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Judgment
[Per: Arun Baroka, Member (Technical)]
The present appeal is being filed under Section 61 of the Insolvency and Bankruptcy Code (hereinafter referred to as ‘IBC’) against the order dated 29.02.2024 (hereinafter referred to as ‘Impugned Order’) passed by the Ld. Adjudicating Authority, National Company Law Tribunal, Indore Bench (hereinafter referred to as ‘Ld. Adjudicating Authority’) in C.P. (IB)/23/MP/2023 whereby the Ld. Adjudicating Authority dismissed the application filed on behalf of the Appellant/Financial Creditor under Section 7 of the IBC seeking initiation of Corporate Insolvency Resolution Process (hereinafter referred to as ‘CIRP’) against the Respondent/Corporate Debtor.
Facts of the Case:
The present appeal is being filed under Section 61 of the IBC against the Impugned Order passed by the Ld. Adjudicating Authority in C.P. (IB) No. 23 of 2023 whereby the Ld. Adjudicating Authority dismissed the application filed on behalf of the Appellant under Section 7 of the IBC seeking initiation of CIRP against the Corporate Debtor. The facts necessitating the filing of the present appeal before this Hon’ble Tribunal are as follows:
Appellant’s case:
In 2018, the respondent, SPG Macrocosm Limited, approached the appellant, Fortune Land Holdings LLP, seeking a loan of Rs. 70,00,000/-(Rupees Seventy Lakhs only).
On 01.10.2018, a Loan Agreement was executed between the parties for the disbursal of the loan amount, repayable within 36 months with an interest rate of 15% per annum. An Unsecured Demand Promissory Note was also executed as security for the loan.
The loan amount was disbursed as follows:
| Date | Amount (in Rupees) | Mode of Payment |
|---|---|---|
| 09.10.2018 | 15,00,000/- | R.T.G.S |
| 09.10.2018 | 20,00,000/- | R.T.G.S |
| 10.01.2018 | 35,00,000/- | R.T.G.S |
An audit conducted by N.R. Panchal & Co. reflected the loan in the respondent's balance sheet under 'Non-Current Liabilities', which remains undisputed.
Despite repeated demands starting from October 2021, the respondent failed to repay the loan. Demand Notices were issued on 05.10.2021, 05.01.2022, 02.04.2022, 01.07.2022, and a legal demand notice on 31.12.2022, all of which were ignored by the respondent.
Consequently, the appellant filed an application under Section 7 of the IBC (C.P. 23 of 2023) before the Adjudicating Authority for the initiation of CIRP against the respondent.
Despite multiple hearings and submission of additional documents, including the 'Record of Default' authenticated by NeSL, the Adjudicating Authority dismissed the appellant's application on 29.02.2024.
The Adjudicating Authority Erred in dismissing the Application under Section 7 of the IBC on following grounds:
Existence of Debt and Default: The appellant provided substantial evidence demonstrating the existence of a debt and the respondent's default. The loan was reflected in the respondent's balance sheet, and the 'Record of Default' from NeSL was undisputed. Under Section 7 of the IBC, the only requirement for admission of an application is the existence of a debt and default, both of which were clearly established.
Compliance with Procedural Requirements: The appellant complied with all procedural requirements, including filing the information of default with the information utility, as directed by the Ld. Adjudicating Authority. The authenticated records were submitted and should have been duly considered.
Misinterpretation of the Indian Stamp Act, 1899 - Sufficient Stamping of Promissory Note: The Adjudicating Authority incorrectly ruled that the Promissory Note was insufficiently stamped under Schedule 1 Article 49 (b) of the Indian Stamp Act, 1899. The appellant clarified in the additional affidavit that the Promissory Note, being payable on demand, was sufficiently stamped as per Clause 49 (iii) of the Stamp Act.
Irrelevance to the Determination of Debt and Default: The primary focus under Section 7 of the IBC should be the establishment of debt and default. Even if the stamping of the Promissory Note was in question, it should not have overshadowed the clear evidence of debt and default presented by the appellant.
Procedural Errors and Due Process Violations:
Failure to Consider Additional Evidence: The Adjudicating Authority failed to adequately consider the additional affidavit and the 'Record of Default' from NeSL. This oversight constitutes a significant procedural error and a violation of the appellant's due process rights.
Unjust Rejection of the Application: The dismissal of the appellant's application without proper consideration of all evidence and compliance with procedural requirements resulted in a miscarriage of justice, adversely affecting the appellant's right to seek redress under the IBC.
For the foregoing reasons, the appellant respectfully requests that this Appellate Tribunal set aside the Impugned Order dated 29.02.2024 passed by the Adjudicating Authority and admit the application
Respondent's Brief
The respondent, SPG Macrocosm Limited submits in defense of the Impugned Order dated 29.02.2024 passed by the National Company Law Tribunal, Indore Bench, which correctly dismissed the appellant's application under Section 7 of the Insolvency and Bankruptcy Code, 2016 seeking initiation of the corporate insolvency resolution process against the respondent.
The loan amount disbursed in the Loan Agreement dated 01.10.2018 is Rs. 70,00,000/- (Rupees Seventy Lakhs only). The principal loan amount is not disputed; however, the interest levied at 15% per annum, amounting to Rs. 44,62,500/- (Rupees Forty-Four Lakhs Sixty-Two Thousand Five Hundred only), is questionable and denied in totality.
The petition is not maintainable as the interest component has been added to the principal amount with mala fide intent to initiate CIRP. The claimed amount of Rs. 1,14,62,500/- is misleading, and the actual disputed loan amount remains Rs. 70,00,000/-.
The loan was intended for general corporate purposes and should be treated as a business loan rather than a financial loan under Section 5(8) of the IBC. This distinction is crucial in determining the applicability of CIRP under the IBC, as the nature of the loan affects the legal rights and obligations of the parties involved. Therefore, the provisions of the IBC are not applicable.
The Appellant's inclusion of the interest amount of Rs. 44,62,500/- in the total claim is unwarranted and intended to unjustly increase the amount claimed under the CIRP. The principal loan amount of Rs. 70,00,000/- is acknowledged, but the inflated claim due to the disputed interest lacks basis and should be disregarded by this Appellate Tribunal. The interest of 15% per annum is denied as it does not form part of the present purpose under the application filed under Section 7 of IBC.
The Adjudicating Authority correctly observed that the Promissory Note dated 01.10.2018 was insufficiently stamped under Schedule 1 Article 49(b) of the Indian Stamp Act, 1899. This deficiency was highlighted in the clarification sought on 12.10.2023.
The appellant failed to produce the original Promissory Note during the proceedings, providing only a photocopy, which cannot be validated by impounding. This is in accordance with the precedent set by the Hon’ble Supreme Court in Hariom Agarwal vs. Prakash Chand Malviya (2008) 3 CTC 457, which states that an insufficiently stamped instrument cannot be admitted as secondary evidence.
The Adjudicating Authority rightly concluded that if the original instrument was produced, it could be impounded under Section 33 of the Indian Stamp Act, 1899, with the necessary stamp duty and penalty to be collected under Section 35 and sent to the Collector as required under Section 38 of the Act. The appellant’s failure to address this issue further undermines their claim.
The Adjudicating Authority correctly applied the judgment in Thenappa Chettiar vs. Andiyappa Chettiar (AIR 1971 MAD 290), which clarifies that the duty paid on a Promissory Note “payable on demand” under Schedule I Article 49(a)(iii) of the Indian Stamp Act, 1899, was insufficient in this case. The issue was correctly identified as related to the Stamp Act, not the IBC.
The Adjudicating Authority appropriately focused on the insufficiency of the stamping on the Promissory Note rather than solely on the existence of debt and default. This legal nuance is critical, as procedural and evidentiary compliance is fundamental to the adjudication process.
For the foregoing reasons, the respondent respectfully requests that this Appellate Tribunal uphold the Impugned Order dated 29.02.2024 passed by the Ld. Adjudicating Authority, thereby dismissing the appellant's application under Section 7 of the IBC.
Appraisal:
Heard both parties and perused all documents on record.
The main issue for Consideration is whether there exists a debt and default as defined under Section 7 of the IBC in the instant case.
Existence of Debt and Default: The primary requirement for admitting an application under Section 7 of the IBC is the existence of a debt and default. The Appellant has presented several documentary evidence like Loan Agreement dated 01.10.2018, Unsecured Demand Promissory Note dated 01.10.2018, Independent Audit report by N.R. Panchal & Co and also record of information utility authenticated by NeSL on 22.08.2023.
Loan Agreement dated 01.10.2018, which is a registered document, has clear mention of the principal amount of Rs 70 Lakhs and also the interest @15%. The relevant clauses are extracted herein:
This document also has a clause for a promissory note which is not registered. The relevant clause is as follows:
And the unsecured promissory note is as follows:
From the above material on record, it is evident that in October 2018, a Loan Agreement dated 01.10.2018 was executed between the Appellant and the Respondent for disbursal of loan of Rs. 70,00,000/- which was to be repaid by the Respondent within a period of 36 months along with the accumulated interest calculated at 15% per annum. Also, document reveals that an Unsecured Demand Promissory Note dated 01.10.2018 was also executed by the Respondent in favour of the Appellant as a security and the same has been recorded in Clause 4 of the Loan Agreement.
The argument of the Respondent-CD that the loan amount of Rs.70,00,000/- was for general Corporate purposes and was in nature of business loan and not a financial loan as explained under Section 5(8) of the Code is not borne out from the facts and the loan agreement itself and cannot be accepted.
Further we look into other evidence of the Independent Audit report by N.R. Panchal & Co. in 2019. An independent audit of the Respondent/Corporate Debtor was conducted by N.R. Panchal & Co. (Chartered Accountants) and an Annual Report dated 28.06.2019 was generated by N.R. Panchal & Co. The loan granted by the Appellant is reflected in the balance sheet attached to the said report wherein a loan amount of Rs. 70,00,000/- granted by the Appellant is clearly mentioned under the heading of ‘Non-Current Liabilities’.
Now we further look into the other evidence of the information utility. On enquiry by the Adjudicating Authority, the Appellant during the proceedings submitted the record of financial information i.e., ‘Form C’, on the portal of the information utility namely National E-Governance Services Limited (NeSL) which was subsequently authenticated by NeSL on 22.08.2023 pursuant to which ‘Form D’ i.e., ‘Record of Default’ was issued to the Appellant in respect of the default of debt owed by the Respondent/Corporate Debtor.
The above-mentioned evidence presented by the Appellant, including the balance sheet and the 'Record of Default', unequivocally establishes the debt and default.
Stamping of Promissory Note:
The Adjudicating Authority's focus on the stamping issue of the unsecured promissory note, while relevant, should not overshadow the clear evidence of debt and default. Its legal validity has been well settled by the Hon’ble Apex court in its Judgement in Curative Petition (C) No. 44 of 2023 in Review Petition (C) No. 704 of 2021 in Civil Appeal No. 1599 of 2020 in which seven judge bench acknowledges and adopts the revised legal stance on the enforceability of unstamped arbitration agreements in the case “IN RE INTERPLAY BETWEEN ARBITRATION AGREEMENTS UNDER THE ARBITRATION AND CONCILIATION ACT 1996 AND THE INDIAN STAMP ACT 1899”, the relevant portion is as follows:
“ …
M. Conclusions
224.The conclusions reached in this judgment are summarised below:
a. Agreements which are not stamped or are inadequately stamped are inadmissible in evidence under Section 35 of the Stamp Act. Such agreements are not rendered void or void ab initio or unenforceable;
b. Non-stamping or inadequate stamping is a curable defect;
c. An objection as to stamping does not fall for determination under Sections 8 or 11 of the Arbitration Act. The concerned court must examine whether the arbitration agreement prima facie exists;
d. Any objections in relation to the stamping of the agreement fall within the ambit of the arbitral tribunal; and
e. The decision in NN Global 2 (supra) and SMS Tea Estates (supra) are overruled. Paragraphs 22 and 29 of Garware Wall Ropes (supra) are overruled to that extent......”
It has been clearly brought out in the above judgement of the Apex Court that Agreements which are not stamped or are inadequately stamped are inadmissible in evidence under Section 35 of the Stamp Act and such agreements are not rendered void or void ab initio or unenforceable and further Non-stamping or inadequate stamping is a curable defect and therefore as claimed by the Appellant unstamped “confirmation and undertaking” doesn’t make the whole process illegal if this document is not even relied upon as an evidence. In this backdrop we need not look into the claim of the Appellant that the Promissory Note was sufficiently stamped under Clause 49(iii) of the Indian Stamp Act, 1899. Even if there was an issue with the stamping, it should not detract from the established debt and default. The precedence set by the Hon’ble Apex Court suggests that minor procedural lapses should not impede the substantive justice under IBC.
In this backdrop reliance by the Adjudicating Authority and also the Respondent on the ratio laid down by the Hon’ble Supreme Court of India in the case Hariom Agarwal vs Prakash Chand Malviya 2008(3) CTC 457 wherein it was held that a photocopy of an instrument that is not duly stamped cannot be validated by impounding and cannot be admitted as secondary evidence, instrument under Section 2(14) means only original and does not include a copy thereof, loses its relevance, particularly when other compelling material is on record to establish debt and default.
It is evident that, the debt and default are clearly established by the material on record in the form of the Loan Agreement, the Audit Report and also Record of Default (Form D) from the Information Utility (NeSL) taken together, as was examined in earlier part of the Appraisal.
Conclusion
For the reasons stated above, this Appellate Tribunal finds that the Adjudicating Authority erred in dismissing the application under Section 7 of the IBC. The existence of debt and default has been clearly established, and the procedural requirements have been met by the Appellant. The issue of stamping does not outweigh the substantive evidence of debt and default.
40. Order
o The appeal is allowed.
o The Impugned Order dated 29.02.2024 passed by the Adjudicating Authority is set aside.
o The application filed by the Appellant under Section 7 of the IBC deserves to be admitted.
o The matter be taken up within 10 days by the Adjudicating Authority for initiating the CIRP as per the IBC provisions and to pass consequential orders. Each party shall bear its own costs.