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Judgment
Justice Rakesh Kumar Jain:
This appeal is filed by a member of the suspended board of directors of Smaaash Entertainment Pvt. Ltd. (Corporate Debtor) against the order dated 06.05.2022, passed by the Adjudicating Authority (National Company Law Tribunal, Mumbai Bench III) in C.P. (IB) No. 935(MB)/2020 by which an application filed under Section 7 of the Insolvency and Bankruptcy Code, 2016 (in short ‘Code’) read with Rule 4 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 (in short ‘Rules’) for resolution of unresolved financial debt of Rs. 2,924,730,442/- by Edelweiss Asset Reconstruction Company Ltd. (Respondent No. 1) as Financial Creditor, in its capacity as trustee of EARC Trust SC 384 (Assignee of the rights of the assignor ECL Finance Ltd.) vide assignment deed dated 28.06.2019, has been admitted.
The facts in brief, extracted from the memorandum of appeal, are that the Corporate Debtor i.e. Smaaash Entertainment Pvt. Ltd., engaged in providing gaming arcade services and sporting entertainment services, issued 14.75% secured redeemable non-convertible debentures in September, 2017 to ECL Finance Ltd. at par with face value of Rs. 10 lakhs per debenture for an aggregating amount of Rs. 280 Crores at a private placement basis in two tranches. The first tranche was up to Rs. 258 Crores and the second tranche was up to Rs. 22 Crores.
The debenture trust deed was executed between the Corporate Debtor and Catalyst Trusteeship Limited on 17.08.2017 (amended by first supplemental dated 15.01.2018).
Sam Family Trust and AHA Holdings Pvt. Ltd. executed security documents in favour of Catalyst Trusteeship Limited and created mortgage over certain properties in favour of Catalyst Trusteeship Ltd. The Appellant also created a mortgage over its certain properties in favour of Catalyst Trusteeship Ltd.
Catalyst Trusteeship Limited issued a recall notice dated 24.07.2019 to the Corporate Debtor, mortgagors and guarantors, claiming that the Corporate Debtor was required to serve interest on 30.05.2019 and 30.06.2019, which it failed and is thus in default.
ECL Finance Ltd. also executed an assignment agreement with EARC Trust SC 384 on 28.06.2019 and the application, under Section 7 of the Code, was filed before the Adjudicating Authority by Edelweiss Asset Reconstruction Company Ltd. (Respondent No. 1), acting as a trustee of EARC Trust SC 384.
On the other hand, Catalyst Trusteeship Ltd. issued notice to Sam Family Trust, AHA Holdings Pvt. Ltd. and other guarantors of the Corporate Debtor and invoked the guarantees. Catalyst Trusteeship Ltd. took measures under the Securitisation And Reconstruction Of Financial Assets And Enforcement Of Security Interest Act, 2002 (in short ‘SARFAESI Act’) which was challenged by the Sam Family Trust and AHA Holdings Pvt. Ltd. before the DRT, Pune by way of SA No. 207 of 2021 and 208 of 2021.
It is alleged that in this interregnum, the Respondent No. 1 filed an application i.e. I.A. No. 1930 of 2020 before the Adjudicating Authority to restrain the Corporate Debtor from alienating or transferring the assets. The Respondent No. 1 also filed an application i.e. I.A. No. 2034 of 2020 for urgent listing of I.A. No. 1930 of 2020. Both I.As with CP (IB) 935/2020 were listed on 19.01.2021 and the Adjudicating Authority directed the Corporate Debtor to maintain status quo. I.A. No. 2034 of 2020 and 1930 of 2020 were disposed of.
It is pertinent to mention that the Financial Creditor/Respondent No. 1 has given the date of default as 28.05.2019 in the petition filed under Section 7 of the code.
The applications filed by Sam Family Trust and AHA Holdings Pvt. Ltd. before the DRT, Pune was allowed on 28.02.2022 holding that the account had not become NPA:
“51. In the facts and circumstances, I hold that the demand notice under section 13(2) was issued when neither principal amount was due nor the interest payable was overdue. Different dates of NPA shows that the Respondents were themselves not sure in respect of date of NPA. NPA is the main crux in issuing 13(2) notice which is found missing in the circumstances as on date of notice under section 13(2) of Act. On this count the Securitisation Application deserves to be allowed.”
It is the grievance of the Appellant that when the matter was listed before the Adjudicating Authority on 15.03.2022, request of the Appellant (Corporate Debtor) to file additional document on account of subsequent development was not allowed rather the order was reserved. The order passed on that date is “C.P. 935 of 2020 & 1930 of 2020. Heard both sides and orders are reserved. Both parties are directed to file written submissions within two days”.
This order was challenged by the Appellant by way of i.e. CA(AT) (Ins) No. 322 of 2022 which was dismissed on 28.03.2022 with the following order:
“This Appeal has been filed against the following order dated 15.03.2022 passed by the Adjudicating Authority (National Company Law Tribunal), Mumbai Bench, Court III:
“Counsel for both sides present. Parties directed to file WS within 2 days. Reserved for Orders.”
We are of the view that above is no such order against which an Appeal can be entertained. This Appeal is premature. It shall be open for the Appellant to take all pleas and submissions after judgment is delivered if they are so aggrieved. The Appeal is dismissed.”
It is alleged that the assignment of debt by EARC Trust SC 384 was challenged by the Appellant by way of Writ Petition (C) No. 10663 of 2020 before the Hon’ble Delhi High Court but it was withdrawn vide order dated 23.07.2021 to approach the court of appropriate jurisdiction.
It is further alleged that thereafter the Appellant filed a suit before the Hon’ble High Court of Bombay that the assignment agreement dated 28.06.2019 be declared as null and void. The said suit was registered as commercial suit (L) no. 1292 of 2022 in which the Ld. Single Judge passed the order:
“Accordingly, the deed of assignment dated 28.06.2019, prima facie appears to have been executed on the misconceived premise that the loan accounts of Applicants/Plaintiffs were NPA/SMA-2 accounts. Accordingly, they cannot be acted upon. In view thereof, the Defendant Nos. 1 to 3, their servants, agents and officers are required to be restrained by an order and injunction of this court from in any manner acting in pursuance of the Assignment Agreement dated 28.06.2019 on substance or otherwise in any other from or in any other manner whatsoever.
15.....
(i) Till the hearing of the interim applications, ad-interim relief is granted in terms of prayer clause (a) in both the interim applications i.e. interim application (L) No. 994 of 2022 and interim application (L) 1294 of 2020.”
It is pertinent to mention that the order dated 19.04.2022 was challenged in appeal before the Bombay High Court and was stayed vide order dated 05.05.2022 which is as under:
“6. Therefore, in short debts are admitted by Respondent No. 1 and admittedly amounts have not been paid since August, 2018 in the case of AHA Holdings Pvt. Ltd. and 28.02.2019 in the case of Smaaash Entertainment Pvt. Ltd. Hence, we do not agree with the impugned order which is hereby stayed.”
However, the commercial suit (L) No. 987 of 2022, challenging the assignment agreement is still pending. The order dated 05.05.2022 was challenged by the Appellant herein by way of SLP(C) D. No. 26154/2022 before the Apex Court in which the following order was passed on 19.09.2022 which is reproduced as under:-
“1.Permission to file the Special Leave Petition is granted.
2 Delay condoned.
3 The ad-interim order of the learned Single Judge dated 19 April 2022 has been stayed by the Division of the High Court of Judicature at Bombay on 5 May 2022 while admitting the appeal. The Division Bench has specifically clarified that the pendency of the appeal shall not come in the way of the hearing of the interim application and that “learned Single Judge may dispose the interim application in accordance with law”. The reasons contained in the impugned order of the Division Bench shall not be regarded as a final or conclusive expression of opinion since they are only confined to the admission of the appeal and an ad-interim stay. The appellants would be at liberty to move the Single Judge for early hearing.
4 The Special Leave Petition is accordingly disposed of.
5 Pending applications, if any, stand disposed of.”
It is further pertinent to mention that the order dated 28.02.2022 passed by the DRT, Pune was stayed by the DRAT, Mumbai in appeal no. 31 of 2022 vide its order dated 03.06.2022 which is reproduced as under:-
“Reply which was directed by Tribunal within three weeks is being filed today with copy to other side.
Appellant had already sought stay of the entire operation in impugned order. That impugned order for stay was restricted to restoration of the possession on the understanding that both sides would be ready for hearing alongwith Appeal No. 30 of 2022.
It is submitted by Ld. Counsel representing for Respondent that arguing counsel is not present today due to personal reasons, therefore, he seeks adjournment.
In view of the fact that the reply has been filed today and since the Respondents have sought time, I find that the Appellants are entitled to stay the impugned order until further order.
Compilation submitted by Ld. Counsel for the Appellant be taken on record.
Rejoinder, if any, shall be filed with copy to the other side.
Post on 04.07.2022 for hearing.”
Besides aforesaid facts which are borne out from the record, it would be relevant to refer to certain orders passed by this Tribunal during the pendency of this appeal, which are reproduced as under:
“23.05.2022: Heard Shri Abhijeet Sinha, Learned Counsel for the Appellant and Shri Ramji Srinivasan, Learned Senior Counsel for the Respondent No.1.
This Appeal has been filed against the order dated 06.05.2022 passed by the Adjudicating Authority (National Company Law Tribunal), Mumbai Bench, Court-III admitting Section 7 Application filed by the Respondent. Several submissions have been raised on behalf of the Appellant including violation of principle of natural justice, the Respondent being only Debenture Holder not entitled to initiate proceeding.
Shri Ramji Srinivasan, Learned Senior Counsel for Respondent No.1 opposing the submission of the Learned Counsel for the Appellant submits that in view of the fact that there are several materials which indicate that debt and default is proved, admission of the Application cannot be faulted. He submits that insofar as the principle of natural justice is concerned, the document which is sought to be relied and claimed by the Appellant not been able to produce before the Adjudicating Authority was order dated 28.02.2022 of the Debt Recovery Tribunal which may not be relevant for admitting Section 7 Application.
Shri Abhijeet Sinha, Learned Counsel for the Appellant submits that the Appellant has approached the Respondent for making an offer of some settlement.
Shri Ramji Srinivasan, Learned Senior Counsel for Respondent No.1 submits that although Appellant submits that Appellant is ready to make upfront payment of Rs.30 Crores but in the e-mail, they said that the said payment can be made only after approval of one-time settlement within one month from signing of the settlement.
Be that as it may. Issue notice. Shri Ramji Srinivasan, Learned Senior Counsel accepts notice on behalf of Respondent No.1. Shri Bhrugesh Amin, Learned Counsel accepts notice on behalf of Respondent No.2. No further notice need be issued. Let reply be filed within one week. Rejoinder, if any, may be filed by the next date.
List the Appeal on 02.06.2022. Subject to Appellant depositing Demand Draft of Rs.30 Crores in favour of “The Pay and Accounts Officer, Ministry of Corporate Affairs, New Delhi” within one week from today, the Interim Resolution Professional shall collate the claims but shall not constitute the Committee of Creditors. We further observe that in event the amount is not deposited within one week from today, this interim order shall stand automatically vacated.
31.05.2022: Mr. Abhijeet Sinha, Ld. Counsel appearing for the Applicant in I.A. No. 1705 of 2022 submits that in pursuance of the order passed by this Appellate Tribunal on 23rd May, 2022, an amount of Rs. 11 Crores have been deposited and he seeks liberty to deposit rest of Rs. 19 Crores by 2nd June, 2022 when the matter is already fixed. The prayer is allowed.
Subject to above, the interim order already granted shall continue till 2nd June, 2022.
02.06.2022: Learned Counsel for the Appellant submits that an amount of only Rs.11Crores/- have been paid but balance of Rs.19Crores/- has not yet been paid.
In view of the matter, we are of the view that the Interim Order dated 23/05/2022 staying the constitution of CoC is withdrawn. However, it shall be open for the Appellant after making payment of Rs.19Crores/- to make an appropriate Application for any Interim Relief as may be advised.
Learned Counsel for the Appellant may file the 'Rejoinder Affidavit' within three weeks.
List this Appeal on 26th July, 2022.”
Counsel for the Appellant has argued that the Adjudicating Authority has not followed the principle of natural justice because due opportunity was not granted to argue the matter before it in as much as when the matter was taken up for hearing on 15.03.2022, Advocate Sujit Lohaty had appeared on behalf of the Appellant and requested for an adjournment to place on record subsequent events but no time was given and was not permitted to argue orally as well. In this regard, affidavit dated 21.03.2022 of Sujit Lohaty, Adv. of High Court of Bombay has been attached.
On the other hand, Counsel for Respondent, in this regard, has submitted that the Adjudicating Authority had given opportunity to both sides for arguments and thereafter reserved the order. It is further submitted that even in the order dated 15.03.2022 the said Adv. Sujit Lohaty is not recorded as present rather another Adv. Ankit Worlikar was present on behalf of the CD/Appellant. In this regard, Counsel for the Respondent has relied upon a decision of the Hon’ble Supreme Court in the case of State of Maharashtra Vs. Ramdas Shrinivas Nayak and Anr. (1982) 2 SCC 463, to contend that the statement of fact regarding proceedings in the court are conclusive and not open to be contradicted in appeal. It is further submitted that any such affidavit should have been filed before the same court instead of making a part of the Appeal. It is further submitted that in the case of Dharampal Satyapal Limited Vs. Deputy Commissioner of Central Excise, Gauhati & Ors. (2015) 8 SCC 519, it has been held that if a hearing would not change the ultimate conclusion reached by the decision maker then it is not necessary to grant a hearing and therefore, until and unless prejudice is shown, every violation of a natural justice may not lead to the conclusion that the order passed is always null and void. Moreover, the Respondent has also filed an affidavit of Rahul Dev, Adv. to counter the assertion made by the Appellant through affidavit of Sujit Lohaty.
Thus, from the aforesaid facts and circumstances much less the order recorded by the Adjudicating Authority on 15.03.2022 of hearing the parties before reserving the order and in view of the decisions of Hon’ble Supreme Court in the case of State of Maharastra (Supra) and Dharampal Satyapal Limited (Supra), it cannot be said that the principle of natural justice has been violated for not granting an opportunity of hearing. However, in the interest of justice the subsequent events which the Appellant wanted to show i.e. the order passed by the DRT, Pune on 28.02.2022 holding that the account had not become NPA, can be taken into consideration even now.
As a matter of fact, the Appellant has challenged the locus of Respondent No. 1 to file the application under Section 7 of the Code on the ground that it is not a financial creditor to the Corporate Debtor. In this regard, it has been argued that a suit has been filed in the High Court of Bombay seeking declaration that the assignment deed dated 28.06.2019 is null and void in which ad-interim injunction was issued on 19.04.2022 before the impugned order could have been passed on 06.05.2022. Meaning thereby, the locus standi of the Appellant was not established. However, Counsel for the Respondent has submitted that the order dated 19.04.2022 was stayed by the Division Bench of High Court of Bombay in appeal on 05.05.2022 whereas the impugned order was passed on 06.05.2022. It is also submitted that mere pendency of the suit for declaration is thus not suffice to stall the proceedings for the initiation of CIRP when the debt and default has been proved.
Counsel for the Appellant has then argued that the issue regarding the debt was decided in favour of the Appellant by the DRT, Pune on 28.02.2022 and once there was no NPA, the question of filing of the application under Section 7 of the Code on account of a default was neither here nor there. In this regard, Counsel for Respondent has submitted that since the subsequent events have been seen by this Tribunal, it would be apt to mention that the order of 28.02.2022 purported to have been passed by the DRT, Pune was stayed by the DRAT, Mumbai in appeal No. 31 of 2022 on 03.06.2022.
It is further submitted that even the order dated 05.05.2022 of the Division Bench of High Court of Bombay passed in appeal was tested by the Appellant by way of SLP filed before the Hon’ble Supreme Court which was disposed of on 19.09.2022. Therefore, it is submitted that the effect of the order dated 19.04.2022 has been wiped out as also the order dated 28.02.2022 of the DRT, Pune by the order dated 03.06.2022 by the DRAT, Mumbai.
There is force in the submissions made by Counsel for Respondent in respect of the issue regarding the locus of the Respondent in filing the petition under Section 7 of the Code because the order dated 19.04.2022 of the Single bench was stayed by the Division Bench of the High Court of Bombay on 05.05.2022 and was further upheld by the Hon’ble Supreme Court vide order dated 19.09.2022.
Similarly, the issue regarding the NPA, decided in favour of the Appellant by the DRT, Pune on 28.02.2022 has been put to rest by way of stay by the DRAT, Mumbai on 03.06.2022, therefore, the Adjudicating Authority has not committed any error in passing the order of admission as there is a debt and default which is required to be looked into for the purpose of initiation of proceedings under Section 7 of the Code.
Consequently, we do not find any merit in the present appeal and the same is hereby dismissed. No costs.
However, before parting with this order, we may hasten to add that since we have dismissed the appeal, therefore, the amount of Rs. 11 Crores deposited by the Appellant in pursuance of the order dated 23.05.2022 passed by this Tribunal be returned to the Appellant within one month.