement is real and substantial. Hari Vitthal Mission which is 99.9% owned by Kanoria Foundation is a subsidiary company of Kanoria Foundation. The holding entity Kanoria Foundation in this case holds more than 20% in both CD and appellant and appellant therefore squarely falls in the definition of related party of CD. 

To substantiate the aforesaid findings, the NCLAT also relied upon the judgment of the Hon’ble Supreme Court’s Judgment in Phoenix Arc Private Limited v. Spade Financial Services Limited (2021) 3 SCC 475, wherein the court emphasized the necessity of excluding related parties from the CoC to maintain the integrity of the insolvency resolution process. The said principal underscores the legal rationale for excluding entities like HVM, given the substantial voting rights control held by Kanoria Foundation. Therefore, HVM is clearly classified as a related party under Section 5(24) due to this significant control. 

The Committee of Creditors (Respondent No.2 and 3) was represented by Mr. Gopal Jain, Senior Advocate, assisted by Mr. Raunak Dhillon (Partner), Ms. Isha Malik (Senior Associate) and Ms. Niharika Shukla (Senior Associate) from Cyril Amarchand Mangaldas.