AI Structured Summary
Not yet generated for this judgment
Judgment
PER BENCH
This Company Petition has been filed by Mr. Manik Lal Sanghi (hereinafter also referred as 'Financial Creditor/Petitioner') under Section 7 of 'The Insolvency and Bankruptcy Code, 2016', (hereinafter to be referred as 'IBC'), read with Rule 4 of Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016, inter alia seeking initiation of 'Corporate Insolvency Resolution Process' ('CIRP') of M/s. Neeraj Pipes Private Ltd. (hereinafter referred as 'Corporate Debtor/Respondent') alleging non-payment of Rs.2,63,60,000/-, including interest is said to be due and payable by Corporate Debtor to Financial Creditor as on 05.11.2024.
2. Brief of averments of the Petitioner:
It is averred that the Petitioner, Mr. Manik Lal Sanghi, is a businessman with over twenty years of experience across financial and industrial sectors. The Petitioner was widely respected in the business community for consistently upholding high standards of professionalism, with his longstanding reputation serving as clear evidence of his trustworthiness and reliability. Based on years of mutual trust and association with the directors of the M/s. Neeraj Pipes Private Limited, (herein after 'the Corporate Debtor'), the Petitioner has extended financial assistance to the Corporate Debtor.
That in the year 2018, the Corporate Debtor approached the Financial Creditor seeking urgent financial support to overcome working capital shortages and operational difficulties. The directors of the Corporate Debtor assured the Financial Creditor that the funds would be utilized exclusively for business purposes and repaid within one year, along with applicable interest.
Relying on the assurance given by the directors of the Corporate Debtor and the longstanding relationship, the Financial Creditor disbursed a sum of Rs.1,50,00,000/- on 31.03.2018, vide Cheque No. 587715, duly supported by bank statements. Additionally, the Corporate Debtor executed a Promissory Note dated 31.03.2018, acknowledging repayment within one year with interest. However, despite repeated reminders and assurances, the Corporate Debtor failed to repay as on 31.03.2019 and continued to default, citing financial difficulties without making bona fide efforts. Such sustained non-performance amounts to a default under Section 3(12) of the IBC, 2016.
Subsequently, the Corporate Debtor issued written acknowledgments of debt, including letters dated 01.10.2020 and 01.03.2022, explicitly admitting liability and seeking more time for repayment. These acknowledgments fall within the statutory limitation period, validating the claim of the Financial Creditor. As the Respondent failed to clear dues, the Financial Creditor issued a demand notice dated 06.11.2024, claiming an outstanding amount of Rs.2,63,60,000/- (inclusive of interest). In response to the demand notice, vide reply dated 13.11.2024, the Corporate Debtor admitted inability to pay and did not offer any repayment plan.
That the prolonged default in repayment of amount has caused severe financial and emotional strain to the Financial Creditor, whose capital has remained blocked for over five years. Consequently, the Financial Creditor, being a Financial Creditor under Section 5(7) of the IBC, and the loan qualifying as a financial debt under Section 5(8), invoked Section 7 of IBC to initiate the CIRP for the default committed by the Corporate Debtor under Section 3(12).
The Financial Creditor has proposed the name of Mr. Vakiti Vineeth Reddy, as the Interim Resolution Professional (IRP), having IBBI Registration No.IBBI/IPA-002/IP-NO1250/2022-2023/14240, and having AFA certificate No.AA2/14240/02/121224/203125 valid till 31.12.2025 and the Form-2 Written consent was given on 18.12.2024.
3. Brief of Counter filed by the Respondent:
It is stated that the application filed by the Financial Creditor against the Corporate Debtor is neither valid nor maintainable under Section 7 of the IBC, and is therefore liable to be dismissed at the threshold.
The Applicant has attempted to misconstrue a friendly financial arrangement as a ‘financial debt’ within the meaning of Section 5(8) of the IBC, without satisfying the statutory requirements thereof. The alleged transaction was merely a financial accommodation, extended on the basis of a long-standing personal and professional association, and does not bear the essential characteristics of a commercial lending transaction. Specifically, the arrangement lacked structured repayment terms, defined interest rates, and any loan agreement constituting a formal, binding financial contract as contemplated under the Code.
It is stated that the Financial Creditor relied on a promissory note, but its execution lacked formal terms, statutory compliance, or accounting entries reflecting it as a debt. Even if validly executed on 31.03.2018, the alleged debt became due on 31.03.2019, and the Section 7 application is barred by the three-year limitation under Article 137 of the Limitation Act, 1963. Letters dated 01.10.2020 and 01.03.2022 do not extend the limitation. Under Section 3(12) of the IBC, “default” requires clear admission of liability on a valid, enforceable debt, which the Corporate Debtor has never made. Any financial assistance, if given, does not constitute a debt under the IBC. Accordingly, it is prayed that the present application be dismissed as not maintainable in law or on facts.
We have heard Mrs. Sandhya Rani, Learned Counsel for the Financial Creditor, Mr. Somasekhar, Learned Counsel for the Corporate Debtor and perused the record.
In the light of the contest put forth as above by both the parties, the point that emerges for our consideration is:
Point:
Whether a 'Financial Debt' of a sum exceeding rupees one crore due and payable by the Corporate Debtor to the Financial Creditor? If so, whether the Corporate Debtor has committed default in repayment of the same?
SUBMISSIONS:
The Learned Counsel for the Petitioner submitted that the Petitioner, was a businessman with over two decades of experience in financial and industrial sectors and a reputation for integrity and professionalism, extended financial assistance of Rs.1,50,00,000/- to the Corporate Debtor on 31.03.2018, based on longstanding trust and assurances of repayment within one year with interest. The amount was disbursed through cheque and supported by bank records, and the Corporate Debtor executed a Promissory Note dated 31.03.2018 acknowledging the liability. Despite repeated reminders, repayment was not made, and the Corporate Debtor continued to default, thereby attracting the definition of "default" under Section 3(12) of the IBC.
The Ld. Counsel further contented that the written acknowledgments of debt, including letters dated 01.10.2020 and 01.03.2022, confirms the liability and extend the period of limitation. As the dues remained unpaid, the Petitioner issued a demand notice dated 06.11.2024 for Rs.2,63,60,000/- (inclusive of interest), to which the Corporate Debtor, vide reply dated 13.11.2024, admitted inability to pay without offering any repayment plan. The sustained default has caused significant hardship to the Petitioner, whose funds have remained blocked for over five years. Accordingly, the Petitioner, being a Financial Creditor under Section 5(7), and the loan constituting a financial debt under Section 5(8), has rightly invoked Section 7 of the IBC to initiate CIRP against the Corporate Debtor.
Per Contra, The Respondent submitted that the Petition under Section 7 of the IBC is not maintainable and liable to be dismissed. The alleged transaction was merely a friendly financial accommodation, lacking essential features of a financial debt such as structured repayment terms, interest, or a binding loan agreement. Reliance on the promissory note is misconceived, as it neither satisfies statutory requirements nor extends limitation. Even if assumed valid, the debt became due on 31.03.2019, rendering the present Petition barred under Article 137 of the Limitation Act. No default of an enforceable debt has ever been admitted by the Corporate Debtor. Hence, the Petition deserves dismissal in law and on facts.
OUR ANALYSIS AND FINDINGS
At the outset, on bare reading of the pleadings and submissions of both the parties and in order to succeed in a Petition filed under Section 7 of the IBC, it is imperative for the Petitioner/Financial Creditor to establish that a financial debt of a sum of Rs.1 crore is due and payable by the Respondent/Corporate Debtor to the Petitioner and that the Corporate Debtor had defaulted in repayment of the said financial debt.
The legal position can be traced from the ruling of the Hon'ble Supreme Court of India, in Innoventive Industries Ltd. vs ICICI Bank, (2018) 1 SCC 407, has held that for initiation of Corporate Insolvency Resolution Process by financial creditor under sub-section (4) of Section 7 of the IBC, the 'Adjudicating Authority' on receipt of application under sub-section (2) is required to ascertain existence of default from the records of Information Utility or on the basis of other evidence furnished by the financial creditor under sub-section (3). The relevant para of the judgement is extracted hereunder:
> '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."
Subsequently, the Hon'ble Supreme Court of India, in re, Vidarbha Industries Power Limited Vs. Axis Bank Limited in (2022)(8) SCC P352 held that:
> '87. Ordinarily, the Adjudicating Authority (NCLT) would have to exercise its discretion to admit an application under Section 7 of the IBC of the IBC and initiate CIRP on satisfaction of the existence of a financial debt and default on the part of the Corporate Debtor in payment of the debt, unless there are good reasons not to admit the petition. 88. The Adjudicating Authority (NCLT) has to consider the grounds made out by the Corporate Debtor against admission, on its own merits.
79.In the case of a financial debt, there is a little more flexibility. The Adjudicating Authority (NCLT) has been conferred the discretion to admit the application of the Financial Creditor. If facts and circumstances so warrant, the Adjudicating Authority can keep the admission in abeyance or even reject the application. Of course, in case of rejection of an application, the Financial Creditor is not denuded of the right to apply afresh for initiation of CIRP, if its dues continue to remain unpaid.”
Therefore, in light of the above legal frame coupled with the factual matrix of this case, we proceed to decide the above point.
As the Financial Creditor has contended that on 31.03.2018, the Financial Creditor has lent a loan amount of Rs.1,50,00,000/- to the Corporate Debtor. There is no dispute as regards to factum of the loan taken by the Corporate Debtor as the Corporate Debtor has acknowledged the amount due to the Financial Creditor in letter dated 01.10.2020 and 01.03.2022, stands admitted. It is also the contention of the Financial Creditor that for the said loan transactions, a ‘Promissory Note’ was signed by the Corporate Debtor on 31.03.2018. The scanned copy of the Promissory Notes is reproduced here wherein the narration was as under:
As it was so, the Corporate Debtor has raised a contention that the Petitioner does not fall under the category of the Financial Creditor and the financial arrangement made by the Financial Creditor is not the financial debt. Therefore, we find it proper to usefully glance certain definition clues of IBC, which defines 'financial creditor' and 'financial debt' as under:
"5(7) "financial creditor" means any person to whom a financial debt is owed and includes a person to whom such debt has been legally assigned or transferred to;
5(8) "financial debt" means a debt along with 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 dematerialised 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;"
To fully understand the present issue, it is essential to explore the fundamental and essential criteria that determine the classification of a debt as a financial debt. Section 5(8) of the IBC which deals with financial debt has been exhaustively discussed in Anuj Jain, Interim Resolution Professional for Jaypee Infratech Ltd. vs. Axis Bank Limited and Ors. (2020 8 SCC 401) by the Hon’ble Apex Court and the relevant paragraph is to the effect:
“43.Applying the aforementioned fundamental principles to the definition occurring in Section 5(8) of the Code, we have not an iota of doubt that for a debt to become “financial debt” for the purpose of Part II of the Code, the basic elements are that it ought to be a disbursal against the consideration for time value of money. It may include any of the methods for raising money or incurring liability by the modes prescribed in clauses (a) to (f) of Section 5(8); it may also include any derivative transaction or counter-indemnity obligation as per clauses (g) and (h) of Section 5(8); and it may also be the amount of any liability in respect of any of the guarantee or indemnity for any of the items referred to in clauses (a) to (h). The requirement of existence of a debt, which is disbursed against the consideration for the time value of money, in our view, remains an essential part even in respect of any of the transactions/dealings stated in clauses (a) to (i) of Section 5(8), even if it is not necessarily stated therein. In any case, the definition, by its very frame, cannot be read so expansive, rather infinitely wide, that the root requirements of “disbursement” against “the consideration for the time value of money” could be forsaken in the manner that any transaction could stand alone to become a financial debt. In other words, any of the transactions stated in the said clauses (a) to (i) of Section 5(8) would be falling within the ambit of “financial debt” only if it carries the essential elements stated in the principal clause or at least has the features which could be traced to such essential elements in the principal clause. In yet other words, the essential element of disbursal, and that too against the consideration for time value of money, needs to be found in the genesis of any debt before it may be treated as “financial debt” within the meaning of Section 5(8) of the Code. This debt may be of any nature but a part of it is always required to be carrying, or corresponding to, or at least having some traces of disbursal against consideration for the time value of money.”
Upon careful examination of the documents filed by the Petitioner, as well as the reply submitted by the Corporate Debtor, it is clearly established that the Corporate Debtor has availed the amount of Rs.1,50,00,000/- from the Financial Creditor by executing the promissory note dated 31.03.2018.
Further, it is the case of the Financial Creditor that the Corporate Debtor had executed a Promissory Note on 31.03.2018, allegedly acknowledging repayment within one year along with interest. However, upon examination of the said Promissory Note, it is evident that there is no acknowledgment by the Corporate Debtor of repayment within a year, nor is any interest rate stipulated therein. The said promissory note contains no timeline of repayment. Nonetheless, we are of the considered view that the money advanced under the Promissory Note remains repayable to the Financial Creditor on demand.
We further found that the Financial Creditor has submitted that he had issued cheque number being 587715 on 31.03.2018 for a sum of Rs.1,50,00,000/-, but no document was submitted before this Tribunal. On perusal of the bank statement of the Financial Creditor, we find that vide cheque no.507715, a sum of Rs.1,50,00,000/- has been withdrawn on 04.04.2018. Even after receiving the loan amount of Rs.1,50,00,000/- the Corporate Debtor did not make any interest payments or repayment of the principal amount.
We further observe that, there is no evidence of any demand raised by the Financial Creditor under the Promissory Note, nor any communication that could be construed as a demand for repayment of the outstanding amount with interest. However, it is evident from the letters dated 01.10.2020 and 01.03.2022, that the Corporate Debtor has expressly acknowledged that an amount of Rs.1,50,00,000/- has been received from the Financial Creditor on 31.03.2018. Additionally, in the said letters dated 01.10.2020 and 01.03.1012, the Respondent has also assured to repay the principal amount along with applicable interest.
Though we find that the Promissory Note dated 31.03.2018, does not specify the rate of interest, it is clearly established from the letters dated 01.10.2020, 01.03.1012 and the Bank statement of the Corporate Debtor, that the Corporate Debtor has availed the financial assistance of Rs.1,50,00,000/- from the Financial Creditor. Thus, the above said transaction being a disbursement made for consideration of the time value of money, satisfies the essential ingredients of a “financial debt” as defined under Section 5(8) of the IBC. Consequently, the Financial Creditor falls within the ambit of Section 5(7) of the Code.
As it was so, we observe that the Financial Creditor has issued a Demand Notice dated 06.11.2024, pursuant to Rule 7(1) of the Insolvency and Bankruptcy (Application to Adjudicating Authority for Insolvency Resolution Process for Personal Guarantors to Corporate Debtors) Rules, 2019, directing the Corporate Debtor to unconditionally repay the outstanding debt of Rs.2,63,60,00,000/- as on 05.11.2024, within 10 days. Subsequently, in response to the said notice, the Corporate Debtor, vide letter dated 13.11.2024, expressed its inability to make the payment. Such admission of inability to pay clearly establishes the occurrence of default within the meaning of Section 3(12) of the IBC. Consequently, as the Corporate Debtor has failed to discharge its liability towards the unpaid financial debt, the Financial Creditor has filed the present Petition on 07.01.2025.
Now, in order to determine whether this Company Petition has been filed within the prescribed period of limitation, we observe that although the Promissory note was executed on 31.03.2018, and no separate demand notice under the Promissory Note was issued earlier by the Financial Creditor, the letters dated 01.10.2020 and 01.03.2022, issued by the Corporate Debtor to the Financial Creditor, acknowledging the subsisting liability, constitute valid acknowledgments of debt. As per the said promissory note, a sum of Rs.1,50,00,000/- is payable on Demand and the demand notice dated 06.11.2024, issued under the IBC and the reply dated 13.11.2024, from the Corporate Debtor reaffirming its inability to pay, collectively operate to extend the period of limitation in terms of Section 18 of the Limitation Act, 1963. Accordingly, the present Company Petition filed by the Financial Creditor on 07.01.2025, under the provisions of IBC is well within the limitation period.
In lieu of the above discussion, this Tribunal is satisfied that the Financial Creditor has successfully established the financial debt of a sum exceeding Rupees One Crore and its default by the Corporate Debtor. Therefore, it is a fit case to put the Corporate Debtor into Corporate Insolvency Resolution Process (CIRP).
Accordingly, the instant petition, i.e., CP (IB) No.41/7/HDB/2025 is admitted and put in CIRP forthwith.
ORDER
Hence, the Adjudicating Authority admits this Petition under Section 7 of IBC, declaring moratorium for the purposes referred to in Section 14 of the Code, with following directions:
A. Corporate Debtor, M/s. Neeraj Pipes Private Limited, is admitted in Corporate Insolvency Resolution Process under Section 7 of IBC.
B. The Bench hereby prohibits 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 any other authority; transferring, encumbering, alienating or disposing of by the Corporate Debtor any of its assets or any legal right or beneficial interest therein; any action to foreclose, recover or enforce any security interest created by the Corporate Debtor in respect of its property including any action under Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (54 of 2002); the recovery of any property by an owner or lessor where such property is occupied by or in possession of the corporate Debtor;
C. That the supply of essential goods or services to the Corporate Debtor, if continuing, shall not be terminated or suspended or interrupted during moratorium period.
D. Notwithstanding anything contained in any other law for the time being in force, a license, permit, registration, quota, concession, clearances 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, concessions, clearances or a similar grant or right during the moratorium period.
E. That the provisions of sub-section (1) of Section 14 shall not apply to such transactions as may be notified by the Central Government in consultation with any financial sector regulator.
F. That order of moratorium shall have effect from the date of this order till completion of the Corporate Insolvency Resolution Process or until this Bench approves the Resolution Plan under Sub-Section (1) of Section 31 or passes an order for liquidation of Corporate Debtor under Section 33, whichever is earlier.
G. That public announcement of initiation of Corporate Insolvency Resolution Process shall be made immediately as prescribed under section 13 of Insolvency and Bankruptcy Code, 2016.
H. That this Bench hereby appoints Mr. Vineeth Reddy Vakiti, having Registration No. IBBI/IPA-002/IP-N01250/2022-2023/14240, as Interim Resolution Professional, whose contact details as mentioned in the Petition are: E-mail: [email protected] Address: Flat No.301, Plot No.426, Door No 301, Radha Mohan Enclave, Mathrusreenagar, Miyapur, Ranga Reddy District, Hyderabad, Telangana-500049. Mobile number: 9550046000.
I. The Proposed IRP has been registered as Insolvency professional on 09.12.2024. His Authorisation for Assignment (AFA) is valid up to 31.12.2025. This information is also available in IBBI Website. Thus, there is compliance of Regulation 7A of IBBI (Insolvency Professionals) Regulations, 2016, as amended. The proposed IRP has given his Form-2 Consent form on 18.12.2024. Therefore, the proposed IRP is fit to be appointed as IRP since the relevant provision is complied with.
Registry of this Tribunal is directed to send a copy of this order to the Registrar of Companies, Hyderabad for marking appropriate remarks against the Corporate Debtor on website of Ministry of Corporate Affairs as being under CIRP.
Accordingly, this Petition is admitted.