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Judgment
ORDER
The applicant L&T Finance Limited has filed present petition under Section 7 of the Insolvency and Bankruptcy Code, 2016 (hereinafter referred as I & B Code, 2016) seeking initiation of the Corporate Insolvency Proceedings against the Corporate Debtor i.e Perpendicular Construction Private Limited read with Rule 4 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules 2016 in Form 1 containing all the information as required in Part I, II, III, IV and V of the Form.
The Applicant is a company incorporated under the Companies Act, 1956 and is registered as Non-Banking Financial Institution (NBFC) with the Reserve Bank of India (hereinafter after referred to as Applicant/Financial Creditor). The Applicant has assigned Mr. Ruchir Jauhari (Zonal Head– North) as the Authorized Representative in the present case vide Board Resolution dated 18 October 2019 r/w Section –E (2) of Post Approval Delegation of Credit Related Powers r/w Letter of Authority 06 December 2021, annexed as Annexure A-3 (Colly) of the instant petition, who has signed the instant petition.
The Corporate Debtor i.e Perpendicular Construction Private Limited was incorporated on 14 November 2019 and is carrying on the business of Real Estate development with registered Office at Gautam Buddh Nagar, Uttar Pradesh (hereinafter, referred to as Respondent/Corporate Debtor). The Corporate Debtor submitted two applications of loan on 15 November 2019 to L & T Housing Finance Company Ltd which sanctioned a loan amount of Rs.90 crore crore and 50 crores to them. This Company later got merged with L&T Finance Limited, the Present Applicant/Financial Creditor. Corporate Debtor is represented by Mr. Aman Dwivedi and Mr. Akshay Mohiley Advocates.
The Applicant/Financial Creditor sanctioned two loans in favour of the Respondent/Corporate Debtor of Rs. 90,00,00,000 and 50,00,00,000 vide sanction letters dated 09 January 2020 and 06 August 2020 respectively. In pursuance of these two loans, Loan Agreement dated 14 January 2020 and a Facility Agreement dated 10 September 2020 were executed between both the parties. These two agreements are collectively referred a “Loan Agreements”. First Loan as per the Loan Agreement dated 14.01.2020 were to be utilised towards purchase of Mortgage Properties and other incidental expenses like stamp duty and other charges in relation to purchase of Mortgage Properties, and second loan as per the Facility Agreement dated 10.09.2020 were to be utilised for payment towards development management rights in relation to the Project of group housing over land measuring 25.709 acres at Samaspur Khalsa, Najafgarh , Delhi and for payment towards projects costs including construction costs, creating DSR and other and other incidental costs of the Facility.
Out of first sanctioned loan, Rs.86,00,00,000 and out of second sanctioned loan Rs.40,25,00,00,000 was disbursed. The period of loan repayment was 72 months from the date of disbursement with initial 36 months constituting moratorium period and next 36 months for repayment of the principal loan amount.
The loan carries an interest rate of “8.75% below the interest rate of (L&T Housing Finance Limited Prime lending Rate i.e 9% p.a (floating) plus applicable interest rate statutory levy (if any) on the principal amount of loan remaining outstanding each day. The PLR rate being 17.75% p.a.” The said interest rate was payable on 15th of each subsequent month. However, the first instalment of interest shall be payable till 14th day of next month from the date of disbursement. Both the loans were secured by the Security stated in Schedule III of the loan Agreement dated 14th January 2020
The Corporate Debtor had granted exclusive right on all the immovable mortgage properties in favour of the Creditor and all the receivables from the mortgage properties. The loan was secured by the Corporate Guarantee and Personal Guarantee from the Promoter along with pledge of 100% of the fully paid up Share Capital of the Borrower. Exclusive charge was also leviable on the Escrow Account and Debt Reserve Account and other reserves. In addition to this, a Hypothecation Deed was also executed as per the loan agreement by the Corporate Debtor.
It is claimed by the Applicant that the Corporate Debtor issued an unconditional Demand Promissory Note promising to pay the Applicant both the loan amounts advanced as per the loan agreements dated 14 January 2020 and Facility Agreement dated 10 September 2020 respectively.
The Corporate Debtor had remitted the interest on loan amount till 15 June 2021 and thereafter, defaulted in payment of interest till date. The loan disbursed by the Financial Creditor has been acknowledged by the Corporate Debtor and its liability towards repayment of the same along with interest. The Applicant/Financial Creditor by way of emails dated 13.03.2021 shared the balance statements in respect of the dues under the loan agreement with the Corporate Debtor. The said balance statements were duly accepted by the Corporate Debtor admitting its liability under the loan agreements. These emails of applicant and acceptance by the Corporate Debtor are annexed at Annexure A-15 (Colly) of the application. These two loans are also shown to be accepted/acknowledged by the Corporate Debtor as reflected in the audited financial statements of the Corporate Debtor prepared by an independent auditor and same is annexed as Annexure A-16 of the application.
It is also pointed out by the Applicant/Financial Creditor that apart from not paying the interest after 15 June 2021, the Corporate Debtor has also failed to fulfil many conditions of loan agreements as enumerated below:-
I. The Corporate Debtor has failed to create Debt Service Reserve.
II. The Corporate Debtor is obligated to deposit entire receivables in the designated escrow account. However, this has not been complied by the Corporate Debtor which is in absolute contravention to the terms of the loan Agreement.
III. Failure to obtain NOCs for sale of units due to which sale is void ab initio.
IV. Failure to route receivables through Escrow Account.
V. Failure to maintain security and receivable cover.
VI. Failure to achieve sales of units and sales of units and sales collections in the project inventory as per Project Inventory as per agreed schedule.
VII. Non-adherence to the agreed schedule of construction of the Project.
VIII. Failure to obtain RERA Registration and launch project for sale.
IX. Failure to submit sale MIS.
The Above Failure of the Corporate Debtor to honour the payment terms under the loan agreements coupled with non-payment of interest led to an ‘Event of Default’ as enumerated in the Loan Agreement. Thus, the financial creditor classified the account of the Corporate Debtor as Non-Performing Assets (“NPA”) on 13 October 2021.
As the default continued, the Applicant/Financial Creditor subsequently issued Recall notice dated 25 November 2021 declaring the total amount of Rs. 1,27,14,93,543.02 is due and payable as on 25 November 2021 together with interest. The Financial Creditor gave two days’ notice to the Corporate Debtor to pay the above outstanding amount but the Corporate Debtor failed to pay by 27 November 2021. Therefore, the present application under section 7 has been filed computing the total outstanding debt of Rs. 1,27,30,01,025.30/- (consisting of Principal of Rs.11921,65,113/- and interest Rs.510,84,616/- and additional interest Rs.208,52,511/- and TDS due Rs.59,34,881/- and Delay Payment Charges Rs.29,63,903/- as on 30.11.2021 for payment which the Corporate Debtor has defaulted. The detailed breakup of the outstanding amount has been given in Annexure A-6 of the application and the same is reproduced below:-
| Borrower | Due as on | Principal | Interest | Additional Interest | Delayed interest/Penal Interest | Total Dues | TDS Dues |
Perpendicular Construction | |||||||
| 15-Jul-21 | 36,32,450.00 | 1,41,97,454.92 | 7,44,197.00 | 2,45,74,1101.92 | Excluded | ||
| 15-Aug-21 | 1,95,85,986.00 | 1,57,25,652.96 | 8,34,187.00 | 3,61,45,825.96 | Excluded | ||
| 15-Sep-21 | 2,95,39,522.00 | 1,72,53,850.99 | 10,17,168.00 | 4,78,10,540.99 | Excluded | ||
| 15-Oct-21 | 3,84,44,400.00 | 1,87,32,752.97 | 12,82,856.00 | 5,84,60,008.97 | Excluded | ||
| 15-Nov-21 | 4,75,57,114.00 | 2,02,06,951.00 | 16,42,022.00 | 6,94,60,087..00 | Excluded | ||
| 30-Nov-21 | 1,19,21,65,113.00 | 5,70,19,497.51 | 2,08,52,5111.79 | 29,63,903.00 | 1,27,30,01,025 | Included |
A Statement of accounts of Financial Creditor reflecting the above said total outstanding amount of debt alongwith a Certificate in accordance with the Bankers Book of Evidence Acy,1891 are annexed as Annexure A-19 of Section 7 of Application. Particulars of the financial debt through various documents and records evidencing the default are provided in Part-V of the Application and supporting documents are also annexed with the Application.
In support of the total default amount of Rs.1,27,14,93,543.02 the Applicant/Financial has also filed Report of Default with the National E-Governance Services Limited dated 22 November 2021 but the same is shown as pending authentication by the CD and the same is annexed as Annexure-36.
Reply on Behalf of the Corporate Debtor
In the counter Affidavit, it is submitted by the Corporate Debtor that the transaction between Corporate Debtor and Financial Creditor is a one-sided non-negotiable arrangement. There is no substantial evidence to prove the disbursement of loan amount by the Financial Creditor for consideration of time value of money. Hence, it does not come within the definition of financial debt as provided under Section 5(8) of the Code consequently applicant is not financial creditor as per the provisions of the IBC, 2016.
Further, it is also submitted by the Respondent/Corporate Debtor that Applicant/Financial Creditor has only alleged based on the loan agreement dated14.01.2020 and 10.09.2020 that there is a financial debt. However, there is no evidence submitted by the applicant that there is actual disbursement of the loan amount to the applicant. It is out of the purview of the Section 5(8) of the IBC, 2016. It is further submitted that the Hon’ble NCLAT in Sanjay Kewalramani vs Sunil Parmanad Kewalramani, Company Appeal (AT) (Insolvency) No. 57 of 2018 held that
“…There is nothing on the record to suggest that 2nd and 3rd Respondents had given the loan in favour of the ‘Corporate Debtor’ which can be termed to be ‘disbursement of an amount for consideration for the time value of money’ as required under Section 5(8). Merely grant of loan and admission of taking loan will ipso facto not treat the 2nd and 3rd Respondents as ‘Financial Creditors’, till they show that it complies with the substantive definition or any one or other clause of Section 5(8). Mere fact that the company paid interest @ 12% per annum, during certain period cannot be the ground to hold that the ‘debt’ comes within the meaning of ‘Financial Debt’ to treat the 2nd and 3rd Respondents as ‘Financial Creditors’. As we find that 1st Respondent who signed and filed the application under Section 7 of the ‘I&B Code’ was not eligible to file the application not being a ‘Financial Creditor’, as held by the Adjudicating Authority, we hold that the petition at the instance of 2nd and 3rd Respondents were also not maintainable. …”
The applicant has also relied upon the Vidarbha Industries Power Ltd v. Axis Bank Ltd. (2022) 8 SCC 352 contending that admissibility of application under section 7 by the Adjudicating Authority is discretionary in nature which depends upon the debt, default and financial health of the corporate debtor. The relevant paras are as under:-
“76.The fact that the legislature used “may” in Section 7(5)(a) IBC but a different word, that is, “shall” in the otherwise almost identical provision of Section 9(5)(a) shows that “may” and “shall” in the two provisions are intended to convey a different meaning. It is apparent that the legislature intended Section 9(5)(a) IBC to be mandatory and Section 7(5)(a) IBC to be discretionary. An application of an operational creditor for initiation of CIRP under Section 9(2) IBC is mandatorily required to be admitted if the application is complete in all respects and in compliance of the requisites of the IBC and the rules and regulations thereunder, there is no payment of the unpaid operational debt, if notices for payment or the invoice have been delivered to the corporate debtor by the operational creditor and no notice of dispute has been received by the operational creditor. The IBC does not countenance dishonesty or deliberate failure to repay the dues of an operational creditor. 77. On the other hand, in the case of an application by a financial creditor who might even initiate proceedings in a representative capacity on behalf of all financial creditors, the adjudicating authority might examine the expedience of initiation of CIRP, taking into account all relevant facts and circumstances, including the overall financial health and viability of the corporate debtor. The adjudicating authority may in its discretion not admit the application of a financial creditor. 78. The legislature has consciously differentiated between financial creditors and operational creditors, as there is an innate difference between financial creditors, in the business of investment and financing, and operational creditors in the business of supply of goods and services. Financial credit is usually secured and of much longer duration. Such credits, which are often long term credits, on which the operation of the corporate debtor depends, cannot be equated to operational debts which are usually unsecured, of a shorter duration and of lesser amount. The financial strength and nature of business of a financial creditor cannot be compared with that of an operational creditor, engaged in supply of goods and services. The impact of the non-payment of admitted dues could be far more serious on an operational creditor than on a financial creditor. 79. As observed above, the financial strength and nature of business of financial creditors and operational creditors being different, as also the tenor and terms of agreements/contracts with financial creditors and operational creditors, the provisions in the IBC relating to commencement of CIRP at the behest of an operational creditor, whose dues are undisputed, are rigid and inflexible. If dues are admitted as against the operational creditor, the corporate debtor must pay the same. If it does not, CIRP must be commenced. In the case of a financial debt, there is a little more flexibility. The adjudicating authority (NCLT) has been conferred the discretion to admit the application of the financial creditor. If facts and circumstances so warrant, the adjudicating authority can keep the admission in abeyance or even reject the application. Of course, in case of rejection of an application, the financial creditor is not denuded of the right to apply afresh for initiation of CIRP, if its dues continue to remain unpaid.”
It is also submitted by the Corporate Debtor that the Financial Creditor was harassing them by threatening to recall the loan despite the fact that Corporate Debtor was servicing the said loan as per the loan agreement by paying all interests on time. The recall of loan vide recall notice dated 25th November 2022 by the Financial Creditor is illegal which delayed the construction of the project and hampered the revenue generation of the Corporate debtor.
In its written submission, the Corporate Debtor has presented an argument based on the loan agreement dated 20th March 2017, executed between the financial creditor and Supertech Ltd for the construction of the Eco Village Project. The Corporate Debtor has alleged that the Financial Creditor misappropriated the funds deposited in the Escrow account, which were intended for the aforementioned project. This misappropriation allegedly resulted in the inability of the Corporate Debtor to complete the project as well as the failure to repay the debt. The respondent contends that the recall notice issued on 25.11.2021 is deemed to be illegal on the grounds that the moratorium period of 36 months had not concluded on the aforementioned date. Instead, the completion of the moratorium period is anticipated on 12.02.2023, 17.02.2023, 29.12.2023, and 18.03.2023. Furthermore, the principal amount was not due on the specified date. Respondent/Corporate Debtor further contends that default in the payment of interest by the Respondent/Corporate Debtor is not supported by any evidence on record. Therefore, it does not touch any of the grounds of Section 7 and deserves not to be admitted accordingly.
Rejoinder on behalf of the Financial Creditor
It is submitted by the Financial Creditor that Corporate Debtor has defaulted in payment of interest from 15 July 2021 onwards which is evident from the Statement of Accounts of the Applicant annexed as Annexure A-19 to the application. The Corporate debtor has acknowledged and admitted its liability that it has availed secured long-term loan reflecting in the audited balance sheet as on 31 March 2020 annexed as Annexure A-16. The corporate debtor has also categorically admitted that it was servicing the said loan as per agreement in paras 8 and 12 of the Counter Affidavit.
It is also submitted by the Financial Creditor that Corporate Debtor has issued an unconditional demand Promissory Note promising to pay the Applicant the loan amount advanced as per the Loan Agreement dated 14 January 2020 and Facility Agreement dated 10 September 2020. 19. Lastly, it is submitted by the Financial Creditor that default in the payment of the loan amount led to the applicant resorting to Section 7 of the Code, 2016 to initiate Corporate Insolvency Proceedings against the Corporate Debtor.
Findings
We have heard the learned counsel of both the parties and have also examined the record carefully.
As regards to the admission of application filed under Section 7 by the Applicant/Financial Creditor for initiating CIRP, the Respondent/Corporate Debtor has at very outset challenged the Applicant being a Financial Creditor without fulfilling the requirement of the I & B Code, 2016 in this respect and it has been argued in the reply filed by the Corporate Debtor that mere grant of loan by the Financial Creditor and its admission by the Corporate Debtor in the absence of substantial evidence to prove the disbursement of loan amount by the alleged Financial Creditor, for consideration for time value of money will not treat the Petitioner/Applicant as a Financial Creditor till it is shown that the arrangement comply with the substantive definition or anyone of the other clauses of Section 5(8) of the I & B Code, 2016.
In this regard, a decision by the Hon’ble NCLAT in the case of Sanjay Kewalramani vs. Sunil Parmanand Kewalramani, Company Appeal (AT) (Ins.) No.57 of 2018 dated 12.07.2018 has also been cited.
In this regard, Ld. Counsel for the Applicant/Financial Creditor has forcefully argued that the said loan amount has been disbursed in various loan accounts of the Corporate Debtor as per the details disclosed in Part IV of the Application under Section 7. These details are given as under. Disbursement of Loan Amount 1:
| S. No. | Date of disbursement | Loan Account No. | Amount disbursed (Rs.) |
|---|---|---|---|
| 1. | 12.02.2020 | 6240068472 | 85,00,00,000 |
| 2. | 17.03.2020 | 6240069237 | 100,00,000 |
| Total | 86,00,00,000 | ||
Disbursements of Loan Amount 2:
| S. No. | Date of disbursement | Loan Account No. | Amount disbursed (Rs.) |
|---|---|---|---|
| 1. | 29.12.2020 | 6240074338 | 15,55,00,000 |
| 2. | 18.03.2021 | 6240074338 | 10,30,00,000 |
| 3. | 18.03.2021 | 6240074338 | 11,16,09,906 |
| 4. | 18.03.2021 | 6240074338 | 3,23,90,094 |
| Total | 40,25,00,000 | ||
It has also been shown that this loan amount has also been reflected in the audited balance sheet of the Corporate Debtor as on 31.03.2020 annexed with the application at Annexure A-16. Thus, we have found that the disbursal of loan is very much in evidence from the record and the same is found reflected in the Balance sheet of the Corporate Debtor. As the loan was disbursed, the Corporate Debtor has also started servicing the loan and the interest was paid as per the loan agreement till 15th June, 2021. Therefore, we find that the disbursement of loan has been admitted by the Corporate Debtor by starting to make the payment of interest as per the loan agreement and hence, no force has been found in the objection raised in the reply of the Corporate Debtor saying that no evidence on record has been produced by the Applicant showing the actual disbursement of the loan. The Corporate Debtor has also raised a point that mere grant of loan by Financial Creditor and its admission by the Corporate Debtor in the absence of the substantial evidence to prove the disbursement of loan would not make the Petitioner/Applicant to be a Financial Creditor as per the definition of Section 5(8) of the I & B Code 2016. In this regard, we have perused the definition of financial debt provided in Section 5(8) of the I & B Code, 2016. As per this definition, financial debt means a debt alongwith interest, if any, which is disbursed against the consideration for the time value of money and includes as per its clause (a) to be money borrowed against the payment of interest. As per the details available in the record and also reflected in the balance sheet under the head “Long Term Borrowing (secured loans)”, the borrowings made by the Corporate Debtor from the Financial Creditor very much exist and as per the loan agreement, interest was also started being paid by the Corporate Debtor which continued till 15th June, 2021 and thereafter, default occurred and therefore, the argument of the Corporate Debtor has not been found tenable in respect of the Applicant being not a Financial Creditor and hence, we are inclined to accept that as per Section 5(8)(a), there is a financial debt and the Applicant is a Financial Creditor for which the default amount of the financial debt is more than the threshold limit of Rs. 1 crore. As regards the decision of Hon’ble NCLAT in case of Sanjay Kewalramani (Supra) referred by the Corporate Debtor pleading that merely grant of loan and admission of taking loan will episo facto not amount to be a financial debt, we find that the fact of the said decision is completely different than the fact of the present case. As in the present case, the disbursement of loan has been established on which interest had also been paid by the Corporate Debtor before it defaulted after 15.06.2021. Even the Corporate Debtor itself in its reply has admitted that it was servicing the said loan as per the agreement but the Applicant/Financial Creditor was harassing them by threatening to recall the loan on account of lull in real estate industry which led to higher than anticipated unsold inventories and hence, it was apprehensive that Corporate Debtor would not be able to repay the loan amount on time. Such averment made in the reply of the Corporate Debtor itself establishes that the loan was disbursed to them.
The next objection raised by the Corporate Debtor is regarding their being no default in repayment of loan. In this regard, it has been argued that the Applicant/Financial Creditor has prematurely recalled the loan contrary to the terms of the loan agreement between the parties as well as the fair practices code issued by the RBI. It has been mentioned that the tenure of 72 month, 36 months moratorium and 36 months for repayment was provided in the loan agreement, therefore, the repayment of loan would have started only in 2023 for a loan taken in 2020 and in case the Respondent/Corporate Debtor had failed to pay instalments of debt/interest, the provision for issuing of recall notice could have been invoked by the Applicant/Corporate Debtor. Therefore, it has been contended that the Applicant has failed to prove conclusively that the Respondent’s failure to pay interest after 15.06.2022 enabled/entitled the Financial Creditor to invoke the terms in the agreement to issue recall notice. It has also been argued by the Corporate Debtor that it is a settled principle of law that the IBC is not for recovery proceeding by the Creditor but a resolution mechanism and it cannot be used to jeopardize the financial health of an otherwise solvent company by pushing it into insolvency for extraneous considerations. In support of his such argument, reliance has been placed on the decision of Hon’ble Supreme Court in the case of Swiss Ribbons Pvt. Ltd. V. Union of India and certain other decisions as mentioned in the reply filed by the Corporate Debtor.
The above arguments of the Corporate Debtor has been countered by the counsel for the Financial Creditor submitting that such allegations made by the Corporate Debtor against the Applicant, using the present proceeding as a recovery tool, are baseless. Here is a case in which the Corporate Debtor has defaulted in the repayment obligations and hence, the Creditor has right to resort to Section 7 of the I & B Code, 2016, as one of the objectives of the Code is to resolve insolvency of a Corporate entity to balance the interest of all stakeholders. As the Corporate Debtor in the present case, has clearly defaulted in its repayment obligations in terms of the loan agreement and hence, the Applicant has rightly and legally enforced its right by filing the present application under Section 7 of the Code. It has also been contended by the Ld. Counsel for the Financial Creditor that the case laws relied upon by the Corporate Debtor are not applicable in the present case, since there is no valid dispute requiring a detailed trial by way of an arbitration or suit and the necessary ingredients of existence of debt and occurrence of default, are undisputedly made out in the present case.
We have carefully considered the above arguments of both parties. As per the loan agreement, we find that there is a moratorium of 36 months, however, interest is required to be paid on the outstanding loan. There is no dispute on default of payment of interest on 15th July, 2021 and afterwards, as the default on payment of interest continued, the Financial Creditor classified the loan account of the Corporate Debtor as NPA on 13th October, 2021. Thereafter, recall notice dated 25th November, 2021 has been issued to the Corporate Debtor declaring the entire outstanding amount of Rs. 127,14,93,543/- as outstanding amount as on 25th November, 2021 as due and payable and the Corporate Debtor was asked to pay this amount within two days, failing which, it has been informed to the Corporate Debtor that the Financial Creditor would be constrained to take legal action, including but not limited to initiation of Corporate Insolvency Resolution Process under the Insolvency and Bankruptcy Code 2016. However, the Corporate Debtor failed to comply with this notice and thus, a default has occurred. Now, the question is when there was a moratorium on repayment of the principal amount of loan, would it be justified to recall the outstanding loan and asking the Corporate Debtor to pay the entire amount in one go. In this regard, we have examined the details of the outstanding amount as provided in Annexure A6 of the application and also reproduced below.
| Borrower | Due as on | Principal | Interest | Additional Interest | Delayed interest/Penal Interest | Total Dues | TDS Dues |
Perpendicular Construction | |||||||
| 15-Jul-21 | 36,32,450.00 | 1,41,97,454.92 | 7,44,197.00 | 2,45,74,1101.92 | Excluded | ||
| 15-Aug-21 | 1,95,85,986.00 | 1,57,25,652.96 | 8,34,187.00 | 3,61,45,825.96 | Excluded | ||
| 15-Sep-21 | 2,95,39,522.00 | 1,72,53,850.99 | 10,17,168.00 | 4,78,10,540.99 | Excluded | ||
| 15-Oct-21 | 3,84,44,400.00 | 1,87,32,752.97 | 12,82,856.00 | 5,84,60,008.97 | Excluded | ||
| 15-Nov-21 | 4,75,57,114.00 | 2,02,06,951.00 | 16,42,022.00 | 6,94,60,087..00 | Excluded | ||
| 30-Nov-21 | 1,19,21,65,113.00 | 5,70,19,497.51 | 2,08,52,5111.79 | 29,63,903.00 | 1,27,30,01,025 | Included |
As per the details provided in this chart, the total outstanding amount of the interest is Rs. 5,70,19,497/- which itself is more than Rs. 1 crore, the threshold limit for initiating CIRP under Section 7 of I & B Code, 2016. The Hon’ble NCLAT in case of Base Realtors Private Limited vs. Grand Realcon Private Limited in Company Appeal (AT) (Ins.) No.882 of 2022 dated 16th November, 2022 has held that the application filed under Section 7 of the Code could be maintained in respect of the component of interest, which became due and payable, without asking for the principal amount which has not yet become due and payable. The relevant part of this decision is reproduced as under:-
26.After referring to various definition appearing in Part I and Part II of the Code and explaining the scheme with the help of the decision in the case of Innovative Industries Ltd. And taking a cue from the decision of the Hon’ble Supreme Court in the case of M/s Orator Marketing Pvt. Ltd. (Supra), we are of the considered opinion that in the facts and circumstances of the present case the application filed under Section 7 of the Code could be maintained in respect of the component of interest which became due and payable, without asking for the principal amount which has not yet become due and payable.
In view of the above decision, even if it is assumed that the Financial Creditor was not justified in pressing for the repayment of principal amount by issuing the recall notice, there is a clear cut default on part of the Corporate Debtor to pay the interest for which the outstanding amount has crossed the threshold limit of Rs.1 crore. Therefore, we are inclined to accept that there is a default in terms of the provision of I & B Code, 2016 in respect of the outstanding default amount. Thus, we find the both condition of Section 7 of I & B Code, 2016 as there being as debt that has been defaulted in payment, atleast in respect of the interest amount which is more than the threshold limit, however, after issuance of the recall notice as per the loan agreement and after following RBI guidelines, the entire loan amount including the interest amount, amounting to Rs. 127,14,93,543/- are in default.
Finally, the Ld. Counsel for Corporate Debtor has argued in the light of the decision of Hon’ble Supreme Court in the case of Vidarbha Industries Power Ltd. Vs. Axis Bank Ltd. (2022) 8 SCC 352, that the Hon’ble Adjudicating Authority has wide discretionary power, either to admit or reject the instant application on consideration of the whole factual matrix of the present case. In this regard, the Ld. Counsel has emphasised on the facts of the case about the recall notice issued by the Applicant/Financial Creditor being arbitrarily and against the spirit of the loan agreement due to the reason of their being a moratorium on repayment of principal amount of loan, the condition of real estate business being in bad shape and as alleged by him, the Financial Creditor acting illegally and malafidely misappropriating the amounts deposited in compulsory RERA Escrow account affecting the viability and cash liquidity of another company M/S Supertech Limited with whom the Corporate Debtor was under agreement for construction of the housing project for which the loans under consideration was taken and the same prevented the Supratech Limited to complete the housing project and therefore, the Corporate Debtor could not be able to repay the loan amount. It has been pleaded by the Ld. Counsel of the Corporate Debtor for applying the discretionary power considering the above factual matrix of the present case to reject the application under Section 7 of I & B Code, 2016 considering the decision of Hon’ble Supreme Court in the case of Vidarbha Industries Power Ltd. (Supra).
We have considered the above arguments of Ld. Counsel of the Corporate Debtor and also carefully gone through the decision of Hon’ble Supreme Court in the case of Vidarbha Industries Power Ltd. (Supra) and further, review petition filed in this case. On the review petition, in case of Vidarbha Industries Power Ltd. (Supra), the Hon’ble Supreme Court has held in order dated 22.09.2022 that it is well settled that the judgements and observations in judgments are not to be read as provisions of statute and judicial utterances and/or pronouncements are in the setting of the facts of a particular case. Therefore, after clarification by the Hon’ble Supreme Court in the review petition of its decision in the case of Vidarbha Industries Power Ltd. (Supra), it has been made clear that the decision given by the Hon’ble Supreme Court in the case of Vidarbha Industries Power Ltd. was on the facts of that particular case and no ratio was laid down about Section 7(5) of the I & B Code, 2016 being mandatory or discretionary. Now in another decision of the Hon’ble Supreme Court in case of M. Suresh Kumar Reddy vs. Canara Bank & Ors. Civil Appeal No.7121 of 2022 dated 11th May, 2023, it has been held that once NCLT is satisfied that the default has occurred, there is hardly a discretion left with NCLT to refuse admission on the Application under Section 7 of I & B Code, 2016. The relevant part of this decision of the Hon’ble NCLAT is reproduced as under.
8.We have given careful consideration to the submissions. This Court in the case of Innoventive Industries Limited v. ICICI Bank and Another has explained the scope of Section 7. Paragraph nos.28 to 30 of the said decision read thus: -
“28.When it comes to a financial creditor triggering the process, Section 7 becomes relevant. Under the Explanation to Section 7(1), a default is in respect of a financial debt owed to any financial creditor of the corporate debtor — it need not be a debt owed to the applicant financial creditor. Under Section 7(2), an application is to be made under subsection (1) in such form and manner as is prescribed, which takes us to the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016. Under Rule 4, the application is made by a financial creditor in Form 1 accompanied by documents and records required therein. Form 1 is a detailed form in 5 parts, which requires particulars of the applicant in Part I, particulars of the corporate debtor in Part II, particulars of the proposed interim resolution professional in Part III, particulars of the financial debt in Part IV and documents, records and evidence of default in Part V. Under Rule 4(3), the applicant is to dispatch a copy of the application filed with the adjudicating authority by registered post or speed post to the registered office of the corporate debtor. The speed, within which the adjudicating authority is to ascertain the existence of a default from the records of the information utility or on the basis of evidence furnished by the financial creditor, is important. This it must do within 14 days of the receipt of the application. It is at the stage of Section 7(5), where the adjudicating authority is to be satisfied that a default has occurred, that the corporate debtor is entitled to point out that a default has not occurred in the sense that the “debt”, which may also include a disputed claim, is not due. A debt may not be due if it is not payable in law or in fact. The moment the adjudicating authority is satisfied that a default has occurred, the application must be admitted unless it is incomplete, in which case it may give notice to the applicant to rectify the defect within 7 days of receipt of a notice from the adjudicating authority. Under sub-section (7), the adjudicating authority shall then communicate the order passed to the financial creditor and corporate debtor within 7 days of admission or rejection of such application, as the case may be.
29.The scheme of Section 7 stands in contrast with the scheme under Section 8 where an operational creditor is, on the occurrence of a default, to first deliver a demand notice of the unpaid debt to the operational debtor in the manner provided in Section 8(1) of the Code. Under Section 8(2), the corporate debtor can, within a period of 10 days of receipt of the demand notice or copy of the invoice mentioned in sub-section (1), bring to the notice of the operational creditor the existence of a dispute or the record of the pendency of a suit or arbitration proceedings, which is pre-existing—i.e. before such notice or invoice was received by the corporate debtor. The moment there is existence of such a dispute, the operational creditor gets out of the clutches of the Code.
30.On the other hand, as we have seen, in the case of a corporate debtor who commits a default of a financial debt, the adjudicating authority has merely to see the records of the information utility or other evidence produced by the financial creditor to satisfy itself that a default has occurred. It is of no matter that the debt is disputed so long as the debt is “due” i.e. payable unless interdicted by some law or has not yet become due the sense that it is payable at some future date. It is only when this is proved to the satisfaction of the adjudicating authority that the adjudicating authority may reject an application and not otherwise.” (Emphasis added)
9.The view taken in the case of Innoventive Industries has been followed by this Court in the case of E.S. Krishnamurthy and others. Paragraph nos.32 to 34 of the said decision read thus:
32.In Innoventive industries [Innoventive Industries Ltd. v. ICICI Bank, (2018) 1 SCC 407, paras 28 and 30: (2018) 1 SCC (Civ) 356], a two-Judge Bench of this Court has explained the ambit of Section 7 IBC, and held that the adjudicating authority only has to determine whether a “default” has occurred i.e. whether the “debt” (which may still be disputed) was due and remained unpaid. If the adjudicating authority is of the opinion that a “default” has occurred, it has to admit the application unless it is incomplete. Speaking through Rohinton F. Nariman, J., the Court has observed: (SCC pp. 438-39, paras 28 & 30)
“28.When it comes to a financial creditor triggering the process, Section 7 becomes relevant. Under the Explanation to Section 7(1), a default is in respect of a financial debt owed to [Ed.: The word between two asterisks has been emphasised in original.] any [Ed.: The word between two asterisks has been emphasised in original.] financial creditor of the corporate debtor — it need not be a debt owed to the applicant financial creditor. Under Section 7(2), an application is to be made under sub-section (1) in such form and manner as is prescribed, which takes us to the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016. Under Rule 4, the application is made by a financial creditor in Form 1 accompanied by documents and records required therein. Form 1 is a detailed form in 5 parts, which requires particulars of the applicant in Part I, particulars of the corporate debtor in Part II, particulars of the proposed interim resolution professional in Part III, particulars of the financial debt in Part IV and documents, records and evidence of default in Part V. Under Rule 4(3), the applicant is to dispatch a copy of the application filed with the adjudicating authority by registered post or speed post to the registered office of the corporate debtor. The speed, within which the adjudicating authority is to ascertain the existence of a default from the records of the information utility or on the basis of evidence furnished by the financial creditor, is important. This it must do within 14 days of the receipt of the application. It is at the stage of Section 7(5), where the adjudicating authority is to be satisfied that a default has occurred, that the corporate debtor is entitled to point out that a default has not occurred in the sense that the “debt”, which may also include a disputed claim, is not due. A debt may not be due if it is not payable in law or in fact. The moment the adjudicating authority is satisfied that a default has occurred, the application must be admitted unless it is incomplete, in which case it may give notice to the applicant to rectify the defect within 7 days of receipt of a notice from the adjudicating authority. Under sub-section (7), the adjudicating authority shall then communicate the order passed to the financial creditor and corporate debtor within 7 days of admission or rejection of such application, as the case may be. * * *
30.On the other hand, as we have seen, in the case of a corporate debtor who commits a default of a financial debt, the adjudicating authority has merely to see the records of the information utility or other evidence produced by the financial creditor to satisfy itself that a default has occurred. It is of no matter that the debt is disputed so long as the debt is “due” i.e. payable unless interdicted by some law or has not yet become due in the sense that it is payable at some future date. It is only when this is proved to the satisfaction of the adjudicating authority that the adjudicating authority may reject an application and not otherwise.”
33.In the present case, the adjudicating authority noted that it had listed the petition for admission on diverse dates and had adjourned it, inter alia, to allow the parties to explore the possibility of a settlement. Evidently, no settlement was arrived at by all the original petitioners who had instituted the proceedings. The adjudicating authority noticed that joint consent terms dated 12-2-2020 had been filed before it. But it is common ground that these consent terms did not cover all the original petitioners who were before the adjudicating authority. The adjudicating authority was apprised of the fact that the claims of 140 investors had been fully settled by the respondent. The respondent also noted that of the claims of the original petitioners who have moved the adjudicating authority, only 13 have been settled while, according to it “40 are in the process of settlement and 39 are pending settlements”. Eventually, the adjudicating authority did not entertain the petition on the ground that the procedure under IBC is summary, and it cannot manage or decide upon each and every claim of the individual homebuyers. The adjudicating authority also held that since the process of settlement was progressing “in all seriousness”, instead of examining all the individual claims, it would dispose of the petition by directing the respondent to settle all the remaining claims “seriously” within a definite time-frame. The petition was accordingly disposed of by directing the respondent to settle the remaining claims no later than within three months, and that if any of the remaining original petitioners were aggrieved by the settlement process, they would be at liberty to approach the adjudicating authority again in accordance with law. The adjudicating authority's decision was also upheld by the appellate authority, who supported its conclusions.
34.The adjudicating authority has clearly acted outside the terms of its jurisdiction under Section 7(5) IBC. The adjudicating authority is empowered only to verify whether a default has occurred or if a default has not occurred. Based upon its decision, the adjudicating authority must then either admit or reject an application, respectively. These are the only two courses of action which are open to the adjudicating authority in accordance with Section 7(5). The adjudicating authority cannot compel a party to the proceedings before it to settle a dispute.”
(Emphasis added)
10.Thus, once NCLT is satisfied that the default has occurred, there is hardly a discretion left with NCLT to refuse admission of the application under Section 7. Default is defined under sub-section 12 of Section 3 of the IB Code which reads thus:
“3.Definitions: - In this Code, unless the context otherwise requires, -.. .. .. .. .. .. .. .. (12) “default” means non-payment of debt when whole or any part or instalment of the amount of debt has become due and payable and is not [paid] by the debtor or the corporate debtor, as the case may be;” Thus, even the non-payment of a part of debt when it becomes due and payable will amount to default on the part of a Corporate Debtor. In such a case, an order of admission under Section 7 of the IB Code must follow. If the NCLT finds that there is a debt, but it has not become due and payable, the application under Section 7 can be rejected. Otherwise, there is no ground available to reject the application.
11.Reliance is placed on the decision of this Court in the case of Vidarbha Industries and in particular, what is held therein in paragraph nos. 86 to 89 which reads thus:-
“86.Even though Section 7(5) (a) IBC may confer discretionary power on the adjudicating authority, such discretionary power cannot be exercised arbitrarily or capriciously. If the facts and circumstances warrant exercise of discretion in a particular manner, discretion would have to be exercised in that manner.
87.Ordinarily, the adjudicating authority (NCLT) would have to exercise its discretion to admit an application under Section 7 IBC and initiate CIRP on satisfaction of the existence of a financial debt and default on the part of the corporate debtor in payment of the debt, unless there are good reasons not to admit the petition.
88.The adjudicating authority (NCLT) has to consider the grounds made out by the corporate debtor against admission, on its own merits. For example, when admission is opposed on the ground of existence of an award or a decree in favour of the corporate debtor, and the awarded/decretal amount exceeds the amount of the debt, the adjudicating authority would have to exercise its discretion under Section 7(5)(a) IBC to keep the admission of the application of the financial creditor in abeyance, unless there is good reason not to do so. The adjudicating authority may, for example, admit the application of the financial creditor, notwithstanding any award or decree, if the award/decretal amount is incapable of realisation. The example is only illustrative.
89.In this case, the adjudicating authority (NCLT) has simply brushed aside the case of the appellant that an amount of Rs 1730 crores was realisable by the appellant in terms of the order passed by APTEL in favour of the appellant, with the cursory observation that disputes if any between the appellant and the recipient of electricity or between the appellant and the Electricity Regulatory Commission were inconsequential.”
(Emphasis added)
12.A Review Petition was filed by the Axis Bank Limited seeking a review of the decision of Vidarbha Industries on the ground that the attention of the Court was not invited to the case of E.S. Krishnamurthy. While disposing of Review Petition by Order dated 22nd September 2022, this Court held thus:
“The elucidation in paragraph 90 and other paragraphs were made in the context of the case at hand. It is well settled that judgments and observations in judgments are not to be read as provisions of statute. Judicial utterances and/or pronouncements are in the setting of the facts of a particular case. To interpret words and provisions of a statute, it may become necessary for the Judges to embark upon lengthy discussions. The words of Judges interpreting statutes are not to be interpreted as statutes.”
13.Thus, it was clarified by the order in review that the decision in the case of Vidarbha Industries was in the setting of facts of the case before this Court. Hence, the decision in the case of Vidarbha Industries cannot be read and understood as taking a view which is contrary to the view taken in the cases of Innoventive Industries and E.S. Krishnamurthy. The view taken in the case of Innoventive Industries still holds good.
As now, it has been clarified by Hon’ble Supreme Court itself that the decision in the case of Vidarbha Industries Power Ltd., was in the setting of facts of that case before the Hon’ble Supreme Court and the decision of Hon’ble Supreme Court in the case of Innoventive Industries Limited still holds good. In case of Innoventive Industries Limited, it has been clearly held by Hon’ble Supreme Court that if there is a debt and default in repayment of debt and application filed by the Applicant/Financial Creditor is complete in all respect, the application under Section 7 of I & B Code, 2016, is to be admitted. In the present case, we have clearly found that there is a debt and also there is a clear default in payment of interest which is more than the threshold limit as well as the default in payment of entire loan amount after recall notice has been issued, therefore, we are convinced that the present application under Section 7 of I & B Code, 2016 is to be admitted. The argument of the Ld. Counsel of the Corporate Debtor about the factual matrix of this case being the Applicant/Financial Creditor acting arbitrarily and unreasonably by issuing the recall notice and also because of his action, the construction of project could not be completed by Supratech Limited resulting into non-payment of loan, has nothing to do with servicing of the loan taken by them from the Financial Creditor. The reason cited by the Ld. Counsel of Corporate Debtor is only a business risk, which is always present when a business is carried out and that cannot have any bearing on initiation of proceeding under Section 7 of I & B Code, 2016 when there is a debt and default in repayment of such debt as provided under Section 7 of I & B Code, 2016 and also as held by the Hon’ble Supreme Court in the case of Innovative Industries Limited.
In view of our above findings, we are satisfied that the present petition being under Section 7 is fit to be admitted as per Section 7(5) of the I & B Code, 2016.
Another condition is that there are no disciplinary proceedings pending against proposed Resolution Professional. In the present case, in Part III of Form 1, Mr. Ajit Gyanchand Jain has been proposed as Interim Resolution Professional. The Law Research Associate of this Tribunal, Ms. Ankita Sharma, has checked the credentials of Mr. Ajit Gyanchand Jain, and there is nothing adverse against him. In view of the above, we appoint Mr. Ajit GyanChand Jain, Registration No.IBBI/IPA-001/IP-P00368/2017-2018/10625, R/o 204, Wall Street-1, near Gujarat College, Ellisbridge, Ahmedabad, Gujarat-380006, Email: ajit@vcanca.com .Upon verification from the IBBI Website, it is found that IRP holds valid authorization till 17 October 2023. IRP is directed to take the steps as mandated under Sections 15, 17, 18, 20 and 21 of IBC, 2016.
In the given facts and circumstances, the present petition being complete and having established the default in payment of the Financial Debt for the default amount being above threshold limit, the petition is admitted in terms of Section 7(5) of the IBC against the Corporate Debtor and accordingly, moratorium is declared in terms of Section 14 of the Code. As a necessary consequence of the moratorium in terms of Section 14, the following prohibitions are imposed, which must be followed by all and sundry:
“(a)the institution of suits or continuation of pending suits or proceedings against the corporate debtor including execution of any judgment, decree or order in any court of law, tribunal, arbitration panel or other authority;
(b)Transferring, encumbering, alienating or disposing of by the corporate debtor any of its assets or any legal right or beneficial interest therein;
(c)Any action to foreclose, recover or enforce any security interest created by the corporate debtor in respect of its property including any action under the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002;
(d)The recovery of any property by an owner or lessor, where such property is occupied by or in the possession of the corporate debtor.
(e)It is further directed that the supply of essential goods or services to the corporate debtor as may be specified, shall not be terminated or suspended or interrupted during the moratorium period.
(f)The provisions of Section 14(3) shall, however, not apply to such transactions as may be notified by the Central Government in consultation with any financial sector regulator and to a surety in a contract of guarantee to a corporate debtor.
(g)The order of moratorium shall have effect from the date of this order till completion of the corporate insolvency resolution process or until this Bench approves the resolution plan under sub-section (1) of Section 31 or passes an order for liquidation of the corporate debtor under Section 33 as the case may be.”
The Interim Resolution Professional shall after collation of all the claims received against the Corporate Debtor and the determination of the financial position of the Corporate Debtor constitute a Committee of Creditors and shall file a report, certifying the constitution of the Committee to this Tribunal on or before the expiry of thirty days from the date of his appointment, and shall convene the first meeting of the Committee within seven days of filing the report of Constitution of the Committee. The Interim Resolution Professional is further directed to send regular progress reports to this Tribunal every fortnight.
We direct the Financial Creditor to deposit a sum of Rs. 1,00,000/- with the Interim Resolution Professional, to meet out the expenses to perform the functions assigned to him in accordance with Regulation 6 of Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Person) Regulations, 2016. The amount, however, is subject to adjustment by the Committee of Creditors as accounted for by the Interim Resolution Professional on the conclusion of CIRP.
A certified copy of this order shall be provided by the Registry to both the parties. Simultaneously a copy of this order shall also be provided to the IRP for initiation of CIRP against the Corporate Debtor to his email address and to the Registrar of the Companies.
List the matter on 21st August, 2023 for filing of the progress report/further proceeding.