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Judgment
Ashok Bhushan, J.
These two appeals filed by suspended director of the corporate debtor, challenges order dated 29.04.2024 and order dated 07.05.2024 passed by the adjudicating authority (National Company Law Tribunal, New Delhi Bench, Court–IV), admitting Section 7 application filed by the IDBI Trusteeship Services Limited in C.P. (IB) No.445/2023 and C.P. (IB) No.446/2023, respectively.
Brief facts giving rise to these appeals are:
Shree Vardhaman Buildrop Pvt. Ltd., the principal borrower entered into Debenture Subscription Agreement with debenture holder company, DSS Infrastructure Private Limited and the promoters.
The debenture holder agreed to disburse a sum of ₹35 crore to Shree Vardhaman Buildrop Pvt. Ltd. DSS Infrastructure Pvt. Ltd., the subsidiary company of Shree Vardhaman Buildprop Pvt. Ltd. stood as corporate guarantor in the above transaction.
M/s. Shree Vardhman Buildprop Pvt. Ltd. has been developing a low cost/affordable housing project called Shree Vardhman Mantra project on land measuring 11.262 acres situated at Village Badshahpur, Sector 67, Gurgaon, Manesar.
In the project, there were 1203 units out of which 1199 units were already sold, and there were four unsold units only.
In the year 2016, occupancy certificate was applied which could be received only on 23.07.2021.
The principal borrower could not make payment of interest or principal. Project Revenue Escrow Account dated 18.07.2016 was also executed among the promoters of the corporate debtor and Kautilya Finance through its debenture trustee IDBI Trusteeship Services Limited.
Between the period June 2016 and January 2021, various amount became due and payable towards the principal and interest in respect of the debentures from the principal borrower. Shree Vardhaman Buildrop Pvt. Ltd., however, the payment was being delayed on one pretext or another.
Default notice dated 05.08.2019 and 18.11.2020 was issued against Shree Vardhaman Buildrop Pvt. Ltd. who failed to honour the repayment commitment.
Vardhman approached the debenture holders and requested to revise the repayment schedule in respect of debenture by executing a fresh Debenture Trust Deed (DTD).
On 02.02.2021, debenture trustee, Shree Vardhman Buildrop Pvt. Ltd., suspended director of the corporate debtor and corporate guarantor entered into fresh debenture trust deed (second DTD), where parties revised the repayment schedule for payment of interest and redemption amount of the 35 debentures. Even after revision of the repayment schedule, Shree Vardhman Buildrop Pvt. Ltd. failed to repay in terms of the second DTD from first due date i.e., 31.03.2021.
The debenture holder presented the post-dated cheques handed over by Shree Vardhman Buildrop Pvt. Ltd. towards the payments of interest and redemption amount, which got dishonoured for reasons of funds insufficient.
Legal notice was issued on 20.01.2023, under Section 138 of the Negotiable Instrument Act. Reply to legal notice was issued where Shree Vardhman Buildrop Pvt. Ltd. admitted liability towards debenture holders.
The IDBI Trusteeship Services Ltd. vide notice dated 16.06.2023 called upon Shree Vardhman Buildrop Pvt. Ltd. to discharge outstanding liability of ₹57, 87,76,971/- as on 31.03.2023.
The IDBI Trusteeship Services Ltd. vide notice dated 06.07.2023, invoked the corporate guarantee given by the DSS Infrastructure Pvt. Ltd. and ask them to pay an amount of ₹60,07,19,783/- along with the future interest within seven days.
Section 7 application was filed against Shree Vardhman Buildrop Pvt. Ltd. on 21.07.2023, on which C.P. (IB) No. 445/2023 was registered. Section 7 application was filed against DSS Infrastructure Pvt. Ltd. on 02.08.2024 on which C.P. (IB) No. 446/2023 was registered.
In Section 7 application notices were issued by the adjudicating authority. Shree Vardhman Buildrop Pvt. Ltd. and DSS Infrastructure Pvt. Ltd. filed their replies in respective Section 7 application.
Adjudicating authority after hearing both the parties vide order dated 29.04.2024, admitted C.P. (IB) No. 445/2023 against the corporate debtor, Shree Vardhman Buildrop Pvt. Ltd. and by order dated 07.05.2024, admitted Section 7 application in C.P. (IB) No. 446/2023 against the corporate guarantor, DSS Infrastructure Pvt. Ltd. The suspended Directors of Shree Vardhman Buildrop Pvt. Ltd., as well as, DSS Infrastructure Pvt. Ltd. have filed these two appeals.
It shall be sufficient to refer to the pleadings in Comp. App. (AT) (Ins.) No.1026/2024, for deciding both the appeals. Facts and submissions in both the appeals being common.
Learned counsel for the appellant challenging the order, admitting Section 7 application submits that when the DTD was executed on 14.06.2016 out of 1203, 1199 units were already sold and the payment to debenture trustee was to be made from sale of commercial unit and new tower. Observation of the adjudicating authority that occupancy certificate having been issued on 23.07.2021 and possession has also been handed over to 1024 allottees in the project the corporate debtor has failed to regularise the payment is incorrect observation, amount was not to be paid out of the units which were already completed and sold. It is submitted that under the DTD, the movement of money was in the control of debenture trustee. All monies which are received in the RERA Accounts and Escrow Accounts were to be operated by debenture trustee itself. Occupancy was applied in 2016 and was received in 2021. A period from 01.11.2017 to 30.09.2020 has been declared as “zero period” by Director General Town and Country Planning. Section 7 application has been filed by the trusteeship only with an object to take the project land. There is insufficient money in the project and if the project is allowed to be completed by the promoters, the project shall be completed within 12 months and entire amount/liabilities of the financial creditors shall be discharged under second DTD, additional money was taken to pay Department of Town and Country Planning. Initiation of Corporate Insolvency Resolution Process (CIRP) by the financial creditor is with malicious intent for mala fide purpose. The financial creditor is keen to push the principal borrower and corporate guarantor in CIRP. Sufficient amount is receivable from sale of commercial unit and the new tower. There is also sufficient cash flow to repay the debt amount of Respondent No.1 with interest. Mere existence of financial debt and default is not sufficient to initiate the CIRP. Adjudicating authority was required to apply its mind to the relevant factors, including the feasibility of initiation of the CIRP.
Learned counsel for the financial creditor refuting the submissions of the appellant submits that the present is a case where after execution of the DTD on 14.06.2016, no payment towards principal or interest were received from the principal borrower. The principal borrower again approached for additional finance on basis of which DTD dated 02.02.2021 was executed by providing a fresh repayment plan, even after execution of DTD dated 02.02.2021, default was committed and no payments were made by the principal borrower. Appellant in the appeal is not questioning the debt and default. When the debt and default is proved as per the law laid down by the Hon’ble Supreme Court, the Section 7 application has to be admitted. Corporate guarantor having also failed to make the payment in spite of invocation of guarantee the CIRP against the corporate guarantor has also been rightly initiated. Learned counsel for the respondent has referred to the judgement of the Hon’ble Supreme Court in the matter of ‘E.S. Krishnamurthy & Ors.’ Vs. ‘Bharathi Hi-Tecch Builders Private Limited’ reported in (2022) 3 SCC 161 and in the matter of ‘M. Suresh Kumar Reddy’ Vs. ‘Canara Bank & Ors.’ reported in (2023) 8 SCC 387. The reason due to which the corporate debtor could not complete the construction cannot be a reason for resisting the admission of Section 7 application. The debt and default is an admitted fact, not a single instalment of principal or interest was paid in last five years. In the year 2021, additional money was disbursed of ₹15 crore again. No payments have been received, tenure of debenture have already expired and after giving default notice, proceedings have been initiated.
We have considered the submissions of the counsel for the parties and perused the records.
The present is a case where under the Debenture Trust Agreement, 14.06.2016, debentures of ₹35 crore were issued by the corporate debtor, the principal borrower and by the second DTD dated 02.02.2021 debentures of ₹15 crore were further issued. No amounts from 2016 to 2023, till the date of filing the application has been paid by the principal borrower, even after invocation of the guarantee, the corporate guarantor also did not make any payment. The debt and default is an admitted fact in the present case to which even no submissions have been made before this tribunal during hearing.
The submission which has been pressed by the counsel for the appellant is that in the project which was low cost/affordable housing project, out of 1203 units, 1199 units were already sold, which fact is captured in the DTD, hence the payment of the interest and principal was not to come from the projects which were already completed rather the payment was to come from sale of the commercial units and new tower, which could not be constructed due to delay in issuing necessary approvals and permissions. Submissions which has been pressed by the counsel for the appellant is that under the DTD money in the different project amount was to be moved on the instructions by the debenture trustee itself and no money has been siphoned off by the promoters.
The facts as noticed above indicate that for last more than five years, no payment towards interest or principal has been made. It was principal borrower who has issued debentures and the liability to pay the principal and interest cannot be washed of on the ground that project accounts were to be operated by IDBI Trusteeship Services Ltd.
Learned counsel for the respondent has also placed reliance on the judgement of this Tribunal in Comp. App. (AT) (Ins.) No.146/2025, ‘Sandeep Jain’ Vs. ‘IDBI Trusteeship Services Ltd. & Anr.’, which was also an appeal filed by suspended director of M/s. Shree Vardhaman Infra Heights Pvt. Ltd., challenging an order admitting Section 7 application filed by the same financial creditor. The submission was raised on behalf of the appellant in the said case that there was project managing committee constituted to monitor the project and project monitoring committee consists of financial creditor who were in majority, hence the corporate debtor could not have been held liable to discharge of the debt. It was held by this Tribunal that the constitution of project managing committee to assist and improve the operation and construction in no manner diminish the obligation of the corporate debtor to fulfil its payment obligation. In paragraphs 17, 18 & 19 of the judgement following was laid down:
“17.The PMC was constituted for the purpose and object to monitor the project, to improve the sales and collections from the project and completing the construction of the project. PMC was constituted to improve the functioning of company qua the construction of the project. PMC in no manner has undertaken the obligation of the obligors towards repayment which is clearly reflected in Clauses 2.6 and 2.22 as extracted above. We, thus, do not find any substance in the submission of Shri Arun Kathpalia that after constitution of PMC in which there are three members of the financial creditors i.e. majority, blame for non-payment of due amount can be put on the financial creditor itself. The PMC was constituted to assist and improve the operations and construction of the project which in no manner diminish the obligation of the corporate debtor to fulfil its payment obligation. The default in repayment of the obligation by obligors cannot in any manner be put on the financial creditor nor constitution of PMC in any manner affect the obligation or absolve the corporate debtor from its default for repayment of the debt.
18.Counsel for the Respondent is right in his submission that in Section 7 application the Adjudicating Authority was obliged to determine whether default has occurred or whether debt was due as remained unpaid. The Hon’ble Supreme Court in “E.S. Krishnamurthy and Others vs. Bharath Hi-Tech Builders Private Limited- (2022) 3 SCC 161” referring to the earlier judgment of the Hon’ble Supreme Court in “Innoventive Industries Ltd. vs. ICICI Bank- (2018) 1 SCC 407” held following in paragraph 32:-
“32.In Innoventive Industries [Innoventive Industries Ltd. v. ICICI Bank, (2018) 1 SCC 407, paras 28 and 30 : (2018) 1 SCC (Civ) 356] , a two-Judge Bench of this Court has explained the ambit of Section 7 IBC, and held that the adjudicating authority only has to determine whether a “default” has occurred i.e. whether the “debt” (which may still be disputed) was due and remained unpaid. If the adjudicating authority is of the opinion that a “default” has occurred, it has to admit the application unless it is incomplete. Speaking through Rohinton F. Nariman, J., the Court has observed : (SCC pp. 438-39, paras 28 & 30)
“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 [Ed. : The word between two asterisks has been emphasised in original.] any [Ed. : The word between two asterisks has been emphasised in original.] 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.” (emphasis supplied)
19.Subsequent judgment of the Hon’ble Supreme Court in “M. Suresh Kumar Reddy vs. Canara Bank and Ors.-(2023) 8 SCC 387” also decode the same proposition. It is useful to extract paragraph 11 of the judgment which is as follows:-
“11.Thus, once NCLT is satisfied that the default has occurred, there is hardly a discretion left with NCLT to refuse admission of the application under Section 7. “Default” is defined under sub-section (12) of Section 3 IBC which reads thus:
“3.Definitions.—In this Code, unless the context otherwise requires— * * *
(12)“default” means non-payment of debt when whole or any part or instalment of the amount of debt has become due and payable and is not [paid] by the debtor or the corporate debtor, as the case may be;” Thus, even the non-payment of a part of debt when it becomes due and payable will amount to default on the part of a corporate debtor. In such a case, an order of admission under Section 7 IBC must follow. If NCLT finds that there is a debt, but it has not become due and payable, the application under Section 7 can be rejected. Otherwise, there is no ground available to reject the application.”
The appeal was dismissed by this Tribunal by the judgement dated 10.01.2025 against which Civil Appeal No.2640/2025, ‘Sandeep Jain’ Vs. ‘IDBI Trusteeship Services Ltd.’ has also been dismissed by Hon’ble Supreme Court on 21.02.2025.
We thus do not find any substance in the submission that the project account was to be operated under the instruction of IDBI Trusteeship, hence the corporate debtor is not liable for its payment obligation. The present is a case where after receiving the amount by virtue of issuance of debentures in the year 2016 and again in 2021 no payment towards principal and interest have been made. The adjudicating authority has not committed any error in admitting Section 7 application against the principal borrower and the corporate guarantor by the impugned orders dated 29.04.2024 and 07.05.2024.
We thus do not find any merit in any of the appeals. Both the appeals are dismissed.