Meeti Developers Private Limited vs Edelweiss Asset Reconstruction Co. Ltd

The above Interlocutory Application Number 5704 OF 2023 is preferred by Meeti Developers Private Limited (hereinafter referred to as the “Applicant”) seeking direction against Edelweiss Asset Reconstruction Company Limited (hereinafter referred to as the “Respondent”) under Section 65 of the Insolvency and Bankruptcy Code, 2016 And Rule 41 R/W Rule 11 of NCLT Rules, 2016 (hereinafter called as “the Code”), praying for following reliefs:

a. To impose maximum penalty of Rs.1,00,00,000/- (Rupees One Crore Only) on the Financial Creditor who have acted in violation of Section 65 of IBC.

b. To dismiss the present Company Petition filed by the Financial Creditor against the Corporate Debtor.

c. To take on record of this Hon'ble Tribunal the documents as mentioned in Paragraph No. 5 of the present Application;

d. Pass any other and further relief as this Hon'ble Tribunal may deem fit;

e. Costs for the Application.

Brief facts of the application

The Present Application bearing I.A. no. 5704 OF 2023 is preferred by Meeti Developers Private Limited seeking dismissal of the Company Petition No.624 of 2023 filed by the Financial Creditor against the Corporate Debtor i.e. the present applicant.

It is submitted that the Applicant, a company registered under the Companies Act, is the Corporate Debtor in Company Petition (IB) 624 of 2023 filed under Section 7 of the Insolvency and Bankruptcy Code. ("Code")

It is submitted that by a sanction letter dated 14th October, 2016, the Original Lender i.e., ECL Finance Limited had subscribed to the NCDs (Non-Convertible Debentures) issued by the Applicant (MDPL) on the terms and conditions more specifically stated therein. Thereafter, a Debenture Trustee agreement was executed between the Corporate Debtor and Catalyst Trusteeship Limited. Three years thereafter, the original lender through an Assignment Agreement assigned its rights, title, interest, and benefits under the facility/ NCD's in favour of the Financial Creditor (Edelweiss Asset Reconstruction Company Limited) on the terms and the conditions set out. The entire debt was recalled by Default notice cum innovation of guarantee notice dated 01st January, 2020 wherein the applicant (MDPL) was asked to pay the entire outstanding.

To appreciate the present controversy, it is necessary to state certain relevant background facts in brief-

a. Proceedings under Section 7 of the Code were initiated by the Respondent in the present IA i.e. (Edelweiss Asset Reconstruction Company Limited).

b. Vide order dated 5th March 2021 in CP 783 of 2020 CIRP process was initiated against the Applicant by the Hon'ble National Company Law Tribunal.

c. Thereafter, on 08th July 2022 the Financial Creditor i.e. the Respondent in the present IA and Ajmera Realty & Infrastructure India Limited (ARIIL) executed a Transfer Agreement to purchase the NCDs from the applicant (MDPL) for a sum of Rs. 31,66,00,000/- along with rights, title, interests, claims and cause of action available to the applicant on the terms and conditions stated therein.

Subsequent to the above, on the payment of the first instalment i.e. an upfront payment of Rs. 3,26,00,000/- was made to the Financial Creditor leading to the withdrawal of the Company Petition by way of order dated 8th August, 2022 and the Hon'ble Bench permitted the withdrawal.

However, when ARIIL defaulted to the terms agreed with the Respondent/ Org. Petitioner with regards to the payment of balance consideration of Rs.28,40,00,000/- by ARIIL under the said Transfer Agreement, the present Company Petition No. 624 of 2023 under Section 7 of the IBC was filed by the Respondent (Edelweiss Asset Reconstruction Company Limited) against the Applicant/ Org. Corporate Debtor. The applicant (MDPL) argues that CP 624 of 2023, filed by a financial creditor, should not be allowed to proceed against them due to the withdrawal of a previous CP (783 of 2020) and a subsequent Transfer Agreement with ARIIL dated 05.07.2022. They contend that the financial creditor's withdrawal of CP 783 of 2020 without seeking permission to approach the tribunal again, along with the Transfer Agreement, renders CP 624 of 2023 not maintainable. The applicant asserts that these actions and agreements fundamentally change the circumstances under which insolvency proceedings can be pursued against them.

During the proceedings, on November 2nd 2023, the applicant filed a reply to the Section 7 Application. Soon after, on the following day, they were served with a copy of a Commercial Suit filed by the financial creditor (the respondent in the current matter) against the applicant. Upon reviewing Commercial Suit No. 30916 of 2023, the applicant realized that the financial creditor had already initiated proceedings against ARIIL by filing a separate application under Section 7.

The applicant further submits that the financial creditor has already initiated legal actions, including a Commercial Suit and an Interim Application before the Bombay High Court, and a Company Petition before the tribunal, all based on the same cause of action. They argue that because of these existing proceedings against other parties, the financial creditor should not be allowed to purse the current Company Petition against the applicant, as it would amount to duplicating legal actions based on the same grounds.

In Commercial Suit 30916 of 2023, the financial creditor alleges they were induced to advance money to the applicant (MDPL) by New Kamal CHS Ltd., based on assurances regarding a project. The applicant also states they received certain documents after filing their reply and seek to include them now. They acknowledge possessing one document earlier, which they now wish to present as evidence for imposing a penalty on the respondent under section 65 of the IBC.

The Respondent in its reply has denied each and every averment contained in the Application.

The Respondent in its reply to the present IA states that the present Petition against the applicant Corporate Debtor was filed on 2nd June 2023. Thereafter, on 2nd November 2023, the Petitioner instituted the Suit against various other Respondent/Defendant including the Applicant Corporate Debtor. The prayers in the suit are entirely different from that of the present Company Petition. There is no suppression of facts. Further the filing of the Commercial Suit has no bearing whatsoever to the present Petition. The present proceedings are for initiation of Corporate Insolvency Resolution Process ["CIRP"] against the Corporate Debtor on account of its debt and default. The Suit has been instituted against several Defendants, who are not subject to the jurisdiction of this Hon'ble Tribunal.

It is submitted by the Respondent that the contention of any suppression qua Company Petition No. 877 of 2023 instituted against Ajmera Realty and Infra India Limited ["ARIL"] is unfounded. The cause of action of the Petitioner against the Corporate Debtor and ARIIL are separate and independent.

Admittedly, the withdrawal was on the basis of settlement having been arrived at between the parties. The said fact of the settlement is reflected from the proceedings of the COC as well. The CP 783 of 2020 was withdrawn on the belief that the parties would comply with the agreed terms. However, the Petitioner realized that the Corporate Debtor and ARIIL had collusively induced the withdrawal of CP 783 of 2020 without any intention of complying with the terms of payment stipulated in the Agreement dated 8th July 2022. It is on the strength of this Agreement that CP 783 of 2020 was withdrawn as under the Transfer Agreement and Financial Undertaking, the NCDs were to be sold by the Petitioner to ARIIL on receipt of full consideration amount which faculty was never paid and hence the NCDs were never transferred to ARIIL.

The Respondent submits that the Corporate Debtor remained obligated to redeem the Non-Convertible Debentures (NCDs) as on recall of debt on January 1st 2022, the Corporate Debtor failed to make the payment, thus the default of Corporate Debtor stood established. It was agreed that Ajmera Realty and Infra India Limited (ARIIL) would purchase these NCDs from the Petitioner for a total consideration of Rs. 31,66,00,000/-. This arrangement involved an upfront payment of Rs. 3,26,00,000/- with the remaining Rs.28,40,00,000 to be settled by December 31st 2022. To formalize this agreement, a Transfer Agreement and Financial Undertaking were signed on July 8th, 2022. These documents explicitly stated that the transfer of NCDs to ARIL would only occur upon the complete payment of the purchase consideration. Notably, they affirmed that the Petitioner's rights under the debenture documents would persist until ARIL fulfilled its obligations. Specific clauses within the Transfer Agreement, such as Clause 2 (v), (vii), and (ix), alongside Clause 6, underscored this provision. Additionally, a letter dated July 6th, 2022, by the applicant Corporate Debtor further emphasized the Applicant's obligation to the Respondent in case ARIIL defaulted on its payment commitments. The relevant part from the letter is reproduced as under-

“We agree that the rights of EARC shall continue as debenture-holder against MDPL and other security-providers, until the NCDs are transferred in favour of ARIIL or its nominated entity, after ARIL make the payment of entire purchase consideration to EARC. Once the debentures are transferred to ARIIL or its nominated entity, all rights, title and interest of EARC (as NCD-holder) shall stand vested in favour of ARlIL or its nominated entity as new debenture-holder”

Hence it is submitted by the Respondent that the Petitioner continues to hold and is entitled to claim under the NCDs and that the present CP 624 of 2023 is filed on the contention of invocation of guarantee. The Corporate Debtor has committed default in the repayment of the NCDs. It is impermissible for the Corporate Debtor to now contend that the Petitioner cannot maintain the Petition more so given the fact that there is no transfer of NCDs.

Hence the present IA ought to be rejected as this IA is a mischievous attempt by the petitioner to obfuscate facts to mislead the Hon’ble Tribunal.

Findings:

Heard the Ld. counsels for the parties and perused the record with their able assistance.

After having appreciated the contentions of the learned counsels for the applicant wherein the applicant has submitted that the present IA be allowed and a cost of Rs. 1 crore be imposed upon the petitioner i.e. Edelweiss Asset Reconstruction Company Ltd. It is necessary to appreciate Section 65(1) Insolvency and Bankruptcy Code, 2016.

“If, any person initiates the insolvency resolution process or liquidation proceedings fraudulently or with malicious intent for any purpose other than for the resolution of insolvency, or liquidation, as the case may be, the Adjudicating Authority may impose upon a such person a penalty which shall not be less than one lakh rupees, but may extend to one crore rupees.”

From the perusal of the above it is evident that the proceedings can be initiated by the Adjudicating Authority against the person who approaches the court with malicious or with fraudulent intent. The adjudicating authority may impose penalty. In the facts and circumstances of the present case, it is evident that the petitioner EARC, initially filed CP No. 783 of 2020 under the IBC 2016 against MDPL/Applicant which was admitted vide order dated 5th March 2021. Pursuant to the admission no resolution plan was received. The COC proceedings clearly depict that because of the prolonged litigation and in view of rising CIRP cost and in view of no resolution plan, the Org. petitioner/ (EARC) was left with no other option but to enter into settlement with the promoters of the CD. The said fact of the settlement with the CD is recorded in the 16th COC meeting wherein it is stated as under-

"2. In view of the prolonged litigation, receipt of no resolution plan despite multiple processes were conducted, increasing CIRP cost, a settlement has been agreed with the Promoter/ Director of the Corporate Debtor. Therefore, I hereby withdraw the application bearing C.P. (IB)-783/2020 filed by me before the Adjudicating Authority under section 7 of the Insolvency and Bankruptcy Code, 2016."

Pursuant to above, the Hon’ble NCLT vide order dated 8th August 2022, was pleased to permit the withdrawal of CP 783 of 2020 in IA No.2159 of 2022 u/s 12A of IBC. The relevant extract of the order is as under-

"IA 2159 of 2022- This is an application filed seeking withdrawal of the CP 783 of 2020 filed by the Petitioner against the Corporate Debtor. Counsel for the RP submits that Form-FA was given, and the withdrawal was approved by 96% of the COC. Accordingly, the above IA is allowed and the CIRP order passed against the Corporate Debtor is withdrawn by releasing the Corporate Debtor from all rigours of moratorium. In view of the order passed in the above IA 2159 of 2022, all the IAs become infructuous and stand disposed of granting liberty to the Petitioners to agitate their legal remedies before”

This bench further deserves to take note that 96 % of voting share in the COC was of the Org. petitioner/ (EARC) itself. Otherwise also the Hon’ble Supreme Court in many cases has allowed filling of the petition after the withdrawal of previous petition pursuant to non-fulfilment of settlement between the parties in this regard’s reliance can be placed upon the judgement of the Hon’ble NCLAT in the matter of Priyal Kantilal Patel v. IREP Credit Capital Private Limited & Anr. wherein a Petition under Section 7 of the Code was admitted, subsequently withdrawn and a fresh petition was filed on default of settlement terms. The Hon'ble NCLAT held as under:

“……The mere fact that in earlier company petition, consent terms were arrived, which consent terms was breached by the corporate debtor, the financial debt which was claimed by the financial creditor would not be wiped out nor the nature and character of financial debt shall be changed on account of breach of the consent terms.”

Further reliance can also be placed on paragraph No. 7 of the judgement in the matter of Vinay Gupta v. Ashika Credit Capital Private Limited & Anr. Wherein the Hon’ble NCLAT has held that a default under a settlement does not in any manner affect the claim of the original applicant. The relevant part is reproduced as under:

“…. Default in settlement agreement is only a by-product which has permitted revival of Section 7 application but in no manner affect the claim in the original application which is financial debt under Section 7 application”

It is pertinent to notice that the present petition and that of CP 783 of 2023 was filled by the petitioner Edelweiss because of default on the part of the applicant Corporate Debtor who failed to repay the loan amount on the recall. The Debt and default against the applicant stood established. As far as the Agreement dated 8th July 2022 of the petitioner with ARIIL is concerned, the outcome of which was that the NCDs of the petitioner were to be taken over by ARIIL on payment of due consideration never saw the light of the day as the consideration amount was not paid by ARIIL, hence NCDs remained with petitioner Edelweiss. The petition filled by Edelweiss against ARIIL has no relevance with the cause of action in the present petition and also in CP 783 of 2020. Both the issues are independent of each other and thus the petitioner independently has initiated appropriate proceedings against the applicant and that of ARIIL. In the facts and circumstances of the present case the initiation of CP against the applicant cannot by any stretch of imagination be termed as malicious or fraudulent.

Furthermore, the Petition is not barred by the principle of Res judicata. The principle of Res judicata applies only when the decision on merits and doesn’t apply in a situation where the proceedings is withdrawn with liberty. The present case deals with the latter situation, wherein the first petition was withdrawn in the view of the settlement having been arrived at between the parties. The reliance has been placed on the judgement of Honb’le Supreme Court in Baldevdas Shivlal & Anr. V. Filmistan Distributors (India) Pvt. Ltd. The relevant extract is as under-

“……A consent decree, according to the decisions of this Court, does not operate as res judicata because a consent decree is merely the record of a contract between the parties to a suit, to which is superadded the seal of the Court”

After the withdrawal of CP 783 of 2020, ARIIL consistently requested extensions to fulfil its payment obligations under the transfer agreement. However, ARIIL never fully paid the agreed-upon amount, resulting in the Non-Convertible Debentures (NCDs) remaining with the petitioner. It's crucial to note that ARIIL had agreed to purchase the NCDs for Rs.31,66,00,000, of which only Rs.3,26,00,000 was paid up front. The outstanding balance of Rs.28,40,00,000, intended to be paid before December 31, 2020, was never fulfilled by ARIIL. The Transfer Agreement dated July 8, 2022, explicitly stipulated that the transfer of NCDs to ARIIL would only occur upon the complete payment of the purchase consideration. Reviewing the terms of this agreement clearly indicates that the Corporate Debtors rights under the said documents were to remain intact until ARIIL fulfilled its obligations. The relevant clauses of agreement are reproduced as under: -

TERMS PERTAINING TO TRANSFER OF DEBENTURES:

“(v.) The balance amount of INR 28,40,00,00/- (Indian Rupees Twenty-Eight Crore Forty Lakhs Only) (hereinafter referred to as the "Balance Purchase Price") shall be paid by the

Transferee to the Transferor in the EARC Bank Account on or before December 31, 2022 ("Final Payment Date")."

(vii.) Immediately on receipt of the Balance Purchase Price in the EARC Bank Account by the Final Payment Date, the, Transferor intimate the Depository by filing the Delivery Instruction Slip (hereinafter referred to as "DIS") for transferring the Debentures from the account of the Transferor to the Transferee.

(ix) Unless and until the. transfer of Debentures is not completed in accordance with this Agreement, but subject to Clause 8(e) of this Agreement, the Transferor shall continue to hold/ exercise all the rights, title, interest, liabilities, obligations and any other security interest as mentioned under the Debenture Documents. The rights of the Transferor under the Debenture Documents in relation to the Debentures shall not be impacted whatsoever by virtue of execution of this Agreement till the Debentures are not transferred to the Transferee as per this Agreement.”

CONSEQUENCES OF EVENT OF DEFAULT:

“Upon occurrence of any Event of Default, the following consequences shall follow:

（i）The Transferor shall have the rights to pursue any of its rights and remedies available to it against the Transferee under this Agreement ox under the Financial Undertaking or under Applicable Law.

(ii)The Upfront Amount shall stand forfeited and the Transferor shall be under no obligation to whatsoever to refund the Upfront Amount to the Transferee., It is further clarified that forfeiture of the Upfront Amount by the Transferor shall not release the Transferee from fulfilment of its obligations under this Agreement or the Financial Undertaking and shall not affect the rights of the Transferor under the Debenture Documents."

In addition to the above stated clauses of the Transfer Agreement, it also deserves to be taken note that vide letter dated 6th July 2022, it was the applicant who introduced ARIIL to the Petitioner (EARC) and represented that NCDs would not be transferred to ARIIL till ARIIL makes full payment. The relevant portion of the letter dated 6th July 2022 is reproduced as under-

“We agree that the rights of EARC shall continue as debenture holder against MDPL and other security providers, until the NCDs are transferred in favour of ARIIL or its nominated entity, after ARIIL make the payment of entire purchase consideration to EARC.”

Further it deserves to be appreciated that the Transfer Agreement between ARIIL and the petitioner in fact has no bearing upon the default having been committed by the Corporate Debtor. In the present case there is clearly a debt due to the Petitioner on the part of the Corporate Debtor and there is also a default on the part of the Applicant. The transfer Agreement Between ARIIL and Petitioner (EARC) would not absolve the Applicant from its default under NCDs. It doesn’t discharge the liability of applicant in any manner, thus the petitioner is well within its rights to file the present Company petition 624 of 2024 and the said petition by no means can be stated to be a malicious proceeding.

Thus the bench is of the considered view that he filing of CP No. 877 of 2023 against ARIL has no bearing on the locus of the Petitioner to file and maintain the present Petition as is inter alia, the letter dated 6th July 2022 addressed by the Corporate Debtor and express terms of the Transfer Agreement and Financial Undertaking specifically provide that the rights of the Petitioner would continue as a debenture holder against the Corporate Debtor until the NCDs are transferred in favour of ARIL after ARIL makes payment of the entire purchase consideration to the Petitioner. In fact, the stand taken by the Petitioner is consistent with the letter dated 6th July 2022 and terms of the Transfer Agreement and Financial Undertaking.

In view of the above facts, the Interlocutory Application Number 5704 of 2023 is “Dismissed” and “Disposed of” .