Chetan Kumar Vijayvargiya & Anr. vs Aadarsh Inframax Developers Pvt. Ltd.

Per: Shri Deep Chandra Joshi, Judicial Member

The application in the prescribed form is filed by Mr. Chetan Vijayvargia (deceased) and Mrs. Veena Vijayvargiya, claiming to be Financial Creditors (‘Applicants’/ ‘Financial Creditors’) for the initiation of the Corporate Insolvency Resolution Process (‘CIRP’) against M/s Aadarsh Inframax Developers Pvt. Ltd. (‘Respondent’/ ‘Corporate Debtor’). The application is filed under Section 7 of the Insolvency and Bankruptcy Code, 2016 (‘Code’), read with Rule 4 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 (‘Rules’).

The Respondent is a Private Limited Company, incorporated under the Companies Act, 2013, on 15.06.2016 and duly registered with the Registrar of Companies, Jaipur bearing CIN: U70200RJ2016PTC055239. The Registered Office of the Company is at 698, Vijay Path, Devi Nagar, New Sanganer Road, Jaipur – 302019 (Rajasthan). The authorised share capital of the Respondent Company is Rs. 5,00,000/- (Rupees Five Lakhs Only), and the paid-up share capital is Rs. 1,00,000/- (Rupees One Lakh Only). A copy of the Corporate Debtor’s Master Data is annexed as Annexure – E of the application.

The Financial Creditor alleged default on the part of the Respondent in settling the amount of Rs. 2,78,56,710/- (Rupees Two Crores Seventy-Eight Lakhs Fifty-Six Thousand Seven Hundred and Ten Only) inclusive of interest as of 31.05.2020. The details of transactions leading to the filing of this application, as averred by the Applicant, are as follows:

a. The Corporate Debtor approached the Financial Creditors for financial assistance for Rs. 1,70,00,000/- (Rupees One Crore Seventy Lakhs Only) at 19.20% per annum interest, which was disbursed in four tranches in the following manner:

b. The First Tranche was disbursed on 27.07.2016 and recorded vide Agreement dated 02.08.2016 (‘First Tranche Agreement’). As per the First Tranche Agreement, the principal amount of the loan needed to be repaid by 26.07.2017, along with paying Rs. 1,05,000/- (Rupees One Lakh Five Thousand Only) monthly out of the profits made from the construction of flats in Ajmer. A copy of the First Tranche Agreement is annexed as Annexure – A of the application. Against this First Tranche Agreement, the Corporate Debtor has furnished security vide cheques of ‘ICICI Bank – Vaishali Nagar Branch’ bearing account number ‘023505007477’ in the following manner:

These security cheques were dishonoured on the due date for funds being insufficient. The copy of the aforementioned security cheques and cheque return memo dated 20.03.2020 is annexed as Annexure – A1 of the application.

c. The Second Tranche was disbursed on 03.10.2016 and recorded vide Agreement dated 01.10.2016 (‘Second Tranche Agreement’). According to the Second Tranche Agreement, the principal amount of the loan needed to be repaid by 30.09.2017, together with paying Rs. 1,60,000/- (Rupees One Lakh Sixty Thousand Only) monthly out of the profits made from the construction of flats in Ajmer. A copy of the Second Tranche Agreement, disbursement of the loan amount and statement of accounts of the Corporate Debtor is annexed as Annexures – B and B2, respectively, of the application. Against this Second Tranche Agreement, the Corporate Debtor has furnished security vide cheques of ‘Yes Bank – Vaishali Nagar Branch’ bearing account number ‘048363700000281’ in the following manner:

These security cheques were dishonoured on the due date for funds being insufficient. A copy of the aforementioned security cheques is annexed as Annexure – B1 of the application. In addition, the Corporate Debtor, through its director, has acknowledged the liability of receiving an amount of Rs. 1,00,00,000/- (Rupees One Crore Only). A copy of the acknowledgement letter dated 01.10.2016 is annexed as Annexure – D2 of the application.

d. The Third Tranche was disbursed on 03.10.2016 and recorded vide Agreement dated 03.10.2016 (‘Third Tranche Agreement’). In accordance with the Third Tranche Agreement, the principal amount of the loan needed to be repaid by 02.10.2017 by paying Rs. 2,00,000/- (Rupees Two Lakh Only) monthly. A copy of the Third Tranche Agreement is annexed as Annexure – C of the application. Against this Third Tranche Agreement, the Corporate Debtor has furnished security vide cheques of ‘ICICI Bank – Vaishali Nagar Branch’ bearing account number ‘023505007477’ in the following manner:

These security cheques were lapsed/ expired as they were not presented on the due date. A copy of the aforementioned security cheques is annexed as Annexure – C1 of the application.

e. The Fourth Tranche was disbursed on 17.07.2017 and 18.07.2017 through Cheque No. 005903 & 005905 of ICICI Bank bearing account number ‘023501538616’. A copy of the Cheque No. 005903 & 005905 and statement of accounts for the Financial Year 2017 – 18 indicating disbursement is annexed as Annexure – D and D1, respectively, of the application. Against this loan amount, the Corporate Debtor has offered no security.

f. The source of funds for the loan given to the Corporate Debtor is, firstly, a mortgage taken against the property (house); secondly, accrued profits from business and lastly, savings for their daughter’s marriage have been utilised for giving the loan. A copy of the mortgage loan of Rs. 1,00,00,000/- (Rupees One Crore Only) undertaken through Axis Bank is annexed as Annexure – B3 of the application. The total outstanding amount of the aforesaid financial debt, along with interest, as enumerated under Part IV, is as follows:

* Calculated as per the Terms & Conditions of the Loan Agreement between the parties.

Consequent to the notice issued by this Adjudicating Authority, the Respondent filed in its reply vide Diary No. 984/2022 dated 31.03.2022 and has stated the following:

a. The Applicant does not fall under the provisions of Section 7 of the Code as the claim made does not qualify as ‘financial debt’ under Section 5(8) of the Code. The Respondent has no privity of contract with the Applicants. According to the First, Second and Third Tranche Agreement, the first party is defined as Mr. Rajesh Yadav, the director of the Respondent. The sequence of obligation flows from the Applicants to Mr. Rajesh Yadav and later to the Respondent.

b. Further, in clause three under the First and Second Tranche Agreement, the first party would do the construction of flats in Ajmer through the Respondent, while as per the Third Tranche Agreement, the loan was taken for personal and family use. The amount of Rs. 1,20,00,000/- (Rupees One Crore Twenty Lakhs Only) was taken by Mr. Rajesh Yadav as an investment in Respondent. Mr. Rajesh Yadav owed the Applicants a debt, and the Corporate Debtor is not obligated to repay the loan amount.

c. Furthermore, clause four of the First and Second Tranche Agreement states that the returns on the aforementioned investment would be provided out of the profits generated from the construction of flats, while the Third Tranche Agreement provides for monthly repayment of Rs. 2,00,000/- (Rupees Two Lakhs Only). The agreement can only be decided after leading the evidence before the civil court. The Applicants also registered a First Information Report (‘FIR’) at Chitrakoot Police Station, wherein it was mentioned that the money was given for investment purposes. A copy of the FIR is annexed from Pages 37 – 40 of the Written Submission filed vide Diary No. 3166/2022 dated 28.10.2022.

d. The amount received by the Respondent was classified in the head of ‘Other Current Liabilities’ as Refundable Security Deposits, and to substantiate the same, Financial Statements from Financial Year 2016-17 to 2020-21 are annexed from Page No. 08 – 36 of the Written Submission filed vide Diary No. 3166/2022 dated 28.10.2022.

e. The nature of the security deposit does not meet the requirements of ‘borrowing’ because it fails to pass the concept of ‘disbursement of an amount against the time value of money’, and such money disbursed should have a ‘commercial effect of borrowing’. The transaction of giving a security deposit is not an independent transaction. Consequently, the definition of financial debt under the IBC excludes ‘security deposit’ as financial debt for filing an Application under Section 7 of the Code.

f. For the reasons mentioned above, while submitting the reply, the Respondent relied upon these cases:

The Hon’ble Supreme Court has observed:

The Hon’ble Supreme Court of India observed in respect of home buyers. The Hon’ble Court stated in its judgment that

Thus, the allottee who has knocked at the doors of the NCLT is a speculative investor and not a person who is genuinely interested in purchasing a flat/apartment. It could be inferred that the insolvency resolution process under the Code has been invoked fraudulently, with malicious intent or any purpose other than the resolution of insolvency.

The Hon’ble NCLT, New Delhi Bench has observed that where an investor has all the precautionary measures available to them for safeguarding their interest as an Investor in the Corporate Debtor, and the Investor had explored the possibility of investing by taking calculated business risk, he would be treated as an ‘Investor’ and not a ‘Financial Creditor’ within the meaning of the definition contained in the IBC. Thus, where the Applicant can direct and oversee the entire corporate documentation of the investment decision in the Corporate Debtor, such debt cannot be classified as financial debt under Section 5(8) of the IBC

The Hon’ble NCLT, Allahabad Bench, had to decide questions pertaining to the validity of the Settlement Agreement entered between the parties, wherein one of the parties alleged that such agreement is hit by the provisions of Section 16 of the Indian Contract Act, 1872. The Adjudicating

In the present case, it is purported that the director of the Corporate Debtor, Mr. Rajesh Yadav, took the financial loan. Nevertheless, the loan amount was disbursed through the aforementioned agreements in the bank account belonging to the Corporate Debtor. Further, the First, Second and Third Tranche Agreements were backed by security through cheques from the Corporate Debtor’s bank account. The Hon’ble Supreme Court of India, in the case of Rustom Cavasjee Cooper v. Union of India, 1970 AIR 564, held that a ‘company registered under the Companies Act is a legal person, separate and distinct from its individual members.’ However, such protection is not impenetrable, and upon lifting the Corporate Veil of the Respondent, it is seen through bank statements and disbursement receipts that the Financial Creditors transferred Rs. 170 Lakhs to the bank account of the Corporate Debtor for the financial loan. Thus, the Corporate Debtor had prima facie privity of contract with the Financial Creditors.

In the case at hand, the Corporate Debtor, in conformity with clause four of the Second Tranche Agreement, deposited the first five instalments as per the agreed payment schedule, and the same is annexed on Pages 37 – 40 of the Application. The contention of the Corporate Debtor that the contract is covered under the provisions of Section 32 of the Indian Contract Act, 1872, appears as an afterthought.

Both the parties to the agreement have acted in furtherance of consensus ad idem. As provided in the agreements entered between them, construction of the flats was not based upon the happening or non-happening of an event. The Corporate Debtor had all the control and monitoring over the loan amount for construction purposes. Therefore, as per the agreements, the loan was repayable after the expiration of a year and is validly enforceable under the law.

As per Section 5(8), financial debt is a debt along with interest which is disbursed against the consideration for the time value of money, and it may include any of the events enumerated in sub-clauses (a) to (i). Therefore, the first essential requirement of financial debt is that the debt should be disbursed against the consideration for the time value of money, which may include situations enumerated in various sub-clauses. In the matter of Mr. Rajnish Jain v. Manoj Kumar Singh – I.R.P. & Ors., Company Appeal (AT) (Insolvency) No. 519 of 2020, the Hon’ble NCLAT observed that –

Therefore, it is essential that for any transaction to be a Financial Debt, an element of consideration for the time value of money is very critical.

The treatment of the loan amount taken from the Applicants as a refundable security deposit does not absolve the Corporate Debtor from repaying its liability. A security deposit can be considered a Financial Debt depending on the facts and circumstances in which money was tendered. When the interest accompanies a security deposit, it partakes the definitions as provided in Section 5(8) of the Code. The list of the definitions/ explanations given under Section 5(8) of the Code is not exhaustive in nature but merely illustrative, as held in the case of Dr. B.V.S. Lakshmi v. Geometrix Laser Solution Pvt. Ltd., Company Appeal (AT) (Insolvency) No. 38 of 2017.

The Hon’ble NCLAT in Sach Marketing Pvt. Ltd. v. Resolution Professional of Mount Shivalik Industries Ltd., Ms. Pratibha Khandelwal, Company Appeal (AT) (Insolvency) No. 180 of 2021 has squarely covered the issue and held that ‘Security Deposit’ carrying an interest would fall under the ambit of Section 5(8) of the Code. The relevant extract of the judgment is reproduced for ease of reference:

The contention raised by the Corporate Debtor is that there has been no actual disbursement of any amount for consideration for the time value of money; hence the alleged debt does not fall within the meaning of ‘Financial Debt’ as defined under section 5(8) of the IBC, 2016. On a keen examination of the application and perusal of the documents submitted by the Financial Creditor, it has been sufficiently established by the Financial Creditor that the nature of alleged advances was given for consideration for the time value of money.

The application filed in the prescribed Form No. 1 is complete.

The financial debt and further default in the debt payment should be established to initiate proceedings under Section 7 of the IBC. In the present matter, the loan provided by the Financial Creditor does fulfil the requirement of the consideration for time value. This Adjudicating Authority perused all the relevant papers and found them in order. The Registered Office of Corporate Debtor is situated in Jaipur; therefore, this Adjudicating Authority has jurisdiction to entertain and try this application. The matter is within the limitation period as enunciated under the Law of Limitation, as the default date under the First Tranche Agreement is 26.07.2017, and the application was filed on 11.06.2020.

Upon a detailed consideration of the application and documents filed by the Applicant, it is apparent that the payment of the claim amount has been defaulted by the Corporate Debtor. Hence, this Adjudicating Authority is inclined to commence CIRP against the Corporate Debtor as envisaged under the provisions of IBC, 2016.

The Applicant has named one Mr. Vikas Rajvanshi with Registration No. IBBI/IPA-001/IP-P01886-C01/2016-17/10032, duly registered with the Insolvency and Bankruptcy Board of India, to be appointed as the Interim Resolution Professional (‘IRP’). The Applicant has filed Consent in Form 2 under Insolvency and Bankruptcy Board of India (Application to Adjudicating Authority) Rules, 2016, stating that no disciplinary proceedings are pending against the named IRP. The credentials of the proposed IRP have been checked from the IBBI website, and nothing adverse is found on record. A copy of the Written Consent of the IRP is annexed as Annexure – H of the application.

Consequences of initiation of CIRP shall be inter-alia as follows:

a. The Insolvency Resolution Professional proposed by the Applicants, Mr. Vikas Rajvanshi, is hereby appointed as the IRP to take over the affairs of the Corporate Debtor and duties as required to be performed by him under the provisions of IBC, 2016, including the issuance of publication in widely circulated Newspapers as contemplated under the provisions of IBC, 2016 and calling for claims from the creditors of Corporate Debtor and collation of the same shall be done.

b. Further, as a sequel of admission, the moratorium, as envisaged under Section 14 of IBC, 2016, is invoked concerning the Corporate Debtor, which will be in vogue during the Corporate Insolvency Resolution Process of the Corporate Debtor. The IRP shall carry out CIRP strictly per the timelines specified and as envisaged under the provisions of IBC, 2016, concerning the Corporate Debtor.

c. The said IRP shall act strictly in accordance with the provisions of IBC, 2016, and to defray his expenses to be incurred and fees on the account, the Applicant is directed to deposit a sum of Rs. 1,00,000/- (Rs. One Lakh Only) to the bank account of IRP within three days from the date of this Order. The IRP shall duly file a status report apprising this Adjudicating Authority about the progress of CIRP as unfolding in relation to the Corporate Debtor. This amount shall be proportionately contributed and reimbursed to the Applicant upon formation of the Committee of Creditors (‘CoC’).

d. In terms of Sections 17 & 19 of IBC, 2016, all personnel of the Corporate Debtor, including promoters and the Board of Directors, whose powers shall stand suspended, shall extend all cooperation to the IRP during his tenure as such and the management of the affairs of the Corporate Debtor shall vest with the IRP.

e. In terms of Section 7 of IBC, 2016, this Order shall be communicated at the earliest, not exceeding one week from today, to the Applicant, Corporate Debtor, and the IRP appointed by this Adjudicating Authority to carry out the CIRP. A copy of this Order shall also be communicated to IBBI for its records.

Accordingly, CP No. (IB) 99/7/JPR/2020 is admitted in the abovementioned circumstances.