Alok Kailash Saksena vs State Of Karnataka

KANTHI NARAHARI, MEMBER (TECHNICAL)

The Present ‘Appeal’ is filed against the common order dated 28.05.2021 passed by the ‘Adjudicating Authority’ (‘National Company Law Tribunal’, Bengaluru Bench, Bengaluru) in I.A. No. 85/2021, in C.P. (IB) No.51/BB/2018, whereby the ‘Adjudicating Authority’ has allowed the Application filed by the Respondent (State of Karnataka) and directed the Appellant to put up the claim filed by the Respondent as a Financial Creditor in ‘Form-C’ to the Committee of Creditors (‘CoC’) for its consideration and acceptance and to consider the reconstitution of the ‘CoC’.

The Learned Senior Counsel for the Appellant submitted that the Appellant is aggrieved by the common order dated 28.05.2021 limited to I.A. No. 85 of 2021 in CP No. 51 of 2018.

It is submitted that the CIR Process was initiated against M/s Associate Décor Limited, the Corporate Debtor vide order dated 26.10.2018 by the ‘Adjudicating Authority’ (NCLT, Bengaluru Bench). In compliance of the I & B Code and Regulations, the ‘RP’ initiated the process namely issuance of Form-G inviting Expression of Interest etc. The admission order dated 26.11.2018 published on the websites of the Corporate Debtor and also on IBBI’s website. While so, the promoters of the Corporate Debtor approached the Hon’ble Supreme Court in Associate Holding Private Limited Vs. Union of India filed WP (C) No. 1391 of 2018 (tagged along with Dharini Sugars and Chemicals Ltd. Vs. Union of India). The Hon’ble Supreme Court passed a status quo order in the said writ petition on 30.11.2018.

It is submitted that as per Form-A the claims were to be submitted on or before 10.12.2018 and the Appellant received the claims, verified, collated and admitted as described in para 7.5 of Appeal paper book. The Hon’ble Supreme Court pronounced the judgment and the judgment did not have a bearing on the present proceedings. Since the ‘status quo order’ stood vacated, the ‘CoC’ in its meeting held on 12.04.2019 agreed that the ‘CIRP’ could now continue. In view of status quo order, the ‘CIRP’ could not be completed and Appellant filed an I.A. before the ‘Adjudicating Authority’ seeking exclusion of 154 days from the ‘CIRP’ which was allowed and excluded the period.

It was found that the ‘Corporate Debtor’ had availed the special incentives and concessions scheme issued by the Respondent and the said scheme inter-alia provided for an interest free soft loan in the nature of deferment of 75% of eligible gross ‘Value Added Tax’ (‘VAT’), to be paid in 10 equal instalments from the 11^th year. The ‘Corporate Debtor’ and the Respondent entered into a loan agreement dated 15.08.2013 recording the terms and conditions of the special incentives and concessions obtained by the ‘Corporate Debtor’.

It is submitted that the ‘Corporate Debtor’ furnished certain bank guarantees. As these claims were already secured by the bank guarantees there was no occasion to visit the said claim. The ‘RP’ shared the ‘Information Memorandum’ (in short ‘IM’) with the CoC on 04.05.2019 including the information that was available at that point of time. The audited financial statement for the year 2015-16 onwards were not available, the RP included the provisional financial statements for FY 2016-17 and FY 2017-18.

It is submitted that the Appellant took timely action with regard to the smooth conduct of the ‘CIRP’ proceedings and in the 11^th CoC Meeting held on 09.10.2019 the Appellant informed that 25 Expression of Interest (in short EoIs) were received out of which Prospective Resolution Applicant’s (PRAs) had confirmed interests and RP released the provisional list of Resolution Applicants and also issued the request for Resolution Plan (RFRP) along with the updated information memorandum. As per Clause 1.10.5 of the ‘RFRP’, the ‘Corporate Debtor’ was to be resolved on an “as is where is” basis i.e. with the data and resources as available with the ‘Corporate Debtor’ at the time of invitation for Resolution Plans. The ‘CoC’ in their meetings held on 07.11.2019 and 28.11.2019 extended the last date for submissions of plans from 30.11.2019 to 07.12.2019 based on request by Prospective Resolution Applicants. In the 15^th ‘CoC’ held on 07.12.2019 two Plans have been received from (i) Archidply Industries (ii) Mohammed Enterprises (Tanzania) Ltd. (METL). The ‘CoC’ discussed the said plans and further negotiated. Both the Resolution Plans scored on the evaluation matrix with Archidply receiving a total score of 57.20 and ‘METL’ received 72.64. After extensive deliberations and negotiation in previous meeting, the ‘CoC’ decided to e-vote from 13.02.2020 to 15.02.2020 on ‘METLs’ final resolution plan and the ‘CoC’ approved the plan of ‘METL’ and the Appellant was directed to file an application before the ‘Adjudicating Authority’ for its approval.

It is submitted that at the belated stage the Assistant Commissioner of Commercial Taxes, Bangalore filed I.A. No. 134 of 2020 on 05.03.2020 seeking setting aside the Appellants order rejecting the claim of the commercial taxes of Rs. 54,46,13,819/-. While matter stood thus, the Respondent filed W.P. No. 14815 of 2020 before the Hon’ble High Court of Karnataka seeking to declare that the constitution of CoC and all the proceedings in the CIRP are null and void and quash all further proceedings with respect to ‘METLs’ resolution plan and sought a direction to the Appellant to reconstitute ‘CoC’ by including the Respondent etc. The said claim was solely based on an industrial concession given to industries in State of Karnataka and as such there was no disbursement of amounts at all. The Respondent has not filed any ‘Form-C’. Hon’ble High Court initially granted stay of pending proceedings before the ‘Adjudicating Authority’. The Hon’ble High Court on 04.03.2021 directed the Respondent to file an application before the ‘Adjudicating Authority’ with respect to its claim within 7 days.

In view of the directions passed by the Hon’ble High Court, the Respondent filed I.A. No. 85 of 2021 before the ‘Adjudicating Authority’ seeking a direction against the Appellant to take on record and admit its claims filed vide ‘Form-C’. The Appellant filed reply to the said I.A. and contended that the claim made by the Respondent was in the nature of benefit and there is no time value of money involved and also there is no disbursement of any money so as to qualify for a loan much less a Financial Creditor. The Appellant also stated that the respondent does not qualify as ‘Financial Creditor’ and that it had failed to file ‘Form-C’ at any point of time.

The ‘Adjudicating Authority’ erroneously passed the impugned order directing the Appellant to put up the claim of the Respondent before the ‘CoC’ for its consideration. The ‘Adjudicating Authority’ erroneously recorded in paragraph 7 of the ‘Impugned Order’ that “the claim in ‘Form-C’ has been filed” which is contrary to the record and for which reason alone the impugned order ought to be set aside in as much as the entire impugned order is premised on the fact that the Respondent has filed ‘Form-C’. It is submitted that the Appellant has not received the ‘Form-C’ on behalf of the Respondent till date. This aspect was specifically raised as a strong objection by the Appellant before the ‘Adjudicating Authority’. Further the ‘Adjudicating Authority’ failed to consider that the Appellant did not have any occasion to accept or reject Respondents claim as it was never filed in the first place and therefore, erred in holding that the Appellant ought to have considered the claim and to have placed it before the ‘CoC’.

It is submitted that the ‘Adjudicating Authority’ failed to appreciate, that the Respondent does not have a claim, leave alone a valid claim as on date in as much as the payments, which are in the nature of deferred tax liability under the scheme and payments are to be made from 2024. Further the Appellant cannot admit the claims filed after unanimous approval of the Resolution Plan by the CoC. The ‘Adjudicating Authority’ failed to apply the judgment of the Hon’ble Supreme Court in Essar Steel India Limited Committee of Creditors Vs. Satish Kumar Gupta (2020) 8 SCC 531 wherein the Hon’ble Supreme Court categorically held at para 107, that a Successful Resolution Applicant cannot be faced with undecided claims after the resolution plan submitted by that applicant is approved by the ‘CoC’.

In view of the reasons as stated above the Learned Senior Counsel prayed this Bench to allow the Appeal and set aside the ‘impugned order’ passed in I.A. No. 85 of 2021 in C.P. No. 51 of 2018.

The Respondent filed its reply vide diary No. 819 and stated that the ‘Adjudicating Authority’ determined two issues in the above I.A. viz. (a) whether the claim of this Respondent should have been considered by the ‘Resolution Professional’ based on the books of accounts of the ‘Corporate Debtor’ (b) whether the basis of the claim of this Respondent amounts to a financial debt.

The Respondent extended the loan facility to the ‘Corporate Debtor’ and the ‘Corporate Debtor’ had provided bank guarantee to the extent of Rs.20,80,44,296/- to this Respondent. Under the loan agreement, the ‘Corporate Debtor’ was obligated to renew bank guarantees. Since the ‘Corporate Debtor’ failed to renew the bank guarantee and this Respondent wrote a series of letters dated 22.05.2020, 28.05.2020, 04.07.2020, 04.09.2020 requesting to renew bank guarantees.

It is stated that the Respondent is a ‘Financial Creditor’ and the ‘Adjudicating Authority’ upon considering the loan agreement entered into by the ‘Corporate Debtor’ has correctly categorised the concession extended under the said agreement by the Respondent is a loan to be repaid on the lapse of 10 years from the date of commencement of commercial production. The contention of the Appellant is that the loan does not qualify as a financial debt since no interest is charged is untenable. It is stated that the ‘Corporate Debtor’ was required the repay the loan from the 11^th year and if there was any default the ‘Corporate Debtor’ becomes liable to pay the interest and penal interest. Since there was no waiver of the ‘VAT’ payable by the ‘Corporate Debtor’ and only a mere postponement of the obligation, the ‘Corporate Debtor’ did receive the benefit of time value of money under the agreement with this Respondent. The books of accounts of the ‘Corporate Debtor’ also reflects the loan as financial debt.

It is stated that this Respondent was not made part of the ‘CoC’ and as per Section 21 of the IBC, the IRP is obligated to collate the claims received against the ‘Corporate Debtor’ and determine the financial position of the ‘Corporate Debtor’ before constituting the ‘CoC’. In view of the reasons as stated in the reply, it is prayed to dismiss the Appeal.

Heard the Learned Senior Counsel for the respective parties, perused the pleadings, documents and relevant citations. After analysing the pleadings, the issue fell for consideration is whether the Appellant has made out any case warranting interference by this Tribunal in the order passed by the ‘Adjudicating Authority’ (‘impugned order’).

The Respondent herein filed an application being I.A. No.85 of 2021 by arraying the Appellant herein before the ‘Adjudicating Authority’ seeking a direction from the ‘Adjudicating Authority’ to the Appellant to admit the claim of the Respondent herein filed vide ‘Form-C’ and sought a direction to include such claim in the ‘CoC’ and pass any other orders.

The Adjudicating Authority after evaluating the facts of the case passed the following direction:

From the aforesaid directions, it is clear that the ‘Adjudicating Authority’ declared as under;

The basis arriving such finding by the ‘Adjudicating Authority’ on the following facts.

The ‘Corporate Debtor’ approached the Respondent (being the Department of Industries of Commerce which acts as a catalyst for the overall development of the industrial sector in the State of Karnataka) to avail sanction of loan under the special incentives and concessions scheme on 28.12.2021. The project of the ‘Corporate Debtor’ to establish a wood base industry for manufacture of particle boards etc. with an investment of Rs.495.29 crores. The Respondent approved and recommended for sanction of special incentives and concessions and accordingly the government issued order. The Respondent issued a loan eligibility certificate to the unit for a sum of Rs.226.87 crores to the ‘Corporate Debtor’ as interest free loan subject to the terms and conditions contained the governments VAT loan eligibility certificate dated 26.06.2013 and issued corrigendum dated 23.07.2013. It is to state that on 05.08.2013 an agreement entered into between the Respondent and the ‘Corporate Debtor’ recording the incentives and concessions granted to the ‘Corporate Debtor’. The Respondent released interest free ‘VAT’ loan to the ‘Corporate Debtor’ against the submission of bank guarantees as a security.

While matter stood thus, CIRP was initiated against the ‘Corporate Debtor’ on 26.10.2018, accordingly the ‘Insolvency Resolution Professional’ (in short ‘IRP’) issued public announcement on 28.11.2018 inviting claims in Form-A in the daily newspapers, both in English and regional language calling for claims from the general public to be lodged against the Corporate Debtor on or before 10.12.2018. The admission order dated 26.10.2018 was also published on the website of the ‘Corporate Debtor’ and the IBBI. The IRP received claims and the ‘CoC’ was constituted comprising of Oriental bank of Commerce, Union Bank of India and Bank of Baroda. No claims were received by ‘RP’ from the Respondent.

In the 19^th CoC meeting held on 11.02.2020 wherein it was decided to place the Resolution Plan submitted by the ‘METL’ (Mohammed Enterprises) (Tanzania) Limited to e-vote and the e-voting conducted from 13.02.2022 to 06.03.2020 the Resolution Plan of ‘METL’ was approved by all the members of CoC. It is seen that the CIRP period expired on 16.03.2020 and the Appellant filed an application being I.A. No.161 of 2021 before the ‘Adjudicating Authority’ under Section 30 & 31 for approval

It is seen that the Respondent filed writ petition being No. 14851 of 2020 before the Hon’ble High Court of Karnataka seeking directions for reconstitution of ‘CoC’ and consider its claim and also sought interim stay of CIR process pending before the ‘Adjudicating Authority’. The Hon’ble High Court granted ad-interim stay on 22.12.2020 and thereby the ‘CIRP’ proceedings have been stayed. The Hon’ble High Court on 04.03.2021 disposed of the writ petition directing the Respondent to move before the ‘NCLT’ for its claim. Accordingly, the I.A. No.85 of 2021 came to be filed before the ‘Adjudicating Authority’ seeking reliefs as prayed therein.

The ‘Adjudicating Authority’ while deciding the aforesaid I.A. No.85 of 2021 framed issues whether the Respondent claim would amount to a financial debt and whether such claim can be considered even if not submitted within the period stipulated under Regulation 12(2) of the ‘Insolvency and Bankruptcy Board of India’ (Insolvency Resolution Process for Corporate persons), Regulations 2016.

In regard to the aforesaid issues the ‘Adjudicating Authority’ para 9 and para 12(8) of the ‘impugned order’ (at page no. 80 & 84 of appeal paper book) held as under:

In view of the above directions of the ‘Adjudicating Authority’ the moot points that arise for consideration are;

The argument of the Respondents is that loan agreement dated 05.08.2013 entered between the Respondent and the ‘Corporate Debtor’, the ‘Corporate Debtor’ termed as borrower in the loan agreement and have a relationship of borrower lender and is obligated to repay the loan at the end of 10 years. The transaction between the parties would amount to a disbursal. However, the Appellant contend that the benefits and concessions granted to the ‘Corporate Debtor’ were in the nature of incentives provided by the Respondent herein and they are not in the nature of loan given in consideration of time value of money. Section 5(8) of the Code reads as under:

Admittedly, the ‘Corporate Debtor’ availed a special scheme / incentive from the Respondent and there is no actual disbursement of money. The said fact was not denied by the Respondent herein. The loan was interest free and towards unpaid ‘Value Added Tax’ (in short ‘VAT’) for a period of 10 years which is a benefit issued by the Respondent as a promotion policy of the State Government. From the perusal of proceeding of Government of Karnataka dated 05.06.2012 annexed at A4 page 165-168 and the relevant page 167, the Government of Karnataka pleased to sanction following special incentives and concessions to the ‘Corporate Debtor’ for their investment proposal as under:

From the above Government Order, it is seen that there is no actual disbursement of money that has happened to the ‘Corporate Debtor’. Further, there is no enhancement of money after a particular time period. It is pertinent to note that the policy/ scheme was to enhance / boost industrial production by providing some monitory incentive/concession and not to earn interest and the interest payment in case of default in repayment in purely in the nature of a penalty. It is reiterated that there is no actual disbursement of money. While so, the contention of the Appellant that since there is no interest factor as per the definition of the financial debt, the claim of the Respondent cannot be considered as financial debt. The said issue has been decided by the Hon’ble Supreme Court in the matter of Orator Marketing Vs. Samtex Design Pvt. Ltd. reported in (2021) SCC Online 513 para 22 & 31 wherein the Hon’ble Supreme Court at para 22 held as under:

In view of the Judgment of the Hon’ble Supreme Court (supra) even if the money borrowed does not carry any interest and include ‘Interest Free Loan’ advanced to finance the business operations of a corporate body, would amount to financial debt within the meaning of Section 5(8) of the Code. Therefore, the stand of the Appellant that there is no interest component for the claim made by the Respondent is negatived.

From the above ‘Government Order’, it is seen that there is ‘no time value of money’ involved in such an arrangement. The Hon’ble Supreme Court in Phoenix ARC Pvt. Ltd. Vs. Spade Financial Services Limited & Ors. reported in (2021) SCC Online SC 51 para 50 held as under:

Accordingly, this `Tribunal’ holds that the claim of the Respondent does not come under the definition of ‘Financial Debt’, accordingly, the observation made by the ‘Adjudicating Authority’ in this regard is answered in negative.

Utmost, the claim of the Respondent being in respect of the liability of the ‘Corporate Debtor’ to repay the `Value Added Tax’, which the Corporate Debtor has collected but not paid to the Respondent, may be in the nature of operation debt as defined under Section 5(21) of the Code. The said provision reads thus:

It is apt to note that various decisions of this ‘Tribunal’ held that the statutory dues such as income tax, sales tax, value added tax and various other taxes fall within the definition of operational debt under Section 5(21) of the Code as held by this Tribunal in Pr. Director General of Income Tax (Admn. & TPS) Vs. M/s Synergies Dooray Automotive Ltd. & Ors. para 29 & 30 thus read as under:

Further, the Hon’ble High Court of Madras in Ruchi Soya Industries Ltd. Vs. Union of India & Anr. in W.P. No. 31090 of 2015 dated 26.04.2021 held that the customs duty is ‘Operational Debt’ at paragraph 80 as under:

Point No. 2

It is an admitted fact that the I.A. No.85 of 2021 filed by the Respondent herein, more than 800 days after ‘initiation’ of ‘CIRP’ and almost one year after approval of plan by the ‘CoC’. Further, it is an admitted fact that the Respondent had not filed any claim in the proper format within the time before the RP. The ‘Adjudicating Authority’ vide order dated 26.10.2018 initiated `CIRP’ against the ‘Corporate Debtor’ and the ‘Resolution Professional’ published the ‘Public Announcement’ and invited `Claims’ from all creditors in the month of November, 2018. The paper advertisement has been enclosed at Annexure A-7 page 204. In spite of said advertisement in the newspaper the Respondent failed to file its claim before the ‘RP’ nor filed any application before the ‘Adjudicating Authority’ during the CIRP proceeding. The RP collated and verified the claims received by it and on the basis of same the ‘CoC’ was constituted in December, 2018. After deliberations on the plans of the Prospective Resolution Applicants (in short ‘PRAs’), the ‘CoC’ approved one of the plans and the CIR process has been completed. One of the contentions of the Appellant that a Joint Director of the Respondent visited the Corporate Debtor in the month of February, 2020 and he was aware of the CIR Process against the ‘Corporate Debtor’, however, chose not to take any action with regard to their claim either before the RP or before the ‘Adjudicating Authority’. The Respondent approached the ‘Adjudicating Authority’ belatedly. This Tribunal in the matter of Peecon Developers Pvt. Ltd. Vs. Bimal Agarwal RP in Company Appeal (AT) (Ins) No. 756 of 2021 para 5, held as under:

Further, this Tribunal in the matter of Deputy Commissioner of GST & Central Excise Vs. Mr. Vijay Kumar V. Iyer in Company Appeal (AT) (Ins) No. 604 of 2021 para 10 & 12 held as under:

In view judgments of this ‘Tribunal’ (supra) the Respondent did not file the claim before the ‘RP’ during CIRP period therefore, there was no question of considering the same by the ‘CoC’ at such a belated stage. The Hon’ble Supreme Court in Ghanashyam Mishra & Sons Pvt. Ltd. Vs. Edelweiss Asset Reconstruction Company Civil Appeal No. 8129 of 2019 para 71 & 95, the Hon’ble Supreme Court held that the resolution plan approved by the ‘Adjudicating Authority’ shall also be binding on the ‘Central Government’, any ‘State Government’ or any local authority to whom a debt is owed in respect of payment of dues arising under any law for the time being enforce, such as authorities to whom statutory dues are owed, including tax authorities. However, in the present case, an application for approval of plan being I.A. No.161 of 2020 was pending before the ‘Adjudicating Authority’ and the ‘Adjudicating Authority’ vide the aforesaid ‘impugned order’ dated 28.05.2021 disposed of the said I.A. and against the same an appeal is also pending before this ‘Tribunal’, in which the matter was heard and ‘Reserved for Orders’.

It is apt to note that one of the most crucial principles is that ‘Time is Essence’ in any Resolution Process within which the process has to be completed in a time bound manner as contemplated under the ‘Code’. The Hon’ble Supreme Court in the landmark judgment of M/s Innoventive Industries Ltd. Vs. ICICI Bank & Anr. Reported in (2018) 1 SCC 407 at paras

Therefore, this ‘Tribunal’ finds that the ‘Claim’ of the Respondent is belated and cannot be considered and the finding of the ‘Adjudicating Authority’ in directing the ‘Appellant / RP’ to place the ‘Claim’ of the Respondent in ‘Form-C’ before ‘CoC’ per se illegal and unsustainable. Accordingly, the point is answered against the Respondent.

The next point for consideration is whether the Resolution Professional has power to admit the Claims suo-motu?

The I & B Code, 2016, prescribes the duties to be performed by the ‘Interim Resolution Professional’ and ‘Resolution Professional’ as per Section 18 and Section 25 of the Code. The IBBI CIRP Regulations prescribed the procedure to be adopted followed. As per Chapter IV Regulation 7 the claims by ‘Operational Creditor’ to be submitted with proof to the ‘IRP’ in ‘Form-B’ and as per Regulation 8 of the Regulations the ‘Financial Creditors’ shall submit the ‘Claims’ to the ‘IRP’ in ‘Form-C’. After receipt of claims, the ‘IRP’ shall verify the ‘Claims’ in accordance with Regulation 13 and the ‘IRP’ maintained list of creditors containing ‘Names of Creditors’ along with the amount claimed by them, the amount of their Claims admitted and the Security Interest, if any, in respect of such claims. There is no such provision that the ‘IRP’ shall admit the Claim without filing a Claim either in ‘Form-B’ or in ‘Form-C’. Therefore, this ‘Tribunal’, is of the view that the ‘IRP’ suo-motu cannot admit the ‘Claims’ without their being a ‘Claim’ by the `Claimants’ viz. `Operational Creditors’, `Financial Creditors’ and the ‘Claims’ by other ‘Creditors’. Every ‘Claim’ shall be submitted by the ‘Claimant’ with proof. Accordingly, the issue is answered.

Having discussed the issues in detail, this ‘Tribunal’ comes to a resultant conclusion that the ‘Order’ passed by the ‘Adjudicating Authority’ in I.A. No. 85 of 2021 is per se ‘illegal’ and ‘unjusticiable’. Accordingly, the impugned order passed in I.A. No. 85 of 2021 dated 28.05.2021 by the ‘Adjudicating Authority’ (‘National Company Law Tribunal’, Bengaluru Bench, Bengaluru) is set aside. The instant ‘Appeal’ succeeds.

In fine, the Company Appeal (AT) (CH) (Ins.) No. 170 of 2021 is ‘allowed’. No order as to costs. The ‘interim order’ dated 03.08.2021 is made absolute. The connected pending ‘Applications’, if any, stand ‘closed’.