Jose M.M vs State Bank Of India

NARESH SALECHA, MEMBER (TECHNICAL)

The Present Appeal is filed against the common `impugned order’ dated 24.02.2022, passed in CP (IBC)/37/KOB/2021 & CP (IBC)/38/KOB/2021 by the `Adjudicating Authority’, `National Company Law Tribunal’, Kochi Bench, Kerala, whereby, the `Adjudicating Authority’ admitted application under Section 95(1) of Insolvency & Bankruptcy Code, 2016 (in short IBC) `CIRP’ proceedings filed by `State Bank of India-Respondent/Financial Creditor’ (in short `FC’) against `Corporate Debtor’ (in short `CD’) and `Personal Guarantors’ (in short `PG’) and initiated `Insolvency & Resolution Process’ against `Appellant’ under Section 100 of IBC and appointed `Mr. Jossy Steephen Kattur’ as `Insolvency Resolution Professional’ (in short `IRP’). Since common issues and legal points are involved in both the `Appeals’ bearing `Appeal’ numbers Company Appeal (AT) (CH) (INS) No. 227 of 2022 & Company Appeal (AT) (CH) (INS) No. 262 of 2022, both are being taken up together and common order is being passed accordingly.

Mrs. Merin Jose- Appellant/PG [MD of ITMA Hotels India Pvt. Ltd. (in short ITMA)] in Company Appeal (AT) (CH) (Insolvency) No. 227 of 2022 and Mr. Jose M.M.- Appellant/PG Director (in ITMA) in Company Appeal (AT) (CH) (Insolvency) No. 262 of 2022 have been involved in hospitality industry since year 2010. A consortium of banks consisting of erstwhile State Bank of Travancore (SBT) along with State Bank of Bikaner & Jaipur (SBBJ) sanctioned term loan facilities of Rs. 74 Crores to CD (ITMA) for construction of a Star Hotel under name “Jomer Symphony”. The facility was further renewed in the year 2013 for Rs. 95.7 Crore along with working capital facility of Rs. 7 Crore.

On default in the payment by `Corporate Debtor’, SBT declared accounts of `Corporate Debtor’ as NPA in October, 2015 and SBBJ also declared accounts of `Corporate Debtor’ as NPA in November, 2015. Subsequently, Financial Creditor filed OA No. 443/2016 for recovery of then outstanding amount of Rs. 113.2 Crores before Debt Recovery Tribunal at Ernakulam.

Subsequent to merger of SBT & SBBJ with SBI (`FC’) on 31.03.2017 the accounts of `CD’ were transferred and maintained by `FC’.

The Debt Recovery Tribunal pronounced final order dated 20.09.2019 between SBI (Successor of SBT & SBBJ) and ITMA Hotels India Pvt. Ltd., (Defendant No. 1) Mrs. Merin Jose, Erstwhile MD of ITMA Hotels India Pvt. Ltd, (Defendant No. 2) Mr. Jose M.M, Erstwhile Director of ITMA Hotels India Pvt. Ltd. ((Defendant No. 3) along with Jomer Properties and Investment Pvt. Ltd. (Defendant No. 4) in the original OA before DRT. According to this, OA was disposed in terms of compromise settlement between the parties as per Clause No. 1-10 of compromise settlement. The Final Order accepted compromise settlement of Rs. 77 Crore to be paid in various tranches. Rs. 12 Crore had already been paid and remaining Rs. 65 Crore was to be paid subsequently. Out of this, Rs. 28 Crores was to be paid on or before 31.03.2019 and remaining Rs. 37 crores were required to be paid on or before 25.09.2019. In addition to this, Rs. 4.63 crore was to be deposited towards the deficit of 100% cash margin on outstanding bank guarantees.

Final Order further stated that in case payments are not effected within stipulated time, the compromise settlement would stand automatically withdrawn / cancelled and the entire amount as claimed in the OA along with the interest and cost shall become payable forthwith and would becomes recoverable from the defendants and mortgaged properties.

Admittedly, after the `CD’ made an upfront settlement payment of Rs. 12 crore and Rs. 5 crore was paid on 31.12.2019, `CD’ failed to make balance payments as per terms in compromise settlement. Aggrieved by this default, `FC’ filed an Application bearing No. CP (IB)/30/KOB/2020 before the `National Company Law Tribunal’, Kochi Bench, to initiate `Corporate Insolvency Resolution Process’, against the `CD’ and `PG’ under Section 7 of the IBC.

Aggrieved by `Impugned Order’ dated 24.02.2022, the present two appeals as discussed above, have been filed before this `Appellate Tribunal’.

Learned Counsel for the Appellant brought out the facts of the case during the course of arguments and mentioned that due to COVID-19 Pandemic, `CD’ could not make payments as per compromise terms before the DRT, Ernakulam.

Learned Counsel for the Appellant admitted that Appellant/s were made party in the DRT Proceeding, however, it was made incapacity as MD/ Director, respectively of the ITMA (`CD’) and not in personal capacity. Hence, it will be incorrect to proceed against them in the present case.

Learned Counsel for the Appellant further brought out that after settlement between CD and FC, the final order was passed by the DRT, Ernakulam and one specific clause in the final order was stipulated in eventuality of any future default in the payments within the stipulated time. The specific clause which was incorporated in the Final Order is mentioned in Para-4 of the ‘Memo of Appeal’, which is mentioned here as under:-

Learned Counsel for the Appellant takes a plea that instead of following the final order of Debt Recovery Tribunal, Ernakulam, the Respondent filed an Application, before the `Adjudicating Authority’, (`National Company Law Tribunal’), Kochi Bench, for initiating `Corporate Insolvency Resolution Process’), which was not in accordance with law.

Also, Learned Counsel for the Appellant submitted that there was no specific inclusion of ‘penal interest’ in the final order of the Debt Recovery Tribunal, Ernakulam. Hence, penal interest amounting to Rs. 129,38,65,395.94/-was an incorrect one.

Learned Counsel for the Appellant also mentioned that action of `FC’ is barred by limitation, since, account of the `CD’ was made `NPA’ in the year 2015, whereas, notice to guarantors was given on 17.11.2015 and application under Section 95(1) of the IBC was made on 26.10.2021 almost after 6 years from the date when the accounts of `CD’ were declared `NPA’.

Learned Counsel for the Appellant further argued that Section 238 A of the IBC clearly stipulate that “the provisions of the Limitation Act, 1963 shall, as far as may be, apply to the proceedings or appeals before the Adjudicating Authority, the National Company Law Appellate Tribunal, the Debt Recovery Tribunal or the Debt Recovery Appellate Tribunal, as the case may be.”

Learned Counsel for the Appellant cited cases of Hon’ble Supreme Court in the matter of Babulal VardharjiGurjar vs. Veer Gurjar Aluminium Industries Pvt. Ltd. & Ors. Reported in (2020) 15 SCC 1 and B.K. Educational Services Pvt. Ltd. vs. Paras Gupta & Associates: AIR 2018 SC 5601.

Learned Counsel for the Appellant also raised issues regarding debt and dues itself claimed by `FC’ stating that these are uncertain, disputed and imaginary claims.

Finally, Learned Counsel for the Appellant referred to the Hon’ble Supreme Court of India Judgement in Swiss Ribbons vs. Union of India, 2019 (4) SCC 17, according to which, IBC is a beneficiary legislation to put `CD’ back on its feet and not merely `recovery legislation for creditors’.

Learned Counsel for the Appellant concluded with prayer that `impugned order’ dated 24.02.2022, may be suspended along with action taken by `Insolvency Resolution Professional’ also be suspended with immediate effect.

Learned Counsel for the Respondent vehemently opposed the `Appeal’ and relief sought therein. Learned Counsel pointed that the `Appellant’ itself is only seeking to suspend the `impugned order’ dated 24.02.2022 as well as action of `IRP’ and as not sought any relief to set aside the `impugned order’ itself.

Recalling the facts of the case, Learned Counsel narrated various dates of sanctioning financial loan and working capital facility and for the same Mrs. Merin Jose and Mr. Jose M.M executed Personal Guarantees Agreement in favour of `FC’ on 03.07.2014. Subsequent to default of loan repayment, a loan recall notice was issued to `CD’ & `PG’ on 08.10.2015. A Notice under Section 13(2) of SARFAESI Act was issued on 17.11.2015, granting 60 days to `CD’ and `PG’ for making payments. As no payment was received from `CD’ and/or `PG’, `FC’ filed OA 443 of 2016 before DRT, Ernakulam on 27.06.2016 for recovery of the then outstanding of Rs. 113.20 Crore.

Subsequent to merger of SBT & SBBJ into SBI, accounts of `CD’ were transferred to SBI (`FC’) w.e.f 31.03.2017. `CD’ on 26.02.2019 requested for compromise settlement and the same was approved by `FC’ on 21.03.2019. According to the compromise settlement of Rs. 77 crore along with 100% cash margin for existing `BG’ of Rs. 5.03 crore was agreed to be paid on or before stipulated dates. However, `CD’ could made only Rs. 12 Crore on 27.03.2019 and Rs. 5 crore on 31.12.2019. Learned Counsel stated that based on the compromise settlement, final judgement was passed by DRT, Ernakulam on 20.09.2019. As per the final order, provision was made for recovery of full principle amount along with cost with interest in clause 3(6) of Settlement “If the deposits/Payments are not effected by the defendants within the time stipulated above, the compromise settlement would stand automatically withdrawn/cancelled and the entire amount as claimed in the OA along with interest and costs as claimed therein shall become payable forthwith and would become recoverable from the defendants and the mortgaged properties.” Learned Counsel stated that `FC’ has produced the statement of account with certificate issued under Bankers Books Evidence Act, 1891 to prove the debt which were never disputed by the `Appellant’ and total outstanding as of 31.07.2021 was Rs. 1,97,54,49,848,81/-.

Learned Counsel for the Respondent assailed the point of limitation prayed by the Appellant and mentioned that subsequent to declaration of account of `CD’ as `NPA’, `OA’ was filed before the DRT, Ernakulam on 27.06.2016 and based on the compromise settlement approved by `FC’ on the request of `CD’, DRT, Ernakulam passed a decree on 20.09.2019 and Rs. 5 crore was deposited by `CD’ on 31.12.2019. The `FC’ filed an `Application’ under Section 95(1) of IBC on 03.11.2021 within two years from the date of final order of DRT, Ernakulam and from the last payment. Learned Counsel further argued that taking Hon’ble Supreme Court Suo Moto Writ Petition No. 2020 excluding period of limitation from 15.03.2020 to 28.02.2022, the present `Application’ was filed within 74 days from the last payment of 31.12.2019 and is well within Limitation period.

To buttress his point, Learned Counsel referred to Hon’ble Supreme Court of India Judgment in the matter of CA No. 1650 of 2020 Dena Bank (now Bank of Baroda) vs. C. Shivakumar Reddy & Anr. and Sesh Nath Singh and Anr. Vs. BaidyabatiSheoraphuli Co-operative Bank Ltd. and Anr. (Civil Appeal No. 9198 of 2019) and also referred to the Judgement passed by this `Appellate Tribunal’ in the matter of Atharva Auto Logistics Pvt. Ltd. vs. Intec Capital Ltd. &Anr. in CA (AT) (Insolvency) No. 303 of 2022.

Learned Counsel therefore mentioned that the `Application’ made before the Adjudicating Authority was absolutely within the time frame stipulated in the IBC.

Learned Counsel also opposed the averment of the `Appellant’ regarding not following clause 3(6) of final order of the DRT, Ernakulam dated 31.12.2019. He further mentioned that according to clause 3(7), it was Applicant’s entitlement to obtain `Recovery Certificate’ and doesn’t come in way of his way of Application of IBC.

Learned Counsel stated that the Adjudicating Authority had appointed `Resolution Professional’ who had also confirmed debt in record and Resolution Process had also commenced on 24.02.2022 and the Resolution Process is at final stage and therefore `Appeal’ should be dismissed, being infructuous.

Concluding his pleadings, Learned Counsel for the Respondent submitted that the `Appeal’ filed is only with an intention to derail the `process of resolution’ and need to be dismissed with costs.

Heard the Learned Counsel for the Parties and also perused record available along with Written Submissions by the Parties. Several issues have been raised in the `Appeal’ which are required to be deliberated upon before coming to final conclusion. It will be necessary for us to take issue by issue discussion and we shall proceed accordingly in subsequent discussion;

Issues:- (i) Whether, debt was dues and default took placed?

29(a). To understand whether in the present appeal any debt existed at all, which was due and not paid resulting into default. We need to see the exact definitions of relevant sections in the IBC.

The `Debt’ has been defined in Section 3 (11) of IBC which is as under:-

Since, the term `Claim’ is mentioned in above definition of debt, we need to refer to definition of `Claim’, under Section 3(6) of IBC, which is as under:-

Similarly, `Default’ is also defined under Section 3(12) of IBC, which is as under: -

The `Financial Creditor’ and `Financial Debt’ is also defined under Section 5(7) & Section 5(8) of the IBC, which is as under: -

29(b) As seen from above, ‘financial debt’ is an inclusive and non-exhaustive definition given under Section 5(8) of the IBC to mean “a debt alongwith interest, if any, which is disbursed against the consideration for time value of money. Financial creditors have relationship with the entity as financial contract, like loan or security etc.

29(c) We have noted from the Written Submissions of Respondent that FC has produced the statement of account with certificate issued under Bankers Books Evidence Act, 1891 to prove the debt which were never disputed by the Appellant and total outstanding as of 31.07.2021 was Rs. 1,97,54,49,848,81/-. While discussions the facts of the case above, it has already been noted that various term loan and working capital facilities were given by SBT & SBBJ which later merged into SBI (FC). This fact was never disputed by Appellant. We also note that subsequent to FC’s claim under SARFAESI Act and later before Hon’ble DRT, CD proposed compromise settlement which also clearly stipulated about existence and acceptance of debt in terms of both principal as well as interest.

Therefore, there was clear financial debt which was due and not paid and Adjudicating Authority has, therefore, rightly admitted Application under Section 95(1) of the IBC.

30(a). Learned Counsel for Appellant challenged action of FC being barred by limitation since, according to the Appellant, accounts of the CD were made NPA in the year 2015 whereas, notice to guarantors was given on 17.11.2015 and application under Section 95(1) of the IBC was made on 26.10.2021 almost after 6 years from the date when the accounts of CD were declared NPA.

30(b) From records available with us, the following picture emerges with reference to various dates on which events happened to determine about applicability of limitation act in appeal before us.

30(c). From above it is clear that final order was passed by Hon’ble DRT on 20.09.2019 and the last payment of Rs. 5 crore was made by CD on 31.12.2019, whereas, the Application under Section 95(1) filed before Hon’ble Adjudicating Authority on 03.11.2021. Considering the Hon’ble Supreme Court Suo Moto Writ Petition No. 2020 excluding period of limitation from 15.03.2020 to 28.02.2022 the present application was filed within 74 days from the last payment of 31.12.2019.

30(d). We would like to refer to Judgments of the Hon’ble Supreme Court of India in the matter of Dena Bank (now Bank of Baroda) vs. C. Shivakumar Reddy & Anr. Reported in (2021) 10 SCC 330. The relevant paragraphs of the Judgement is mentioned here as under:-

We would also like to refer to Judgments of the Hon’ble Supreme Court of India in the matter of Sesh Nath Singh and Anr. Vs. Baidyabati Sheoraphuli Co-operative Bank Ltd. and Anr. Reported in (2021) 7 SCC 313. The relevant paragraphs of the Judgement is mentioned here as under:-

Also referred to the Judgement passed by this Appellate Tribunal in the matter of Atharva Auto Logistics Pvt. Ltd. vs. Intec Capital Ltd. & Anr. in CA (AT) (Insolvency) No. 303 of 2022. The relevant paragraph of the Judgement is mentioned here as under:-

From above events, as well as case laws of Hon’ble Supreme Court of India and NCLAT it is clear that the Application u/s 95(1) was filed within Limitation Period and we therefore, do not find any error in the Judgment of Adjudicating Authority on this point.

31(a) Both the petitioners have taken plea that they had submitted the guarantee as MD/Director respectively of ITMA and not in their personal capacity, as such, the proceedings against them as PG by FC under Section 95(1) of the IBC is not tenable.

31(b) Similar issue came up in Judgment delivered by the Hon’ble Supreme Court in the matter of Lalit Kumar Jain vs. Union of India & Ors. Reported in (2021) 9 SCC 321 through several petitions before the Hon’ble Supreme Court challenging notification dated 15.11.2019 issued by Central Government along with seeking other relief under IBC concerning the validity of the Insolvency and Bankruptcy (Application to Adjudicating Authority for Insolvency Resolution Process for Personal Guarantors to Corporate Debtor) (in short PGCD) Rules, 2019 issued on 15.11.2019. In Para 3 of the said Judgment it was mentioned which is as herein under:

31(c). Hon’ble Supreme Court had rejected and challenge by PGCD to Central Government notification dated 15.11.2019 by which PGCD were brought within same regime of IBC as govern the CD themselves.

31(d). Part II Chapter-I and II of the IBC contains Section 4 to 54 provided for Insolvency Resolution and Liquidation for Corporate Person.

Section 2 of IBC described the Applications of IBC Code. Section 2(e) of the IBC which case in force w.e.f. 01.12.2019 in so far as they relate to Personal Guarantor to Corporate Debtor. The new section 2(e) came vide notification dated 15.11.2019. The notification also enforced certain other provisions, namely, Section 78, 79 & 94 to 187 (Part III) which provide for Insolvency & Bankruptcy of Individual and also Section 239 (Power to make rules), Section 240 (Power to make regulations) and Section 249 (Part V) in so far as they relate to PGCD.

31(e). With these amendments through the amended Section 2(e) pertaining to PGCD, it was made possible to subject PGCD to Insolvency Proceedings before same Adjudication Authority (NCLT)/ Appellate Authority (NCLAT) who decides matter related to CD. Thus, if the CD’s debt remains unpaid, the personal guarantor would not stand discharged but would himself be forced to face bankruptcy proceedings before the Adjudicating Authority.

After going through the various provisions of IBC as well as detailed judgement in the matter of ‘Lalit Kumar Jain (Supra)’ there is no doubt that personal guarantee given by Mrs. Merin Jose and Mr. Jose M.M are enforceable and Adjudicating Authority has correctly taken decisions accordingly. We therefore, do not find any error as regard this issue.

Issue(iv) Whether, on failure of settlement agreement, the FC need to go to DRT or can directly approach Hon’ble Adjudicating Authority for enforcing claims of FC against CD as well as personal guarantor.

32(a). Learned Counsel for the Appellant submitted that after settlement between CD and Respondent, final order was passed by the DRT, Ernakulam and one specific clause in the final order was stipulated that in eventuality of any future default in the payments within the stipulated time. Learned Counsel alleged that instead of following the final order of the DRT Ernakulam and going back to the DRT, Ernakulam, the Respondent filed an `Application’ directly before the `National Company Law Tribunal’, Kochi for initiating `CIRP’ which was not in accordance with law. In notes of Submissions filed on behalf of the Appellant in Company Appeal (AT) (Ins.) No. 227 of 2022. Ld. Counsel mentioned in his submissions, which is as herein under:-

32(b). Learned Counsel for the Respondent opposed the averment of the `Appellant’ regarding not following clause 3(6) of final order of the DRT, Ernakulam dated 31.12.2019. Learned Counsel further mentioned that according to clause 3(7) of final order of Hon’ble DRT, it was applicant entitlement to obtain recovery certificate and doesn’t come in way of his way of Application of IBC.

We will like to specifically refer to the concerned paras of final order of the Hon’ble DRT Ernakulam for examination of this issue raised by Petitioners. Para 3(6) & 3(7) which are as herein under:-

Thus, the DRT, Ernakulam order as mentioned in clause 3(7) give the right to the FC to apply for and obtain Recovery Certificate and not the mandatory obligation to do so. As such there is no embargo for FC not to approach the Hon’ble Adjudicating Authority, without approaching Hon’ble DRT.

32(c). Incidentally, this `Tribunal’, had passed the Judgment in the matter of Bimalkumar Manubhai Savalia vs. Bank of India &Ors. in Company Appeal (AT) (Insolvency) No. 1166 of 2019 as also deliberated on the issue and in Para 9 of the Judgement following ruling has been given :-

Thus, it is very clear that there was no requirement to approach the Hon’ble DRT for getting Recovery Certificate before approaching the Adjudicating Authority. We, therefore, do not find any merit in the contention of the Appellant on this issue.

33(a). Learned Counsel for the `Appellant’ submitted that there was no specific inclusion of ‘penal interest’ in final order of the DRT, Ernakulam. Hence, penal interest amounting to Rs. 129,38,65,395.94/- was incorrect.

33(b). Learned Counsel for the Respondent however stated that based on the ‘compromise settlement’ final order was passed by Hon’ble DRT on 20.09.2019. As per the final order, provision was made for recovery of full principle amount along with cost with interest in clause 3(6) of Settlement “If the deposits/Payments are not effected by the defendants within the time stipulated above, the compromise settlement would stand automatically withdrawn/cancelled and the entire amount as claimed in the OA along with interest and costs as claimed therein shall become payable forthwith and would become recoverable from the defendants and the mortgaged properties.” Learned Counsel stated that `FC’ has produced the statement of account with certificate issued under Bankers Books Evidence Act, 1891 to prove the debt which were never disputed by the Appellant and total outstanding as of 31.07.2021 was Rs. 1,97,54,49,848,81/-.

From the ‘compromise settlement’ as mentioned by the DRT, Ernakulam in the final order, it has been made clear that in case of failure of ‘compromise settlement’ entire amount as claimed in `OA’ along with interest and cost shall become payable. We took note from Form C filed by FC before `Learned Adjudicating Authority’ about details of Rs. 1,97,54,49,848.81 furnished as herein under in a tabular form:-

In any commercial loan, time value is very important. The definition of `financial debt’ as provided in Section 5(8) of IBC mentioned herein above. It makes clear that `Financial Debt’ along with interest against consideration for the time value of money is required. The DRT, Ernakulam has already provided in their final order about interest component in clause 3(6). Further in Para 1 of the final order of DRT, Ernakulam, future interest @ 13.95% is also provided for. The relevant Para 1 is provided as herein under:-

As such, the contention of Learned Counsel for the `Appellant’ is devoid of merit.

Based on the above discussions and reasons, this `Tribunal’, is of the considered view that no ground is made out for any interference by this `Tribunal’ with the `impugned order’ dated 24.02.2022 in CP (IBC)/37/KOB /2021 and CP (IBC)/ 38/ KOB/2021, passed by the `Adjudicating Authority’ (`National Company Law Tribunal’), Kochi Bench, Kerala, and accordingly, dismisses the instant Comp. App (AT) (CH) (Ins) No.262 of 2022 and Comp. App (AT) (CH) (Ins) No.227 of 2022. No costs. The connected pending Interlocutory Applications, if any, are Closed.