M/s. Religare Finvest Ltd. vs M/s. Stellence PharmScience Pvt. Ltd.

It is stated that the Corporate Debtor, along with other borrowers, availed four Loan Facilities from 2014 to 2015 totalling Rs. 29,00,31,556/- (Rupees Twenty-Nine Crore Thirty-One Thousand Five Hundred Fifty-Six Only) from the Financial Creditor, the details of which are given hereunder:

The Loan Account Nos. XMORKRM00054865 and XMORKRM00062610 were secured through the establishment of security interests by depositing Title Deeds in favour of the Financial Creditor. These Title Deeds pertain to properties described in detail in Part-V of the Petition. Additionally, Memorandum of Entry of First Time Mortgage by Deposit of Title Deeds were executed on 15.09.2014 and 30.07.2015, documenting the deposit of title deeds and the creation of security interests. Furthermore, the secured asset was duly registered with CERSAI.

It is stated that the Corporate Debtor failed to adhere to the repayment schedule and terms of the Loan Agreement, resulting in irregular and untimely repayment of loan dues. Consequently, the account was declared as a Non-Performing Asset on 30.11.2018. Subsequently, actions were initiated under the SARFAESI Act, 2002 to enforce the Financial Creditor's security interest and recover outstanding dues.

Following the execution of a Memorandum of Understanding (MoU) dated 29.08.2019 between the Financial Creditor and the Borrowers, which aimed to address overdue amounts and ensure regular EMI payments by 10th of each consecutive month, the Borrowers' accounts were upgraded to 'standard'. However, the Corporate Debtor defaulted on its EMI payment of Rs. 37,70,200/- on 01.10.2021, triggering a consistent pattern of defaults thereafter. Consequently, the Corporate Debtor's account was reclassified as Non-Performing Asset (NPA) on 01.04.2022. Since the Corporate Debtor committed default on 01.10.2021, the instant Petition falls within the period of limitation of three years. Further, the Corporate Debtor vide letter dated 25.01.2022 addressed to the Financial Creditor has acknowledged its debts and offered to settle the entire dues amounting to Rs. 13,21,54,441.88/-. However, this offer was rejected by the Financial Creditor through a letter dated 14.02.2022. Therefore, the Corporate Debtor has also acknowledged its debt and default.

Furthermore, it is stated that as of 28.11.2022, the Corporate Debtor owes a total amount of Rs. 21,38,75,169.23/- (Rupees Twenty-One Crore Thirty-Eight Lakh Seventy-Five Thousand One Hundred Sixty-Nine and Paisa Twenty-Three Only), the break-up of which is stated below:

In support of its case, Petitioner inter alia filed the following documents:

In the year 2014, the Corporate Debtor sought financial assistance from the Financial Creditor. Relying on the representations provided by the Corporate Debtor, the Financial Creditor approved financial assistance in the form of four Term Loans totalling to Rs.29,00,31,556/-. These facilities were secured by way of Memorandum of Deposit of Title Deeds dated 15.09.2014 and 30.07.2015.

It is contended that the Financial Creditor in its Synopsis stated that the Borrowers' accounts were upgraded to 'standard' following a MoU dated 29.08.2019. However, Financial Creditor deliberately omitted to include this Memorandum to conceal the true state of affairs from this Tribunal. This MoU, crucial for determining the amount due from the Corporate Debtor to the Financial Creditor, was withheld with the intention of inaccurately inflating the dues owed by Corporate Debtor. The Corporate Debtor diligently followed the terms of the said MoU and made significant payments as outlined in its Schedule. These payments are evident in the Ledger Statement.

It is also contended that the principal amount, along with accrued interest, for the loan detailed in the Sanction Letter dated 28.07.2015 and Loan Agreement in XMORKRM00062610 was settled in September, 2016. Only late payment charges were purportedly claimed by the Financial Creditor, which the Corporate Debtor vehemently contested, citing errors and omissions on the part of Financial Creditor. This is supported by an email dated 12.09.2016 from Financial Creditor's representative to Corporate Debtor.

The Respondent, being a company engaged in manufacturing life-saving drugs, is recognized as a Micro, Small and Medium Enterprise (MSME) vide MSME Certificate dated 17.02.2016. In May 2020, the Government of India, Ministry of Finance introduced the Emergency Credit Guarantee Line Scheme (ECLGS), offering 100% guarantee coverage for additional working capital term loan facilities to COVID-19 affected businesses, including MSMEs. The Corporate Debtor qualified for this Scheme, tailored for MSMEs, entitling them to a 20% top-up over the existing loan amount with a 24-month moratorium. The Financial Creditor expressly acknowledged and admitted the Respondent's eligibility, as demonstrated in Annexure R11.

The Respondent under the said Scheme sought capital funding to increase production of life-saving drugs amidst the COVID-19 outbreak. A letter of interest dated 06.10.2020 was issued to the CEO of the Financial Creditor, requesting: (i) Disbursal of Additional Loan of Rs 3.14 Crores as per ECGLS Scheme, (ii) EMI adjustment until Additional Loan credit, (iii) Loan restructuring under MSME Scheme & (iv) Rationalizing Security Comfort.

On 19.11.2020, the Financial Creditor proposed loan reconstruction to the Corporate Debtor, who responded on 21.11.2020, stating verbal communication about the RBI embargo on ECGLS scheme and sought clarification over the rationale of not providing a complete 24-month EMI waiver. The Respondent noted disproportionate collateral worth Rs. 72 Crores against a Rs. 15 Crores loan due to the Petitioner's policy on second charges. It contended that the estimated property value as of 12.08.2023, surpasses Rs.100 Crores, whereas the claimed loan quantum by the Financial Creditor in the instant Petition is Rs. 25 Crores. A 2018 CBRE valuation report valued the mortgaged land and building at Rs. 79.6 Crores. A 2022 valuation by approved valuer Mr. Lakshmi Narasinha KA valued the land at Rs. 59.35 Crores. These valuations indicate that the mortgaged property's current worth exceeds Rs. 100 Crores, which is far beyond the Rs. 25 Crores loan amount claimed by the Financial Creditor.

Vide email dt.21.11.2020, the Corporate Debtor requested the Financial Creditor to release certain land Khatas, structured as separate parcels, to provide additional security, ensuring 2X loan exposure comfort due to the property's higher value. Subsequently, on 14.12.2020, the Financial Creditor responded via email from the Religare Relationship Team, stating that due to being under RBI corrective action plan, they cannot entertain incremental funding requests, however, assured to evaluate the possibility of second seeding on the collateral and promised updates soon. A copy of the said response is attached as Annexure R11.

On 23.12.2020, the Corporate Debtor formally applied for the Debt Restructuring under the MSME Scheme, following instructions from the Financial Creditor. Additionally, on 09.01.2021, a letter was issued to the Chief Manager of Financial Creditor, requesting modification of collateral charge to rationalize security comfort due to the Petitioner's reluctance to disburse additional ECLGS top-up loans or share pari-pasu charges with other banks, as detailed in Annexure R13. Deliberations between both Parties, including a meeting held on 22.02.2023, were documented and attached as Annexure R14. It is contended that the Corporate Debtor requested for the release of certain surveys on 08.06.2022, to secure additional working capital during the pandemic, as their medicine demand surged. The Financial Creditor had previously accepted this release, and Surveyors and Legal Teams had already conducted calculations.

Pursuant to the said MoU, the Financial Creditor agreed to waive LPP/OD/Legal Charges of Rs. 1,91,63,802 on each loan account upon payment of Rs. 1,12,72,898 by 30.08.2019, as stipulated in Proviso 5. Further, both Parties agree that upon payment of Rs. 1,12,72,898 as per Clause 4(a), the LPP/OD/Legal Charges will be waived and revised outstanding amount will be Rs. 17,39,37,743.

It is contended that the Corporate Debtor fulfilled the conditions outlined in Annexure R2, as evidenced by the Ledger Statement in Annexure R3. However, during debt settlement, the Financial Creditor reneged on its Agreement, including LPP/OD/Legal charges, alleging a breach of conditions in Annexure R2. This is evident in the Foreclosure letters dated 28.11.2022, as per Annexure P15 of the Petition.

It is also contended that the Respondent is neither a wilful defaulter nor insolvent, but deferred the EMI payments for the cause of Jus in Rem. The Petitioner neither rejected nor disbursed the due amount, leaving the Respondent unaware until Foreclosure Statement was issued. Further, the Respondent is close to receiving funds from an investor, as communicated to Petitioner in the Meeting Minutes dated 22.02.2023. The investor has approved a loan of Rs. 84 Crores as per sanction letter dated 22.05.2023 (enclosed as Annexure-R19), and is currently awaiting the RBI approval.

In support of its contentions, the Corporate Debtor relied on the following decisions:

Hon'ble Supreme Court in the matter of Vidarbha Industries Power Ltd. vs. Axis Bank Ltd. in Civil Appeal No.46233 of 2022 decided on 12.07.2022;

Olive Tree Retail Pvt Ltd & Anr. vs. South Indian Bank Ltd & Anr., decided on 19.01.2023 by the Hon'ble High Court of Calcutta in WPA No. 11406/ 2022;

Guharoy Food Joint and Hotel Pvt Ltd & Anr. vs. The State of West Bengal & Ors., decided on 30.03.2023 by the Hon'ble High Court of Calcutta in WPA No.12769 of 2022.

The Corporate Debtor's replies extensively admit defaults, affirming the insolvency. These acknowledgments include defaults in EMI payments and diverted that money for drug manufacturing, an application for Debt Restructuring citing decline in production, shutdown of operations and decline in sales and profit, deferral of EMIs for essential drug production and a proposed One-Time Settlement (OTS) on 25.01.2022 for an amount of Rs. 13,21,54,441.88; all rejected by the Financial Creditor. These admissions unequivocally indicate deliberate default on debt repayment, necessitating resolution under the Code since under the provisions of the IBC, 2016, the cause of default is not relevant as long as there is a default exceeding the threshold limit.

The Adjudicating Authority, u/s 7 of the Code, solely examines evidence provided by the Financial Creditor to verify debt and its default, regardless of dispute over the debt. Supreme Court precedents including Innoventive Industries Ltd. v. ICICI Bank, and M. Suresh Kumar Reddy v. Canara Bank & Ors., in Civil Appeal No.7121 of 2022 reinforce that even partial non-payment of due debt constitutes default warranting admission under the Code. The sole ground for rejecting such applications is if the debt hasn't become due and payable. The Financial Creditor has sufficiently demonstrated existence of the debt and its default in this Petition.

The Corporate Debtor's loan repayment irregularities led to its account being declared NPA on 30.11.2018. Despite an MOU dated 29.08.2019 regularizing accounts, another default occurred on 01.10.2021, with continuous defaults thereafter, resulting in the account being declared NPA again on 01.04.2022. A Foreclosure Statement dated 28.11.2022 shows a total due amount of Rs. 21,38,75,169.23 to the Financial Creditor. Additionally, a Record of Default under the IBBI Regulations, 2017, and updated financial information from NeSL were submitted as evidence of default.

It is reiterated that the default date is 01.10.2021 and the application being filed on 06.12.2022 falls within the 3-year limitation period from the default date. Even if considering 30.11.2018 as the default date, the application is within limitation: MOU dated 29.08.2019 acknowledged liability, triggering a fresh limitation period. On 25.01.2022, the Corporate Debtor acknowledged the debt again. Therefore, the application falls within the 3-year period from the last acknowledgement, as per Section 18 of the Limitation Act.

The Respondent-Corporate Debtor disputes the debt quantum due to additional charges contrary to the terms of the said MOU. In this regard, it is stated that the debt calculation is based on the Agreement between the Parties. Further, the quantum of debt (even if disputed by the Corporate Debtor) is immaterial for the purpose of adjudication of an application u/s 7 of IBC so long as the debt is more than the minimum threshold amount of Rs. 1 Crore as provided u/s 4 of the Code.

The Corporate Debtor contends that as the Property's value surpasses the debt, the instant Petition should be dismissed as per Vidarbha Industries precedent. However, Section 7 provides a specific remedy for Financial Creditors, overriding other laws. The Hon'ble Supreme Court in M. Suresh Kumar Reddy v. Canara Bank & Ors., clarified that Vidarbha Industries' context was specific to its facts, where receivables exceeded the debt. In light of the subsequent judgement of Hon'ble Supreme Court in M. Suresh Kumar Reddy (Supra) it is clear that the Adjudicating Authority has to restrict itself to determination of debt and default at the stage of admission of an application u/s 7 of the Code. Reliance has also been placed upon the Judgment of Hon'ble NCLAT in Rajesh Kedia, Ex-Director of Ajanta Paper and General Products Ltd. v. Phoenix ARC Pvt. Ltd., (2022) SCC OnLine NCLAT 147.

It is further stated that any issue/grievance of the Corporate Debtor with regard to the ECLGS scheme is irrelevant for the instant case as the same is beyond the jurisdiction of this Tribunal. It is averred that the Corporate Debtor in its email dated 14.12.2020 had clarified that there was no circular from RBI stating that a waiver of EMI's is to be processed in the absence of ECLGS scheme. It was also informed to the Corporate Debtor that in terms of RBI moratorium norms, six months moratorium was to be extended to all the eligible borrowers and the same was extended to the Corporate Debtor from March 2020 to August 2020. The Financial Creditor was under no obligation to extend any other benefit to the C.D. nor was under an obligation to modify the Charge on the collateral securities.

It is stated that in terms of Clause 4(c) of the MOU dated 29.08.2019, the Financial Creditor had agreed to waive the LPP/OD/Legal Charges subject to meeting of repayment schedule and timelines by the Corporate Debtor. Further, in the said Clause it was specifically clarified that in case of any default by the Corporate Debtor, the entire LPP/OD/Legal Charges would be reinstated and made applicable with immediate effect. Therefore, when the Corporate Debtor defaulted again on 01.10.2021 in payment of EMI, the LPP/OD/Legal Charges were reinstated by the Financial Creditor. Further, expectation of getting any alleged funding from an investor shall have no impact on an application u/s 7 of the Code.