A Related Party to a Corporate Debtor has been burdened with various disabilities in course of Corporate Insolvency Resolution Process and Liquidation Process.

A Financial Creditor, who is a Related Party to a Corporate Debtor, does not have right of representation, participation or voting in the Committee of Creditors. Related party to a Corporate Debtor is not eligible to submit Resolution Plan. Look back period for Preferential Transactions and Undervalued Transactions in case of Related Party to a Corporate Debtor is two years from insolvency commencement date while for others look back period is only one year. A Liquidator cannot sell assets of the Corporate Debtor by private sale to a Related Party to a Corporate Debtor without prior permission of the Adjudicating Authority. 

Related Party in relation to a Corporate Debtor has been defined under Section 5 (24). Section 5 (24) is reproduced as under:

(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) key managerial personnel of the Corporate Debtor or a relative of 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 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) 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 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 to act;

(i) a body corporate which is a holding, subsidiary or an associate 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;

 (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;

(m) any person who is associated with the Corporate Debtor on account of

 (i) participation in policy making processes of the Corporate Debtor; or

 (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 Corporate Debtor;

Clauses (a) and (b) of Section 5 (24) covers such individuals or their relatives under definition of Related Party to a Corporate Debtor, who hold decision making position in the Corporate Debtor.  A director, partner, or key managerial personnel of Corporate Debtor is covered under Related Party under clause (a) of Section 5(24).  A relative of director, partner or key managerial personnel of the Corporate Debtor is also covered under Related Party under clause (b) of Section 5 (24).

Clauses (c), (d) and (e) of Section 5 (24) covers such Partnership Firms, Limited Liability Partnerships and Companies under definition of Related Party to a Corporate Debtor wherein any director, partner or manager of the Corporate Debtor or their relative holds any position of influence. If a director, partner or manager of the Corporate Debtor or their relative becomes partner of Limited Liability Partnership or Partnership Firm, such Limited Liability Partnership or Partnership Firm is covered under Related Party under clause (c) of Section 5 (24). If a director, partner or a manager of the Corporate Debtor is a director in a Private Company and holds more than two percent of share capital, such Private Company is covered under a Related Party under clause (d) of Section 5 (24). If a director, partner or manager of the Corporate Debtor is a director of a public company and holds more than two percent of paid-up share capital, such Public Company is covered under Related Party under clause (e) of Section 5 (24).

Clauses (f), (g) of Section 5 (24) covers such Companies, Limited Liability Partnerships and Partnership Firm under definition of Related Party to a Corporate Debtor, which acts on the direction of the director, partner or manager of the Corporate Debtor and such persons under whose direction the Corporate Debtor acts.  If a body corporate, whose board of directors, managing director or manager in the ordinary course of business acts on the advice, direction or instructions of a director, partner or a manager of the Corporate Debtor, such body corporate is covered under Related Party under clause (f) of Section 5 (24).  If a Limited Liability Partnership or Partnership Firm, whose partners or employees in ordinary course of business acts on the advice, directions or instructions of director, partner or manager of the Corporate Debtor, such Limited Liability Partnership or Partnership Firm is covered under Related Party under Clause (g) of Section 5 (24).

Clause (h) of Section 5(24) covers such person under Related Party to a Corporate Debtor, on whose advice, directions or instructions, a director, partner or manager of the Corporate Debtor is accustomed to act.

Clause (i) of Section 5(24) covers such body corporates under definitions of Related Party to a Corporate Debtor, which is the holding, subsidiary or associate company of the Corporate Debtor or subsidiary of a holding company to which the Corporate Debtor is a subsidiary.

Clause (j) & (k) of Section 5 (24) covers such persons under definition of Related Party to a Corporate Debtor, who controls more than 20 percent of voting rights in the Corporate Debtor on account of ownership or voting agreements or such person in whom the Corporate Debtor controls more than 20 percent of voting rights on account of ownership or a voting agreement.

Clause (l) of Section 5(24) covers such persons under definition of Related Party to a Corporate Debtor, who can control the composition of the board of directors or corresponding governing body of the Corporate Debtor.

Clause (m)  of Section 5 (24) covers all such persons under the definition of Related Party to a Corporate Debtor, who are associated with the Corporate Debtor on account of participation in the policy making processes of the Corporate Debtor;  or having more than two directors in common between the Corporate Debtor and such person; or interchange of managerial person between the Corporate Debtor and such person; or provision of essential technical information to or from the Corporate Debtor.  

RELATED PARTY IN RELATION TO AN INDIVIDUAL

In the original Code there was no provision for Related Party in relation to an Individual.  The Insolvency Committee in its 1^st Report observed that the term Related Party was generally used in the context of a Corporate Debtor or other company under the Code. However, sections 28 and 29A of the Code and Regulation 33 of the Liquidation Regulations use the term ‘Related Party’ in a manner which may also include Related Party in the context of individuals such as a promoters or directors or the Liquidator. The committee recommended for defining Related Party in relation to an Individual in the Code.

Accordingly, Section 5 (24A) was inserted in the Code vide Insolvency and Bankruptcy Code (Second Amendment) Act, 2018.  Section 5 (24 A) is reproduced as under:

(24A) “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;

 (b) a partner of a limited liability partnership, or a limited liability partnership or a partnership firm, in which the individual is a partner;

 (c) a person who is a trustee of a trust in which the beneficiary of the trust includes the individual, or the terms of the trust confers a power on the trustee which may be exercised for the benefit of the individual;

 (d) a private company in which the individual is a director and holds along with his relatives, more than two per cent. of its share capital;

 (e) a public company in which the individual is a director and holds along with relatives, more than two per cent. of its paid-up share capital;

(f) a body corporate whose board of directors, managing director or manager, in the ordinary course of business, acts on the advice, directions or instructions of the individual;

(g) a limited liability partnership or a partnership firm whose partners or employees in the ordinary course of business, act on the advice, directions or instructions of the individual;

 (h) a person on whose advice, directions or instructions, the individual is accustomed to act;

(i) a company, where the individual or the individual along with its related party, own more than fifty per cent. of the share capital of the company or controls the appointment of the Board of directors of the company.

Explanation. – For the purposes of this clause, – (a) “relative”, with reference to any person, means anyone who is related to another, in the following manner, namely:- (i) members of a Hindu Undivided Family,(ii ) husband, (iii) wife, (iv) father, (v) mother, (vi) son, (vii) daughter, (viii) son’s daughter and son, (ix) daughter’s daughter and son, (x) grandson’s daughter and son, (xi) granddaughter’s daughter and son, (xii) brother, (xiii) sister, (xiv) brother’s son and daughter, (xv) sister’s son and daughter, (xvi) father’s father and mother, (xvii) mother’s father and mother, (xviii) father’s brother and sister, (xix) mother’s brother and sister; and

(b) wherever the relation is that of a son, daughter, sister or brother, their spouses shall also be included;

Clause (a) of Section 5 (24A) covers such person under definition of Related Party to an Individual    who is relative of an Individual or relative of spouse of an Individual.

Clause (b), (c) (d) and (e) of Section 5 (24A) covers such persons under definition of Related Party   to an Individual wherein an Individual holds decision making positions. If an Individual is a partner in Limited Liability Partnership or Partnership Firm, such Limited Liability Partnership or any partner of such Limited Liability Partnership and Partnership Firm is covered under definition of Related Party to an Individual under clause (b) of Section 5 (24A).  If terms of trust confer power on the trustee which may be exercised for the benefit of an Individual, a person who is trustee of trust is covered under Related Party to an Individual under clause (c) of Section 5 (24A). If an Individual is a director in a private company and holds more than two percent of share capital, such private company is covered under Related Party to an Individual under clause (d) of Section 5 (24A). If an Individual is a director and holds more than two percent of paid share capital in a public company, such public company is covered under Related Party to an Individual under clause (e) of Section 5 (24A).

Clauses (f), (g) and (h) of Section 5 (24A) covers such persons under definition of Related Party   to an Individual, who act on the advice, directions or instructions of such Individual or on whose advice such Individual acts.  If any board of directors, managing director or manager of a body corporate in ordinary course of business acts on advice, directions or instruction of an Individual, such body corporate is covered under Related Party to an Individual under clause (f) of Section 5 (24). If Limited Liability Partnership or a Partnership Firm, whose partners or employees in the ordinary course of business acts on the advice, directions or instruction of an Individual, such Limited Liability Partnership or Partnership Firm are covered under Related Party to an Individual under clause (g) of Section 5 (24A). A person on whose advice, direction or instruction, an Individual acts, is covered under Related Party under clause (h) of Section 5 (24).

Clause (i) of Section 5 (24A) covers such company as Related Party to an Individual, wherein an Individual or an Individual with related parties owns more than fifty percent of the share capital of the company or controls the appointment of the board of directors of the company.

Related Party has been defined in broadest of terms and attempts to capture all possible relationship which can negatively impact insolvency process. The   Supreme Court in Phoenix Arc Pvt. Ltd¹. has observed as under in respect of definition of ‘Related Party’.

58. 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 interrelationships between the Financial Creditor and the Corporate Debtor.

59 The term ‘related party’ has also been defined by Parliament in the Companies Act, 2013 for all corporations. The definition of the 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 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.

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1. Phoenix Arc Pvt Ltd Vs. Spade Financial Services Ltd; Civil Appeal No 2842/2020