M/s. IL & FS Financial Services Limited vs M/s. Bharat Waterfront Private Limited

PER: RAJEEV BHARDWAJ, MEMBER (JUDICIAL)

This application has been filed under Section 7 of the Insolvency and Bankruptcy Code, 2016 by M/s.IL & FS Financial Services Limited, Financial Creditor (Applicant) to initiate Corporate Insolvency Resolution Process (CIRP) against M/s. Bharat Waterfront Private Limited, Corporate Debtor (Respondent).

The facts necessary to dispose of this application, as stated, are that:

The corporate debtor approached the financial creditor for a long term loan of Rs.140 crores. On this request, the financial creditor issued offer letter dated 24^th June, 2015. This offer was accepted by the corporate debtor on 26^th June, 2015.

Consequently, both the parties entered into loan agreement (Annexure 7 of the application) on 26.06.2015. On the same date, promissory note (Annexure 6 of the application), Corporate Guarantee Deed (Annexure 8 of the application) and Personal Guarantee Agreement (Annexure 9 of the application) were also executed. On 27^th January, 2015, Pledge Agreement (Annexure 10 of the application) was also executed between the financial creditor, corporate guarantor, personal guarantor and the corporate debtor.

It is claimed that the corporate debtor failed to honour its obligation as per the loan agreement and as a result, the financial creditor classified the corporate debtor as NPA on 27.09.2018. Therefore, the financial creditor issued demand notice dated 02.11.2018 to the corporate debtor, corporate guarantor and personal guarantor asking them to pay the loan amount, but they failed to pay.

The total loan liability till 22.12.2021 was Rs.16,72,02,857/- which includes Rs.9,36,81,241/- as principal amount and the remaining as the interest. Thus, the cause of action to file the present application arose on 27.09.2018 and 4.11.2019 when the loan facilities were declared as NPA and shown in the corporate debtor’s balance sheet respectively.

The corporate debtor while filing the counter has contended and disputed the averments of the application, but admitted that only Rs.9 crores was left and for which settlement was offered on 30.09.2019 and 24.01.2020 (Annexure 3 of the counter).

The respondent has denied its liability towards the applicant on the plea that this transaction is circular. In order to justify this contention, the corporate debtor has made reference to many dealings which were conducted between the corporate entities of the financial creditor with the respondent and these transactions are given below:

On the basis of the balance sheet for the year ended 31^st March, 2021 (Annexure 4 of the counter), it is submitted that CIRP will not yield any result because the respondent is not a going concern and is not having any asset base, except the liabilities. (Copy of the balance sheet is at Annexure 5 of the counter).

Besides, it is claimed that the present application has been filed with malafide reasons.

In the rejoinder, the applicant has reiterated and reaffirmed the contentions put forward in the application. It is denied that the applicant has granted loans to keep its account evergreen. The loan was granted for the purpose mentioned in the loan agreement.

It is claimed that the respondent has tried to mislead this Authority by making reference to certain transactions in para 2 of the counter. The term loan sanctioned to the respondent fell within the purview of the offer letter dated 24.06.2015 and the loan agreement dated 26.06.2015. It is averred that the respondent was required to provide certificate from the statutory authority confirming the end use of the funds disbursed and the certificate (Annexure 3 of the rejoinder) has been accordingly furnished on 31.08.2015 confirming that the funds sanctioned were released for the purpose for which it has been sanctioned, and thereby acknowledging the debt and purpose.

About the grant of loan, it is averred that in pursuance of letter of offer dated 24.06.2015 (Annexure 7 of the application) for a grant of Rs.140 crores to the respondent, the latter has accepted this offer and executed the loan agreement on 24.06.2015. The respondent in para No.2(f) of the counter has admitted the debt liability by submitting that only Rs.9 crores were left to be paid and regarding this composite settlement was offered on 30.09.2019 and 24.01.2020 vide Annexure 3 of the rejoinder. However, the total liability of the respondent is what has been claimed and this has been detailed in Annexure 3 of the application.

We have heard the counsel for both the parties and have also gone through the entire record.

The financial creditor can initiate Corporate Insolvency Resolution Process by filing an application before the National Company Law Tribunal. The financial creditor is required to prove the default and outstanding dues as per section 7(3)(a) of IBC, besides following conditions under sections 5(7) and 5(8):

The first contention of the Ld.Counsel for the respondent is based upon the disbursal of loan amount that there were circular transactions involving financial creditor and other two companies of the same group, namely, M/s.Sriba Seabase Pvt. Ltd and M/s.Aarkay Energy (Rameswaram) Ltd, to make the accounts evergreen. He has taken us to the Annexure 5 of the counter, which contains summary of loan movement, interest and other charges paid against Rs.143 crores as on 31.01.2009 and subsequently.

Para No.2(a)(f) of the counter pertains to Annexure 5 and these transactions can be understood from the tabular form given below:

On the basis of these transactions, the Ld.Counsel for the applicant has tried to make out a case that the financial creditor was extending loan to the aforesaid 3 entities, so that on paper there appears no default as to breach the guidelines of the Reserve Bank of India and law. In support of his contention, he has also relied upon the decision of the Hon’ble NCLAT in Ocean Deity Investment Holdings Limited, PCC versus Mack Star Marketing Private Limited, Company, Appeal No. 795 of 2021 decided on 8^th September, 2022 to argue that in similar type of matter, it was held that the transactions were collusive in nature. In that case, M/s.Yes Bank Limited (‘Yes Bank’) advanced loans through M/s.Mack Star Marketing Private Limited to pay the dues owed by Mr.Wadhawan of HDIL to the bank.

On the other hand, Ld.Counsel for the applicant has claimed that the allegations of circular transactions are baseless and without any substance. In fact, the impugned loan falls within the purview of the loan agreement executed between the parties. All the three entities, i.e., M/s.Sriba Seabase Pvt. Ltd, M/s.Aarkay Energy (Rameswaram) Ltd. and M/s.Bharat Waterfront Private Ltd are independent and separate, hence, one cannot be held liable for anything done by the other as the liability of the loan depends upon the agreement executed by the parties. The applicant was only a party to the agreements or arrangements entered into by the corporate debtor for the loan facility and not to its disbursement. He has relied upon the judgement of the Hon’ble NCLAT in Sandeep Kasare versus IL&FS Financial Services Ltd & Anr. CA(AT) (Ins.) No.468/2022, decided on 20.09.2022 and tried to distinguish the judgement in M/s.Ocean Deity Investment Holdings Limited (PCC) and Ors versus Suraksha Asset Reconstruction Limited and Ors.CA(AT) (Ins.) No.795/2021 primarily on the plea that Yes Bank admitted about the collusive arrangements in the disbursal of term loans.

Circular transactions are collusive in nature and are made only on paper to show the balance sheet of the financial creditor healthy. There is virtually no disbursal of loan to the party, but it is only shown on paper and finally the loan is routed back to the lender.

In order to understand the circular transactions, we need to know the meaning of ‘financial debt’ in section 5(8) of the IBC, 2016 and this cannot be read in isolation without considering other relevant definitions, particularly definition of ‘claim’ in section 3(6), ‘corporate debtor’ in section 3(8), ‘creditor’ in section 3(10), ‘debt’ in section 3(11), ‘default’ in section 3(12), ‘financial creditor’ in section 5(7). Here reference can also be made to the decision of the Hon’ble Apex Court in Orator Marketing Pvt. Ltd. versus Samtex Desinz Pvt. Ltd. (2023)3 SCC 753. Section 5(8) reads as below:

The Hon’ble Supreme Court in Anuj Jain IRP for Jaypee Infratech Ltd. versus Axis Bank Ltd. (2020) 8 SCC 401, examined the ingredients of Section 5(8), wherein it was held:

Thus, the pre-requisites for any transaction falling under sub-clauses (a) to (i) of section 5(8) are ‘debt’ and ‘disbursement’. There is admission of the respondent about the existence of debt in Para no 2(f) of the Counter that there was settlement proposal for Rs. 9 crores. The second ingredient ‘disbursement’ entails that disbursal must be for consideration for time value of money. The term disbursement for the time value of money has been explained by the Hon’ble Apex Court in Phoenix Arc Private Limited versus Spade Financial Services Limited and Ors (2021)3 SCC 475:

Accordingly, the transaction can’t be termed as circular one when the money does not remain with the lender, but with the borrower and he then utilises this amount for the purpose agreed upon. In the present case also, the lender has not kept the amount with it but has transferred to the account of the respondent. The statutory auditor of the respondent has also authenticated the end use of the loan amount as per the agreement executed between the parties. The respondent was required to submit statutory audit certificate confirming the end use of funds within 30 days from the date of disbursement for using the loan amount as per the agreement. The certificate required was provided by the applicant on 31.08.2015 (Annexure 3 of the rejoinder). The relevant Clause 2 is reproduced below:

From the table given in earlier para, it is seen that a loan of Rs.150 crores was sanctioned in favour of M/s.Sriba Seabase Pvt. Ltd on 28.10.2009. Another loan of Rs.150 crores was advanced on 18.10.2010 to the same company. The applicant granted another loan of Rs.143 crores on 27.12.2011. The first two loans were cleared in the year 2011, while the loan of the respondent on 31.12.2013. Another loan of Rs.140 crores was sanctioned to M/s.Sriba Seabase Pvt. Ltd on 31.12.2013, which was paid back on 30.06.2015. Therefore, there is substantial time gap between the taking of loan and its repayment. The latest loan was advanced on 10.10.2017 to M/s.Aarkay Energy (Rameswaram) Ltd which is claimed to have been used for the settlement of the loan taken on 31.03.2017 by the respondent.

The transactions as carried out between these three entities show that there is no connection between them to link that one loan was taken for the repayment of another loan. There is not only big time gap between the taking of loan and its repayment but these three entities are also separate and independent. It is well settled law that the suspicion or doubt howsoever strong cannot take place of the evidence and cannot be made basis of drawing inference. Here, we place reliance on the decision in Commissioner of Income Tax versus Daulatram Rawatmall (1964) 53 ITR 574 SC. The applicant was also not party to the agreements which were executed by M/s.Sriba Seabase Pvt. Ltd or M/s.Aarkay Energy (Rameswaram) Ltd with others after the disbursal of loan to them.

The judgment in M/s.Ocean Deity Investment Holdings Limited (Supra) has been given on the basis of different facts and which is clearly distinguishable from the present one. In that case, there was direct payment of Rs.40 crores, part of the loan amount granted in favour of M/s.Mack Star Marketing Private Limited to the account of M/s.IL & FS Financial Services Limited even before the execution of loan documents. Four term loans to the sum of Rs. 147 Crores were sanctioned in between 2012 to 2016 by the Yes Bank to the M/s.Mack Star for the purpose of renovating Kaledonia which is a brand new building and was two years old, constructed at a cost of Rs. 100 Crores. Out of this amount, Rs. 40 Crores were directly disbursed by the Yes Bank to the Bank Account of Wadhawans HDIL instead of M/s.Mack Stars Bank Account even before related documents were signed. The entire loan amount was siphoned off by the Wadhawans through their HDIL group companies to Yes Bank again for settling the HDIL group companies’ earlier loans taken from Yes Bank. Actually, these loans were on the verge of turning into NPA. Therefore, the purpose of the sanctioning and disbursement of loans was to evergreen the accounts of HDIL with Yes Bank to save them from becoming NPA. Yes Bank never carried out any due diligence on Mack Star’s need for funds and the ultimate end-use because they knew that the ultimate use was to finance loan repayments by the HDIL Group companies. The loan was advanced ignoring the Articles of Association of the Mack Star availing any loans without the approval of its shareholders and Yes Bank continued disbursing these loans despite being asked in writing by the appellant that their affiliated company HDIL were not authorized to avail any loan on behalf of Marck Star’s behalf. More than 99% of the loan disbursed was used to discharge the liabilities of the HDIL Group to Yes Bank. There was criminal conspiracy not only of the officials of the Companies used for taking loan or its disbursal and also the Statutory Auditor of Mack Star, therefore, the CBI and the ED registered cases.

However, the facts in the present case are totally different. On the other hand, the decision relied upon by the Ld.Counsel for the applicant in “Sandeep Khare Supra” is applicable to the present case because the facts are almost similar.

Thus, there is not only time gap between the transactions executed by the applicant with the three entities, but there is also no direct or indirect link to say that the loan amount was meant to clear the loans granted by the applicant. It cannot be said in any manner like in the case of M/s.Ocean Deity (supra) that the loan amount was raised by the respondent from M/s.Sriba Seabase Pvt. Ltd or M/s.Aarkay Energy (Rameswaram) Ltd. to pay off the debt of the financial creditor. Therefore, we come to the conclusion that there was no circular transaction.

The next argument of the Ld.Counsel for the respondent is that the respondent is no more an ongoing concern because in the balance sheet for the year ended 31^st March, 2021 (Annexure 4 of the application), it was observed that this concern has no asset, but only liabilities and accordingly, no purpose will be served if the CIRP is started. He has also relied upon the decision of Hon’ble NCLAT in M/s.Synew Steel Pvt Ltd CP(IB) No.96/BB/2020, decided on 16.11.2020, wherein it was held that no useful purpose would be served by placing the corporate debtor under liquidation process if no assets are owned by the corporate debtor.

To the contrary, Ld.Counsel for the applicant submitted that IBC, 2016 provides a speedy mechanism to identify the early financial adversity and initiate winding up of the company even when the corporate debtor is not having any asset, the application for dissolution is to be allowed.

It is settled position of law that once debt and default is proved to the satisfaction of the Adjudicating Authority, there is hardly a discretion left with the NCLT to refuse admission of the application under section 7. [See Innoventive Industries Limited versus ICICI Bank & Anr., 2018 1 SCC 407 and M.Suresh Kumar Reddy versus Canara Bank & others (2023) ibclaw.in 67 SC ]. It has been held by the Hon’ble Supreme Court in Arun Kumar Jagatramka versus Jindal Steel and Power Ltd. (2021) 7 SCC 474 that judicial intervention or innovation be kept at bare minimum and not to disturb the foundational principles of the IBC. In view of the law discussed above, we can’t go beyond four corners of law and invent out our own way to stop CIRP. It is not the duty of the Adjudicating Authority to resolve the disputes like settlement, arbitration etc., and for the release of debt, the insolvency resolution process is to be followed. [See Sesh Nath Singh and another versus Baidyabati Sheoraphuli Cooperative Bank Limited (2021)7 SCC 313]. It is only after the CIRP, this authority would come to know about the exact assets and liabilities as detailed enquiry is to be conducted by the RP who will examine not only the balance sheet of the corporate debtor, but also other material. The decision in M/s.Synew Steel Pvt Ltd supra is not applicable because in that case after the initiation of CIRP, the IRP could not constitute the CoC and further on enquiry, no asset was found to be owned by the corporate debtor and this was also confirmed by the balance sheet ended on 31.03.2020. It is on the basis of this material, the Hon’ble NCLAT came to conclusion that there was no need to convene the meeting of the CoC etc., and it would be just and proper to dissolve the company as proposed by the Resolution Professional.

Another plea which has been raised by the Ld.Counsel is that this petition has been filed with malafide intention, but this ground has been taken only for the sake of objection because there is nothing on record to prove that there is malafide purpose of the applicant to file the present application. The applicant is able to prove the requirements of section 7 of the IBC that there are debt and default.

For the reasons as discussed above, we come to the conclusion that the applicant is able to prove that Rs.9,36,81,241/- as principal amount and interest thereon is still due from the respondent and the latter has made default in making payment. Hence, this application is allowed.

As a result, the Adjudicating Authority admits this Petition under Section 7 of IBC, 2016, declaring moratorium for the purposes referred to in Section 14 of the Code, with the following directions: -