Religare Finvest Limited vs Strategic Credit Capital Private Limited

[Per: Arun Baroka, Member (Technical)]

The present Appeal is under Section 61 of the Insolvency and Bankruptcy Code, 2016 filed by the Appellant, Religare Finvest Limited ("Appellant/Financial Creditor") is impugning the Order dated 25 November 2022 passed by the Ld. National Company Law Tribunal, Principal Bench in the matter titled as "Religare Finvest Limited vs. Strategic Credit Capital Private Limited' numbered as "IB No. 1628 (PB) of 2019" under Section 7 of the Code whereby, the Insolvency Petition was dismissed by the Adjudicating Authority.

Initially as per order dated 27.04.2023 in IA No. 1327 of 2023, this Appellate Tribunal had held that there is delay of more than 15 days in filing the appeal and accordingly the delay condemnation application was rejected and the memo of appeal was also rejected. Subsequently the appellant had taken up the matter before Hon’ble Supreme Court in Civil Appeal No. 5958 of 2023 dated 4^th February 2025 and the application for condemnation of delay was allowed and this Appellate Tribunal was directed to proceed to decide the appeal in accordance with law.

Briefly speaking on 21.07.2015, Nishu Finlease Private Limited ("NFPL"), a NBFC, had disbursed a loan of ₹40,00,00,000/- (Rupees Forty Crores) ("Financial Debt") to the Corporate Debtor under the Term Loan Agreement dated 21.07.2015 ("Loan Agreement"). As per the Loan Agreement, the Financial Debt was repayable by 21.07.2016, i.e., 12 months from the date of disbursement. The Financial Debt was secured by creating pledge over 1,32,33,328 equity shares of ABG Shipyard Limited ("Pledge Shares"). The pledged shares were transferred into the demat account of the Financial Creditor as encumbered shares but the pledge was never invoked the pledge qua the aforementioned shares and as such, there has been no payment of the debt owed by the Corporate Debtor whatsoever. Subsequently on 16.06.2016, 'NFPL, as an assignor, assigned all rights under the Loan Agreement to the Financial Creditor by way of Sale Agreement dated 16.06.2016 for a consideration of ₹45,00,00,000/- (Rupees Forty-Five Crores). The Financial Creditor thus acquired all rights and interests of NFPL under the Loan Agreement as regards the Corporate Debtor. On 24.06.2016, the Financial Creditor issued the Termination cum recall Notice to the Corporate Debtor, thereby demanding payment of the Financial Debt along with accrued interest, as well as future interest, as applicable ("Recall Notice"). Therefore, there has been default of the debt due. Subsequently, the Financial Creditor and Corporate Debtor along with other parties executed a Settlement Agreement dated 01.07.2017, whereby, in terms of Clause 3.7 of the Settlement Agreement, the Corporate Debtor and others, collectively, agreed to pay to the Financial Debtors an amount of ₹793,67,20,176/-, which included the Financial Debt owed by the Corporate Debtor, i.e., the debt of ₹45,00,00,000/- assigned by NFPL to RFL. The terms of the Settlement Agreement, particularly Clause 3.3, require the Corporate Debtor, as one of the Principal Parties, to repay the admitted dues of ₹793,67,20,176/-which included the Financial Debt owed by the Corporate Debtor. The repayment was to be affected in tranches with the Corporate Debtor and Perpetual procuring amounts aggregating to ₹400,00,00,000/- (Rupees Four Hundred Crores) within a period of 9 months, portion whereof to be paid to RFL against the total amount due. Pertinently, no amount has been paid despite the unequivocal obligation to repay INR 400 crores within 9 months. Therefore, there has been a default as under the Settlement Agreement as well. Consequently, the Corporate Debtor has committed default in payment of the Financial Debt under the Loan Agreement and the Settlement Agreement. This default in repayment of the Financial Debt would relate back to the original default date under the Loan Agreement i.e., the date on which the Terminational cum Recall Notice (24.06.2016) was issued to the Corporate Debtor. Despite having unequivocally acknowledged the Financial Debt, the Corporate Debtor has failed to make any payments against the same. Accordingly, on 10.06.2019, the Appellant filed the Insolvency Petition under Section 7 of the Code before the Ld. Adjudicating Authority seeking initiation of Corporate Insolvency Resolution Process against the Corporate Debtor. Similarly, on account of default in payment of financial debt of ₹3,18,91,47,450/- by Perpetual Capital and Servicing Private Limited ("Perpetual"), a petition under Section 7 of the Code was initiated before the Mumbai Bench, NCL T. Pertinently, Perpetual was also a signatory to the Settlement Agreement. This Section 7 petition was allowed and Perpetual has been admitted into CIRP by. way of order dated 12.08.2022.

On 25.11.2022, the Ld. Authority erroneously dismissed the Insolvency Petition vide the Impugned Order despite clear existence of a financial debt and default. Pertinently, the Ld. Adjudicating Authority has misinterpreted the record in order to come to a conclusion that the Settlement Agreement superseded and hence subsumed the Loan Agreement, as a result of which, no standalone debt of INR 40,00,00,000/- existed anymore. The Ld. Adjudicating Authority has erroneously concluded that since the Settlement Agreement, having swallowed the Loan Agreement, was subsisting as on date, there could be no question of a debt and a default nor was there a relationship of creditor debtor existing between the parties. Further, the Ld. Adjudicating Authority has failed to appreciate that the Corporate Debtor has already acted in default of its obligations under the Settlement Agreement in failing to pay the initial sum of INR 400 crores. Provided that the Settlement Agreement is to subsist till the payment of the entire amount of ₹7,93,67,20, 176/- in terms of Clause 9.2 of the Settlement Agreement, if the logic of the Ld. Adjudicating Authority is to be followed, there can never be a default in terms of the Settlement Agreement.

In this appeal, the Appellant raises the following grounds for setting aside the impugned order:

o there exist a valid debt and a default thereof and therefore, ought to have admitted the Petition under Section 7 of the Code.

o the debt arising out of the Loan Agreement is no longer a standalone financial debt of SCCPL which can be enforced merely because a settlement agreement was entered into between RFL and the Corporate Debtor, which was subsequently breached. Even where a settlement agreement is executed in terms of a debt due, the same would not alter the nature of the financial debt merely on account of breach of the consent terms.

o the standalone debt of INR 45,00,00,000/- arising out of the Loan Agreement cannot be held to be subsumed within the transaction contained within the Supplementary Agreement. Corporate Debtor still has the unequivocal obligation of repaying the debt of INR 40,00,00,000/- along with interest, which it has defaulted upon. Even otherwise, an event of default has occurred qua the obligations contained in the Settlement Agreement as well, insofar as the Corporate Debtor has failed to make any payments in term of Clauses 3.3 and 3.4 of the Settlement Agreement.

o It is incorrect to ignore the fact that the Recital C of the Settlement Agreement, of which SCCPL is a party, clearly acknowledges the debt of INR 45,00,00,000/- due and payable by SCCPL to RFL.

o The pledged shares of ABG Shipyard were merely being held by the Appellant under encumbrance. Neither has the pledge been invoked by the Appellant nor have the ·pledged shares been sold to recover the amounts due from the Principal Parties. amounts in excess of INR I lakh would be owed by the Corporate Debtor to the Financial Creditor even despite alleged (and disputed) invocation of pledge against the shares provided as security against the loan of INR 40,00,00,000/- availed by the Corporate Debtor.

o No concrete finding on the composite value of the ABG shipyard shares allegedly transferred in part satisfaction of the amounts owed by the Corporate Debtor to the Financial Creditor. Resultantly, there is no finding on whether the admitted default is against an amount in excess of INR 1,00,000/-as required under Section 4 of the Code.

o The loan granted by NFPL to SCCPL and thereafter transferred to RFL gets subsumed into the Settlement Agreement by way of the recitals. The recital clauses are nothing but acknowledgement of the debt due by the principal parties, including SCCPL, to RFL and the settlement agreement specifically provides in terms of Clause 3.7 that all principal parties shall be under a continuous obligation to repay said debts. Therefore, the debt under the loan agreement subsists despite the execution of the Settlement Agreement, default in repayment of which has occurred.

o Merely because a settlement agreement was entered into between RFL and the Corporate Debtor, which was subsequently breached, the financial debt which was claimed by the financial creditor would not be wiped out nor the nature and/or the character of the financial debt shall be changed on account of breach of the consent terms. Adjudicating Authority has erred in holding that there is no default on the basis of the mere existence of the Settlement Agreement.

o Erroneous to hold that there exists no relation of creditor and debtor between RFL and SCCPL. Adjudicating Authority erred in holding that there has been a default of the debt owed under the Settlement Agreement as well and therefore the Section 7 application is liable to be admitted even if the Settlement Agreement were to take primacy.

o The Settlement Agreement provides for a clear timeline for the initial repayment of INR 400,00,00,000/- (Realizable amount) by collection of the amounts repayable/recoverable/ receivable from the borrowers within 9 months from the date of execution, which has not been adhered to by the Corporate Debtor. Adjudicating Authority has erred in treating the Settlement Agreement as a subsisting Agreement despite clear and repeated breaches and defaults by the Corporate Debtor.

o Section 46 of the Indian Contract Act, 1872, mandates that when a time for performance has not been satisfied, the performance ought to be done within a reasonable period of time.

o Not only has the Corporate. Debtor failed to repay the amount of INR 400,00,00,000/- within a period of 9 months, but no amounts have been paid into the escrow account in terms of the Settlement Agreement in the last 18 months.

o Impugned order is in the teeth of the dicta in Judgment dated Innoventive Industries Ltd. vs. ICICI Bank, wherein the Hon'ble Supreme Court held that even if a part of the total debt due becomes payable and is not paid, the insolvency resolution process begins. The relevant portion is extracted hereinbelow for convenience:

o Adjudicating Authority has erred in holding that there has been no default in repayment of debt despite recording a finding that no amounts have been tendered in terms of the Settlement Agreement.

o Adjudicating Authority has erred in ignoring the fact that even though there was a recovery of around INR 13 crores which was deposited in the account of Appellant after selling the shares, which were pledged by 12 assigned borrowers, the receivables are not connected with the Corporate Debtor and have been appropriated against the outstanding dues under the Settlement Agreement in accordance with the prevalent law. No monies whatsoever have been deposited in the escrow account opened in terms of the Settlement Agreement.

o Where the Debtors has omitted to indicate and there is no other circumstances indicate which debt payment/recovery is to apply to, the creditor may apply the monies recovered to any debt actually and lawfully payable to it by the Debtors at his discretion.

o Corporate Debtor does not have the necessary capacity or intention to honour its commitments under the Settlement Agreement and has defaulted in its obligations to repay said amounts.

o Adjudicating Authority has erred in rejecting the underlying petition despite there being clear default of debt due, and in absence of any award/receivables in favour of the Corporate Debtor.

We note that the Respondents have chosen not to appear before the Appellate Tribunal and file their reply. We extract their defence from the materials placed on record in the form of their reply and additional reply herein after.

Limitation: The application filed by the financial creditor is liable to be dismissed in view of the fact that no application under Section 7 of the IBC Code can lie beyond the limitation period. In B.K. Educational Services Private Limited v Parag Gupta and Associates, Civil Appeal No. 23988 of 2017, since the Limitation Act is applicable to applications filed under Sections 7 and 9 of the Code from the inception of the Code, Article 137 of the Limitation Act gets attracted. "The right to sue", therefore, accrues when a default occurs. If the default has occurred over three years prior to the date of filing of the application, the application would be barred under Section 137 of the Limitation Act. In the present case the limitation expired on 24th June 2019 while the present application was filed on and listed before this Hon'ble Tribunal. Curiously, the petition fails to address the limitation period, a pre-requisite post the B.K. Educational Services judgement. The Financial Creditor in Para 9 of the Application, vide a letter dated 24^th June 2016, the Financial Creditor terminated the Loan Agreement in terms of Clause 5.3 calling upon the Respondent to pay the alleged loan amount, failing which, it would be constrained to enforce and liquidate the Pledged Shares as per the Loan documentation entered into between the parties.

Relinquished rights cannot be claimed: In terms of the Agreements dates 21st July 2015 read with the Demand Letter dated 24th June 2016, the Financial Creditor chose to exercise one of the two rights i.e. (i) to be prepaid some alleged loan amount or in event of alleged default (ii) liquidate pledged shares. On 29th June 2016, the Financial Creditor choose the latter options and invoked the pledged shares. The Financial Creditor has consciously chosen to forfeit the right of claiming the alleged debt and instead invoked the pledge.

Respondent was a 'Financial Service Provider': No application under Section 7 of the IBC Code lies against a 'Financial service provider'. Further, the conditions precedent for maintaining an application under Section 7 of the IBC, 2016 are not being met as demonstrated and established. The Respondent namely Strategic Credit Capital Private Limited is a Private Company previously known as Kalinga Finlease Private Limited, was incorporated on 17th May 1996. The Respondent was registered as an NBFC (Category B) by the Reserve Bank of India (' RBI') vide Certificate of Registration ('CoR') number B-14.02569 dated February 26, 2002. After the Respondent's name changed from Kalinga Finlease Private Limited to Strategic Credit Capital Private Limited, the Ministry of Corporate Affairs issued a fresh certificate of incorporation and RBI also issued a fresh CoR in the changed name of the Respondent dated April 30, 2007. Respondent was engaged in providing financial services for the last 23 years. On 27th February 2018 the Board of Directors of the Respondent company decided to discontinue the NBFC activities and accordingly surrender the CoR. On 28th February, 2018 the Respondent filed an application before the RBI seeking voluntary surrender of its CoR of its NBFC license. It is pertinent to mention that on February 25, 2019, the RBI, in exercise of powers conferred on the RBI under Section 45-IA (6) of the Reserve Bank of India Act, 1934, cancelled the Certificate of Registration of various companies including the Respondent. Accordingly, the Respondent's CoR stood cancelled on January 25, 2019 and the Respondent since has not engaged in any services whatsoever. Thus, the Respondent is not a Corporate Debtor and accordingly excluded from the purview of the IBC regime and the Corporate Creditor.

Transaction not covered under the definition of 'claim': The dispute/ alleged debt does not fall under the definition of "claim" as defined under Section 3 (6) of the IBC. The definition of claim is as given hereafter:

The transaction is a part of a structured debt servicing agreement between the respondent and the Corporate Creditor. It was part of a larger agreement which included financing to the sister company, Perpetual. It was the lawyers of the Corporate Creditor who had structured this 'complicated transaction' with inducements for the respondent and eventually the respondent learned that this was part of a complicated scheme to pass on fraudulent loans to the Respondent and the Respondent terminated the agreement.

Deep and complex dispute: Respondent claims that only one limb of the entire complex transaction has been narrated while leaving out the essential facts. The Respondent company had entered into a structured servicing financial service arrangement with the Corporate Creditor on or about July of 2015. This inter-alia involved Assignment Agreements in terms whereof the Corporate Creditor had unconditionally and irrevocably sold, transferred and assigned the loans granted by the Corporate Creditor to certain borrowers to the Respondent for a fixed amount. The said twelve loans were sold to the Respondent on the fraudulent misrepresentation of being arms-length transactions but in reality, the said loans turned out be related party loans which were a fund siphoning scheme adopted by the Corporate Creditor. The Respondent contemporaneously had entered into a Term Loan Agreement with one Nishu Finlease Private Limited which was a related party of the Corporate Creditor on July 21, 2015 seeking credit facility for the purposes of funding the structured financial services to be provided to the Corporate Creditor. The manipulation scheme adopted by the Corporate Creditor involved the 12 borrowing companies to serially trade shares of one 'ABG Shipyard Limited' in order to inflate the price of shares of ABG Shipyard, enabling ABG Shipyard to borrow upto Rs. 16000 Crores from various Lenders. ABG Shipyard, a company duly incorporated under the Companies Act, 1956, was a related party entity of the petitioner wherein the petitioner would purchase shares to inflate the value of ABG Shipyard Limited. ABG Shipyard having become a debt-ridden company was one of the first entities to have been identified by the RBI for reference to the bankruptcy court for resolution or liquidation (RBI's first list of 12 companies). When the Respondent discovered this fraud, numerous litigations ensued between the parties which resulted in a final all-encompassing suit filed in the Hon'ble High Court of Mumbai, notably, Eleos Finvestia Acquisition Trust and Ors. vs. Religare Finvest Ltd. & Ors. COMSL/254/2017 (hereinafter Elios Suit). Upon the filing of the Eleos Suit, there was an immediate move for settlement, which was captured in the Settlement Deed dated July 1, 2017. The loan from Nishu Finlease. Private Limited was part of the original transaction structure, which was a non-recourse loan as per the committed understandings at the time. In any event, the loan from Nishu Finlease Private Limited was used to secure shares of ABG Shipyard and when the transaction unravelled the Nishu Finlease Private Limited loan was acquired by the Corporate Creditor and the shares stood invoked. The Settlement Agreement of July, 2017 captures the Nishu Finlease Private Limited loan as being part of the Settlement Agreement. The Settlement Agreement accomplished the following objectives:

Financial Creditor is not covered under the definition of Section 5 (7): At the time the settlement was entered into, the Financial Creditor accepted that the falsities and reduced the repayment of the obligations on a "best efforts" basis. At best upon the execution of the settlement agreement, the respondent became an operational creditor and thus the Respondent is not a Corporate Debtor. On June 26, 2016 the Respondent transferred all its obligations and rights to Eleos Trust. This transfer was accepted by the petitioner as part of the settlement agreement and any obligations arising later were assumed by the Trust and accepted by the Corporate Creditor. The above understanding is evidenced by the pass through certificate' issued by the Eleos Trust and accepted by the Corporate Creditor for settlement of all obligations and reducing them to receipts from the pass through certificate. It is pertinent to point out that the Corporate Creditor had recognised the transfer by the Respondent of all its rights and in favour of Eleos Finvestia Acquisition Trust. The Eleos Finvestia Acquisition Trust had issued a pass-through certificate to the Corporate Creditor for the settlement of all obligations and limited the obligation to receiving 50% of the net proceeds.

Failure by the Financial Creditor to meet its obligations: There are other suits/ litigations pending before various courts between the parties which involve the rights and obligations backing the financial services provided by the Respondent to the Corporate Creditor including assignment of the 'Religare' brand to the Respondent as security offered by the Corporate Creditor and its related entities for services to be rendered by the Respondent. The Corporate Creditor instead of complying with the terms and conditions of the Settlement Agreement dated 01 July 2017 interfered with the Respondent's rights to recover the loans as ensconced under the Settlement Agreement. To resolve the dispute between the parties which includes the alleged debt under this petition, a suit has been filed in Saket district court titled Strategic Credit Capital Private Limited & Ors. vs. Religare Finvest Limited & Anr. CS DJ No. 384 of 2018, in terms of the dispute resolution clause of the said Settlement Agreement which supersedes all agreements entered into between the parties as mentioned in the Settlement Agreement The suit filed in Saket inter-alia seeks the following:

Thus, it is claimed that the instant petition lacks any cause of action including surviving cause of action under the IBC, 2016.

We have heard the counsel of the appellant and also perused the material placed on record. We note that the respondents have not entered their appearance despite multiple opportunities and despite even substituted service. We had to peruse the material placed before the adjudicating authority – which included the reply of CD, additional reply of CD, rejoinder of FC and reply of FC on additional affidavit of the CD -which was filed along with the appeal paper book.

Brief question before us is whether under the circumstances, Section 7 petition under the Code is admissible in this case or not. There are following ancillary questions which we need to answer:

o Whether application under section 7 was hit by limitation or not

o Whether FC had relinquished any rights

o Whether Respondent-CD is a ‘Financial Service Provider'

o Whether the transactions are covered under the definition of 'claim' or not

o Whether Dispute is of any relevance or not

The respondent had claimed that the application under section 7 was hit by limitation as it was filed beyond 3 years and Article 137 of the Limitation Act gets attracted. "The right to sue", therefore, accrues when a default occurs. If the default has occurred over three years prior to the date of filing of the application, the application would be barred under Section 137 of the Limitation Act. In the present case the limitation expired on 24th June 2019 while the present application was filed and listed before this Hon'ble Tribunal. We find that the present petition was filed before this Hon'ble Tribunal on June 12, 2019. Assuming that the period of limitation for filing the present petition was to commence from the date of the issuance of the Termination cum Recall Notice dated June 24, 2016, the present petition has been filed within the prescribed period of limitation of three years. Furthermore, the Corporate Debtor had acknowledged its liability to repay the outstanding borrowing of ₹45 Crore in the Settlement Agreement that was executed by the Financial Creditor and the Corporate Debtor on July 1, 2017. Recitals of the Settlement Agreement as also Part C of Schedule C thereof categorically states that the sum of ₹45,00,00,000/-was due and payable as on July 1, 2017 from Corporate Debtor to the Financial Creditor. Thus, the argument relating to limitation stood rejected. In any case the Respondent has chosen not to appear and agitate his case. Thus in B.K. Educational Services Private Limited (supra) will not be of assistance to the Respondent in this case.

Another argument which was canvassed by the Respondent, was that Relinquished rights cannot be claimed as in terms of the Agreements dated 21^st July 2015 read with the Demand Letter dated 24th June 2016, the Financial Creditor chose to exercise one of the two rights i.e. (i) to be prepaid some alleged loan amount or in event of alleged default (ii) liquidate pledged shares. On 29th June 2016, the Financial Creditor choose the latter option and invoked the pledged shares. The Financial Creditor has consciously chosen to forfeit the right of claiming the alleged debt and instead invoked the pledge. From the materials on records we find that Financial Creditor had not relinquished its right to claim the outstanding loan of ₹45 Crore and interest thereof from the Corporate Debtor as alleged. Moreover, under the terms of the Loan Agreement read with the Sale Agreement, the Financial Creditor was entitled to demand the payment of the outstanding loan amount and to also enforce its security interest with regard to the security provided for the outstanding loan amount, being the pledge created over the pledged shares. We note that the two remedies available to the Financial Creditor were in addition to and not in derogation of or mutually exclusive or as alternative to each other. Moreover, the shares of ABG Shipyard Ltd being held by the Financial Creditor as beneficiaries in their demat account pursuant to the Sale Agreement executed between the Financial Creditor and NFPL. were pledged as security to the Loan Agreement, and that ABG Shipyards has been under corporate insolvency resolution process, and consequently, the pledged shares of the said company could not be transferred and were otherwise of no marketable value. Thus, we find this argument of the Respondent also of no relevance in deciding the case of debt and default.

Respondent claims itself to be ‘Financial Service Provider' and thus claims exempted to be a corporate debtor per IBC provisions. In its rejoinder FC denied that the Corporate Debtor is a Financial Service Provider and thus was not exempted from the definition of corporate debtor as defined under the Insolvency and Bankruptcy Code, 2016 ("IBC").

We find that on the date of filing of Section 7 application; Respondent is not an NBFC but on the date of alleged financial transactions the respondent was very much an NBFC as per the material placed on record. Section 3(7) read with 3(8) of the Code doesn’t allow the Respondent-Strategic, which was FSP at the relevant point of time, to be considered under Section 7 proceedings.

Countering the arguments for its claim to be a FSP, the FC-Appellant has in its rejoinder before the AA canvassed that the definition of 'financial service provider' as defined in Section 3(17) of the IBC has two necessary ingredients (1) the entity should be providing 'financial services', and (ii) the entity shall be authorized to do so by a 'financial sector regulator'. As such, for an entity to be exempted from the definition of corporate debtor, it has to qualify both of these requirements as on the date of filing of the petition under Section 7 of the IBC. However, the Respondent-Corporate Debtor in the present case has not only admitted but also filed documentary evidence to establish that it is presently (and was not on the date of institution of the present petition) neither in the business of providing any financial services (as defined under Section 3(16) of the IBC) nor does it have a valid and subsisting registration or license Issued by a financial sector regulator, including the Reserve Bank of India, for carrying out such financial services as on the date of filing of the institution of the present petition to qualify within the meaning of Section 3(17) of the IBC as 'financial service provider'. It further argues that, merely on the ground that the Corporate Debtor was holding a certificate of registration of NBFC at the time of the availing of the loan from NFPL does not exclude it from the definition of corporate debtor. We do not find the arguments of the appellant financial creditor to be convincing and we hold that as on the date of financial transactions the respondent was financial service provider and the Section 7 proceedings under the Code were not permissible on it and for this sole reason itself the appeal could be dismissed.

Respondent also canvasses an argument that the transaction between the parties is not covered under the definition of 'claim'. Respondent claims that the “dispute/ alleged debt” does not fall under the definition of "claim" as defined under Section 3 (6) of the IBC. The definition of claim is as given hereafter:

Respondent claims that the transactions were part of a structured debt servicing agreement between the respondent and the Corporate Creditor. It was part of a larger agreement which included financing to the sister company, Perpetual and it was the lawyers of the FC who had structured this 'complicated transaction' with inducements for the respondent and eventually the respondent learned that this was part of a complicated scheme to pass on fraudulent loans to the Respondent and therefore the Respondent terminated the agreement. Respondent has also produced the copy of the mail exchange between various stakeholders demonstrating that the proposed complex transaction was initiated and followed through by the lawyers of the Corporate Creditor.

A related argument canvassed by the Respondent was that there is a Deep and complex dispute. The Respondent company had entered into a structured servicing financial service arrangement with the Corporate Creditor on or about July of 2015. This inter-alia involved Assignment Agreements in terms whereof the Corporate Creditor had unconditionally and irrevocably sold, transferred and assigned the loans granted by the Corporate Creditor to certain borrowers to the Respondent for a fixed amount. The said twelve loans were sold to the Respondent on the fraudulent misrepresentation of being arms-length transactions but in reality, the said loans turned out be related party loans which were a fund siphoning scheme adopted by the Corporate Creditor. The Respondent contemporaneously had entered into a Term Loan Agreement with one Nishu Finlease Private Limited - which was a related party of the Corporate Creditor on July 21, 2015 seeking credit facility for the purposes of funding the structured financial services to be provided to the Corporate Creditor. Respondent claims that the manipulation scheme adopted by the Corporate Creditor involved the 12 borrowing companies to serially trade shares of one 'ABG Shipyard Limited' in order to inflate the price of shares of ABG Shipyard, enabling ABG Shipyard to borrow upto ₹16000 Crores from various Lenders. ABG Shipyard, a company duly incorporated under the Companies Act, 1956, was a related party entity of the petitioner wherein the petitioner would purchase shares to inflate the value of ABG Shipyard Limited. ABG Shipyard having become a debt-ridden company was one of the first entities to have been identified by the RBI for reference to the bankruptcy court for resolution or liquidation (RBI's first list of 12 companies). Respondent claims that when it discovered this fraud, numerous litigations ensued between the parties which resulted in a final all-encompassing suit filed in the Hon'ble High Court of Mumbai, notably, Eleos Finvestia Acquisition Trust and Ors. vs. Religare Finvest Ltd. & Ors. COMSL/254/2017 (hereinafter Elios Suit). Upon the filing of the Eleos Suit, there was an immediate move for settlement, which was captured in the Settlement Deed dated July 1, 2017. The loan from Nishu Finlease. Private Limited was part of the original transaction structure, which was a non-recourse loan as per the committed understandings at the time. In any event, the loan from Nishu Finlease Private Limited was used to secure shares of ABG Shipyard and when the transaction unravelled the Nishu Finlease Private Limited loan was acquired by the Corporate Creditor and the shares stood invoked. The Settlement Agreement of July, 2017 captures the Nishu Finlease Private Limited loan as being part of the Settlement Agreement. The Settlement Agreement accomplished the following objectives:

o Gave the Respondent a right to recover/ earn up to Rs 400 Crores [50% of the ₹800 Crores recovery], which was on a best efforts basis

o settled all litigations against the Respondent and its related parties

o obligated the Corporate Creditor-FC to provide complete support to the Respondent for recovery of the originals loans

Basis above background the Adjudicating Authority had come to the following conclusion:

[emphasis supplied]

We find that a loan was taken by the Respondent [who was FSP] from a third-party lender [Nishu-NFPL]. Subsequently the outstanding loan amount and accrued interest thereon in terms of the Loan Agreement between NFPL and Respondent was purchased by the Financial Creditor. We note that in a petition under Section 7 of the IBC the Adjudicating Authority has to determine whether the Respondent [who was FSP] owes financial debt to the Financial Creditor, and whether the same is not paid and that consequently there exist default on part of the Corporate Debtor. In the present background when the Corporate Debtor itself is a Financial Service Provider and thus Section 7 petition itself is not maintainable and therefore other questions are only academic. But we are delving into other issues for sake of completeness.

Another ground which has been raised by the respondent is that the present petition is part of a deep or complex dispute. We note that unlike Section 9 of the IBC, dispute is of no relevance to a petition filed under Section 7 of the IBC. Consequently, presence of any alleged dispute between the parties has no bearing to the present petition filed under Section 7 of the IBC but in this case the petition itself is not maintainable as the Respondent at the relevant point of time was a FSP.

But what is the so called dispute? In the present case it is the case of Religare Finvest Limited – Financial Creditor that the loan agreement of dated 21.07.2015 read with the sale agreement dated 16.06.2016 constituted a valid financial debt which was disbursed against consideration for the time value of money and was supported by a pledge of shares. We note that the Appellant-FC had also assigned 12 loan accounts to the Respondent for recoveries vide assignment dated 25.07.2015. Later on, Appellant – Financial Creditor – Religare Finvest Limited recalled the loan of ₹40 Crores by issuing a demand notice on 24.06.2016, which is still in default. Further, there is a settlement agreement dated 01.07.2017 which was to settle multifarious litigations, which had following parties:

And as per the Settlement Terms, as per the settlement, 3 liabilities were identified against the Respondent and Perpetual Capital:

o Against Perpetual – ₹228.75 Cr. [Recital B @Pg.120, Schedule C Part C @Pg.138] – Transaction 1 as noted herein earlier.

o Against Respondent ₹40 Cr. with 12% interest payable by Respondent to the Appellant. [Recital C @Pg.120, Schedule C Part B @Pg.139] – Transaction 2 as noted herein earlier {Loan which was assigned by Nishu Finlease to Appellant}

It is the case of the Appellant that the settlement agreement dated 01.07.2017 does not extinguish or waive the original debt and at best is a repayment arrangement thereby implying that the breach of settlement agreement revives the original cause of action. The Appellant also relies on clause 3.7 in the settlement agreement, which imposes a continuing obligation to repay the outstanding debt. It claims that since no payments have been made either under the loan agreement or under the settlement agreement despite express acknowledgment of liability obligation. Basis the provisions under the Code that “(5) Where the Adjudicating Authority is satisfied that--(a) a default has occurred and the application under sub-section (2) is complete, and there is no disciplinary proceedings pending against the proposed resolution professional, it may, by order, admit such application” and settled judicial precedents, we could conclude that this is a fit case of admission of debt and default.

To add strength to the arguments of the Appellant we find that in the related case under the same settlement agreement, on the petition of the FC against Perpetual, which is also one of the parties in the settlement agreement, NCLT Mumbai Bench passed admission order^{11.Order dated 12.08.2022 passed in Religare Finvest Limited v. Perpetual Capital and Servicing Private Limited, CP (IB) No. 3640/MB/C-1/2019} against perpetual for defaulting. The relevant portion of the order is as follows:

It is argued by the FC that this is also a fit case for Section 7 admission. But the Adjudicating Authority had not admitted the Section 7 petition against the Corporate Debtor – Strategic while deciding this case and had concluded as follows:

Adjudicating Authority has gone into the background and finds that loan claimed by the Financial Creditor is subsumed into the settlement agreement dated 01.07.2017 and it is not a stand-alone liability. The terms of settlement are all encompassing on its various terms. Therefore, the question of debt and default in a subsisting agreement which is alive even as of today would not partake the character of debt. It has come to a conclusion that it is a recovery process agreement, the question of default as pleaded by the petitioner does not arise.

We have also perused the materials placed on record, and we find this loan to be in part C of the Schedule of the settlement agreement dated 01.07.2017. When we look into the details of the settlement agreement, we find at Clause 3.4 that the principal parties which include both perpetual and Strategic Credit Capital Private Limited -were to procure repayment recovery of all amounts dues by / borrowers and were to be deposited in the escrow account. It was also agreed to procure on best effort basis at least ₹400 Crores within a period of 9 months from the execution paid. Also, Clause 3.7 provides that the obligations of the principal parties to pay the second parties dues shall be a continuing obligation and the Principal Parties shall not be discharged of their obligations to Second Party until the entire Second Party Dues are paid in full, including by way of collections in the Escrow. And the appellant relies very heavily upon this clause 3.7. While clause 3.7 is relevant but when we peruse the background in which the “debt” has been created and the settlement agreement between the parties, it raises many unanswered questions for it to fall in the category of debt. Most importantly, the Respondent being a Financial Service Provider (FSP) shuts the case being non-maintainable.

As noted herein earlier. there is a fundamental question of the maintainability of the Section 7 petition. The Corporate Debtor had also provided a detailed account of the genesis of the debt, which is available on the material placed on record and at the relevant time its status as NBFC. Briefly speaking it was pointed out by the Respondent that the Financial Creditor had unconditionally and irrecoverably sold, transferred and assigned the loans granted to certain borrowers to the Respondent - SSCPL and Perpetual. Respondent claims that the loans granted to certain borrowers were sold to SSCPL as per the settlement agreement dated 01.07.2017. It also claims that the loans sold out turned out to be the related party’s transaction and a funds siphoning scheme adopted by the Financial Creditor. Upon unearthing the alleged fraud, multiple litigations ensued between the parties and which culminated into a suit before Hon’ble Bombay High Court Eleos Finvestia Acquisition Trust and in the above suit a settlement was arrived at and hence settlement agreement dated 01.07.2017 was entered into and enforced.

The Respondent also claims that when the settlement agreement was entered into between the Financial Creditor and the Applicant had accepted and reduced the repayment of the obligations of the respondent on a best-efforts basis, it implies that the Respondent had to act in good faith and take effective steps to procure repayment / recovery, all amounts due by/from the borrowers. It is not the case of the Respondent that it has not breached its obligation of creating an escrow account, but it made best efforts to collect the outstanding amount from the borrowers and for that reason it cannot be held liable for breach. This is particularly important in the context of the background of the genesis of the loan, which has been described in detail by the Respondent. We find strength in the arguments that the funding of the Corporate Debtor through Nishu Finlease Private Limited was mere optics. The loans as well as the underlying security were both controlled by Financial Creditor itself. Financial Creditor was controlling the investments being made by the Corporate Debtor in the shares of ABG Shipyard Pvt. Ltd. It is brought to our notice that the central purpose of this transaction structure was consolidation of the shares of ABG Shipyard Pvt. Ltd. in order to force a settlement with the ABG Shipyard Pvt. Ltd.

In normal course when a clear debt was involved and there was a default, one could have considered the admission under Section 7. But this case appears to be a deep and complicated set of transactions which have been orchestrated by collusion of the FC (claimed by FC to be by erstwhile management) and the Respondent [FSP]. Admittedly, Respondent [FSP] was induced by the fees for the transactions. On one side there is acceptance for fees and on the other side there is deep and complicated history of creation of debt. We find tacit understanding of both sides. FC cannot be given shelter of wrong-doings of erstwhile management and the Respondent [FSP] was also equally at fault when they allowed their company to be used (abused) by the FC. It is not a clean case of loan and creation of debt and default. Without going into the details, we find that if there was a direct linkage of loan between the Financial Creditor and the Corporate Debtor, it could have been explicitly worked out in a bilateral settlement agreement. But the settlement which is relied upon by the Financial Creditor is a convoluted route to settle and is not helpful for Section 7 admission as debt and default is not clearly established.

We have gone into the details of Part-IV in the Section 7 petition which also provides the background in which a loan has been bought by the Financial Creditor from Nishu Finlease Private Limited. Part IV is extracted below:

In the background of the above case as noted herein earlier, we find that this is a complicated settlement which had been willingly entered into between the Financial Creditor and various borrowers in which the Corporate Debtor [FSP] is also one of the parties. The matter has been examined in detail by the Adjudicating Authority and it has come out with the finding that:

[Emphasis supplied]

In the above noted facts and circumstances, we find that the petition itself is not maintainable as the Respondent, being a NBFC, is a Financial Service Provider (FSP) and the impugned transactions had taken place when the Respondent was NBFC. Moreover, there are deep and complicated transactions which are disputed. Furthermore, both parties willingly entered into such transactions, despite being fully aware that it is for purchase of share of ABG Shipyards. Furthermore, Respondent was being controlled by FC and it willingly entered into such transactions. We find both parties were colluding with each other and therefore we are not convinced to allow the admission of Section 7 petition. We also note that Section 7 petition against cannot be filed against Corporate Debtor being a Financial Service Provider. Accordingly, the appeal filed by FC is not maintainable and is liable to be dismissed. Apart from non-maintainability there are other counts also – noted by us herein earlier, which don’t allow admission of Section 7 petition.

Therefore, in the facts and circumstances of the case we find sufficient grounds to dismiss the Appeal and accordingly the Appeal is dismissed. All related IAs are also dismissed. No order as to costs.