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Judgment
ORDER
I. This Company Petition is filed by Shri. Dev Deepak Doshi (hereinafter referred as “Petitioner/Financial Creditor”) on 20.07.2024 seeking to initiate Corporate Insolvency Resolution Process (hereinafter referred as “CIRP”) against M/s. Dura PUF (Silvassa) Private Limited (hereinafter called “Respondent/Corporate Debtor”) by invoking the provisions of Section 7 of the Insolvency and Bankruptcy code, 2016 (hereinafter called “Code”) read with Rule 4 of Insolvency & Bankruptcy (Application to Adjudicating Authority) Rules, 2016, for a Default amount of Rs. 2,15,98,097/-, with the date of default as stated to be 11.11.2023.
II. Facts and submissions of the Petitioner, in brief-
The Petitioner is an individual who was appointed as a Director of the Corporate Debtor on 01.08.2006, which is a company engaged in the business of Moulding Polyurethane Foam Flexible Poly Foam. The Petitioner, provided necessary Financial Assistance to the Respondent as and when needed.
The Petitioner advanced a Loan amount of ₹ 2,19,43,097/- to the Respondent in various tranches from 09.05.2016 till 18.05.2022. The said loan was repayable on Demand.
During February 2023, the Petitioner differed from other Directors on certain business decisions, resulting in the Petitioner being ousted from the regular business decisions of the Respondent. Due to oppressive acts by the other Directors, around October 2023, the Petitioner considered resigning from the position of Director of the Respondent.
On 11.11.2023, the Petitioner issued a Loan Recall Notice to the Respondent asking for repayment of the due amount, which was duly received by the Respondent. However, despite acknowledging the liability, the Respondent did not make any payment.
As the oppressive acts continued and the loan amount remained unpaid, the Petitioner resigned from directorship on 01.03.2024.
The Petitioner issued two further notices to the Respondent on 31.12.2023 and 05.03.2024 respectively, demanding repayment of the loan.
Despite issuance of notices, the Respondent failed to make any payment to the Petitioner, resulting in the filing of the present Petition under Section 7 of the Code.
As stated, the Financial Statements of the Respondent acknowledge that an amount of ₹ 2,15,98,097/- is due and payable as of 31.03.2023, and further records that the said loan is due and payable on Demand.
The Petitioner submits that the present Petition is maintainable and the CIRP should be initiated against the Respondent for the default committed for the claim amount of ₹ 2,15,98,097/-, which has been in default since 11.11.2023.
III. Facts and submissions of the Respondent, in brief-
The Respondent, at the outset, submits that the Petition filed by the Petitioner is non-maintainable and denies each and every averment, contention, submission and allegation made therein.
The alleged disbursals are from the year 2016 onwards whereas the petition is filed only in the year 2024, i.e., on 20.07.2024. Further, there is no written Agreement/Contract or document between the parties to demonstrate the nature of the transaction and the terms of the alleged financial debt. The Petitioner has failed to bring on record even a single document to demonstrate the alleged financial debt.
The Respondent is a close-knit family business and thus as and when money was required towards the working capital, the directors advanced funds from time to time as required. However, there is no date of repayment agreed between the parties.
It is submitted that the Petitioner has unilaterally determined the date of default as 11.11.2023 by issuance of a demand notice. A bare perusal of the said letter demonstrates that it was issued only on account of dissatisfaction of the Petitioner regarding working of the Respondent. The said letter is addressed to the Board of Directors and not to the Respondent per se. Mere receiving of a letter does not constitute a default in making payment to the Petitioner.
Furthermore, the claim made by the Petitioner is without any interest component added to it. Therefore, even if it is assumed that the alleged amount has been transferred by the Petitioner as Financial Assistance, the same is without any interest levied upon it, i.e., there is no time value for money and the same cannot be termed as Financial Debt in terms of Section 5(8) of the Code.
Consequently, the alleged debt does not have any commercial effect of borrowing as it is neither used by the Respondent towards its Working Capital Requirement nor taken from the Petitioner for meeting the Working Capital of the Respondent.
The Petitioner has failed to demonstrate the date of default of the alleged financial debt, and it is a settled position of law that without any date of default, actual default cannot be ascertained.
In continuation to the first letter, the Petitioner issued further reminder letters dated 31.12.2023 and 05.03.2024. The contents of these letters demonstrate that the Financial Creditor was aggrieved due to alleged oppressive acts of the other directors of the Respondent.
The present proceeding is a fit case for a Civil Trial and the terms, if any, can be concluded after such trial. However, the Petitioner has surpassed that stage and has exercised remedy under section 7 of the Code.
In light of the abovementioned submissions, the Respondent prays for the dismissal of the present Petition.
IV. Analysis and Findings-
We have heard the Ld. Counsels for the parties and perused the documents available on record. The case of the Petitioner is that he had advanced a loan amount of Rs. 2,19,43,097/- to the Respondent in various tranches from 09.05.2016 till 18.05.2022, which was repayable on demand. The Petitioner had issued a loan recall notice on 11.11.2023 demanding repayment of the outstanding amount of Rs. 2,15,98,097/-, followed by two reminder notices dated 31.12.2023 and 05.03.2024, but the Respondent failed to make any payment, thereby committing default. On the other hand, the case of the Respondent is that there is no written agreement to demonstrate the nature of the transaction and terms of the alleged financial debt, the amount advanced does not carry any interest component and therefore lacks the "time value of money" element required for a financial debt, the Financial Creditor has unilaterally determined the date of default, and the present proceedings are a fit case for civil trial rather than resolution under the Code.
The first issue that arises for consideration is whether there exists a 'Financial Debt' as defined under Section 5(8) of the Code. The Respondent has contended that there is no written agreement to evidence the loan transaction. However, it is pertinent to note that the existence of financial debt can be established through various other documents and records. In this regard, the Hon’ble NCLAT in the matter of Agarwal Polysacks Ltd. vs K. K. Agro Foods & Storage [Company Appeal (AT) (Insolvency) No.1126 of 2022] has held as under-
“11.We need to test the submission of learned counsel for the Respondent that the written financial contract is necessary for proving debt. A financial contract supported by financial statements as evidence of the debt is one of the documents contemplated in Regulation 8(2) but that is not exclusive requirement for proving existence of debt. Financial contract thus can very well be furnished to prove the financial debt but a plain reading of Regulation 8(2) indicate that it is not mandatory that existence of financial debt has to be proved by a financial contract. For example: records available with an information utility can very well be used as proof for existence of financial debt. Further, financial statements showing that the debt has not been paid is also one of the clauses in Regulation 8(2) by which existence of debt can be proved.”
Thus, in the present case, the bank statements of the Petitioner evidencing the transfer of funds to the Corporate Debtor in various tranches from 09.05.2016 till 18.05.2022, aggregating to Rs. 2,19,43,097/-, the ledger account maintained in the books of the Respondent in the name of the Petitioner, and most importantly, the Balance Sheet of the Respondent as on 31.03.2023, wherein the amount of Rs. 2,15,980.97/- as on 31.03.2023 is specifically acknowledged as "Long Term Borrowings" under the name of the Petitioner, substantiate the existence of financial debt.
Further, the categorization of the amount as "Long Term Borrowings" in the Balance Sheet of the Corporate Debtor is a clear acknowledgment of the debt and its nature. We are supported by the Hon’ble Supreme Court in Vidyasagar Prasad Vs. UCO Bank & Anr. [CIVIL APPEAL No. 1031 of 2022], wherein it was held as under-
“10.Having considered the specific facts and circumstances of this case, the Adjudicating Authority as well as the NCLAT have concurrently held that the entries in the balance sheets amount to clear acknowledgment of debt. We agree with the findings. Further, Note 3.4 appended to said balance sheet entry dated 31.03.2017mentions that “company has made certain defaults in the repayment of term loans and interest.” It further mentions of a continuing default. The entry also mentions long-term borrowings. The conclusions of NCLT and NCLAT that there is acknowledgment of debt are unimpeachable.”
The next contention of the Corporate Debtor is that the loan does not have any interest component and therefore cannot be termed as Financial Debt. It deserves to be appreciated that the definition of 'Financial Debt' under Section 5(8) of the Code does not mandate that interest must be charged on every loan/facility for it to qualify as a financial debt. The Hon’ble Supreme Court in Orator Marketing Pvt. Ltd. v. Samtex Desinz Pvt. Ltd. [Civil Appeal No. 2231 of 2021], has explicitly held as under-
“22.The NCLT and NCLAT have overlooked the words “if any” which could not have been intended to be otiose. ‘Financial debt’ means outstanding principal due in respect of a loan and would also include interest thereon, if any interest were payable thereon. If there is no interest payable on the loan, only the outstanding principal would qualify as a financial debt. Both NCLAT and NCLT have failed to notice clause(f) of Section 5(8), in terms whereof ‘financial debt’ includes any amount raised under any other transaction, having the commercial effect of borrowing.”
Furthermore, the Corporate Debtor has also contended that the said transaction has no time value of money. The phrase "time value of money" needs to be interpreted in the commercial context wherein even an interest-free loan, has commercial effect of borrowing. In this regard, we again rely on the decision of the Hon'ble Supreme Court in Orator Marketing case (Supra), wherein it was held that-
“29.In Jaypee Infratech Ltd. (supra), the debts in question were in the form of third-party security, given by the Corporate Debtor to secure loans and advances obtained a third party from the Respondent Lender and, therefore, held not to be a financial debt within the meaning of Section 5(8) of the IBC. There was no occasion for this Court to consider the status of a term loan advanced to meet the working capital requirements of the Corporate Debtor, which did not carry interest. Having regard to the Aims, Objects and Scheme of the IBC, there is no discernible reason, why a term loan to meet the financial requirements of a Corporate Debtor for its operation, which obviously has the commercial effect of borrowing, should be excluded from the purview of a financial debt.”
In the present case, it is the Corporate Debtor’s own admission, as clearly stated in the Written Notes, that “the Corporate Debtor is a close-knit family business and thus as and when money was required towards the working capital of the Corporate Debtor the directors advanced from time to time, funds as required by the corporate debtor.” Thus, it is established that the amounts advanced by the Financial Creditor (being a director) were utilized as working capital by the Corporate Debtor and therefore, has the commercial effect of borrowing and the same should not be excluded from the purview of a financial debt. Otherwise also, the fact that the amount is recorded as "Long Term Borrowings" in the Balance Sheet of the Corporate Debtor also establishes the commercial effect of borrowing.
Turning to the issue of default, Section 3(12) of the Code defines 'default' as the 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. In the present case, the Financial Creditor issued a loan recall notice dated 11.11.2023, which states that "I hereby call the company to repay the outstanding amount to the undersigned of 2,15,98,097.38 forthwith". The said notice was duly received by the Corporate Debtor, making the amount due and payable immediately. Despite the issuance of this notice and subsequent reminders dated 31.12.2023 and 05.03.2024, the Corporate Debtor failed to make any payment towards the loan amount. The NeSL record of default available on record further corroborates the existence of default.
In light of the aforementioned discussion, we are of the considered view that the Financial Creditor has fulfilled all the requirements under Section 7 of the Code. the Petitioner is a 'Financial Creditor' as defined under Section 5(7) of the Code, there exists a 'Financial Debt' of Rs. 2,15,98,097/- as defined under Section 5(8) of the Code, there is a 'Default' as defined under Section 3(12) of the Code. Further, the amount due in this case is above the threshold limit as stipulated under Section 4 (1) and the present Petition has been filed well within the limitation period. Thus, in view of the settled law wherein the Hon’ble Supreme Court in the matter of M/s. Innoventive Industries Ltd. vs. ICICI Bank 2018 (1) SCC 407, has been pleased to hold as under-
“28.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.”
Therefore, the present petition is hereby admitted by passing the following order:
ORDER
The above Company Petition No. 633/IBC/MB/2024 is hereby admitted and initiation of Corporate Insolvency Resolution Process (CIRP) is ordered against M/s. Dura PUF (Silvassa) Private Limited.
The Petitioner has proposed the name of CA Hans Raj Bhogra, having Registration No. IBBI/IPA-003/ICAI-N-00389/2021-2022/13940 and email Id: hansrajbhogra@gmail.com as Interim Resolution Professional. The Insolvency Professional as proposed by the Petitioner is hereby appointed as the IRP to conduct the Insolvency Resolution Process as mentioned under the Insolvency & Bankruptcy Code, 2016.
The Petitioner shall deposit an amount of Rs. 2 Lakhs towards the initial CIRP costs by way of a Demand Draft drawn in favour of the Interim Resolution Professional appointed herein, immediately upon communication of this Order. The IRP shall spend the above amount towards expenses and not towards fee till his fee is decided by CoC.
This Bench hereby declare moratorium in terms of Section 14 of Insolvency and Bankruptcy Code, 2016 prohibiting the institution of suits or continuation of pending suits or proceedings against the corporate debtor including execution of any judgment, decree or order in any court of law, tribunal, arbitration panel or other authority; transferring, encumbering, alienating or disposing of by the corporate debtor any of its assets or any legal right or beneficial interest therein; any action to foreclose, recover or enforce any security interest created by the corporate debtor in respect of its property including any action under the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002; the recovery of any property by an owner or lessor where such property is occupied by or in the possession of the Corporate Debtor.
The order of moratorium shall have effect from the date of pronouncement of this order till the completion of the corporate insolvency resolution process or until this Bench approves the resolution plan under sub-section (1) of section 31 or passes an order for liquidation of corporate debtor under section 33, as the case may be.
The supply of essential goods or services to the Corporate Debtor, if continuing, shall not be terminated or suspended or interrupted during moratorium period.
The provisions of sub-section (1) of Section 14 shall not apply to such transactions as may be notified by the Central Government in consultation with any financial sector regulator.
The public announcement of the corporate insolvency resolution process shall be made immediately as specified under section 13 of the Code.
During the CIRP period, the management of the Corporate Debtor will vest in the IRP/RP. The board of directors of the Corporate Debtor shall stand suspended. The members of the suspended board of directors and the employees of the Corporate Debtor shall provide all documents in their possession and furnish every information in their knowledge to the IRP/RP.
Registry shall send a copy of this order to the Registrar of Companies, Mumbai, for updating the Master Data of the Corporate Debtor.
Accordingly, C.P. No. 633/IBC/MB/2024 is admitted.
The Registry is hereby directed to communicate this order to both the parties and to IRP immediately.