Related Party Supplies Not CIRP Costs Without CoC Approval: NCLAT In Amtek Auto Insolvency

The National Company Law Appellate Tribunal (NCLAT) at Delhi has dismissed a Rs 18.98 crore claim by Lotus Auto Engineering Limited, a group company of Amtek Auto Limited, holding that supplies made by a related party during the corporate insolvency resolution process cannot be treated as insolvency resolution process costs unless expressly approved by the Committee of Creditors.

A Principal Bench comprising Chairperson Justice Ashok Bhushan and Technical Member Barun Mitra held that permission granted by the CoC to undertake related party transactions cannot be equated with approval of expenses as insolvency resolution process costs entitled to priority payment.

“The Minutes of the CoC itself makes it clear that when any cost is to be approved, it has been separately dealt by the CoC like approval of the CIRP cost and the cost of the legal counsel,” the tribunal observed.

It clarified that the approvals relied upon by Lotus Auto were approvals of related party transactions mandated under Section 28(1)(f) of the Insolvency and Bankruptcy Code, and not approvals of CIRP costs under Regulations 31 and 34 of the CIRP Regulations, 2016.

The case arose from the insolvency proceedings against Amtek Auto Limited, which began in July 2017. While the company was undergoing the corporate insolvency resolution process, Lotus Auto continued supplying machined automotive components so that Amtek could continue operating as a going concern.

After Amtek's resolution plan was approved in July 2020, Lotus Auto moved applications claiming that dues for supplies made during the CIRP period, first pegged at Rs 22.95 crore and later revised to Rs 18.98 crore, should be treated as insolvency resolution process costs and paid in priority.

Those applications, however, were rejected by the National Company Law Tribunal, Chandigarh Bench, on August 3, 2023. The NCLT relied on the Supreme Court's ruling in Ghanshyam Mishra and Sons to hold that claims not dealt with in an approved resolution plan stand extinguished.

Challenging this decision, Lotus Auto told the appellate tribunal that the NCLT had wrongly applied the law.

It argued that its claim arose from supplies made during the CIRP and pointed out that the Committee of Creditors had ratified the transactions in meetings held on August 22, 2017, and November 22, 2017.

The Resolution Professional opposed the plea, maintaining that the ratification was only to meet the requirement under Section 28(1)(f) of the Insolvency and Bankruptcy Code, which requires CoC approval for related party transactions. He said the amounts claimed were never placed before the CoC for approval as insolvency resolution process costs.

After examining the minutes of the CoC meetings, the NCLAT accepted this distinction. It noted that agenda items relating to ratification of related party transactions and those dealing with CIRP costs were treated separately. It found that the CoC had never approved the dues claimed by Lotus Auto as insolvency resolution process costs.

Holding that the claim was never placed before or approved by the CoC as a CIRP cost, the tribunal upheld the NCLT's order and dismissed the appeals.

For Appellant: Senior Advocate Krishnendu Dutta, with advocates NPS Chawla, Sandeep Bajaj, Vipul Jai, Vrinda Mishra, Sujoy Datta, Surekh Kant Baxy, and Mahima Shekhawat.

For Respondents: Advocates Sumant Batra, Sanjay Bhatt, Sarthak Bhandari, and Riya Kaur Arora for R1; Senior Advocate Sunil Fernandes with Advocates Siddhant Kant, Charu Bansal, and Tanya Chib for AMC.