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Judgment
The instant application was filed on 08.08.2022 by Ms. Rekha Singh (Applicant) under Section 7 of the Insolvency and Bankruptcy Code, 2016 (CODE) read with Rule 4 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 for initiation of Corporate Insolvency Resolution Process (CIRP) against Shri Mankameshwar Sales LLP (Respondent) for the default amount of Rs. 2,02,99,298/- (principal amount Rs.1,55,00,000/- + interest amount of Rs. 48,99,298/-) as on 30th April 2022. The date of default is 31st March 2021.
The averments made by the financial creditor/applicant in its application and as argued by the learned counsel are summarised as under:
The corporate debtor was incorporated as LLP in the year 2020. The loan was advanced by the applicant to the corporate debtor for an amount of Rs.1,55,00,000/- in 5 tranches through cheques and bank transfers between August 2020 to December 2020 against the fixed interest of 18%. The details of the amount transferred by the applicant is as follows:
| Sr. | Date | Amount (Rs.) | Mode |
|---|---|---|---|
| 1 | 24.08.2020 | 85,00,000 | Cheque No. 000009 Axis Bank Gwalior |
| 2 | 05.09.2020 | 20,00,000 | Cheque No. 000010 Axis Bank Gwalior |
| 3. | 05.09.2020 | 20,00,000 | Cheque No. 000011 Axis Bank Gwalior |
| 4. | 26.09.2020 | 10,00,000 | RTGS from Axis Bank Gwalior |
| 5. | 02.12.2020 | 20,00,000 | RTGS from Axis Bank Gwalior |
| Total | 1,55,00,000 | ||
During the Covid-19 period the respondent was facing financial difficulty and therefore, invited money/loans from the market at a fixed interest of 18% per annum which is a very normal practice in business. The applicant believing in the credibility of the partners in LLP offered to lend an amount of Rs.1,55,00,000/- against a fixed interest of 18%. There was no written agreement between the applicant and the respondent, but they had an oral agreement based on trust and goodwill. A fixed monthly interest on the loan was to be paid and was promised to be settled by the end of the financial year i.e. 31.03.2021. However, the respondent failed to return the money, therefore, the applicant approached and reminded the respondent on several occasions to return the money but the respondent failed to repay the same. The applicant finally issued a recall notice dated 04.05.2022, however, the corporate debtor did not even repay the amount or dispute the said notice.
Thereafter, the applicant filed its financial information with Information Utility (IU) on 29.06.2022 as per the provisions of Section 7 of the Code and filed the present application. The NESL in compliance with Regulation 21 of the IBBI Rules gave three opportunities to the corporate debtor to reply or to dispute the claims filed by the financial creditor. However, the corporate debtor did not dispute or replied to the said email sent by the IU, and therefore, the IU on 24.07.2022 recorded the default as “deemed to be authenticated”.
The respondent has admitted and acknowledged the debt amounting to Rs.1,55,00,000/- as unsecured loans in their audited balance sheet for the financial year 2020-21. The same is placed on record.
The name of the Interim Resolution Professional (IRP) is proposed by the financial creditor Mr. Sanjeev Chaudhary (registration No. IBBI/IPA – 001/IP-P-01892/2019-2020/12911) and the written consent of the IRP is also placed on record.
The objections raised by the corporate debtor/respondent in its reply dated 12.01.2023 and as argued by the learned counsel for the respondent are summarised as under:
The applicant approached the respondent in the year 2020-21 to participate in the business of the respondent and to invest in various projects of the respondent. The applicant expressed interest in providing requisite funds as an investment to become a partner in the respondent. Following that, the funds were mobilized but no document to that effect was signed or executed.
Prior to the initiation of this application, the applicant claimed herself as an “Investing Partner” who has invested in the respondent company. Thus the present application is filed by the applicant solely for the recovery of her investment amount.
The amount claimed by the applicant was disbursed from the joint account of Shri Ummed Singh and Rekha Singh wherein Shri Ummed Singh was the primary account holder and the applicant was a joint account holder which is evident from the account statement filed by the applicant. Further, the notice dated 04.05.2022 as well as the present petition is issued and filed by the applicant alone, therefore, the same is devoid of merits as the claimed amount was transferred from the joint account and the present petition suffers from the misjoinder of parties.
In order to substantiate the claim, the applicant relied upon the audit report of the respondent. However, the audit report itself states that Rs.85,00,000/- was received by the respondent from Ms. Rekha Singh and Rs.70,00,000/- was received from Mr. Ummed Singh/Ms. Rekha Singh (joint account) and therefore, based upon the said audit report itself the amount was disbursed from different entities which was below the threshold limit of Rs.1,00,00,000/- as mandated by Section 4 of the Code.
The applicant failed to provide any document other than the bank statement to show that the amount was advanced as an unsecured loan to the respondent. Further, no document is placed on record in support of the claim of 18% interest on the consideration amount and that the said loan was required to be repaid within a fixed period of time. Moreover, no documents are on record to justify the date of default as 31.03.2021 as stated by the applicant in the application.
The applicant failed to place on record any document to show that they are a financial service provider or possess any authorization or license issued or registration granted by a financial sector regulator to operate as NBFC. Therefore, the applicant being an individual cannot grant the loan.
Since the present application lacks sufficient documents and the applicant failed to justify whether any financial debt occurred or not the same is liable to be dismissed.
The applicant has through its rejoinder dated 30.01.2023 submitted that the applicant advanced the loan amount during the pandemic period against a fixed rate of interest. Further, the contention of the respondent that the said loan was advanced by the applicant for the purpose of investment is not supported by any document and the respondent itself has in its audited balance sheet admitted the said advanced amount as an unsecured loan instead of showing it under the head Investment. Moreover, the part amount of Rs.70,00,000/- transferred by the applicant is from a joint account wherein the applicant is also a joint account holder and therefore the joint account holder has the right to use the funds of the joint account. The debt qualifies as financial debt and is within the threshold limit as prescribed by the Code.
In response to the said rejoinder the respondent through its reply dated 01.05.2023 submitted that the applicant took verification of the claim from the Information Utility on the basis of incomplete information after filing the present application before this Adjudicating Authority. Further, the applicant gave no explanation as to for what reason the joint account holder is not made party to the present application and therefore, the application deserves to be rejected on the ground of misjoinder of proper & necessary parties alone.
We heard the learned counsel for the applicant as well as for the respondent and perused the relevant documents available on record. It is noted that the applicant advanced loan amounting to Rs.1,55,00,000/- in 5 tranches to the respondent during August 2020 to December 2020 from two different bank accounts i.e. one from the applicant bank account and the other from the joint bank account where the applicant was a joint account holder.
It is however, noted that admittedly, there was no written agreement entered into between the applicant and the respondent for loan.
It is also noted that the receipt of the said amount by the respondent is undisputed, however, the difference is that the applicant states to have transferred the said amount as a loan whereas the respondent states to have received the said amount as an investment by the applicant in the business activities of the respondent.
The applicant filed its claim with NESL and IU 24.07.2022 recorded the claimed amount of Rs.2,03,99,298/- as “deemed to be authenticated” subsequent to granting three opportunities to the respondent to dispute or reply against the said claim.
The respondent has also challenged the occurrence of the date of default as on 31.03.2021 on the ground that no supporting documents have been placed on record by the applicant. The recall notice was given on 04.05.2022 issued by the applicant to which the respondent had preferred not to reply.
For admission of an application under Section 7 of the IBC, the applicant has to satisfy and prove that he is a financial creditor as defined in Section 5(7) of the Code. Section 5(7) reads 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;”
Thus, financial creditor is a person who owes financial debt. The term ‘financial debt’ is defined in Section 5(8) of the Code. The relevant part of Section 5(8) reads as under:-
“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 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 non-recourse basis; (f) any amount raised under any other transaction, including any forward sale or purchase agreement, having the commercial effect of a borrowing;
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;”
In view of the above definition, there are to essential ingredients within the definition of financial debt that need to be satisfied – (i) there must be a disbursement; and (ii) the disbursement must be against consideration for time value of money.
Hon’ble Supreme Court, in its judgment dated 26.02.2020, in “Anuj Jain v. Axis Bank, Civil Appeal Nos. 8512-8527 of 2019”, has held time value of money to be a necessary prerequisite to classify a debt as a financial debt. The relevant para 43 is hereunder:
“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.”
We may add that in the present case not a single document has been produced to show that the said amount was to be repaid after a particular period. The applicant is also an individual and not a Bank or Financial Institution which provides loan.
Hon’ble NCLAT in their judgment in M/s VRG Healthcare Pvt. Ltd vs M/s VRG Infrastructure Pvt. Ltd (Company Appeal (AT) (Insolvency) No. 778 of 2020) decided on 22.03.2023 has considered a similar case where there was no written agreement for disbursement of money as a loan. While agreeing with the views of the adjudicating Authority, Hon’ble NCLAT stated as under:
17.After hearing the parties and going through the pleadings made on behalf of the parties, we are of the considered view that we agree with the findings given by the Adjudicating Authority that the Appellant has not produced any agreement between the Appellant and the Respondent that any interest would be payable by the Respondent/Corporate Debtor against the alleged loan. Further, the Adjudicating Authority rightly come to the conclusion that in order to qualify the debt to be a ‘financial debt’, it is necessary that the amount advanced to the Corporate Debtor is against the time value of money, which is totally absent in the present matter. Further, it was held that since the Appellant is not a financial creditor as the Appellant has not disbursed money against the consideration for the time value. Accordingly, the claim of the Appellant is not a ‘financial debt’ within the meaning of Section 5(8) of the IBC.
17 In the present matter, the Applicant has failed to prove that the amount advanced to the Corporate Debtor is against the time value of money, which is an essential ingredient for a financial debt. Therefore, it was not a financial debt within the meaning of Section 5(8) pf the Code. Hence, application under Section 7 is not maintainable.
Accordingly, CP(IB) 55 of 2022 is dismissed.