Anuj Kumar Tiwari vs Deepak Gupta Huf

Virendra Kumar Gupta (Technical)

Though the grounds of relief are not happily worded, still we thought it fit to consider this application as the whole process of CIRP has come to a standstill due to the pendency of this application, which affects the voting rights of the members of the CoC. The CoC comprises of respondent nos. 2 & 3 as majority voting rights holders, and this may result in great disadvantage to other stakeholders.

Facts in brief

The Corporate Debtor was admitted into CIRP by the order of this Adjudicating Authority dated 28th August, 2019. Mr. Mohit Maheshwari was appointed as IRP. The Respondent No.2 & 3 filed their claims in Form-C before the IRP on 11th September, 2019. The respondent No.2 claimed the outstanding amount at ₹7,53,38,914/- which included principal amount of ₹80,00,000/- and interest component of ₹6,73,38,194/-. In respect of respondent No.3, the claim amount at ₹3,93,12,477/- which comprises of principal amount stands of ₹1,30,00,000/-and interest of ₹2,63,12,477/-.

The erstwhile IRP accepted their claims. However, the IRP was replaced and Mr. Sudheer Shukla was appointed as RP by this Adjudicating Authority dated 23.10.2019. Subsequently that RP was also replaced by the order of this Adjudicating Authority dated 30th August, 2020. The present RP was appointed in his place and is continuing as such. An application for change of this RP was also filed in IA (IB) No.357/ALD/2020 which have been dismissed by this Adjudicating Authority vide order dated 20.04.2022. Notably, all such applications/actions have been taken by CoC wherein these respondents are having majority voting rights.

This RP has filed this application for re-consideration and re-valuation of the claim amount for the reason that these were given in violation of provisions of Section 73 of the Companies Act, 2013 and terms and conditions relating to rate of interest were out of proportion.

Contentions of RP

In this background, when the matter was taken up for hearing, the Ld. Counsel for the RP appeared and submitted that in the present case, the RP has sought directions of this Authority as he is of the view that the amount claimed and admitted by earlier IRP is not appropriate and not in accordance with the acceptable norms of business. To this effect, it was submitted that in case of loan of ₹80,00,000/- the rate of interest was 4.26% per month which defined all logics. Respondent No.3 was a buyer of five flats. However, an assured return was also promised with the option of buy back and such assured return was computed at the rate of 27.5% per annum compounded monthly. Hence, in effect, the simple rate would have been much higher rate.

Contentions on behalf of Respondents

During the course of hearing, the Ld. Counsel appeared on behalf of the respondent nos.2 & 3 submitted that once a claim had been admitted by IRP, the said claim could have been revisited /revised only when additional information was received by IRP/RP subsequently and, in the present case, no such information was received subsequently. Hence, the action of RP is not tenable in law. In support of this claim, reliance has been placed of Regulation 14(2) of CIRP Regulations, 2016. Apart from this, the intent of the RP has also been questioned by the respondent because as consequence of such action of RP, their voting rights in the CoC may come down from 100% to 43%.

Findings

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

It is noted that the claim of the respondent No.2 arises from two agreements dated 15th April, 2014 whereby a sum of ₹40,00,000/- each aggregated to ₹80,00,000/- was given by respondent No.2 to the corporate debtor with interest at the rate of 4.26% per month for the period of 4 years for development of real estate project by the corporate debtor. Repayment schedule had also been provided in the agreements. The corporate debtor, however, failed to repay the same. Hence, respondent No.2 these initiated proceedings under Section 7 of IBC which were admitted by this Adjudicating Authority vide order dated 28th August, 2019. Subsequently, such applicant filed claim with the IRP who accepted the claim of respondent No.2 in its entirety on the basis of loan agreement.

Similarly, respondent No.3 vide agreement dated 01.04.2014 gave a sum of ₹1,30,00,000/- against as consideration for purchase of 5 flats. It is further noted that said agreement also guaranteed returned money through buy back of 5 flats within the period of 36 months from the date of said execution.

The grant of amount of loan and other conditions are not in dispute. The two questions arise for our consideration;

(i) The RP, in what manner and in what circumstances can revise an admitted claim subsequently in terms of provisions of IBC, 2016 and CIRP Regulations, 2016.

(ii) Whether, in the present case, the rate of interest/guaranteed return can be considered as permissible and reasonable? If not so, then what rate of interest can be determined as applicable to present transactions?

Answer to Question No.1

On passing of an order on admission of corporate debtor, the Adjudicating Authority appoints an IRP as proposed by the financial creditor in their application filed under Section 7 as, in case of such application, it is mandatory for financial creditor to propose the name of IRP. Thus, in such situation the familiarity of IRP with applicant/financial creditor cannot be ruled out. The IRP, being an Insolvency Professional, is bound to take reasonable care and diligence while performing his duties as provided in Section 208(2) of IBC, 2016, it is also obligatory on the part of IRP to perform his functions in such manner and subject to such conditions as may be specified.

The IBBI, being regulator of Insolvency Professionals, has formulated code of conduct for Insolvency Professionals in terms of provisions of Regulation 7(2)(h) of IBBI (Insolvency Professionals) Regulations, 2016. As per provisions of such Code of Conduct, the IRP is required to function with integrity and objectivity in an independent and impartial manner so that CIRP can be completed in a time bound manner.

We have briefly outlined the above legal situation as to what is the legitimate expectation of various stakeholders involved in CIRP. The role of IRP, being a creation of statue, is of utmost importance as he is the person who initiates the conduct of whole CIRP. One of the duties is to collate, update and revise the list of creditors from time to time and to constitute the CoC. The CoC mainly comprises of financial creditors only in majority of the cases. If a claim of a financial creditor is admitted in disproportionate manner then it will not only result into additional liability being admitted as payable to such creditor but such financial creditor also gets dominating position in CoC which may result into functioning of CoC for its own benefit at the cost of other stakeholders.

Thus, the actions of the IRP in this regard must be in accordance not only the contractual provisions entered into by and between the corporate debtor and the financial creditor but it should also be seen that whether terms and conditions of such contracts are reasonable and do not make such contracts unconscionable or otherwise unenforceable at law. In this regard, we take cognizance of provisions of Section 4 of Usurious Loans Act, 1918, which permits a Court to look into reasonability of interest in case of entity subject to insolvency and bankruptcy proceedings. Further, if a transaction shocks the conscience of a Court, then also the Court can declare it void or voidable and modify the terms.

In this regard, we further take note of the fact that though the word “Court” has been used in Section 4 of this Act at relevant time the Tribunals were not in existence. Thus, instead of its grammatical sense, this term needs to be interpreted in functional sense as Tribunals, though quasi-judicial bodies, substantially performs the function of a Court.

Thus, from this perspective also, this Adjudicating Authority can apply the provisions of this Act to the facts of the case. Having said so, we are further of the view that the terms and conditions of such transactions can be examined by this Adjudicating Authority in terms of provisions of Section 60(5)(c) of IBC, 2016 as there is a material impact of such rate of interest on the voting power of members of CoC. The question so raised is in relation to insolvency resolution of corporate debtor, hence, this question can certainly be examined by this Adjudicating Authority.

In the present case, RP formed a view that these transactions resulted into liability on part of corporate debtor to an extent that manifestly works against the interests of other creditors/stakeholders, hence, RP has approached this Adjudicating Authority. Thus, RP has not invoked the provisions of Regulation 14(2) of IBBI (Insolvency Resolution Process) Regulations, 2016, hence, reliance placed by respondents as to regard to the situations when a claim can be revised by RP under such Regulations are not at all attracted.

Answer to Question No.2

Now coming to the second question, it is informed by the respondent No.2 that this money had been withdrawn from PPF accounts whereon respondent No.2 was getting any interest at the rate of 10% per annum. We are surprised and shocked to see that such a person invested the same money at the rate of interest 4.26% per month which, from the very beginning makes it clear that this money was not going to be repaid. This has been done without any tangible security. It is stated public policy of Indian Law that a Court can disregard the terms and conditions which shocks its conscience or is otherwise exorbitant. Thus, such rate of interest may not be sustained by a judicial forum who has to follow the same public policy.

Now, the question arises as to what rate the interest should be allowed to such person for amount advanced by him to the corporate debtor. Admittedly, he was getting a rate of 10% on PPF account which is most secured and the amount under consideration is unsecured. Hence, in our opinion a rate of 15% per annum worked out at simple interest rates would be justified considering the fact that since 2014 there is decline in the rate of interest payable on PPF/FDs by Public Financial Institutions as well as overall there is a declining trend in the interest rate in commercial transactions. In the case of respondent No.3 there was a security of flat by way of allotment letter. Hence, we direct the RP to apply the rate of simple interest @ 12% per annum in case of respondent No.3.

Accordingly, we direct the Ld. Counsel for RP to re-work out claims of respondent No.2 & 3 by applying the above rate of interest and admit their claims accordingly.

This application filed by the RP stands allowed and disposed of in terms of indicated above.

The Registry is directed to send e-mail copies of the order forthwith to all the parties inclusive of the Counsel.

Urgent certified copy of this order, if applied for be issued upon compliance with all requisite formalities.

Rajasekhar V.K., Member (Judicial)

I have had the benefit of perusing the order proposed to be passed by my learned brother, and I fully agree with the end results thereof. The facts have been succinctly stated by my learned Brother, and therefore, I shall not repeat them to avoid prolixity, except where it is necessary to understand the issue in context. However, I would like to supplement the decision with a few paragraphs of my own.

Normally, the Adjudicating Authority would not have entertained an application like this from the RP, which essentially seeks directions of the Adjudicating Authority at the time of collation of claims. This would be within the realm of the RP to take an independent decision thereon. But the conspectus of facts that this application presents itself with, would justify a call for interference by the Adjudicating Authority at this stage itself.

In the case of the Respondent No.2 here is a Financial Creditor who has lent a sum of ₹80,00,000/- to the Corporate Debtor on 15.04.2014, hoping to rake in a quick profit, one calculated at the rate of 4.26% per month, spread over a four-year period! The claim filed with the RP worked out to ₹7,53,38,914/-, inclusive of interest amount of ₹6,73,38,194/-. In the case of the Respondent No.3, a sum of ₹1,30,00,000/- was paid as consideration against five flats, with the assurance of buyback of the flats on the assured return computed at the rate of 27.5% per annum compounded monthly, of the sum so paid.

One certainly must admire the chutzpah with which the Respondent Nos.2 & 3 did this. Unless there was some vested interest of the suspended board, we do not see how acceptance of such a contract would have been commercially prudent and in the interest of the Corporate Debtor that was then in the hands of the suspended board. The board of the Corporate Debtor either without thinking through, or being involved neck-deep in the proposals, accepted the same at great detriment to the Corporate Debtor, whose interests they were tasked to protect. This should properly be construed as a breach of their fiduciary duties to the Corporate Debtor, and its shareholders. The contracts that are presented on record are simply unconscionable. But that is not the end of the matter.

The legal conundrum is the question of applicability of the Usurious Loans Act, 1918, to proceedings under the Insolvency & Bankruptcy Code, 2016. There would probably be no better occasion to discuss the applicability or lack of it, to proceedings under the IBC, than the present one.

In Naveen Luthra v Bell Finvest (India) Ltd. & another, Company Appeal (AT) (Insolvency) No.336/2017 decided on 29.11.2018, order may be accessed here - https://nclat.nic.in/Useradmin/upload/5400385815bffa62a89d6a.pdf the Hon'ble NCLAT was hearing an appeal against the order of admission CP No.1178/I&BC/NCLT/MB/MAH/2017 decided on 15.11.2017 passed by the NCLT Mumbai Bench, in the matter of Luthra Water Systems Private Limited, the Corporate Debtor therein. The order of admission was challenged by one of the shareholders on the ground that the petition under section 7 of the Code was not maintainable having regard to the usurious penal interest, in view of section 3 of the Usurious Loans Act, 1918.

Analysing the provisions of the Usurious Loans Act, 1918, the Hon'ble NCLAT observed that CIRP is not a litigative process, and that the Adjudicating Authority is not a court of law. The Adjudicating Authority is also not deciding  a money suit, and hence cannot exercise any of the powers vested under sections 3

Re-opening of transactions.

(1) Notwithstanding anything in the Usury Laws Repeal Act, 1855, where, in any suit to which this Act applies, whether heard ex parte or otherwise. the Court has reason to believe: -

(a) that the interest is excessive; and

(b) that the transaction was, as between the parties thereto, substantially unfair, the Court may exercise all or any of the following powers, namely, may,

(i) re-open the transaction, take an account between the parties, and relieve the debtor of all liability in respect of any excessive interest;

(ii) notwithstanding any agreement, purporting to close previous dealings and to create a new obligation, re-open any account already taken between them and relieve the debtor of all liability in respect of any excessive interest, and if anything has been paid or allowed in account in respect of such liability, order the creditor to repay any sum which it considers to be repayable in respect thereof;

(iii) set aside either wholly or in part or revise or alter any security given or agreement made in respect of any loan, and if the creditor has parted with the security, order him to indemnify the debtor in such manner and to such extent as it may deem just:

Provided that, in the exercise of these powers, the Court shall not –

(i) re-open any agreement purporting to close previous dealings and to create a new obligation which has been entered into by the parties or any persons from whom they claim at a date more than twelve years from the date of the transaction;

(ii) do anything which effects any decree of a Court.

Explanation.- In the case of a suit brought on a series of transactions the expression “the transaction” means, for the purposes of proviso (i), the first of such transactions.

(2) (a) In this section “excessive” means in excess of that which the Court deems to be reasonable having regard to the risk incurred as it appeared, or must be taken to have appeared, to the creditor at the date of the loan.

(b) In considering whether interest is excessive under this section, the Court shall take into account any amounts charged or paid, whether in money or in kind, for expenses, inquiries, fines, bonuses, premia, renewals or any other charges, and if compound interest is charged, the periods at which it is calculated, and the total advantage which may reasonably be taken to have been expected from the transaction.

(c) In considering the question of risk, the Court shall take into account the presence or absence of security and the value thereof, the financial condition of the debtor and the result of any previous transactions of the debtor, by way of loan, so far as the same were known, or must be taken to have been known, to the creditor.

(d) In considering whether a transaction was substantially unfair, the Court shall take into account all circumstances materially affecting the relations of the parties at the time of the loan or tending to show that the transaction was unfair, including the necessities or supposed necessities of the debtor at the time of the loan so far as the same were known, or must be taken to have been known, to the creditor,

Explanation.- Interest may of itself be sufficient evidence that the transaction was substantially unfair.

(3) This section shall apply to any suit, whatever its form may be, if such suit is substantially one for the recovery of a loan or for the enforcement of any agreement or security in respect of a loan or for the redemption of any such security.

(4) Nothing in this section shall affect the rights of any transferee for value who satisfies the Court that the transfer to him was bona fide, and that he had at the time of such transfer no notice of any fact which would have entitled the debtor as against the lender to relief under this section.

For the purposes of this sub-section, the word “notice” shall have the same meaning as is ascribed to it in section 4 of the Transfer of Property Act, 1882.

(5) Nothing in this section shall be construed derogating from the existing powers or jurisdiction of any Court.

or 4 Insolvency Proceedings. of a loan in any insolvency proceedings, the Court may exercise the like powers as may be exercised under section 3 by a Court in a suit to which this Act applies. of the Usurious Loans Act, 1918.

Aggrieved by the judgment of the Hon'ble NCLAT, the appellant preferred a civil appeal before the Hon'ble Supreme Court, which came to be dismissed on 25.01.2019. Civil Appeal No.654/2019 decided on 25.01.2019, which can be accessed here - https://ibclaw.in/naveen-luthra-vs-beel-finvest-india-limited-and-another-sc/  While dismissing the civil appeal, the Hon'ble Supreme Court observed that it will be open for the appellant to press the issue of rate of interest and application of the Usurious Loans Act before the NCLT, if so advised. Therefore, the Hon'ble Supreme Court left the question of applicability of the Usurious Loans Act, 1918, open.

A reading of section 4 of the Usurious Loans Act, 1918, makes it clear that on any application relating to the admission or amount of a proof of loan in any insolvency proceedings, the Court may exercise powers as may be exercised under section 3 of the said Act by a court in a suit to which the Act applies.

In the present case, the first limb of section 4 of the Act ibid is indeed satisfied: this is an application relating to the admission or amount of proof of loan in an insolvency proceeding. It is the second part of the provision that presents a problem: whether the Adjudicating Authority can properly be called a “Court” within the meaning of section 4 of the Usurious Loans Act, 1918. Because, if it is, then the provisions of section 4 of the Usurious Loans Act, 1918 can be applied straightaway.

At the time of enactment of the Usurious Loans Act, 1918, insolvency matters were being heard by civil courts. After the Insolvency & Bankruptcy Code, 2016, was brought on to the statute books, the jurisdiction of civil courts in respect of any matter in which the Adjudicating Authority is empowered or under the Code to pass any order, has been taken away, and vested in the Adjudicating Authority, in terms of section 231 No civil court shall have jurisdiction in respect of any matter in which the 231. Bar of jurisdiction-No civil court shall have jurisdiction in respect of any matter in which the. Adjudicating Authority or the Board is empowered by, or under, this Code to pass any order and no injunction shall be granted by any court or other authority in respect of any action taken or to be taken in pursuance of any order passed by such Adjudicating Authority or the Board under this Code. of the Code.

The word ‘Court’ is not defined in the IBC or in the Civil Procedure Code.

In Canara Bank v Nuclear Power Corporation & others, 1995 Supp (3) SCC 81 decided on 06 March 1995 the Hon'ble Supreme Court considered the question whether the Company Law Board (CLB) was a court. The Hon'ble Apex Court observed that the word ‘Court’ must be read in the context in which it is used in a statute. It is permissible, given the context, to read it as comprehending courts of civil judicature and courts or some tribunals exercising curial or judicial powers. Para 26 ibid It also held that an interpretation that suppresses the mischief and advances the remedy must, plainly, be given. Para 28 ibid In arriving at this determination, the Hon'ble Supreme Court referred to its own majority decision in Harinagar Sugar Mills v Shyam Sunder Jhunjhunwala. (1962) 2 SCR 339 : AIR 1961 SC 1669 decided on 25 April 1961

In the present context, therefore, the word ‘Court’ used in section 4 must be read in a manner so as to include the Adjudicating Authority constituted under the IBC. Read thus, section 4 of the Usurious Loans Act, 1918, can be applied harmoniously in the present conspectus of facts, so as to reduce the contractual rate of interest, which is unscrupulous to say the least.

In this view of the matter, I endorse the decision of my learned Brother Member (Technical) that the claim of the Respondent No.2 be worked out by factoring in an interest rate of 15%, and that of Respondent No.3 by factoring in an interest rate of 12%. This would meet the ends of justice.