Subsequent Shareholding Changes Cannot Retrospectively Cleanse Related-Party Status: NCLT Chandigarh

The Chandigarh bench of the National Company Law Tribunal (NCLT) has recently ruled that a subsequent change in shareholding or directorship cannot retrospectively erase a company's related-party status for transactions entered into earlier.

Dismissing an application filed by Mona Portfolio Ltd., the court held that the company had failed to establish that its claim against Chandigarh Overseas Pvt. Ltd. was a financial debt.

The bench of Judicial Member Khetrabasi Biswal and Technical Member Shishir Agarwal observed that related-party status must be assessed with reference to the relationship existing when the underlying transactions were entered into, and not on the basis of subsequent changes in shareholding or management.

“The subsequent restructuring of shareholding cannot retrospectively obliterate the character of the relationship existing at the time when the transactions were entered into. Related-party status must be assessed with reference to the relationship subsisting at the time the underlying transactions were entered into, and cannot be retrospectively cleansed by subsequent cosmetic changes in shareholding or directorship.”, the tribunal ruled

Mona Portfolio claimed it had extended credit facilities to Chandigarh Overseas between FY 2014-15 and FY 2023-24. After the corporate debtor entered the corporate insolvency resolution process (CIRP), it submitted a claim for ₹11.41 crore towards principal and ₹8.23 crore as interest. The Resolution Professional admitted the claim under the "related party" category.

The company challenged that classification, arguing that a change in its ownership and management in 2018 had severed its ties with the corporate debtor. It contended that it should therefore be treated as an unrelated financial creditor.

The Resolution Professional opposed the application. It argued that the applicant had failed to produce documents such as a loan agreement, sanction letter or repayment schedule to establish a financial debt under the Insolvency and Bankruptcy Code.

The Resolution Professional also relied on MCA records to contend that members of the Setia family continued to hold substantial shareholding in Mona Portfolio until FY 2021-22.

At the outset, the court noted that Mona Portfolio had earlier withdrawn a similar application without obtaining liberty to file a fresh one.

The court observed that Mona Portfolio had withdrawn an earlier application seeking substantially the same relief without obtaining liberty to file a fresh one. It said the present application sought to reopen the same dispute, a factor that weighed against its maintainability.

Turning to the merits, the court said ledger entries by themselves could not establish a financial debt. It noted that the applicant had not produced material to show that the transactions involved disbursement against consideration for the time value of money or had the commercial effect of borrowing.

The court also relied on statutory records, which continued to show the Setia family's shareholding in the applicant company for several years after the alleged transfer of control. It found inconsistencies between the applicant's documents and the statutory filings, raising doubts about its claim that it had ceased to be a related party in 2018.

The court further held that, even if the company's management had changed later, the transactions in question were entered into when the applicant was under the Setia family's control.

A subsequent restructuring, it said, could not retrospectively change the related-party nature of those transactions.

The application was, therefore, dismissed.