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Judgment
Justice M. Venugopal, Member (Judicial):
Background:
Company Appeal (AT) (CH) (INS.) No. 335 of 2022:
The `Appellant’ / `Ex-Chairman’ of the `Corporate Debtor / Company’, preferred the instant Comp. App (AT) (CH) (INS.) No. 335 of 2022 as an `Aggrieved Person’, on being dissatisfied with the `impugned order’ dated 09.06.2022 in CP(IB)/203(CHE)/2021 (Filed by the `1st Respondent / Petitioner / Financial Creditor’), passed by the `Adjudicating Authority’, (`National Company Law Tribunal’, Division Bench – I, Chennai), in the `Application’.
The `Adjudicating Authority’, (`National Company Law Tribunal’, Division Bench – I, Chennai). in CP(IB)/203(CHE)/2021, (Filed by the `1st Respondent / Petitioner / Financial Creditor’), while passing the `impugned order’ dated 09.06.2022, wherein, inter alia at Paragraphs 5 to 10, had observed the following:
5.``From Part-IV of the Application it is seen that the Financial Creditor has claimed a sum of Rs.31,17,20,210.16 (Rupees Thirty One Crores Seventeen Lakhs Twenty Thousand Two Hundred and Ten and Sixteen paise only) as on 19.08.2021 which is due and payable by the Corporate Debtor together with interest. The date of default as mentioned in the application is 31.10.2018. The amount of disbursement as mentioned in Part IV of the Application is as follows:
Sl.No. Facility Date Interest Limit A Cash Credit (including LC Limit of Rs. 8.00 Crores) 23.05.2016 13.50% 18,00,00,000.00 B Term Loan 23.05.2016 13.75% 71,89,000.00 C Term Loan (closed) 23.05.2016 13.45% 4,50,00,000.00 23,21,89,000/- 6.Part V of the application describes the particulars of Financial Debt, documents and the same is placed as Annexure – I of the Application typeset filed by the Financial Creditor.
7.In relation to Corporate Debtor, the Corporate Debtor had filed a counter wherein it was submitted that the Financial Creditor classified the account of the Corporate Debtor as fraud. Pursuant to the declaration of the Fraud Account, CBI registered an FIR and have been investigating the matter. So far the CBI has not been able to identify any diversion of funds or any act that could tantamount to the account being named fraud. Therefore, the Respondent had filed a writ petition bearing WP No. 17839 of 2021 and interim orders have been granted in the said Writ Petition. It was further submitted that from the time the Corporate Debtor’s account was declared NPA and till the initiation of the fraud declaration there was no allegation with regards to any fraud. Further the bank has not conducted any audit to determine if there has been diversion of funds which caused the bank to suspect that there has been any diversion of funds.
8.Heard the Submissions of both the parties. This Tribunal after comprehensively hearing the said matter is of the view that, the debt and default had been proven beyond reasonable doubt. During the hearing, the learned Counsel for the Respondent submitted that the Corporate Debtor has been classified the account as a ``fraudulent transaction’’ and unable to go for One Time Settlement (OTS) proposal. Under these circumstances, the Respondent filed a Writ Petition bearing WP No. 17839 of 2021 for removal of name of the Corporate Debtor from the classification as ``fraudulent transaction’’.
9.It can be seen from the records of the proceedings placed before us that since the Corporate Debtor’s account has been classified as fraudulent transaction by the banker and the Corporate Debtor is unable to infuse more funds and submit better proposal for OTS. However, we are constrained to initiate CIRP on the Corporate Debtor and it is proved that there is a debt and default on the part of the Corporate Debtor.
10.Apropos, the Hon’ble Supreme Court in the case of Innoventive Industries Limited v. ICICI Bank Limited, where it has discussed extensively the scope of the Adjudicating Authority under Section 7 of the IBC is limited to assessing the records provided by the financial creditor to satisfy itself that the default has occurred.
28.``When it comes to a financial creditor triggering the process, Section 7 becomes relevant. Under the explanation to Section 7(1), a default is in respect of a financial debt owed to any financial creditor of the corporate debtor – it need not be a debt owed to the applicant financial creditor. Under Section 7(2), an application is to be made under sub-section (1) in such form and manner as is prescribed, which takes us to the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016. Under Rule 4, the application is made by a financial creditor in Form 1 accompanied by documents and records required therein. Form 1 is a detailed form in 5 parts, which requires particulars of the applicant in Part I, particulars of the corporate debtor in Part II, particulars of the proposed interim resolution professional in part III, particulars of the financial debt in part IV and documents, records and evidence of default in part V. Under Rule 4(3), the applicant is to dispatch a copy of the application filed with the adjudicating authority by registered post or speed post to the registered office of the corporate debtor. The speed, within which the adjudicating authority is to ascertain the existence of a default from the records of the information utility or on the basis of evidence furnished by the financial creditor, is important. This it must do within 14 days of the receipt of the application. It is at the stage of Section 7(5), where the adjudicating authority is to be satisfied that a default has occurred, that the corporate debtor is entitled to point out that a default has not occurred in the sense that the “debt”, which may also include a disputed claim, is not due. A debt may not be due if it is not payable in law or in fact. The moment the adjudicating authority is satisfied that a default has occurred, the application must be admitted unless it is incomplete, in which case it may give notice to the applicant to rectify the defect within 7 days of receipt of a notice from the adjudicating authority. Under sub-section (7), the adjudicating authority shall then communicate the order passed to the financial creditor and corporate debtor within 7 days of admission or rejection of such application, as the case may be.
30.On the other hand, as we have seen, 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.’’ and came to the conclusion that the `Financial Debt’, was proved by the `1st Respondent / Petitioner / Financial Creditor’ and that the `Default’, was committed by the `2nd Respondent / Corporate Debtor’, and finally admitted the `Application’, by declaring `Moratorium’, and appointing Mrs. M. Jayasree, as the `Interim Resolution Professional’.
Appellant’s Contentions:
The Learned Counsel for the Appellant submit that the `1st Respondent / Petitioner / Financial Creditor’, had claimed an outstanding amount of Rs.20,78,85,229.37 through Demand Notice, who had sanctioned a limit of only Rs.10 Crores. In fact, the `1st Respondent / Bank / Financial Creditor’, had not wanted to show the Letter of Credit Limits, which they permitted the Corporate Debtor to use for the greed of Letter of Credit Commission and Charges. Moreover, the `1st Respondent / Bank / Financial Creditor’, in their Notice, had merged the `Letter of Credit utilisation into Cash Credit Facility’, and claimed a Sum, which is double of the Cash Credit Limit.
It is represented on behalf of the Appellant, whatever money was received as the refund of Letter of Credit Development, was taken by the `1st Respondent / Bank / Financial Creditor’ for servicing interest. Also that, the `2nd Respondent / Corporate Debtor’, had not taken any amount, out of the Company and any `Auditor’, would be able to certify the same.
It is the version of the `Appellant’ that the `1st Respondent / Bank / Financial Creditor’, had declared the `Corporate Debtor’s Account’, as `Fraud Account’ and the same was not notified to the `Corporate Debtor / M/s. Rosvar Steels Pvt. Ltd’. In fact, the `Corporate Debtor’, on numerous dates, had requested the `Bank / Financial Creditor’, to consider its `Restructuring of Loan Proposal’, but was denied on all occasions and only through a correspondence dated 22.02.2021, the `Financial Creditor’, had intimated the `2nd Respondent / Corporate Debtor’, that its account was declared as `Fraud’, and therefore, cannot agree for `Restructuring of Loan’. Indeed, no reason was ascribed for declaring the `Corporate Debtor’s Account’ as `Fraud’, neither did the `Corporate Debtor’ received any communication intimating the reason, for classifying its account as `Fraud Account’.
According to the Appellant, the `1st Respondent / Bank / Financial Creditor’, had not taken into consideration the amounts paid by the `Corporate Debtor’ and came up with a wrong calculated Sum. In reality, because of the Bank / Financial Creditor’s stand, the `2nd Respondent / Corporate Debtor’, was forced to use the `Letter of Credit’ limitations for all local transactions, even if a hefty fee was required to be paid for the issuance of the Letter of Credit.
On behalf of the Appellant, it is brought to the notice of this `Tribunal’, that by combining the Letter of Credit utilisation and the Cash Credit Facility, the `1st Respondent / Bank / Financial Creditor’, had consequently demanded a Sum, i.e., twice the Cash Credit Limit, mentioned in the `Notice’. In addition, the `Bank / Financial Creditor’, had started appropriating the `Funds’ received as a `Refund’ from the supply towards paying interest, but had not accounted for those funds, for closing out the use of the Letter of Credit Limit.
The plea of the Appellant is that because of the loss that got increased by an efflux of time, the `Corporate Debtor’, was responsible for paying the Letter of Credit charges. In fact, the 1st Respondent / Bank had debited the Letter of Credit commission from the Cash Credit Account and was charging interest on it, despite the account being declared as a `Non Performing Asset’, thereby acting in total contradiction to the Reserve Bank of India’s Prudential Norm. All income earned by the `1st Respondent / Bank / Financial Creditor’, should have been reversed in compliance of the Reserve Bank of India’s directives, but unfortunately, the `Bank’, had not resorted to that recourse.
The Learned Counsel for the Appellant points out that between the period 01.03.2011 to 31.10.2018, a sum of Rs.16,62,82,607/- was paid in favour of the `1st Respondent / Bank / Financial Creditor’, by the `2nd Respondent / Corporate Debtor’, in respect of the outstanding amount of Rs.23,21,89,000/-. Therefore, according to the `Appellant’, the remaining sum to be paid is Rs.6,59,06,393/-.
The stand of the Appellant is that, the `2nd Respondent / Corporate Debtor’, is willing to honour its `Repayment Obligation’, and therefore, a case is made out by the `Appellant’ to set aside the `impugned order’, passed by the `Adjudicating Authority’, and a direction is to be issued to the `1st Respondent / Bank / Financial Creditor’, to receive the Sum offered by the `2nd Respondent / Corporate Debtor’, towards settlement of Loan Accounts.
The grievance of the Appellant is that, the 1st Respondent / Bank had declared the account of the 2nd Respondent / Corporate Debtor as `Fraud’, without any cogent proof and later, lodged a complaint with the `Enforcement Agencies’, which was a `violation’ of the Corporate Debtor’s basic rights, guaranteed under the `Constitution of India’.
In this connection, the Learned Counsel for the Appellant points out that a `Fraud Tag’, can affect a Defaulting Promoter’s ability, to control other businesses, and the `Settlement Process’ was scuttled and a `One Time Settlement Proposal’ of the `Corporate Debtor’, proved `futile’. Moreover, no `Forensic Audit’, was conducted by the `1st Respondent / Bank / Financial Creditor’, to arrive at the said conclusion. Only with a malicious intent, the `Corporate Insolvency Resolution Process’, was initiated by the `1st Respondent / Bank / Financial Creditor’, and hence the `impugned order’, passed by the `Adjudicating Authority’, (`National Company Law Tribunal’, Division Bench – I, Chennai). in CP(IB)/203(CHE)/2021, (Filed by the `1st Respondent / Petitioner / Financial Creditor’), is liable to be set aside.
The Learned Counsel for the Appellant comes out with a plea that `I & B Code Proceedings’, are not `recovery proceedings’, and that the motive of the `1st Respondent / Bank’, is `Recovery’, and it acted as a `Pressure Tool of Recovery’, through the `impugned order’. In fact, the `Net Worth’ of the `2nd Respondent / Corporate Debtor’, in excess of the Sum payable to the `1st Respondent / Bank’.
In any event, it is premature to take the `2nd Respondent / Corporate Debtor’, to be a `Bankrupt’ or an `Insolvent’, and initiate the `Corporate Insolvency and Resolution Process’, against it.
The Learned Counsel for the Appellant, refers to the Judgment of the Hon’ble Supreme Court of India dated 12.07.2022 between Vidarbha Industries Power Limited v. Axis Bank Limited (vide Civil Appeal No. 4633 of 2021), wherein at Paragraphs 59 to 63, 75 to 79, 84, 86 to 88, it is observed as under:
59.``There can be no doubt that a Corporate Debtor who is in the red should be resolved expeditiously, following the timelines in the IBC. No extraneous matter should come in the way. However, the viability and overall financial health of the Corporate Debtor are not extraneous matters.
60.The Adjudicating Authority (NCLT) found the dispute of the Corporate Debtor with the Electricity Regulator or the recipient of electricity would be extraneous to the matters involved in the petition. Disputes with the Electricity Regulator or the Recipient of Electricity may not be of much relevance. The question is whether an award of the APTEL in favour of the Corporate Debtor, can completely be disregarded by the Adjudicating Authority (NCLT), when it is claimed that, in terms of the Award, a sum of Rs.1,730 crores, that is, an amount far exceeding the claim of the Financial Creditor, is realisable by the Corporate Debtor. The answer, in our view, is necessarily in the negative.
61.In our view, the Appellate Authority (NCLAT) erred in holding that the Adjudicating Authority (NCLT) was only required to see whether there had been a debt and the Corporate Debtor had defaulted in making repayment of the debt, and that these two aspects, if satisfied, would trigger the CIRP. The existence of a financial debt and default in payment thereof only gave the financial creditor the right to apply for initiation of CIRP. The Adjudicating Authority (NCLT) was require to apply its mind to relevant factors including the feasibility of initiation of CIRP, against an electricity generating company operated under statutory control, the impact of MERC’s appeal, pending in this Court, order of APTEL referred to above and the over all financial health and viability of the Corporate Debtor under its existing management.
62.As pointed out by Mr. Gupta, Legislature has, in its wisdom, chosen to use the expression “may” in Section 7(5)(a) of the IBC. When an Adjudicating Authority (NCLT) is satisfied that a default has occurred and the application of a Financial Creditor is complete and there are no disciplinary proceedings against proposed resolution professional, it may by order admit the application. Legislative intent is construed in accordance with the language used in the statute.
63.The meaning and intention of Section 7(5)(a) of the IBC is to be ascertained from the phraseology of the provision in the context of the nature and design of the IBC. This Court would have to consider the effect of the provision being construed as directory or discretionary.
75.Significantly, Legislature has in its wisdom used the word ‘may’ in Section 7(5)(a) of the IBC in respect of an application for CIRP initiated by a financial creditor against a Corporate Debtor but has used the expression ‘shall’ in the otherwise almost identical provision of Section 9(5) of the IBC relating to the initiation of CIRP by an Operational Creditor.
76.The fact that Legislature used ‘may’ in Section 7(5)(a) of the IBC but a different word, that is, ‘shall’ in the otherwise almost identical provision of Section 9(5)(a) shows that ‘may’ and ‘shall’ in the two provisions are intended to convey a different meaning. It is apparent that Legislature intended Section 9(5)(a) of the IBC to be mandatory and Section 7(5)(a) of the IBC to be discretionary. An application of an Operational Creditor for initiation of CIRP under Section 9(2) of the IBC is mandatorily required to be admitted if the application is complete in all respects and in compliance of the requisites of the IBC and the rules and regulations thereunder, there is no payment of the unpaid operational debt, if notices for payment or the invoice has been delivered to the Corporate Debtor by the Operational Creditor and no notice of dispute has been received by the Operational Creditor. The IBC does not countenance dishonesty or deliberate failure to repay the dues of an operational creditor.
77.On the other hand, in the case of an application by a Financial Creditor who might even initiate proceedings in a representative capacity on behalf of all financial creditors, the Adjudicating Authority might examine the expedience of initiation of CIRP, taking into account all relevant facts and circumstances, including the overall financial health and viability of the Corporate Debtor. The Adjudicating Authority may in its discretion not admit the application of a Financial Creditor.
78.The Legislature has consciously differentiated between Financial Creditors and Operational Creditors, as there is an innate difference between Financial Creditors, in the business of investment and financing, and Operational Creditors in the business of supply of goods and services. Financial credit is usually secured and of much longer duration. Such credits, which are often long term credits, on which the operation of the Corporate Debtor depends, cannot be equated to operational debts which are usually unsecured, of a shorter duration and of lesser amount. The financial strength and nature of business of a Financial Creditor cannot be compared with that of an Operational Creditor, engaged in supply of goods and services. The impact of the non-payment of admitted dues could be far more serious on an Operational Creditor than on a financial creditor.
79.As observed above, the financial strength and nature of business of Financial Creditors and Operational Creditors being different, as also the tenor and terms of agreements/contracts with financial creditors and operational creditors, the provisions in the IBC relating to commencement of CIRP at the behest of an Operational Creditor, whose dues are undisputed, are rigid and inflexible. If dues are admitted as against the Operational Creditor, the Corporate Debtor must pay the same. If it does not, CIRP must be commenced. 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. 84. The judgment of this Court Swiss Ribbons (supra), which was rendered in the context of a challenge to the vires of the IBC, does not consider the question of whether Section 7(5)(a) of the IBC is mandatory or discretionary. It is well settled that a judgment is a precedent for the question of law that is raised and decided. The language used in a judgment cannot be read like a statute. In any case, words and phrases in the judgment cannot be construed in a truncated manner out of context.
86.Even though Section 7 (5)(a) of the IBC may confer discretionary power on the Adjudicating Authority, such discretionary power cannot be exercised arbitrarily or capriciously. If the facts and circumstances warrant exercise of discretion in a particular manner, discretion would have to be exercised in that manner.
88.The Adjudicating Authority (NCLT) has to consider the grounds made out by the Corporate Debtor against admission, on its own merits. For example when admission is opposed on the ground of existence of an award or a decree in favour of the Corporate Debtor, and the Awarded/decretal amount exceeds the amount of the debt, the Adjudicating Authority would have to exercise its discretion under Section 7(5)(a) of the IBC to keep the admission of the application of the Financial Creditor in abeyance, unless there is good reason not to do so. The Adjudicating Authority may, for example, admit the application of the Financial Creditor, notwithstanding any award or decree, if the Award/Decretal amount is incapable of realisation. The example is only illustrative.’’
The Learned Counsel for the Appellant, adverts to the decision of the Hon’ble Supreme Court of India in E S Krishnamurthy v. Bharath Hi Tech Builders Pvt. Ltd., reported in (2021) SCC Online SC 1242, to fortify his stance that, a `Tribunal’, can encourage `Settlement’, between a `Financial Creditor’, and a `Corporate Debtor’.
According to the Appellant, the Legislature intended Section 9 (5) (a) of the I & B Code, 2016, is a `Mandatory’ one and Section 7 (5) (a) of the Code, to be a `Discretionary’ one.
An `Adjudicating Authority’, is to take into account, all relevant facts and circumstances, including the overall `Financial Health’ and `Viability’, of the `2nd Respondent / Corporate Debtor’. Further, an `Adjudicating Authority’ (`Tribunal’), may in its `Discretion’, not to admit the `Application’ of a `Financial Creditor’. Also that, the `Adjudicating Authority’, is to consider the grounds, made out by the `Corporate Debtor’ against an `Admission Order’, on its own merits.
1st Respondent / Bank’s Pleas:
According to the 1st Respondent / Petitioner / Financial Creditor (Bank), the `Debts’, granted to the `Corporate Debtor’, were mentioned in Column I Part IV of the Section 7 Application of the I & B Code, 2016, in which, the `Term Loan of Rs.4.5 Crores’, was clearly showed as `Closed’, and the `Outstanding’ was depicted in the next Column at Rs.31,17,20,210.16, which stood payable as on 19.08.2021.
It is represented on behalf of the 1st Respondent / Bank, that the `Application’, for initiation of `Corporate Insolvency Resolution Process’, on 19.08.2021, which is `within three years from the `Date of Default’, which is 31.10.2018, and the said `Application’, is free from any `Infirmities’. Moreover, the `Adjudicating Authority’, rightly allowed the `Application’, filed by the `1st Respondent / Bank’.
As a matter of fact, the `Corporate Debtor’, had admitted the `Debt’, even in its `Memo’, before the `Adjudicating Authority’, and even before this `Tribunal’, `One Time Settlement’ opportunity, to be provided to it (without going before the `Bank’, at any point of time).
The Corporate Debtor had not availed the time granted by the `Adjudicating Authority’, to approach the `Bank’, for an `One Time Settlement’, and its endeavouring to take advantage of the Interim Orders, passed in WP No. 17839 of 2021.
The Learned Counsel for the 1st Respondent / Bank, brings it to the notice of this `Tribunal’, that a `Classification of an Account’ as `Fraud’, does not `prohibit’ / `debar’ a `Bank’, from considering `OTS’, as per Counter Affidavit dated 07.06.2022, filed by the `Bank’. Also that, the `Appellant’s offer of Rs.6 Crores, as against the dues of Rs.24 Crores was unacceptable to the `1st Respondent / Bank’, and the last letter for the `One Time Settlement’ was made on 25.02.2021. In fact, the `Appellant’ was put on `Notice’ to improve his Offer and the said Affidavit, was served on the `Appellant’.
The categorical stand of the 1st Respondent / Bank is that, the `Classification of the Accounts of the Appellant’, as `Fraud’, has no bearing in the instant matter and the `Adjudicating Authority’, had admitted the `Petition’, filed by the `1st Respondent / Bank / Financial Creditor’, by exercising its discretion in a sound manner, ofcourse, within the purview of the `I & B Code, 2016’.
The Pleas of 2nd Respondent / IRP :
The Corporate Debtor had intentionally omitted to furnish the details of CBI cases and Writ Petition No. 17839 of 2021, filed by the `Corporate Debtor’ to the `Interim Resolution Professional’, in regard to the challenge, relating to the `Classification of Account of M/s. Rosvar Steels Pvt. Ltd. as `Fraud’.
According to the 2nd Respondent / IRP, there was no reason of justification at her end to conduct and defend Mr. Ravichandran, the erstwhile `Director’ of the `Corporate Debtor’ from the proceedings initiated by the `Financial Creditor’. Indeed, the `Classification of Account of Rosvar Steels Private Limited (as `Fraud), by a `Financial Creditor’, which can be attributed only to the `Directors’ of the `Corporate Debtor’, and a company by itself, cannot be indicted to have committed `fraud’, only for `stalling’ the `Corporate Insolvency Resolution Process’ proceedings, the allegations were made by the `Erstwhile Managing Director’, which are all `misconstruing’ one.
Before the `Adjudicating Authority’, the `1st Respondent / Bank / Financial Creditor’, had filed an `Application’, under Section 7 of the Code, in the matter of Rosvar Steels Private Limited, wherein at Part IV, the `Debt’, granted was Rs.23,21,89,000/- and the breakup is mentioned, as under:
| PART – IV | ||||
|---|---|---|---|---|
| PARTICULARS OF FINANCIAL DEBT | ||||
| 1 | TOTAL AMOUNT OF DEBT GRANTED DATE(S) OF DISBURSEMENT | Debt Granted is Rs.23,21,89,000/- as detailed below | ||
| Sl.No. | Facility | Date | Int | Limit |
| A | Cash Credit (including LC Limit of Rs. 8.00 Crores) | 23.05.2016 | 13.50% | 18,00,00,000.00 |
| B | Term Loan | 23.05.2016 | 13.75% | 71,89,000.00 |
| C | Term Loan (closed) | 23.05.2016 | 13.45% | 4,50,00,000.00 |
| 23,21,89,000/- | ||||
According to the 1st Respondent / Bank, the amount claimed to be in `Default’, as on 19.08.2021, was Rs. 31,17,20,210.16 and that the Account was classified as `Non Performing Asset’, on 31.10.2018.
Before the `Adjudicating Authority’, the `2nd Respondent / Corporate Debtor’, had averred that the `Financial Creditor’, has so far earned Rs.2.25 Crores, merely on `LC Charges’. Also that, the `Corporate Debtor’, had duly repaid its Term Loan of Rs.450 Lakhs on 29.08.2017, availed from the `Financial Creditor’ on 19.03.2011, and the same was acknowledged by the `Bank’ / `Financial Creditor’, through a Letter and the `Loan Account’ was Closed. In respect of the newly `Sanctioned Term Loan’, the `Corporate Debtor’ had paid Rs.58.66 Lakhs. Because of certain challenging circumstances, beyond control of the `Corporate Debtor’, and demanding Market conditions, the `Corporate Debtor’, had experienced heavy stress on `profitability’, and suffered `Loss’, in lieu of `deterioration of stocks’. In fact, the `Corporate Debtor’, had incurred heavy loss, during the year 2017-18 and continued to operate `below breakeven point’.
The Corporate Debtor in its Counter to the main CP(IB)/203(CHE)/2021, on the file of the `Adjudicating Authority’, `NCLT’, Chennai Bench, that the account of the `Corporate Debtor’, was declared as NPA, on 31.10.2018, with an `Outstanding of Rs.20.92 Crores.
Even, in the Section 13 (2) `Notice’ of SARFAESI Act, 2002, the `Financial Creditor’, had alleged that there was a `Default’ of Rs.20,78,85,229.37. In fact, the `Bank’, had not wanted to show the LC Limits, which they permitted the `Corporate Debtor’, to be used for the greed of Letter of Credit Commission and Charges.
It is the version of the 2nd Respondent / Corporate Debtor, before the `Adjudicating Authority’, that whatever money was received, as `Refund of LC Development’, was taken by the Financial Creditor, for servicing interest and that the `Corporate Debtor’, had not taken any money out of the Company and any Auditor would be able to certify the same.
According to the 2nd Respondent / Corporate Debtor’s reply, before the `Adjudicating Authority’ (to the main CP(IB)/203(CHE)/2021), it filed an `Application’, before the `Financial Creditor’ / `Bank’, under the `Right to Information Act’, seeking information, about the basis for `declaring’ the `Corporate Debtor’s Account’ as a `Fraud Account’, and an evasive reply was given by the `Bank / Financial Creditor’, on 01.07.2021.
The Corporate Debtor took a stand before the `Adjudicating Authority’, that the `Classification of its Account’ as `Fraud’, impaired the ability of the `Borrower’, to engage a Settlement talks with the `Bank’ and settle the Accounts. Also that, the `Central Bureau of Investigation’, who is investigating the matter, after registering a `First Information Report’, was not able to identify any `Diversion of Funds’ or any `act’, that would tantamount to, the `Account’, being characterised as `Fraud’.
Added further, the `Corporate Debtor’, had pointed out that, it must be given extensions, on account of prevailing pandemic, etc., and it is clear from the antecedents of `Corporate Debtor’, they were inclined towards `honouring its payment obligations’, and it desires to make good the payment obligation. The `I & B Code, 2016’, is not a mere `Money Recovery Legislation’, and the `Code’, is intended to place the `Corporate Debtor’, on its feet.
I & B Code, 2016:
Claim:
Section 3(6) of the I & B Code, 2016, defines `Claim’, meaning—
`(a) a right to payment, whether or not such right is reduced to judgment, fixed, disputed, undisputed, legal, equitable, secured or unsecured;
(b)right to remedy for breach of contract under any law for the time being in force, if such breach gives rise to a right to payment, whether or not such right is reduced to judgment, fixed, matured, unmatured, disputed, undisputed, secured or unsecured’.
Corporate Debtor:
Section 3(8) of the Code, defines `Corporate Debtor’, meaning `a `corporate person’ who owes a debt to any person’.
Creditor:
Section 3 (10) of the Code, defines `Creditor’ meaning `any person to whom a debt is owed and includes a financial creditor, an operational creditor, a secured creditor, an unsecured creditor and a decree-holder’.
Debt:
Section 3 (11) of the Code, defines `Debt’ meaning `a liability or obligation in respect of a claim which is due from any person and includes a financial debt and operational debt’.
Default:
Section 3 (12) of the Code, defines `Default’ meaning `non-payment of debt when whole or any part or instalment of the amount of debt has become due and payable and is not 1[paid] by the debtor or the corporate debtor, as the case may be’.
Dispute:
Section 5 (6) of the Code, defines `Dispute’ includes `a suit or arbitration proceedings’, relating to -
(a)the existence of the amount of debt;
(b)the quality of goods or service; or
(c)the breach of a representation or warranty’.
Financial Creditor:
Section 5 (7) of the Code, defines `Financial Creditor’ meaning `any person to whom a financial debt is owed and includes a person to whom such debt has been legally assigned or transferred to’.
Financial Debt:
Section 5 (8) of the Code, defines `Financial Debt’ meaning a debt alongwith 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 de-materialised 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.
1[Explanation. — For the purposes of this sub-clause, —
(i)any amount raised from an allottee under a real estate project shall be deemed to be an amount having the commercial effect of a borrowing; and
(ii)the expressions, “allottee” and “real estate project” shall have the meanings respectively assigned to them in clauses (d) and (zn) of section 2 of the Real Estate (Regulation and Development) Act, 2016 (16 of 2016);]
(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;
Debt:
A sum of money which is certainly and in all events payable is a `Debt’, without regard to the fact, whether, it is payable now or at a `Contingency’, is not a `Debt’, until the `Contingency’ has happened, as per decision in People v. Arguello, reported in (1869) 37 Calif 521.
`Debt’, is a `Sum of Money’, which is now `payable’ or will `become payable’, in future, by reason of a `present obligation’, as per decision in Registrar of Companies, Gujarat v. Kavita Benefit (P) Ltd. (1978) 48 CompCas 231 (Guj).
Companies Act:
Under Section 434(1)(c) of the Companies Act, 1956, corresponding to Section 271 (2) (c) of the Companies Act, 2013, the term `Debt’, means a `definite sum’, owed by a `Person’.
Financial Debt;
A `Financial Debt’, is `any Sum borrowed or received as `Loan’, by a `Person’ / `Enterprise’ / `Entity’, as the case may be.
Proving of Default:
A `Default’, may be established in such a manner, as prescribed by the `Insolvency and Bankruptcy Board of India’.
Right to Apply:
The `Right to Apply’, by a `Financial Creditor’, under Section 7 of the I & B Code, 2016, accrues to the `Bank’, only when the `Code’ came to force.
Summary Proceedings:
An `Adjudicating Authority’ (`NCLT’) is not a `Court of Law’, in a summary proceedings, under the I & B Code, 2016, and not to decide like a `Money Claim’, in a `Suit’, before a `Civil Court’.
What is the `exact Sum of Claim’, to be considered at the stage of `Corporate Insolvency and Resolution Process’. Also, when an `Interim Resolution Professional’, after collating the `Claims’, including the `Claim’ of the `Respondent’, may ascertain / find out, what amount is payable to the `Respondent’.
Provisions of Non Performing Asset:
The provisions of `Non Performing Asset’, relates to SARFAESI Act, or the `Debt’ recovery loss.
Evaluation:
Before the `Adjudicating Authority’, the `1st Respondent / Bank’ in Form I of Section 7 Application in CP(IB)/203(CHE)/2021, under Part IV, had mentioned that the `Total Sum of Financial Debt’, granted to the `Corporate Debtor’ is mentioned as Rs.23,21,89,000/-. The amount claimed to be in `Default’, as on 19.08.2021 was Rs.31,17,20,210.16. The name of the `Corporate Debtor’ is M/s. Rosvar Steels Pvt. Ltd., Coimbatore.
The main plea taken on behalf of the Appellant is that, the `Corporate Debtor / M/s. Rosvar Steels Pvt. Ltd.’, had repaid the `Loan Amounts’, in numerous instalments to the `1st Respondent / Bank’, and a payment of Rs.16,62,82,607/- was made in favour of the `1st Respondent / Bank’, during the period 01.03.2011 to 31.10.2018 and that only a Sum of Rs.6,59,06,393/-, was only to be paid as `Outstanding Sum’. Furthermore, the `Corporate Debtor’, is willing to honour its repayment obligation.
The other stand taken by the Appellant is that, only with a `Malicious Intent’, the `CIRP’, was initiated by the `1st Respondent / Bank’. Also that, the `Corporate Debtor’, is a `Solvency Company’, and that the I & B Code, 2016, cannot be used as a `Pressure Tool’, of the `Recovery’, through the `impugned order’, passed by the `Adjudicating Authority’ (`Tribunal’).
The emphatic contention advanced on behalf of the Appellant is that, the ingredients of Section 7 (5) (a) of the `Code’, are discretionary in nature and an `Adjudicating Authority’ / `Tribunal’, has discretion, in not `admitting’ the `Petition’ / `Application’ of the `1st Respondent / Financial Creditor / Bank’.
In short, according to the `Appellant’, there is no `Insolvency’, in the instant case on hand, before this `Tribunal’, and hence prays for `allowing’ of the present Comp. App (AT) (CH) (INS.) No. 335 of 2022.
According to the 1st Respondent / Bank, in Form I of the Section 7 Application, filed by it, under Part IV, the `Term Loan of Rs.4.5 Crores’, was clearly showed as `Close’, and the `Outstanding Sum’, to be paid as on 19.08.2021, was mentioned as Rs.31,17,20,210.16.
It cannot be forgotten that an `Application’ for initiation of `Corporate Insolvency Resolution Process’, was made on 19.08.2021, by the `1st Respondent / Bank’, and the `Date of Default’, was 31.10.2018. As such, the `Application’, filed under Section 7 of the `Code’, by the `1st Respondent / Bank’, before the `Adjudicating Authority’, is well within time and its `Ex-facie’, is `maintainable in Law’, as held by this `Tribunal’.
In the instant case, the `Corporate Debtor’, had admitted the `Debt’ and not `disputed’ the same. Even the `Appellant’s offer of Rs. 6 Crores, in respect of the dues of Rs.24 Crores, was not acceptable to the `1st Respondent / Bank’, and the last letter for `One Time Settlement’, was made on 25.05.2021.
It is not out of place for this `Tribunal’, to make a pertinent mention that the ability / inability of the `Appellant’, to `settle his account(s)’, is not germane, in regard to the `commencement’ of the `Corporate Insolvency and Resolution Process’ proceedings. Because of the latent and patent fact, that the I & B Code, 2016, is for `Resolution’, and not a `Recovery Mechanism’, in the earnest opinion of this `Tribunal’.
It cannot be gainsaid that `Classification of an Account’ as `Fraud’, by the `1st Respondent / Financial Creditor / Bank’, does not hinder the `Bank’, from considering the `OTS Proposal’, and the `Offer of Rs.6 Crores’, as against the due of Rs.24 Crores, was not acceptable to the `1st Respondent / Financial Creditor / Bank’. Although, a `Notice’, was issued to the `Appellant’, to improve his `Offer’, the `Appellant’, had not availed the same.
It is always open to a `Corporate Debtor’, to `exhibit’ that a `Debt’, may not be `Due’, ofcourse, it is `not payable’ in `Law’ or in `Fact’. A `Party’ is not to be permitted to `abuse’ the `Legal Process’, by adopting dilatory tactics at the stage of `admission’ of an `Application’.
As for as the present case is concerned, the `Corporate Debtor’, had not `disputed the Debt’, but `admitted’ the same. There is no `Dispute’, in regard to the grant of `Term Loan Facilities’ or about the `Corporate Debtor’, being in `Default’.
The amount of `Debt’, given to the `Corporate Debtor’ was Rs.23,21,89,000/- and that a Sum of Rs.31,17,20,210.16 was the amount in `Default’, as on 19.08.2021.
The `Default’ occurred when the `Account’ of the `Corporate Debtor’, was classified as `Non Performing Asset’, on 31.10.2018.
In the light of the qualitative and quantitative discussions, this `Tribunal’, keeping in mind of the fact that the `Financial Debt’ and `Default’ of the `Corporate Debtor’, were established by the `1st Respondent / Financial Creditor / Bank’, based on the facts and circumstances of the instant case which float on the surface, on going through the the `impugned order’ dated 09.06.2022, passed by the `Adjudicating Authority’, (`National Company Law Tribunal’, Division Bench – I, Chennai) in CP(IB)/203(CHE)/2021 (Filed by the `1st Respondent / Petitioner / Financial Creditor’), under Section 7 of the I & B Code, 2016, read with Rule 4 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016, comes to a consequent conclusion that the `Adjudicating Authority’ (`Tribunal’), had rightly exercised its `subjective discretion’ in a `right thinking’ and `sound manner’, in `admitting’ the `Application’ in CP(IB)/203(CHE)/2021, which is free from `any Legal Errors’. Accordingly, the instant `Appeal’ fails.
Conclusion:
In fine, the instant Comp. App (AT) (CH) (INS.) No. 335 of 2022 is dismissed. The connected pending IA No. 753 of 2022 (`For Urgent Hearing’) and IA No. 754 of 2022 (`For Interim Stay’) are closed.