M/s. Krone Finstock Private Limited vs M/s. Krrish Realtech Private Limited

ORDER

24.

It is most respectfully submitted that the combined effect of the DTCP order dated 10.02.2022, the status quo order of the Hon’ble Supreme Court, and the Enforcement Directorate’s attachment order has resulted in a complete cessation of all revenue inflow into the Corporate Debtor. The Corporate Debtor has been rendered a body without hands – it possesses a commercially viable project with 60% development completed, but is legally prohibited from taking any step to monetize or deal with its assets. Specifically:

a)

The DTCP order has prohibited the Corporate Debtor from creating any third-party rights, preventing all new sales, registrations, and conveyances;

b)

The Sub-Registrars have been directed not to execute any sale/conveyance/lease deeds pertaining to the Krrish allocated land;

c)

The Supreme Court’s status quo order has constrained the Corporate Debtor from undertaking any development activities or dealing with the project land;

d)

The ED attachment has frozen the Corporate Debtor’s properties, making it legally impossible to raise any funds against those assets;

e)

As a direct and inevitable consequence, the Corporate Debtor has had absolutely no revenue inflow since 2022, and has been unable to service any of its financial obligations.

25.

It is submitted that the loan from the Financial Creditor was obtained in October 2024 at a time when the Corporate Debtor was already facing the aforesaid regulatory and judicial restrictions. The loan of Rs. 5,00,00,000/- was specifically obtained to address the earlier Section 7 proceedings initiated by M.K. Jain & Ors. (involving a default of Rs. 12,30,25,023/-), in order to settle that matter and protect the Corporate Debtor from CIRP. The Financial Creditor was fully aware of the financial distress and operational constraints faced by the Corporate Debtor at the time of extending the loan.

26.

The Corporate Debtor acknowledges the execution of the Loan Agreement dated 25.10.2024 for a principal amount of Rs. 5,00,00,000/-(Rupees Five Crores Only) at an interest rate of 15% per annum, the issuance of post-dated cheques for repayment, their dishonour, and the receipt of the Notices of Default dated 16.01.2025 and 10.02.2025, followed by the Loan Recall Notice dated 13.02.2025.

27.

The Corporate Debtor is making every earnest effort to arrange the repayment of the Financial Creditor’s dues. Despite the extraordinary circumstances, the Corporate Debtor is:

a)

Actively pursuing legal remedies to challenge the DTCP order dated 10.02.2022 before the Hon’ble High Court of Punjab and Haryana;

b)

Pursuing the writ petition as remanded by the Hon’ble Supreme Court for expeditious hearing;

c)

Challenging the confirmation of the Provisional Attachment Order before the Appellate Tribunal under PMLA;

d)

Exploring all possible avenues for raising funds and settling the Financial Creditor’s dues at the earliest possible opportunity. The Corporate Debtor reiterates its unequivocal commitment to repaying the debt to the Financial Creditor and submits that its inability to do so is purely a temporary situation arising from regulatory and judicial restraints which are beyond its control.

“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”

“(8)

"financial debt" means a debt alongwith interest, if any, which is disbursed against the consideration for the time value of money and includes—

(a)

money borrowed against the payment of interest;

(b)

any amount raised by acceptance under any acceptance credit facility or its de-materialised equivalent;

(c)

any amount raised pursuant to any note purchase facility or the issue of bonds, notes, debentures, loan stock or any similar instrument;

(d)

the amount of any liability in respect of any lease or hire purchase contract which is deemed as a finance or capital lease under the Indian Accounting Standards or such other accounting standards as may be prescribed;

(e)

receivables sold or discounted other than any receivables sold on nonrecourse basis;

(f)

any amount raised under any other transaction, including any forward sale or purchase agreement, having the commercial effect of a borrowing;

(g)

any derivative transaction entered into in connection with protection against or benefit from fluctuation in any rate or price and for calculating the value of any derivative transaction, only the market value of such transaction shall be taken into account;

(h)

any counter-indemnity obligation in respect of a guarantee, indemnity, bond, documentary letter of credit or any other instrument issued by a bank or financial institution;

(i)

the amount of any liability in respect of any of the guarantee or indemnity for any of the items referred to in sub-clauses (a) to (h) of this clause;”

“32….But when the financial creditor initiates the insolvency process for the purposes of admission, the Adjudicating Authority is only to ascertain the existence of a default from the records of the information utility or the evidence furnished by the financial creditor within fourteen days from the receipt of such application. At this stage, neither is a corporate debtor entitled nor is the Adjudicating Authority required to examine any dispute regarding the existence of such debt. This significantly reduces the scope of enquiry at the stage of a time-bound admission of an insolvency process by a financial creditor which has been succinctly summed up in Innoventive (supra):-

“30…… 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.

Reiterating the ratio in Innoventive (supra), this Court in ES Krishnamurthy v. Bharath Hi-Tech Builders (P) Ltd.32 held as follows:

“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.”

34.

In a similar vein, the Adjudicating Authority is not required to go into the inability of a corporate debtor to pay its debt. This is a clear departure from the scheme of winding up envisaged under Section 433(e) of the erstwhile Companies Act, 1956 which required the Adjudicating Authority to come to a finding with regard to the inability of the company to pay the debt and thereby arrive at a requisite satisfaction whether it is just and equitable to wind up the company. The Code restricts the scope of enquiry for admission of an insolvency process by a financial creditor merely to the existence of default of a debt due and payable and nothing more. The legislative intent behind such prompt and summary intervention is “to ensure revival and continuation of the corporate debtor by protecting the corporate debtor from its own management and from a corporate death by liquidation.

35.

The Appellant has heavily relied on Vidarbha (supra) to argue that the Adjudicating Authority has ample discretion to apply its mind to relevant factors including the feasibility of initiation of insolvency process notwithstanding the existence of default on a debt due and payable by the Corporate Debtor. In Vidarbha (supra), this Court observed:

“61.

In our view, the Appellate Authority (NCLAT) erred in holding that the adjudicating authority (NCLT) was only required to see whether there had been a debt and the corporate debtor had defaulted in making repayment of the debt, and that these two aspects, if satisfied, would trigger the CIRP. The existence of a financial debt and default in payment thereof only gave the financial creditor the right to apply for initiation of CIRP. The adjudicating authority (NCLT) was required to apply its mind to relevant factors including the feasibility of initiation of CIRP, against an electricity generating company operated under statutory control, the impact of MERC's appeal, pending in this Court, order of Aptel referred to above and the overall financial health and viability of the corporate debtor under its existing management. …………………………………………………………………

90.

We are clearly of the view that the adjudicating authority (NCLT) as also the Appellate Tribunal (NCLAT) fell in error in holding that once it was found that a debt existed and a corporate debtor was in default in payment of the debt there would be no option to the adjudicating authority (NCLT) but to admit the petition under Section 7 IBC.”

“6.

The elucidation in para 90 and other paragraphs [of the judgment under review] 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.”

“14.

Thus, it was clarified by the order in review that the decision in Vidarbha Industries was in the setting of facts of the case before this Court. Hence, the decision in Vidarbha Industries cannot be read and understood as taking a view which is contrary to the view taken in Innoventive Industries and E.S. Krishnamurthy. The view taken in Innoventive Industries still holds good.” (emphasis supplied)

“(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.

[Explanation -For the purposes of this sub-section, it is hereby clarified that notwithstanding anything contained in any other law for the time being in force, a licence, permit, registration, quota, concession, clearance or a similar grant or right given by the Central Government, State Government, local authority, sectoral regulator or any other authority constituted under any other law for the time being in force, shall not be suspended or terminated on the grounds of insolvency, subject to the condition that there is no default in payment of current dues arising for the use or continuation of the license, permit, registration, quota, concession, clearances or a similar grant or right during the moratorium period;]”