M/s. Sundaram Mahadeo Autoworld Pvt. Ltd. vs State Bank of India & Ors.

[Per se: Shri Deep Chandra Joshi, Member(J)]

This application has been filed under Section 10 of the Insolvency & Bankruptcy Code, 2016 by the Corporate Debtor/Petitioner, namely M/s. Sundaram Mahadeo Autoworld Private Limited, seeking initiation of Corporate Insolvency Resolution Process (CIRP) against itself.

M/s Sundaram Mahadeo Autoworld Private Limited is a private, limited company having its registered office at NI-1-52, Near ITBP Headquarters, Bihaguri, Sonitpur-7841.53, Assam. The Company was incorporated on 29^th day of May, 2015, Presently the following are the Directors:

The Petitioner submits that

The petitioner is in the business of buying, selling, imparting, exporting exchanging, hiring & assembling & altering, improving & servicing, repairing and dealing in all kind. of commercial vehicles manufactured by TATA Motors. The company majorly services the North Eastern states of India and is also into the business of leasing, managing, running, establishing, building workshops, garages, service stations for all types of motors and vehicles, to carry on, the business of motor vehicle plying and to do all incidental acts and things necessary for the attainment of the above objects and to carry on the business of distribution and servicing of motor insurances policies.

The petitioner has incurred substantial diminishing profits to visible losses during the FYs 2019-20, 2020-21 and 2021-22 (up to 30.06.2022) ,which are evident in the audited balance sheets of these financial years. The cumulative losses amounted to Rs. 1,27,86,244.35 as on 30.06.2022 eroding the entire paid-up share capital and reserves.

The major financial creditor State Bank of India (SBI) had issued a reminder notice on 28.04.2022 after which they classified the petitioner's credit facilities as non-performing asset as on 08.05.2022. The petitioner does not have the capacity to repay the existing dues considering the huge financial/operational losses and financial stress being faced by the petitioner.

The petitioner availed various credit facilities from SBI from time to time and the total dues payable to SBI as on 30.06.2022 are Rs. 6.20 Crores as per the bank statements. As the petitioner failed to service interest and instalment from time to time, SBI classified the petitioner's facilities as non-performing asset (NPA) as on 08.05.2022.

The petitioner also availed credit facilities from TCFSL from time to time and the total dues payable as on 30.06.2022 are Rs 4.04 Crores, as per the bank statements. As the petitioner failed to service interest and instalment from time to time, TCFSL classified the petitioner's facilities as non performing asset (NPA) as on 02.06.2022.

The petitioner further availed credit facilities from TMFSL, from time to time and the total dues payable as on 30.06.2022 are Rs. 5.84 Crores, as per the bank statements. As the petitioner failed to service interest and instalment from time to time, TMFSL through its facility agent partner, Catalyst Trusteeship Limited had issued two numbers of recall notices dated 27.04.2022 in this regard and has classified the petitioner's facilities as non performing asset (NPA) as on 30.06.2022.

Further, the petitioner also availed credit facilities from Induslnd Bank Limited and the total dues payable as on 30.06.2022 are Rs. 6.35 Lacs as per the bank statements whereby the petitioner defaulted in payment of interest and/instalment due to the huge financial losses and financial stress being faced by the petitioner.

Moreover, HDB Financial Services Ltd. had granted credit facilities towards Trade Advance, which has been squared off by way of sale of one vehicle, thus the balance outstanding towards HDB is nil hence, no consideration of HDB to be made to the list of financial creditors.

The reasons for acute financial stress of the Corporate Debtor have been stated below by the CD itself:

B. The stress in the Company is attributable to both internal and external factors.

a. Demonetization in November 2016 affected the business for 2 months

b. Transition from BS III to BS IV in March 2017 led to closure of sales for 3 months as no stock was not available in TML.

c. TML pushed stocks to 3 months’ inventory in the year 2017 which was forcefully maintained for 2 consecutive years.

d. Funds got stuck with Directorate of Municipal Administration for 11 months starting from March 2019 which led to no supply from TML for 3 months due to no funds available.

e. COVID 19 Pandemic hit made the entire business stagnant for 3 long months.

f. Simultaneously, the conversion of BS IV to BS VI also affected the business again in March 2019 as the vehicles were not available in market.

a. Interest Loss: Due to operational losses and financial stress from the external factors which resulted in piling up of dues and resultant building up of huge interest cost without being able to service the debt. This has caused an additional foreseen burden.

b. The working capital got eroded due to which the business in FY 2021-22 got badly affected with almost 50% drop in sales.

c. Continuous losses in FY 2021-22 due to external factors: The Company started incurring losses since FY 2020 onwards due to the intrinsic stress as enumerated in the above-mentioned points.

The Corporate Debtor/Corporate Applicant has not incurred any ineligibility as per Section 11 of IBC, 2016.

The Corporate Debtor incurred heavy losses in the business and the liabilities are far in excess of the assets, the Petitioner seeks resolution of its insolvency through maximization of value of its assets under provisions of IBC, 2016.

The details of the amount of debt due and the date from which such debt due as mentioned in Part- III of this application is as follows:

The Petitioner further submits the particulars of land and buildings as per provisional Balance Sheet as on 30.06.2022:

Further, the Petitioner has submitted the details of the Guarantors/Mortgagors, who guaranteed Bank Credit Facilities and whether related to the CD and the Corporate Applicant:

On the other hand, Respondent No. 1, SBI, submits that:

The Financial Creditor No. 1 Bank is a Body Corporate duly constituted under the State Bank of India Act, 1955, having its Central Office at Madam Cama Road, Mumbai- 400021 and one of its Local Head Office at Dispur, opposite Asom Sachivalaya, Guwahati-6 and carrying on the business of Banking through diverse branches and in particular a Branch named State Bank of India, Tezpur Branch (maintained by RMME, SBI Mission Chariali Branch), Tezpur, Sonitpur Assam, and represented this case by the Chief Manager, State Bank of India, Stressed Assets Recovery Branch, Na-All, M.G. Road, Jorhat, Assam-785001.

The Corporate Applicant is a Private Limited Company registered under the Companies Act, 2013 and engaged in Automobile Dealership business and most specifically dealership and Sales of Automobiles, Spare Parts, etc. pertaining to dealership of Tata Commercial Vehicles etc. One Sri Sumit Agarwal and Sri Amit Agarwal are the Directors of the Corporate Applicant. The said Sri Sumit Agarwal, Sri Amit Agarwal and One Smt. Shakuntala Devi Stood as the Personal Guarantors to the loan facilities availed by the Corporate Applicant. The Corporate Applicant and the said Sri Sumit Agarwal, Sri Amit Agarwal and One Smt. Shakuntala Devi had also created equitable mortgage over their immovable properties. The Corporate Applicant through its Director applied for loan facilities for its dealership business on 01.03.2016.

Sanctions of Facilities by the FC No. 1 to the Corporate Applicant: Vide Letter of Arrangement dated 19.03.2016 the FC No. 1 sanctioned a Term Loan of Rs. 4.50 Crores and a Cash Credit Limit of Rs. 2.50 Crores (Overall Limit Rs. 7.00 Crores). The Corporate Applicant signed and executed the necessary Board Resolution. dated 19.03.2016 and Loan cum security documents including Guarantee Agreements all dated 21.03.2016. The Corporate Applicant also created Equitable Mortgage over Lease hold right period (15 years) over a plot of land measuring 1 Bigha 1 Katha 10 Lechas covering Dag No. 395 PP No. 204 by deposit of the Lease Deed dated 29.12.2015 and confirmed the said deposit on 31.03.2016. The said plot of land was additionally put into equitable mortgage by the Lessors with the Financial Creditor on 21.03.2015 and confirmed the said deposit on 31.03.2016. Similarly, One Sri Sumit Agarwal and Smt. Shakuntala Devi also created Equitable Mortgage of their respective residential flats.

Applications dated 28.02.2017 and 15.02.2017, the Corporate Applicant applied for E-DFS (Electronic-Dealership Finance scheme) facility within the overall limit of Rs. 7.00 Crores and vide Letter of arrangement dated 16.05.2017, the FC had reduced the Cash Credit Limit to Rs. 1.50 Crores with E-DFS Facility of Rs. 3.00 Crores and reviewed the Term Loan at Rs. 2.50 Crores. The Corporate Applicant through its Directors signed and executed the Loan cum security documents 16.05.2017 including E- DFS Agreement and Guarantee Agreements.

Similarly, on 19.06.2018 and 25.06.2018 the Corporate Applicant applied for renewal/ enhancement review of the CC limit, E-DFS facility and Term Loan respectively and vide Letter of Arrangement dated 31.01.2019 the CC limit stood renewed and the E- DFS limit was enhanced from Rs. 3.00 Crores to Rs. 4.00 crores and the TL stood reviewed at Rs. 2.14 Crore.

Again, vide Letter of Arrangement dated 29.09.2020 the FC renewed the CC limit at Rs. 1.50 Crores and the E-DFS limit of Rs. 4.00 Crores and reviewed of the TL at the outstanding level of Rs. 1.71 Crores. Under the same sanction a fresh Adhoc E-DFS limit of Rs. 1.10 Crores and BG limit of Rs. 2.50 Crores were sanctioned.

On the basis of an Application dated 13.12.2021, the FC vide Letter of Arrangement dated 04.03.2022 renewed the CC limit at Rs. 1.50 Crores and the E-DFS limit at Rs. 4.0 Crores. Additionally, the FC also reviewed the TL at an outstanding level of Rs. 1.11 Crores. However, the BG stood closed and the total limit sanctioned stood at Rs. 7.61 Crores as on 04.03.2022.

The charges over hypothecated and mortgage properties were duly registered with the ROC and personal guarantees and equitable mortgage were duly extended. Even though the documentations and sanctions had been made within the specified three-year period for the purpose of limitation, however Balance Confirmation Letter had been executed on 16.05.2017 and 06.05.2022 respectively.

As the status of the Loan accounts started to show deterioration, the FC No. 1 Issued Demand Letters followed by Demand Notice dated 07.09.2022 under Section 13(2) of the SARFAESI! Act, 2002 to Corporate Applicant whereby the FC No. 1 had already set the wheel in motion for recovery of its dues both under the SARFAESI Act as well as by filing Original Application No. 473/2022 under Section 19 of RD & B Act, 1993 in the DRT, Guwahati. Vide Letter dated 06.09.2022 the FC had also warned that there is a mismatch of inventory and Vehicles missing. Field/spot inspection of the Corporate Applicant was carried out on 02.08.2022 and 25.08.2022 and stock irregularities and revenue receipts mismatch were found.

The Loan Accounts were classified as NPA on 06.09.2022:

(Rupees Five Crores Eighty-Two Lacs Forty-Eight Thousand Six Hundred Sixty-Six and Paise Forty-Nine) only.

In view of the above, the conduct of the Corporate Applicant in filling the Instant Application under Section 10 of IBC, 2016, before the classification of the Loan Accounts as NPA (06.09.2022), have no explanation as the Affidavit accompanying the Application had been executed on 04.09.2022. Meaning thereby, Corporate Applicant had anticipated that the FC would initiate recovery proceedings under the SARFAESI Act, 2002 as well as under the Recovery of Debts and Bankruptcy Act, 1993 and therefore, preferred the Instant Application to stop any recovery proceedings by getting benefits arising out of moratorium under IBC 2016. Matter of fact, the conduct is too obvious to ignore and palpably give away the purpose and intent of the Corporate Applicant. The very fact that the outstanding in the E-DFS Accounts stands at Rs. 3,49,21,542.58 establishes the fact beyond any reasonable doubt that the Corporate Applicant had failed to route the Sale proceeds in the E-DFS Account within the stipulated period and till date and the vehicles are also found to be missing from the inventory meaning thereby the same had been sold but the sale proceeds had been diverted by the Corporate Applicant. Therefore, preferring an Application under Section 10 of IBC, 2016 by the Corporate Applicant amounts to sheer misuse and abuse of Section 10 by the Corporate Debtor/ Applicant and this fact cannot be ignored because the admission of CIRP shall lead to moratorium for the benefit of the Debtor and as such the Application is liable to be rejected.

Further, elements of sections 65 and 66 of IBC, 2016 are also attracted in the instant case. This Hon'ble Tribunal has the discretion to reject the instant Application as the Corporate Debtor/ Application misused the provision for CIRP under IBC.

In fact, in the case of Innovative Industries Ltd. versus ICICI Bank, the Hon'ble NCLAT held that the Tribunal has the discretion to reject the Corporate Applicant's/Debtor's Application under Section 10 of IBC on the ground that where the Debtor had made an application for CIRP with malicious intentions to take advantage of the moratorium provisions of the IBC.

In the matter of Leo Duct Engineers and Consultants Ltd., the Corporate Debtor Leo Duct had outstanding liability of Rs. 32.00 crores towards Banks. Since Leo duct was not in a position to discharge its liability, so it made an Application under Section 10 of IBC to initiate CIRP. Somehow the Banks which had initiated proceedings under SARFAESI Act, 2002 got to know regarding the moving of the Application of CIRP by the Leo Duct in the NCLT and approached the NCLT to dismiss the Application, positing that such move being a blatant abuse of law. Learned NCLT, Mumbai held that for admission of CIRP for Corporate Applicant under Section 10, the Adjudicating authority has to consider the merits of each case and to see beyond what meets the eye and also requires due Application of mind before taking any decision. It had been further held that Application for CIRP should be rejected on the following grounds

Where initiation of the CIRP shall cause irreparable loss and injury to the creditor and an uncalled for protection to the Borrower.

Where the admission of the CIRP would have a serious impact on the FC who have already set the wheel in motion to secure its debt.

In the Case of Unigreen Global Pvt. Ltd., NCLT Principal Bench, New Delhi observed that admission of the CIRP Application would invoke the Application of the moratorium, scuttling all legal proceedings thus, it would unjustly restrain the Bank from exercising security interest under SARFAESI Act, 2002 and dismissed the Application by imposing a penalty of Rs. 10.00 Lacs on the Corporate Applicant and its Directors.

The mater was taken up by this tribunal on 29.09.2022, 28.10.2022 and 02.12.2022.

Heard the Counsels for both the sides at length. This Application has been filed under section 10 of IBC by the CD seeking initiation of CIRP against itself. Both, the Applicant - CD here and the Financial Creditors (FC)-SBI have confirmed that the accounts of the Applicant are NPAs and the Applicant has defaulted in making payments of interest and instalments to SBI- the FC/Respondent here. There is no dispute that the debt is not due, not payable in law and not defaulted. The CD has submitted that it has incurred cumulative losses of Rs. 1,27,86,244.35 as on 30.06.2022 eroding the entire paid-up share capital and reserves.

Reliance is placed on the judicial precedents of Hon’ble Supreme Court in the matter of M/s Innovate Industries Ltd. vs. ICICI Bank & Anr. as well as Hon’ble NCLAT in the matter of Unigreen Global Pvt. Ltd. vs. Punjab National Bank & Ors., Co. Appeal (AT) (Insolvency) No. 81 of 2017, we find that the contentions/objections of the Financial Creditors have no merits as the legal position in this respect has already been settled by the Hon’ble Supreme Court as well as Hon’ble NCLAT. Therefore, pendency of SARFAESI proceedings or proceedings before the DRT cannot be a valid ground not to initiate Corporate Insolvency Resolution Process under section 10 of the Code in respect of the Corporate Applicant/Corporate Debtor, if such application is found complete in all respects. The provisions of section 238 of the IBC have been given overriding effect to the provisions and proceedings under any other law. Hence, such contentions of the Financial Creditor are not legally tenable. More over the FC has liberty to replace the IRP and other sections of IBC i.e., 43,45,49,50,66,95 etc are available with the CoC /FC to deal certain transactions, if any, and to proceed against the CD/Guarantors if they prefer to do so. The objectives of the IBC are for resolution only in time. Hence, we don’t find any reason to dismiss the application as prayed for by the FC when the account of the CD is declared as NPA by the FC.

Considering the materials, papers filed and submission made by both the Petitioner and the Respondents, this Adjudicating Authority is satisfied that:

The Corporate Debtor availed the loan/credit facilities from the Financial Creditors/Respondents;

The Applicant CD has furnished:

Existence of debt is above Rupees One Crore;

Debt is due, payable in law and defaulted;

Default has occurred on 08.05.2022 with SBI (R1); on 02.06.2022 with TCFSL (R2); on 30.06.2022 with TMFSL (R3);

Copy of the Application filed before this Bench has been sent to the Financial Creditors and the application filed by the Corporate Debtor under Section 10 of the IBC is found to be complete for the purpose of initiation of Corporate Insolvency Resolution Process against itself;

Hence, the present IB Petition is admitted with the following directions/observations. The date of admission of this Application is 20/01/2023.

As per the provisions of Section 13 and 14 of the IB Code on the date of commencement of insolvency, this Adjudicating Authority declares moratorium with effect from today for prohibiting all of the following, namely:

(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.

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.

The provisions of sub-section (I) shall not apply to-

a. Such transactions as may be notified by the Central Government in consultation with any financial sector regulator.

The order of moratorium shall have effect from the date of this order till the completion of the Corporate Insolvency Resolution Process.

This Adjudicating Authority hereby appoints, as proposed, Mr. Amit Pareek [Registration No: IBBI/IPA-002/IP-NO0413/2017-2018/11205], having address at 4 Floor, Ram Prasad Complex, Chatribari, Guwahati-781001, Assam, as an Interim Resolution Professional. The Interim Resolution Professional is further directed to make public announcement of moratorium in respect of Corporate Debtor soon after receipt of an authenticated copy of this order and to act further as per the order/directions issued by this Adjudicating Authority and to follow the provisions under Section 13 and 14 and other relevant provisions of the Insolvency and Bankruptcy Code. The IRP has to submit Assignment Declaration before the Registry within 2 days from today.

The Applicant shall deposit Rs. 4,00,000.00 (Rupees Four Lakhs Only) in the account of the IRP within three days for initial expenses of the CIRP including the cost of paper publication, which will be apportioned as per the provisions of the Code and reimbursed to the Applicant upon formation of the Committee of Creditors.

The IRP is hereby advised to adhere to the time limit as stipulated for completion of the Corporate Insolvency Resolution Process (CIRP) and perform the duties as specified under Section 17, 18, 20 and 21 of I&B Code. The IRP shall perform all his functions contemplated, inter-alia, in Sections 15,17,18,19,20 & 21 of the Code and transact proceedings with utmost dedication, honesty and strictly in accordance with the provisions of the Code, Rules and Regulations. It is further made clear that all the personnel connected with the Corporate Debtor, its promoters or any other persons associated with the Management of the Corporate Debtor are under legal obligation under Section 19 of the Code to extend every assistance and cooperation to the IRP as may be required by him in managing the day-to-day affairs of the Corporate Debtor. In case there is any violation, the IRP would be at liberty to make appropriate application to this Tribunal with a prayer for passing an appropriate order. The IRP shall be under duty to protect and preserve the value of the property of the Corporate Debtor as a part of its obligations imposed by Section 20 of the Code, Rules and Regulations.

The Registry is hereby directed to communicate the authenticated copy of this order to the Financial Creditor, Corporate Debtor, the IRP and also to the Registrar of Companies, Guwahati immediately through speed post/registered post and e-mail, if available.

The commencement of Corporate Insolvency Resolution Process shall be effective from the date of this order.

Thus, the present IB Petition filed under Section 10 of the IBC stands admitted today i.e. 20.01.2023 with the above observations and directions.