Mr. Anish N. Nanavaty vs V Hotels Limited

Per: Coram

The present Application is filed by the Resolution Professional of the Corporate Debtor, V Hotels Limited pursuant to the directions of this Tribunal passed vide Order dated 31.05.2019 (Admission Order) wherein the issue of rate of applicable interest whether to be charged as to 22% or 14.85% was kept open to be decided by this Tribunal on filing of the complete information by the Resolution Professional.

The Corporate Debtor obtained had credit facilities from a Consortium of six Banks (Bank of India, Punjab National Bank, Union Bank of India & Vijaya Bank, Indian Bank & Canara Bank) and availed a facility for a sum of Rs. 129 Crores. On account of persistent defaults in principal and interest instalments, the account of the Corporate Debtor was classified as NPA on 01.12.2008. The facilities availed by the Corporate Debtor from the said Banks were subsequently assigned to the Financial Creditor herein through respective Assignment Agreements.

Subsequently, settlement talks were initiated between the Financial Creditor and the Corporate Debtor. The Corporate Debtor addressed letter dated 10.02.2011 to the Financial Creditor to put forth a proposal for settlement offering to pay interest @ 22% p.a. An extract of the said letter is reproduced hereunder :-

The said offer for settlement was considered by the Financial Creditor who sent a letter dated 28.02.2011 thereby accepting the offer for settlement along with the terms and conditions. An extract of the Sanction Letter dated 28.02.2011 is reproduced hereunder :

The said letter was signed by the representative of the Corporate Debtor as well as the Guarantors for the amount borrowed. Pursuant to the Sanction letter, the Financial Creditor and the Corporate Debtor entered into a Modification Agreement dated 29.09.2011 wherein the outstanding dues as on 30.06.2010 were acknowledged by the Corporate Debtor who agreed that in event of default revised rate of interest @ 22% p.a. compounded with monthly rests from 01.07.2010 shall be reinstated and continue to remain in force and the Financial Creditor shall be at liberty to take action for recovery of its dues.

The Corporate Debtor wrote multiple letters seeking extensions in the repayment schedule. The Financial Creditor agreed extension of time for repayment to 31.03.2013 subject to payment of 25 lakhs apart from the outstanding dues of the Corporate Debtor. Thereafter Corporate Debtor wrote multiple letters dated 21.02.2013, 06.04.2013 and 07.05.2013 respectively seeking further extensions in the repayment of total outstanding amounts until 30.09.2013.

However, due to continuous defaults in repayment on the part of the Corporate Debtor, the Financial Creditor vide letter dated 17.06.2013 revoked the sanctioned settlement agreement and also subsequent extensions. In response to the revocation letter, the Corporate Debtor addressed letter dated 01.07.2013 to the Financial Creditor contesting the revocation letter. Subsequently, the Financial Creditor exercised its right under section 13(2) of the SARFAESI Act calling upon the Corporate Debtor to make payment of an aggregate sum of Rs. 235,46,34,381/- due to the Financial Creditor together with interest @ 22% p.a. compounded at monthly rests till the payment.

The Corporate Debtor relies upon legal opinion issued by Justice D.K Deshmukh (former Judge of Hon’ble High Court of Bombay) wherein the interest rate has been recommended to be charged @ 14.85% instead of 22% as specified by Hon’ble DRT in its Order dated 23.03.2016. Further, the Corporate Debtor has also recognised the interest to be payable at the rate of 22% p.a. to the Financial Creditor in its Financial Statements until the Financial Year ending 31.03.2017. However, the statutory Auditor of the Corporate Debtor was replaced for the financial year ending 31.03.2018 and the new Auditor also relied upon the aforementioned legal opinion of Justice D.K. Deshmukh and accordingly the interest to be charged is @ 14.85% instead of 22% as originally accounted in the books of accounts of the Corporate Debtor.

Further, the issue and proceedings between the parties have been dealt in various forums as to DRT, DRAT, Hon’ble Bombay High Court and Hon’ble Supreme Court and the Orders passed therein are matter of fact and presented before this Tribunal. However, till date the applicable rate of interest has not been determined by any court.

The suspended Board of Directors (to be referred to as the objectors) of the Corporate Debtor have filed reply to the IA filed by the Resolution Professional and objected to the Application filed by the RP as the RP did not implead them as the parties. The objectors have drawn our attention to the Judicial Orders passed by DRT, DRAT, Hon’ble Bombay High Court.

The objectors have relied upon the revocation of the Settlement Agreement and states that the said agreement was revoked by the Financial Creditor on 17.06.2013 on its own motion hence, the enforcement of the same to carry out filing of new Application is untenable.

The Hon’ble High of Bombay vide its order dated 19.10.2018 dismissed the Writ Petition filed by the Financial Creditor stating that “as the main foundation i.e. the sanction letter dated 28.02.2011 was revoked by the Financial Creditor, hence there is no question of for carrying out amendment on the basis of said letter.

Further, a contention has been raised by the suspended Board of directors is that the correct amount of debt due is yet to be ascertained by the RP by giving due credit of the amount paid by the Corporate Debtor or adjusted by the Financial Creditor. Also, it was recorded in the Order dated 31.05.2019 that the payments made by the Corporate Debtor had been adjusted against the interest at a rate of 22% instead of applying the formula of adjustment of interest partly towards principal amount and partly towards interest amount. The RP has failed to comply with the said directions also.

The Applicants in IA 3114 of 2022, Tulip Star Hotels Limited & Anr have filed the Application being the shareholders each holding 50% of shares in the Corporate Debtor thereby seeking appropriate directions against the Respondent i.e. RP subject to non-compliance of the Order dated 31.05.2019. The Applicants state that the Financial Creditor had preferred the CP 532 of 2018 under section 7 of the Code initiating Insolvency proceedings without mentioning the exact amount of debt and default. Vide Order dated 31.05.2019, this Tribunal admitted the Petition and Insolvency proceedings had been initiated against the Corporate Debtor without determination of amount of debt and default and the said issue was kept open for the IRP to get the rate of interest to determined from the Tribunal after collating the information and presenting the said to the Tribunal.

The Applicant states that the IRP cannot proceed with the Corporate Insolvency process unless and until the amount of default owed by the Corporate Debtor is ascertained and determined.

The Applicants state that in the year 2016, the Financial Creditor filed an Application before the Debt Recovery Tribunal (DRT) to amend the pendente lite interest from 14.85% to 22% based on the Settlement Agreement. The DRT vide its Order dated 23.02.2016 dismissed the Application stating that the said amendment cannot be carried out at a belated stage since it may amount to change in the cause of action. Further, the Financial Creditor filed an Appeal before Hon’ble Debt Recovery Appellate Tribunal and vide Order dated 21.11.2017, the DRAT dismissed the appeal on the ground that the Financial Creditor was seeking amendment at a later stage. Thereafter, the Financial Creditor challenged the Order of DRAT by way of Writ Petition before Hon’ble Bombay High Court. The Hon’ble Bombay High Court dismissed the Writ Petition vide Order dated 19.10.2018 in view that as the sanction letter is revoked, the Petitioner cannot amend the Application. Further, the Financial Creditor filed an Appeal in the Supreme Court, wherein vide Order dated 03.01.2019 the Apex Court has directed the DRT to decide on the appropriate rate of interest.

Hence the Applicants prayed for issuing appropriate directions against the Respondent RP not to proceed with the CIRP process as there being non-compliance of the Order dated 31.05.2019 (admission Order) passed by this Tribunal.

Further, Vide Order dated 22.02.2023, this Tribunal allowed the Financial Creditor to intervene in the compliance Application filed by the RP being MA 2886 of 2019 and also to intervene in the IA 3114 of 2022 filed by Tulips Star Hotels & Anr. 18.The Financial Creditor has filed its reply dated 21.02.2023. The Financial Creditor has relied upon of the Settlement Agreement which clearly provides that the accrued rate of interest on the amount payable by the Corporate Debtor would be 22%. The Corporate Debtor contractually agreed to pay the Applicable Rate of interest to the Financial Creditor pursuant to the Settlement Agreement and Modification Agreement both executed in 2011. The Corporate Debtor did not raise any objection about the rate of interest being exorbitant between 2011-2013. 19.Further, in the audited Financial Statements for the year 2013-2014, signed as on 29.05.2014, after a year of revocation also, the Corporate Debtor acknowledged its liability to pay the rate of interest @ 22%. The revocation letter was only meant to revoke various extensions granted to the Corporate Debtor. However, the liability to pay the outstanding amount at a interest of 22% continued and was not forsaken.

The Financial Creditor states that the Corporate Debtor and the Applicants in IA 3114 of 2022 have placed reliance on letter dated 17.06.2012 i.e. Revocation letter and stated that since the settlement agreement stood revoked the Financial Creditor is not entitled to 22% interest rate. However, for the purpose of determining the Applicable rate of interest, terms and conditions of the Settlement Agreement and Modification Agreement are to be taken in to consideration.

Further, the Financial Creditor states that the Applicants in IA 3114 of 2022 have no locus standi to challenge the rate of interest as they are the erstwhile promoters of the Corporate Debtor. the decision of the rate of interest on the claim of the Financial Creditor will have no impact on the Applicants. The primary objection raised by the Applicants and the Corporate Debtor with regards to the revocation of the settlement agreement is not maintainable as the Modification Agreement also lays down that in case of default by the Corporate Debtor in paying the outstanding amount, THE Corporate Debtor will be required to pay the amount with a rate of interest at the rate of 22% p.a. compounded with monthly rests.

Hence, the Financial Creditor submits that the applicable rate of interest on the outstanding dues from the Corporate Debtor is @ 22% p.a. compounded at monthly rests.

Heard the Arguments for the Counsels appearing for both the parties. Considering the facts and circumstances of the present case and the directions passed by Hon’ble NCLAT vide Order dated 02.02.2023, we are of the opinion that the limited issue arising for consideration before us is determination of rate of interest to be charged on the financial debt owed to the Financial Creditors.

It is the contention of the Corporate Debtor that that the rate of interest is to be charged at 14.85% p.a. while the contention of the Financial Creditor that the rate of interest to be charged should be @ 22%.

Having perused the agreements and letters on record, it is seen that the Corporate Debtor itself on 10.02.2011 put forth an offer for settlement wherein the rate of interest to be paid was @ 22%. Thereafter, vide sanction letter dated 28.02.2011, it was agreed between the parties that in the event of default of any terms and conditions the Financial Creditor reserves its right to cancel, reduce, suspend or modify any or the entire aforesaid settlement of dues and/or vary the terms and conditions thereof. The other terms and conditions of the diverse original loan agreements executed by the Borrower with the Lender shall without Limitation apply mutatis mutandis hereto save and except the rate of interest which shall be applicable at the rate of 22% p.a. with compounding at monthly rests from 01.07.2010 with the revised repayment schedule as if the same are incorporate herein in extension

Further, it is observed in the Annexure to the Settlement of dues referred to as the Sanction letter in the General terms and conditions as in case of breach or default in the dues observance and compliance of this Settlement Terms then in such event, the entire amount claimed by the ARCIL together with interest and additional interest by way of liquidated damages as mentioned in clause 2.1 above shall become forthwith due and payable by the borrower and the guarantor jointly and severally to the ARCIL notwithstanding anything to the contrary contained in this Settlement Terms/Consent Terms which may be filed and ARCIL shall become forthwith entitled to various legal remedies including enforcement of security interest, towards the said claim amounts mentioned in clause 2.1 hereinabove. Clause 2.1 of the said Annexure of Terms and Conditions for Settlement is reproduced as under :-

The said Terms and Conditions for Settlement were signed by both the Corporate Debtor and also the Guarantors, the Applicants in IA 3114 i.e. Tulip Star Hotels Limited.

Further the Modification Agreement dated 29.09.2011 also stipulated that the Corporate Debtor is required to pay the outstanding amount along with 22% interest. Further it is also observed and noted that the Modification Agreement has not been referred in the revocation letter dated 17.06.2013 nor the Financial Creditor has any point of time cancelled or revoked the Modification Agreement. The relevant clause of the Modification Agreement specifying the rate of interest in the event of default is as under :-

Hence, on the basis of the Modification Agreement, which continues to bind the parties, the Financial Creditor is entitled to the outstanding dues along with the Applicable rate of interest at the rate of 22% p.a. compounding rests monthly. Further the issue in the proceedings pending before the DRT, DRAT, Hon’ble High Court of Bombay and Supreme Court, was with regards to whether or not the Financial Creditor can amend the pleading in the Original Application filed before the DRT. The issue of Settlement Agreement, Modification Agreement was not even a fact in issue before the aforesaid Courts. The Hon’ble Supreme Court vide its Order dated 03.01.2019 has also ordered that the rate of interest may be decided by the Tribunal.

Further, as per the Order dated 31.05.2019 passed by this Tribunal, the rate of interest would be decided by this Tribunal on filing of complete information by the RP. Hence, the Resolution Professional after collating and analysing the documents in hand filed an additional Affidavit dated 18.10.2019 wherein after taking into note all the judicial Orders, Agreements between the parties, the RP came to a conclusion that the rate of interest to be charged on the financial debt of the Financial Creditor would be 22% p.a. The relevant paragraph is reproduced as under:

In view of the above, this bench is of the considered view that the rate of interest payable on the financial debt is required to be charged @ 22% p.a. compoundable with monthly rests.

In view of the above MA 2886 of 2018 is allowed and disposed of. While IA 3114/2022 is dismissed.