Alliance Broadband Services Private Limited vs Manthan Broadband Services Private Limited

Per Virendra Kumar Gupta, Member (T)

This application under Section 7 of Insolvency and Bankruptcy Code, 2016 ("IBC, 2016") has been filed by Financial Creditor, namely, Alliance Broadband Services Private Limited for initiation of Corporate Insolvency Resolution Process ("CIRP") against the Corporate Debtor, namely, Manthan Broadband Services Private Limited. The Corporate Debtor has filed C.A. No. 1052/KB/2019 and sought for dismissal of this application filed by the Financial Creditor. The amount of default has been claimed at Rs. 11,06,15,268/- (Rupees Eleven Crore Six Lakh Fifteen Thousand Two Hundred Sixty Eight only) which comprises of Principal amount of Rs.10,20,00,000/- (Rupees Ten Crore Twenty Lakh only) and Interest of Rs.86,15,268/- (Rupees Eighty Six lakh Fifteen Thousand Two Hundred Sixty Eight only). The dates of default have been stated as (26^{\text{th}}) August, 2018 and (28^{\text{th}}) November, 2018.

The facts, in brief, are that the Financial Creditor, on being approached by the Corporate Debtor, gave an accommodation loan of Rs.5,30,00,000/- (Rupees Five Crore Thirty Lakh only) to finance the set-top box installation infrastructure by the Corporate Debtor. The said loan had been provided for 11 (eleven) months against a security of 77,500 equity shares in the Financial Creditor, held by the Corporate Debtor. The rate of interest was agreed at (9.75%) per annum, payable on monthly basis. The loan amount was transferred to Corporate Debtor on (11^{\text{th}}) April, 2017. The said shares were delivered to the Financial Creditor as a pledge for the security of the loan received. On (5^{\text{th}}) July, 2017, another sum of Rs. 1,00,00,000/- (Rupees One Crore only) was given to Corporate Debtor. In March 2018, Corporate Debtor paid Rs.6,30,00,000/- (Rupees Six Crore Thirty Lakh only), being the Principal amount of above two disbursements, but failed to pay the agreed interest. Thereafter, in the month of April, through various transfers, a sum of Rs.10,20,00,000/- (Rupees Ten Crore Twenty Lakhs only) was given. On 19th November, 2018, the Financial Creditor issued demand notice for payment of impugned outstanding amount along with interest thereon which the Corporate Debtor fail, hence, this petition.

The Ld. Senior Counsel for the Financial Creditor narrated the aforesaid facts and drew our attention to the various documents in support of its claim. Ld. Senior Counsel further claimed that invoices for the interest were also raised, however, the same remain unpaid. The Ld. Senior Counsel contended that there was a financial debt which was due and payable, but Corporate Debtor failed to pay, hence, initiation of CIRP was required.

The Ld. Senior Counsel appearing on behalf of the Corporate Debtor submitted that the first transaction was in the nature of loan which was executed through a Loan Agreement between Corporate Debtor and Financial Creditor. However, the second transaction of Rs. 1,00,00,000/- was not a loan transaction and it was without interest. As regards the amount of Rs. 10,20,00,000/-, he vehemently denied the claim of the Financial Creditor for the reason that such amount was, in fact, given as advance against purchase of property belonging to the Corporate Debtor. He also emphasized on the fact that there was no loan agreement in this regard and, on the contrary, Memorandum of Understanding ("MOU") had been exchanged between the parties for sale of property of Corporate Debtor to Financial Creditor and this money was given as advance against transfer of such property. He further contended that the impugned sum was not financial debt in terms of the provisions of Section 5 (8) of the IBC, 2016 as it had no time value of money and, therefore, no remedy could be sought by the Financial Creditor under IBC, 2016. Accordingly, he submitted that this petition was not maintainable. Ld. Senior Counsel for the Corporate Debtor further submitted that, to give this transaction a design of a loan transaction, the Financial Creditor raised invoices for interest for the back period which were disputed and not accepted by the Corporate Debtor. He drew our attention to pages 62 and 63 of reply affidavit to show that invoices had been raised for the back-dated period but were submitted subsequently. In support of the claim of Corporate Debtor, he referred to pages 49 to 53 of reply affidavit. He specifically drew our attention to page 53 which comprised of the e-mail sent by Corporate Debtor to the Financial Creditor regarding non-acceptance of interest invoices raised by the Financial Creditor. He further contended that unilateral act of raising of invoices was done with a view to prevent the Corporate Debtor to get its nominees appointed on the Board of Directors of the Financial Creditor where Corporate Debtor held 48.14% of shares and its directors were holding around 6.21% shares. He also submitted that petition under Sections 241 to 242 had also been filed in July, 2019 by the Corporate Debtor which was also pending for disposal and because of this reason only the proceedings under Section 7 were initiated by the Financial Creditor so that Corporate Debtor could go out of existence and no change of management / other issues of Corporate governance could be raised against the Financial Creditor and its management. He again emphasized that it was a case of an advance against sale of property for which draft agreement had been exchanged but not executed and therefore, such transaction inherently did not involve any time value of money and consequently, the transaction did not fall within the ambit of the definition of financial debt.

After controverting the claims of the Financial Creditor on factual basis, the Ld. Senior Counsel initiated his argument on legal aspects. His first plea was that loan could not be a transaction in unilateral manner way without mutual agreement as to terms and conditions of both the parties, hence, for want of mutual consent by the Corporate Debtor, such claim of the Financial Creditor was not valid. He further contended that to invoke the provisions of Section 7 of IBC, the pre-requisite was that the loan transaction must have time value of money and this transaction did not have any time value of money as it had no interest element, hence, this application was not maintainable. For this proposition, he relied on the following decisions:-

The Ld. Senior Counsel drew our attention to relevant paragraphs of these orders to substantiate his claims. Thereafter, he contended that Financial Creditor did not have Money Lending Licence which was a pre-requisite in terms of the provisions of The Bengal Money-Lenders Act, 1940, hence, for this reason also, the claim of the Financial Creditor was not enforceable at law.

The Ld. Senior Counsel for the Financial Creditor, in the rejoinder, submitted that the first loan had been given against the security of shares which were pledged by the Corporate Debtor. Similarly, for recovery of the loan given subsequently, the draft MOU was prepared and exchanged so that liability of Corporate Debtor to repay the loan can be discharged by way of transferring of the property of Corporate Debtor to Financial Creditor and it was not a case of advance against purchase of said property. To support this contention, the Ld. Senior Counsel stated that there were series of transactions of money being given to the Corporate Debtor and in case of first transaction, loan agreement had been executed; however, subsequent transactions were entered into on the basis of mutual understanding on the similar line which now the Corporate Debtor was disputing to evade its liability. He further submitted if the contentions of the Corporate Debtor regarding nature of transactions were to be accepted, then, it could be a rarest of the situation where full sale consideration had been given without entering into any MOU / Agreement to Sale. He further contended that only when invoices for interest were raised, the Corporate Debtor initiated steps to get the directors of the Financial Creditor removed by bringing in its own nominees and also filed petition under Section 241 / 242 and it was not a case where invoices were raised because of these proceedings. He further contended that all these judicial decisions regarding non-maintainability of petition under Section 7 IBC on the ground of no time value of money involved were distinguishable on facts and, hence, not applicable. He has specifically submitted that the proposition of law laid down by the Hon'ble Supreme Court in the case of Swiss Ribbons Pvt. Ltd. & Ors. Vs. Union of India & Ors., Order dated 25/1/2019 could not be disputed and the said ratio did not further the cause of the Corporate Debtor in any manner. As regards the reliance placed by the Corporate Debtor on the provisions of the Bengal Money-Lenders Act, 1940, he submitted that the object of IBC, 2016 was insolvency resolution and not recovery of money, hence, the provisions of the Bengal Money-Lenders Act, 1940 were not applicable. He further submitted that such provisions being contradictory to the provisions of the IBC, 2016, hence, those could not be applied at all in view of the provisions of Section 238 of the IBC, 2016. He also contended that the Financial Creditor was not engaged in the business of financing / money lending in the ordinary course of its business and had no such transaction with many the parties and, therefore, for this reason as well, provisions of the Bengal Money-Lenders Act, 1940 were not applicable. He further contended that the transaction had involved time value of money and consequently, it fell within the ambit of the provision under Section 5(8) of IBC, 2016, hence, this petition was liable to be admitted as the Corporate Debtor had defaulted in respect of the payment of debt due and payable.

We have considered the submissions made by both the sides and also perused the material on record.

It is an admitted fact that money had been transferred by Financial Creditor to the Corporate Debtor. It is apparent from the perusal of loan agreement relating to first transaction of disbursement of Rs.5,30,00,000/- that the Corporate Debtor is liable to pay interest thereon @ 9.75%. It is also not in dispute that in respect of this transaction, shares had been pledged by the Corporate Debtor to secure the loan. It is also noteworthy that MOU relied on by the Corporate Debtor to say that the sum of Rs.10,20,00,000/- was given for purchase of the property of Corporate Debtor has not been executed. It is also observed from the e-mail written on behalf of the Corporate Debtor, copy of which has been placed at page 53 of the reply affidavit, that the Corporate Debtor has merely not accepted the invoices for interest being charged on the amount given by Financial Creditor to Corporate Debtor, but in such mail no claim as regards the nature of such amount being availed has been disputed i.e., that the amount so given was against the purchase of the property and not of the nature of loan. Accordingly, we find substantial merit in the claim of Financial Creditor that without any MOU full sale consideration would not have been given. Hence, in our considered opinion, claim of the Corporate Debtor that it was advance against property appears to be an afterthought.

Firstly, the aspect of time value of money needs to be considered. It has been claimed by the Corporate Debtor that due to no interest element being involved, hence, the transaction does not have an element of time value of money and, therefore, not a financial debt within the provisions of section 5(8) of IBC, 2016. Before proceeding further, we consider it pertinent to reproduce Section 5(8) of IBC, 2016 as under:-

From the perusal of the above section, the following points emerge:

Further, in any time-value relationship, there are following components:-

Thus, in conventional manner, the time value of money concept can be defined as time is money having above dimensions affecting the yield and purchasing power over a period of time. The value of money, whether present or future, is derived through interest rate or discounting rate. Normally, interest is a positive yield in absolute terms, but net of rate of inflation, the real yield or interest yield could be much less and could be negative as well in case of rate of inflation is higher than the rate of interest. There could also be a case where economic conditions result into negative interest rates as is happening in some places currently where Banks are giving zero interest or charging interest on deposits so that money is consumed to spur economic growth. Thus, time value of money is a dynamic concept and have got linkages with macro / micro economic principles and commercial objectives.

iv) In economic sense, the above factors are associated with the concept of time value of money and used to arrive at monetary values at different points of time for a given sum of money. However, in business sense, there could be a situation where no interest element is involved and the money has been disbursed/borrowed to derive some commercial benefit or profit or capital gain. Further, the lender also takes risk of default by the borrower. It can be further stated that disbursement of debt against the consideration for time value of money has to be understood for both ends of the same transaction i.e., from the perspective of both lender and borrower because if borrower gets money without any charge (interest), he gains / benefits from non-payment of interest, whereas the lender in such a case has lost income because of foregoing of interest on such transaction as well as suffers adversely with opportunity cost of earning money on this investment had such money been gainfully deployed somewhere else. This aspect may, on the face of it, appear to enlarge the scope of section 5(8) as in the said section time value of money has been stated as consideration for disbursement of debt meaning thereby that focus is on lender of money only but it is not so if we even cursorily look at various clauses of section 5(8) which list the transactions of borrowing/ raising of money as of the nature of financial debt. For example, clause (a), clause (b), clause (c) and clause (f) of section 5(8) relate to borrower's initiative / requirements. Thus, time value of money is not an economic concept solely dependent on interest earning or paying factor, but it is a combination of economic, business, investment, finance and commercial considerations inextricably linked with time duration. These factors have duly been incorporated in section 5(8) of IBC, 2016 as evident from the structuring of the said section. Accordingly, we are of the view that any money transaction between two parties would require analysis based on above considerations to arrive at a conclusion whether such transaction has got the element of time value of money or not instead of looking at the same with interest aspect only.

In the present case, it is not in dispute that first transaction has been of loan carrying interest at a specified rate payable by the borrower. Subsequently, Financial Creditor has given money to the Corporate Debtor which has been used and utilized by the Corporate Debtor for its business purposes, but Corporate Debtor has disputed that interest was payable thereon. Further, the Corporate Debtor has not adduced any material on record to show that the invoices for interest were raised just to prevent the Corporate Debtor from filing of petition under section 241/242 of the Companies Act, 2013 or to remain in control of the management and ownership of Financial Creditor. Be that as it may, the transactions remain of the nature of debt. Hence, in view of these facts and legal position discussed as above, the disbursement of money by the Financial Creditor to the Corporate Debtor can safely be concluded as a transaction of financial debt involving time value of money.

Although we have already held that the present transaction is an instance of debt transaction having time value of money, but for the sake of argument, if it is assumed that it is a case of giving of advance against purchase of property, then also, it would be financial debt in view of clause (f) of section 5 (8) of the IBC, 2016, because the amount raised is having commercial effect of borrowing. For this reason also, the contention of the Corporate Debtor that it is not a case of a financial debt is liable to be rejected.

As regards the reliance placed by the Corporate Debtor on various other decisions, we most humbly submit that those decisions were given in the facts and circumstances as applicable to those cases which are distinguishable on facts of the case on hand, hence, ratio of those decisions is not applicable here. For example, in the case of B.V.S. Laxmi (Supra) Vs. Geometrix Laser Solutions Pvt. Ltd. [Company Appeal (AT) (Insolvency) No. 38 of 2017, order dated 22.12.2017, in para 30, the Hon'ble NCLAT observed as under:-

In the present case, however, there is no dispute as regards the fact of borrowing of money by the Corporate Debtor, even first transaction is evidenced by agreement which contains provision for interest also. The Corporate Debtor has failed to controvert this claim of the Financial Creditor.

We find further support from the decision of the Hon'ble NCLAT in the case of Shailesh Sangani Vs. Joel Cardoso & Anr. in Company Appeal (AT) (Insolvency) No. 616 of 2018, wherein the Hon'ble Appellate Tribunal held as under:-

The other claim of the Corporate Debtor is that in the absence of any licence being obtained by the Financial Creditor as required under the provisions of the Bengal Money-Lenders Act, 1940, such claim was not enforceable in law and, therefore, not liable to be admitted under Section 7 of IBC, 2016. We are of the view that this contention of the Corporate Debtor is also devoid of merit as provisions of IBC is a self-contained code and any law being in contradiction to IBC would not be applicable. We also consider it pertinent to mention that in the case of Religare Finvest Ltd. Vs. Bharat Road Network Ltd., Order dated 28/8/2019, this Bench has expressed a view that in such cases, the definition of 'claim' as mentioned in Section 3(6) of the Act of IBC, 2016 would have to be considered. Relevant findings in the case are reproduced as under :-

Another aspect relating to the term "claim" is that right to payment may be an equitable claim. The term 'equitable' has not been defined under IBC, 2016, hence we have to look the meaning of the term in the common parlance or, as has been noticed judicially or, as defined in the dictionary. In general parlance, the term "equitable" means, something that is fair and reasonable to all parties in a particular situation. In judicial sense, it can be explained as a remedy or solution that is ethically or legally just and reasonable under the circumstances, though, it may or may not be wholly satisfactory to any or all parties involved. The dictionary meaning of the term 'equitable' is just that confirmable to the principles of natural justice and right. Just, fair and right, in consideration of the facts and circumstances of the individual case. Existing in equity; available or sustainable only in equity; or upon the rules and principles of equity.

Accordingly, based upon these findings, the decision of NCLT in the case of Ranual Technology Pvt. Ltd. (supra) relied on by the Corporate Debtor does not come to its rescue.

We further find merits in the claim of the Financial Creditor that IBC, 2016 is not a recovery mechanism and, therefore, the provisions of The Bengal Money Lenders Act, 1940 being part of that legislation which operates in different field i.e. recovery of dues, could not be applied to proceedings under IBC, 2016. In our considered view, in any case, such provisions being contrary to the provisions of IBC, 2016 are not applicable in view of specific provisions of section 238 of IBC, 2016.

In view of the above facts and legal position, we hold that the Corporate Debtor be admitted under CIRP as per the provisions of Section 7 of IBC, 2016. The Financial Creditor has suggested the name of Interim Resolution Professional which we approve. The petition is complete in all other aspects and complies with the requirements of IBC, 2016 and Regulations, hence, we admit the petition and order as under:

iv) Moratorium under Section 14 of the Insolvency & Bankruptcy Code, 2016 prohibits the following:

vii) The order of moratorium shall have effect from the date of admission till the completion of the corporate insolvency resolution process.

viii) Provided that where at any time during the corporate insolvency resolution process period, if the Adjudicating Authority approves the resolution plan under sub-section (1) of Section 31 or passes an order for liquidation of corporate debtor under Section 33, the moratorium shall cease to have effect from the date of such approval or liquidation order, as the case may be.

ix) Necessary public announcement as per Section 15 of the IBC, 2016 may be made.

xi) The Financial Creditor to pay sum of Rs. 5,00,000/- (Rupees Five Lakh Only) to IRP as advance fees as per Regulation 33(3) of IBBI (Insolvency Resolution Process for Corporate Persons) Regulation 2016 which shall be adjusted from final bill.

xii) The Resolution Professional shall conduct CIRP in time bound manner as per Regulation 40A of IBBI (Insolvency Resolution Process for Corporate Persons) Regulation, 2016.

xiii) CA(IB) No. 1052/KB/2019 stands disposed of in terms of our aforesaid order.

xiv) List the matter on 17/10/2019 for the filing of the progress report.

xv) Registry is hereby directed under section 7(7) of the I&B Code, 2016 to communicate the order to the Financial Creditor, the Corporate Debtor and to the I.R.P. by Speed Post as well as through e-mail.

Certified copy of the order may be issued to all the concerned parties, if applied for, upon compliance with all requisite formalities.