State Bank Of India vs Aarya Industrial Products Pvt Ltd.

Virendra Kumar Gupta, Member (Technical)

This application under Sec.7 of the Insolvency & Bankruptcy Code, 2016 read with Rule 4 of the Insolvency & Bankruptcy (Application to Adjudicating Authority) Rules, 2016 has been filed by the financial creditor, viz., State Bank of India to initiate corporate insolvency resolution process against the corporate debtor, viz., Aarya Industrial Products Pvt. Ltd. for the reason that the corporate debtor has defaulted in payment of debt due and payable by the corporate debtor to the financial creditor.

The amount of default has been claimed as Rs.117,68,92,706.55 as on 30/9/2018 and the date of default has been stated as 9/3/2015 on which the account of the corporate debtor was termed as non-performing asset.

The facts, in brief, are that the corporate debtor was incorporated in the year 1995 and was carrying on business of trading in industrial chemical etc. Credit facilities/loans were granted by the financial creditor to the corporate debtor beginning from in the year 2002. Credit facilities limits were also revised upwards from time to time. Various documents were executed between the parties to this petition and loans were also secured by way of obtaining guarantees. Last loan was sanctioned in June 2013. Financial creditor issued demand letter on 9/2/2015 requesting the corporate debtor to pay the debt and also issued notice under Sec.13(2) of Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act, 2002) on 20/2/2015.

Ld. Counsel appearing on behalf of the financial creditor submitted that the facts relating to disbursement of loan and non-payment thereof along with interest in respect of demand being made by the financial creditor were not in dispute. Hence, as per provision of Insolvency & Bankruptcy Code, 2016 the petition was liable to be admitted.

Ld. Counsel also submitted that the debt was not barred by limitation as application before the Debts Recovery Tribunal had been filed on 18/3/2015 which was well within the limitation period from the date of default, being 9/12/2014.

Ld. Counsel appearing on behalf of the corporate debtor contended that there were disputes between the corporate debtor and the financial creditor on account of action of the financial creditor resulting into financial constraints to the corporate debtor and cancellation of contracts resulting into substantial business loss to the corporate debtor.

Ld. Counsel further stated that as against the claim of the financial creditor, the corporate debtor had claimed damages and which were roughly Rs.226 crores. Corporate debtor further submitted that a civil suit had already been filed for recovery of such damages and which was pending before the civil court. Accordingly, Ld. Counsel contended that if that suit was decreed in favour of the corporate debtor then the amount of claim would become negative and being less than Rs.1 lakh, hence the petition filed under Sec.7 Insolvency & Bankruptcy Code, 2016 was not maintainable.

We have considered submissions of both sides and have also perused the materials on record.

Admittedly, the corporate debtor has obtained loans from the financial creditor. It is also not in dispute that there is a debt which is due and payable by the corporate debtor along with interest and corporate debtor has defaulted in making the payment thereof. As per Sec.4 of Insolvency & Bankruptcy Code, 2016 insolvency and liquidation of corporate debtor can be triggered when the amount of default is Rs.1 lakh or more. As on date the amount of default is much higher than this amount. Sec.4 simplicitor states that there should be a default. The term default as defined in Sec.3(12) means non-payment of debt when whole or any part or instalment of debt has become due and payable and is not paid by the debtor or the corporate debtor, as the case may. Thus, even non payment of any part of the debt also results into default. The term "debt" as per Sec.3(11) means a liability or obligation in respect of a claim which is due from any person and includes the financial debt and operational debt. In Sec.3(11) the obligation or liability is in respect of a claim. The term claim has been defined in Sec.3(6) as a right to payment of creditor. On cumulative reading of Sec.3(11) and Sec.3(6) it is apparent that right to payment of debt is to receive payment from any person and such debt should be of the nature of either financial debt or operational debt.

Having regard to this legal position, it is seen that the corporate debtor, in the present case has committed default in payment of a financial debt which has been disbursed by the financial creditor to the corporate debtor over a period of time. Further, the debt is not barred by limitation, in the facts and circumstances of the case. Hence, prima facie the CIRP can be initiated.

Now, the corporate debtor submits that it had counter claim of Rs.226 crores against the financial creditor. A civil suit in that regard had been filed and which is pending for disposal. Hence, instead of corporate debtor being liable to pay financial debt to the financial creditor, it is the financial creditor who would be liable to pay to the corporate debtor ultimately, hence, these proceedings had to be dismissed. This claim of the corporate debtor if examined in the light of discussion made herein before, has got no legs to stand for the simple reason that it is a claim which has been slapped by the corporate debtor not for any debt being payable by the financial creditor as a consequence of any transaction between the financial creditor and the corporate debtor giving rise to a liability or obligation on the part of the financial creditor to make payment of a debt as claims in the suit are far altogether different reasons. Further, the right to claim set off/adjustment of a counter claim is provided under Insolvency & Bankruptcy Code, 2016 during CIRP. Such counter claims have to be made/disclosed in Form B and Form C at the relevant column by the operational creditors/financial creditors respectively. As per column 8 and column 7 of these Forms "details of mutual credit, mutual debts or other mutual dealings between the corporate debtor and the creditor which may be set off against the claim" be furnished. However, such set off is permissible during the course of Corporate Insolvency Resolution Process after admission of petition filed by the financial creditor/operational creditor under Sec. 7 and 9 respectively which means that the legislature has prescribed the methodology of set off of counter claim only after admission of petition under Sec.7 and 9 of Insolvency & Bankruptcy Code, 2016 and, therefore, we hold that counter claim can not be taken into consideration for determining the threshold limit of default for initiating Corporate Insolvency Resolution Process under Sec.7 or Sec.9 of Insolvency & Bankruptcy Code, 2016.

The application filed by the financial creditor is complete in all respects. The financial creditor has also proposed the name of IRP which we approve. We admit this application and order as under: -

List the matter on 21/10/2019 for the filing of the progress report.

Certified copy of the order may be issued to all the concerned parties, if applied for, upon compliance with all requisite formalities.