State Bank Of India vs Hackbridge Hewittic And Easun Limited

By this Common Order, we dispose of the petition IBA/1178/2019 filed by State Bank of India (hereinafter referred to as “Petitioner/Financial Creditor”) under Section 7 of IBC, 2016 against the Respondent/Corporate Guarantor viz., Hackbridge Hewittic and Easun Limited and the application IA/2006/2024 filed by Respondent/Corporate Guarantor against the Petitioner under Section 65 of IBC, 2016.

This petition under section 7 read with Rule 4 of the Insolvency and Bankruptcy Code, 2016 (“IBC”) has been filed by State Bank of India against the Respondent/Corporate Guarantor, Hackbridge Hewittic and Easun Limited for initiating insolvency process against the Corporate Guarantor.

Part-I of the petition sets out the details of the Petitioner, State Bank of India. It has its office at SAMB-II, First Floor, TSRTC Bus Stand Complex, Kachiguda, Hyderabad. Part-II of the petition sets out the details of the Corporate Guarantor/Respondent. It was incorporated on 25.01.1956 with Paid-Up Capital of Rs.2,91,70,000. Its Registered Office is situated at 6/1A1 & 6/1B1, SY. No.6, Behind Escorts Ltd., Ernavur, Village, Tiruvottiyur, Chennai-600 019 within the jurisdiction of this Tribunal. In Part-III of the petition, the Petitioner has proposed the name of the IRP, Mr. Chinnam Poorna Chandra Rao having Registration No. IBBI/IPA-003/IPA-N000119/2017-18/11298.

Part-IV of the petition sets out the details of the amount of debt as Rs. 275,01,28,558.93 and date of default as 31.07.2019.

As per the averments made, the Company, Victory Electricals Limited (“VEL”) had availed loan facilities for Rs.134.88 Crores from the Financial Creditor. The Respondent viz., Hackbridge Hewittic and Easun Limited vide Declaration-cum-Indemnity dated 16.11.2009, stood as Guarantor to the loan facilities granted to the Principal Borrower for the repayment of loans. It undertook to repay all the loans with interest accrued to the Financial Creditor and declared that it along with the Principal Borrower is jointly and severally liable for the discharge of all such monies and dues payable to the Financial Creditor. The Respondent in order to secure repayment of financial facilities, also mortgaged a property/land measuring 6.14 acres in favour of the Principal Creditor recorded in the Memorandum of Extension of Mortgage by deposit of title deeds dated 31.12.2008. The Respondent also issued a letter to the Financial Creditor confirming the deposit of title deeds of the property by way of Equitable Mortgage. The Respondent also executed a Revival Letter dated 01.06.2012 acknowledging its liability for the repayment of all outstanding dues with interest etc. It, in its financial statement for the year 2015, also declared that it has given guarantee to the Financial Creditor for the financial facilities availed by the Principal Borrower. It created a charge with respect to the guarantee, hypothecation of fixed assets and mortgage of property with the Registrar of Companies, Tamil Nadu.

It is stated that the Principal Borrower defaulted in the payments and offered One-Time Settlement (“OTS”) vide a letter dated 18.05.2016 to the Financial Creditor for full and final settlement of its dues. The Financial Creditor vide letter dated 06.10.2016, approved the OTS for Rs.68.00 Crores subject to the terms and conditions which were accepted by the Principal Borrower and the Respondent. Subsequently, the Financial Creditor issued a letter dated 06.10.2016, in continuation of previously issued letter approving the OTS increasing the OTS amount from Rs.68.0 Crores to Rs.69.50 Crores. Since the Corporate Debtor failed to pay the OTS amount as per the agreed terms, the Financial Creditor vide letter dated 03.05.2018, cancelled the OTS. As on the date of filing of the petition i.e. 31.07.2019, an amount of Rs.275,01,28,558.93 became due.

It is stated that one of the creditors i.e. Cortia Manufacturing (India) Private Limited filed a petition under section 7 of IBC against the Principal Borrower vide CP/872/2018 which was admitted vide an order dated 10.04.2019. Later, the Principal Borrower was ordered to be liquidated vide an order dated 19.11.2019.

It is stated that another sister company of the Principal Borrower i.e. Victory Transformers and Switchgears Limited (VTSL) had also availed financial assistance from State Bank of India. The Respondent/Corporate Guarantor was also the Guarantor to the said loan. When Victory Transformers and Switchgears Limited defaulted in repayment of loan, CIRP was initiated against the Victory Transformers and Switchgears Ltd. on a petition filed by State Bank of India vide CP/1515/IB/2018 vide an order dated 01.05.2019.

The Petitioner has given the details of documents annexed with the petition as under:

 Copy of Letter regarding the grant of individual limits dated 01.06.2012 is

Copies of entries in a Bankers Book in accordance with the Bankers Book Evidence Act, 1891 (18 of 1891) under section 2A(a) & (b) under The Bankers' Books of Evidence Act 1891 is filed herewith as Annexure No. 26.

This petition has been filed on 06.09.2019.

On getting notice of the petition, the Respondent/Corporate Guarantor filed a reply stating that though it had rendered one liner reply statement on 29.11.2019 by not objecting to the CIRP but it is highly prejudiced under the changed circumstances since the RP/Liquidator failed to recover almost an amount of Rs.649,47,03,194/- of book debts, claims and actionable claims which were the receivables and assets of the Corporate Debtor and its Group Companies. It is alleged that the Respondent and its group companies have been dragged into the CIRP. with a fraudulent and malicious intent. It is stated that there was immense possibility of OTS dated 06.10.2016. The value of 8.99 acres of land (6.14 acres mortgaged by the Respondent/Corporate Guarantor + 2.850 cents belonging to the Respondent/Corporate Guarantor but not mortgaged) situated at Tiruvottiyur, Chennai is more than Rs.110.0 Crores but in the MOM dated 12.05.2022, the Liquidator stated the value of share of the Respondent as zero stating that it would not fetch any value to the Corporate Debtor.

It is stated that the Principal Borrower i.e. Victory Electricals Limited (VEL) was the manufacturer of distribution and power transformers. Its holding company, Victory Transformers and Switchgears Limited (VTSL) was also manufacturing distribution and power transformers etc. Both had been supplying transformers to the State Electricity Boards, DISCOMS, TRANSCOMS and other major power generating stations since 2001. The supply to these Bodies constituted almost 80% of the sales. They defaulted in payments one by one and VEL slipped into the category of NPA as per the RBI Guidelines. On 23.05.2016, the Bank conducted a Joint Lenders Meeting (JLM) and invited VEL. It was decided that an opportunity be given to the Principal Borrower, VEL and its holding company VTSL to submit an OTS proposal for approval independently by each bank. The Principal Borrower accordingly forwarded a proposal on 18.05.2016 for Rs.68.0 Crores. The Financial Creditor vide letter dated 06.10.2016, agreed for the OTS but for unknown reasons, parallely issued another ante-dated OTS approval for Rs.69.50 Crores. Against the OTS obligations, the Guarantor of the Corporate Debtor paid Rs.2,82,50,000/-. Out of the said amount, Rs.1,35,00,000/- was paid as advance for the sale of 8.99 acres of land at Tiruvottiyur, Chennai belonging to the Respondent with the approval and NOC from the Bank. It is stated that the Bank had sanctioned the OTS for both the companies i.e. VEL and VTSL. It is stated that the Respondent had not executed any security interest in respect of 2.85 acres of land and building thereon. Only plant and machinery were hypothecated along with the goods by an agreement dated 16.11.2009. The Petitioner had agreed that the bank has been having the original registered Sale Deed of 2.85 acres in favour the Respondent and it would release the the documents on part payment of OTS. It is stated that the original documents of lands were given by the Respondent to the bank for safe keeping and not for any other reason.

It is stated that the Respondent made several endeavours to identify potential buyers for sale of land measuring 6.14 acres and plant & machinery for an indicated amount of Rs.52.50 Crores in the OTS sanction letter dated 06.10.2016 for releasing the mortgage and original title deeds of 6.14 acres of land but the bank did not co-operate nor provided the NOC. It is stated that one M/s. Sri Lakshmi Consultants had shown interest to acquire the whole land belonging to the Respondent. It had discussions with the bank. It wanted to convert the land from industrial red zone to residential zone which the Bank agreed. The bank agreed for the sale of the entire land for a consideration of Rs.50.0 Crores to Sri Lakshmi Consultants vide offer dated 11.10.2017 and also received the sale advance of Rs.1,35,00,000/- and permitted the Respondent to divide the land into marketable components vide letter dated 22.11.2017. It is stated that the Respondent and the prospective buyer then approached Chennai Metropolitan Development Authority (CMDA) for approvals but the bank cancelled the OTS exactly at the time when such approvals were due thus scuttled the entire OTS proceedings.

It is stated that the RP/Liquidator only collected Rs.4.40 Crores which were credited into the account of the bank even after one and half years of liquidation order which is not even 10% of the OTS amount which was agreed by VEL. It is stated that the erstwhile promoters of the Corporate Debtor mobilised an amount of Rs.2.825 Crores towards OTS in a short span of six months from the date of sanction of OTS that too, during the period of demonetisation. It is stated that the present value of the land measuring 6.14 acres mortgaged to the bank is more than Rs.80.23 Crores and the market value of 2.85 acres of land not mortgaged to the bank is Rs.37.25 Crores.

It is stated that sudden cancellation of OTS on 03.05.2018 put the Corporate Debtor, VEL to serious loss and injury.

It is stated that the Respondent issued a notice on 12.05.2018 to the bank and approached the Court at Hyderabad by filing a declaratory suit in OS/137/2018 challenging the OTS cancellation by the Bank which suit is pending. It is stated that the Joint Lenders in both the CoCs of VEL and VTSL have different voting percentage. RP/Liquidator in respect of CIRP/liquidation of both the companies is the same i.e. Mr. Chinnam Poornam Chandra Rao.

It is stated that the RP during the meetings, had confirmed that he would pursue recovery of book debts as well as actionable claims in favour of the Principal Borrower. The Promoter-Directors of the Principal Borrower as well as the Respondent were confident that the book debts of Rs.649,47,03,195/- would be recovered in due course within the stipulated timeline but the RP/Liquidator did not properly exercise his power/duties and caused huge loss to the companies.

It is stated that aggrieved by the negligence of the RP/Liquidator, the Director of the Corporate Debtor issued a notice dated 13.04.2021 and also approached the Hon'ble High Court in W.P. No. 11156 of 2021 and W.P. No. 11479 of 2011 in respect of both the companies i.e. VTSL and VEL alleging fraud committed by the RP/Liquidator, which are pending. It is stated that the Liquidator on the instructions of the bank refrained from communicating with the erstwhile management and the stakeholders with an intention not to disclose the affairs of liquidation to them.

It is stated that purpose and objective of the IBC is to maximize the assets belonging to the Corporate Debtor which the RP/Liquidator miserably failed. The RP/Liquidator with the advice of bank, abandoned all the actionable claims. It is stated that the RP/Liquidator in his mail dated 10.06.2021, discussed a cost-benefit analysis and chances of recovering of the actionable claims assessed prior to taking any decision and the Bank having substantial voting acceded to such shoddy recovery methods against the interest of the Corporate Debtor. It is stated that abandonment of the actionable claims and recovery of dues were consciously approved by the bank with a thumping majority. It is alleged that such fraudulent resolution is nothing but a wilful violation of the provisions of the Code. As such, Section 65(1) of IBC, 2016 is attracted against the RP/Liquidator and the bank. It is alleged that the RP/Liquidator conveniently abandoned the claims against the Electricity Boards and other government entities though this option was available with the RP/Liquidator. Reference is made of the case A.V. Pappaya Sastry Vs Govt of AP (2007) 4 SCC 21 where the Hon'ble Supreme Court has held that “fraud – vitiates all judicial acts whether in rem or in person’’.

IA/2006/2024 Application filed by the Respondent/ Corporate Guarantor under Section 65 of IBC, 2016

The Respondent/Corporate Guarantor has filed an application under Section 65(1) of IBC against the Financial Creditor/Petitioner (State Bank of India) wherein it reiterated the facts as stated in the reply filed to the petition referring the case of Swiss Ribbons (P) Ltd. v. Union of India (2019) 4 SCC 17 : 2019 to state that Section 75 of IBC provides for punishment for furnishing false information in a petition filed by the Financial Creditor for invoking the provisions of Section 7 of IBC. It was held that the set off may be considered at the stage of filing of proof of claim during the Resolution Process. Equally the counter claims are the independent rights which are not taken away by the Code but are preserved for the stage of admission of claims during the Resolution Plan. There is nothing in the Code which interdicts the Corporate Debtor from pursuing such counter claims in other judicial forums. Reference is made of the case of Tamil Nadu Generation and Distribution Corporation Limited Vs. Union of India WP No. 19785 of 2021 where it was held that a Creditor has right to approach NCLT against an entity which is substantially owned by the government for recovery of its dues and it is within the domain of NCLT to adjudicate any dispute qua the claim and decide the claims and counter claims in the case. It is stated that the RP/Liquidator conveniently abandoned the claims against the Electricity Boards and other entities. Reference is made to the case of S.S. Engineers Vs. Hindustran Petroleum Corporation Ltd. & Others – 2022 SCC OnLine SC 1385 dated 15.07.2022 where it was held by the Hon'ble Supreme Court that it is not the object of IBC that CIRP should be initiated to penalise the solvent companies for non-payment of disputed dues claimed by Operational Creditor.

The Petitioner/Respondent has filed the reply to the application stating that the writ petitions relate to the forensic audit conducted by the bank. They do not seek any relief against the RP/Liquidator of VEL and VTSL qua malicious prosecution or on the recovery of actionable claims. It is stated that the Respondent in its reply dated 20.11.2019, had given ‘no objection’ as to the admission of the petition. It is stated that the Respondent is a company different from VEL and VTSL. It has not filed any case seeking any relief against the bank except the instant application as such, it has waived off its rights against the bank. In the Balance Sheet as on 09.04.2019 (insolvency commencement date) submitted by VEL, the trade receivables were shown as Rs.5,62,19,563/-. The Balance Sheet does not show Rs.100 Crores or more as alleged by the Respondent. The bank has filed the reply in the writ petitions pending before the Hon'ble Telangana High Court. The Managing Director of VEL had sent a mail on 21.09.2019 about the CIRP against the company which the Arbitrator had also acknowledged. It is stated that it was the duty of the promoter to co-operate with the RP/Liquidator in protecting the interest of the company. The Director had informed the Liquidator vide his mail dated 17.07.2019 that recovery is impossible against the debtors including the Government Bodies. It is stated that the Respondent cannot blow hot and cold. The dispute relating to OTS has already reached finality and cannot be agitated again. It is stated that since the Principal Borrower did not comply with the terms of OTS, it did not fructify. The Hon'ble NCLAT has already held that the petition is within limitation. It is stated that the Liquidator of VEL has sold the following properties through e-auction:

It is stated that the above realisation was based on the fair value and liquidation value of the assets. The Liquidator of VTSL has sold the following properties through e-auction after getting the fair value and liquidation value of the assets.

It is stated that the Liquidator has recovered Rs.59.94 Crores as on 12.11.2024 after the e-auction sale of the assets of VEL and VTSL. As per the tally data, on the date of liquidation commencement date, the following debts were outstanding to be recovered by the Corporate Debtor, VEL:

In respect of the Holding Company/Corporate Debtor VTSL, as per the tally data on the liquidation commencement date, the following debts were outstanding to be recovered:

It is stated that the erstwhile Promoters/Corporate Debtor also instituted some cases before and during CIRP/liquidation, as detailed below:

It is stated that based on the forensic report, State Bank of India referred the matter to CBI for investigation. It is stated that the ex-promoters have challenged the forensic audit report but have not sought any relief as regards the alleged dereliction of duty or for recovery of Rs.649,47,03,194/-. It is stated that there was no dereliction of duty on the part of the bank and as such, the application filed under section 65(1) of IBC deserves to be dismissed.

The Corporate Guarantor/Respondent has filed the rejoinder to the application wherein it reiterated what it has stated in the application. It is stated that the grounds raised in the application were raised during the appeal before the Hon'ble NCLAT in CA/5/2021 which were elaborately recorded in the final order dated 10.04.2023. The Financial Creditor had filed the reply on 17.11.2024 against which, it filed the rejoinder where the Financial Creditor never raised the grounds as taken in the reply to the application. It is alleged that the Financial Creditor having 43.37% voting in the CoC remained a mute spectator to the failure of RP/Liquidator in the recovery of actionable claim of around Rs.677.0 Crores. Rather the bank arbitrarily declared both the Corporate Debtors as fraud though the bank in the earlier independent audits, had affirmed that there was no fraud at all. When the promoters questioned the bank why recovery of actionable claim was neglected by the bank, in retaliation, the bank conducted the forensic audit to make the promoters remediless. It is alleged that the entire group companies have been dragged into insolvency proceedings with a malicious intention. It is stated that there was no misappropriation or fraud committed by the Principal Borrower with regard to the stocks and books of the accounts. The cash flow problem led to a dip in profitability owing to increased interest cost. The RP/Liquidator did not pursue the insurance claims before NCDRC. The case of Kapil Steels Ltd. Vs. M/s. Indore Steel Alloys Pvt. Ltd. in Company Appeal (AT) (Insolvency) No.802 of 2022 is referred where the Hon'ble NCLAT in the order dated 23.03.2023, held that the Liquidators under the IBC are undisputedly vested with sufficient authority to take into custody or control all assets, property, effects and actionable claims of the Corporate Debtor and also collect outstanding receivables including payment of bills and outstanding debts. In the case of Eva Agro Feeds Pvt. Ltd. Vs. Punjab National Bank and Anr. in Civil Appeal No. 7906 of 2021, the Hon'ble Supreme Court in the order dated 07.09.2023, has held that the Liquidator virtually steps into the shoes of the management of the Corporate Debtor and oversees the liquidation process. In this process, he holds the liquidation estate of the Corporate Debtor as a fiduciary for the benefit of all the creditors. While overseeing the liquidation process, he has the mandate to sell all movable and immovable properties and ‘actionable claims’ of the Corporate Debtor in liquidation by way of either public auction or by private contract, though he cannot sell such property or claims to any person who is not eligible to be a resolution applicant.

It is stated that the Liquidator is vested with the powers for preservation and protection of assets of the Corporate Debtor and to promote entrepreneurship. Section 3(27) of IBC defines property which includes actionable claims. Section 25 of IBC lays down that the RP shall take immediate custody and control of all the assets of the Corporate Debtor including the business records.

Ld. Counsel for the Petitioner argued on the lines of the petition and the reply to the application filed under Section 65(1) of IBC, 2016. Ld. Counsel submits that the Respondent vide Declaration-cum-Indemnity dated 16.11.2009, had stood as Guarantor for the repayment of loans availed by VEL. It had executed a revival letter dated 01.06.2012 acknowledging its liability. The Principal Borrower had offered an OTS vide letter dated 18.05.2016 which was accepted by the Financial Creditor vide letter dated 06.10.2016, however, the OTS was cancelled vide letter dated 03.05.2018 due to the default committed by the Corporate Debtor. There was a total debt of Rs.275,01,28,558.93 in default on the date of filing of the petition. Ld. Counsel submits that CIRP was initiated against the Corporate Debtor, VEL on 10.04.2019. The Petitioner had submitted the claim for the amount before the RP which was admitted. When no Resolution Plan came, the Tribunal passed an order for the liquidation of the Corporate Debtor, VEL vide dated 19.11.2019. Ld. Counsel submits that the liability of the Guarantor did not extinguish since no Resolution Plan came. In the liquidation process, debt will extinguish only on the distribution of proceeds from the sale of the liquidation assets which stage has not reached yet. Ld. Counsel submits that liability of the Principal Debtor and Guarantor is coextensive. Ld. Counsel submits that the liquidation value of VEL is only Rs.27.95 Crores which is quite less than the claim admitted. Ld. Counsel submits that the petition satisfies the requirements of IBC especially that of Section 7(5)(a) of IBC. Ld. Counsel submits that IBC does not bar simultaneous proceedings against the Principal Debtor and the Guarantor. Section 14 of IBC does not create bar against initiation of insolvency proceedings against the Guarantor of the Corporate Debtor since both are the separate legal entities. Ld. Counsel submits that the assets of the Guarantor do not form part of the liquidation estate. Ld. Counsel submits that in the case of Innoventive Industries Limited vs. ICICI Bank and Others AIR 2017 SC 4084 and Mobilox Innovations Private Limited vs. Kirusa Software Private Limited AIR 217 SC 4532, it was held that the Tribunal at the stage of admission of petition, has to see the debt and default. In the present case, initial default occurred on 09.03.2012 under the Working Capital facilities and on 31.05.2012 under the Term Loan facilities. The Principal Borrower had submitted OTS proposal on 13.03.2014 for Rs.50.0 Crores which was not accepted by the Petitioner being on a lower side. Subsequently, the Principal Borrower modified the OTS proposals. Ld. Counsel submits that each OTS proposal amounts to fresh acknowledgment of debt. He submits that on 06.10.2016, OTS sanction letter was given by the Bank for Rs.69.50 Crores which was accepted/acknowledged by the Principal Debtor and the Respondent, however, the payments were not made in terms of the OTS and the Petitioner issued a letter dated 03.05.2018 cancelling the OTS. Ld. Counsel submits that the default occurred on 03.05.2018 which gave a fresh cause of action to the Petitioner to file the petition.

Ld. Counsel submits that the Hon'ble NCLAT in the order dated 10.04.2023, has confirmed that the petition is not barred by limitation. Further, the Respondent in its reply on 20.11.2019, had given ‘no objection’ as to the admission of the petition. Ld. Counsel submits that the Respondent changed its stand on the pretext of changed circumstances although the facts remain that as per Section 128 of The Indian Contract Act, 1872, the liability of the Guarantor is coextensive with that of the Borrower and as on date, the Borrower has not cleared the debts of the Petitioner. Law does not permit a person to approbate and reprobate. Doctrine of estoppel is applicable as against the Respondent. Ld. Counsel submits that the Respondent did not change its stand for almost two years after the admission of CIRP of the Principal Borrower and has raised the allegations with an ulterior motive to delay the proceedings. Ld. Counsel submits that the OTS proposal amounts to acknowledgment of debts as held in the case of Tejas Khandhar v. Bank of Baroda – Company Appeal (AT) (Insolvency) No.371 of 2020.

Ld. Counsel submits that the allegations raised by the Respondent in the writ petitions are immaterial for the instant case. Further, the Hon'ble High Court has not passed any interim order. Ld. Counsel submits that as on date, VEL and VTSL have been undergoing liquidation.

Ld. Counsel submits that till date, neither the Corporate Guarantor nor the Personal Guarantors have filed any case in regard to the alleged non-recovery of receivables. The prayers in the writ petitions are only for the declaration of forensic audit reports as null and void. Ld. Counsel submits that the ex-directors had attended the CoC meetings and in none of the CoC meetings, they raised any question regarding alleged non-recovery of receivables. Ld. Counsel submits that in the application filed under Section 65(1) of IBC, the Liquidator of VEL has not been made party. Ld. Counsel referred the case of Cofex Exports Ltd. v. Canara Bank MANU/DE/0500/1997 to contend that the NCLT exercising the jurisdiction of DRT as per Section 67 of the Code has a limited power. Ld. Counsel submits that the Liquidator of VEL has performed his duty diligently which can be seen from the paras supra. Ld. Counsel submits that the arbitration invoked by Reliance Capital Limited does not involve the company. It is between Reliance Capital Limited and VTSL. The operations of VEL stopped in 2012. Although, the ex-promoters were arrayed as counter claimants in the arbitral proceedings but they did not take any action.

Ld. Counsel submits that it is a clear case of debt and default and the petition is liable to be admitted.

Ld. Counsel for the Respondent per contra argued on the lines of reply and the application filed under Section 65(1) of IBC and the rejoinder to the application.

Ld. Counsel submits that Section 7 petition filed by the Financial Creditor on 27.08.2019 was dismissed by this Tribunal vide an order dated 06.01.2021. Against that order, the Financial Creditor preferred an appeal and Hon’ble NCLAT vide an order dated 10.04.2023, remanded back the petition for re-hearing.

Ld. Counsel submits that the Corporate Guarantor is in fact a subsidiary of VEL. Based on the OTS proposals from the Corporate Debtor and its Guarantors, the Financial Creditor along with other Joint Lenders, passed a resolution on 23.05.2016 to consider the OTS. The Financial Creditor vide letter dated 06.10.2016, agreed for the OTS for Rs.68.0 Crores but for unknown reasons, parallelly issued another antedated OTS approval for Rs.69.50 Crores. Ld. Counsel submits that against the OTS obligation, the Guarantor paid Rs.2,82,50,000/- out of which, Rs.1.35 Crores was paid as advance for sale of 8.99 acres of land belonging to the Corporate Guarantor with the approval and NOC of the Financial Creditor. The Respondent had also approached potential buyers for the sale of the land for an amount of Rs.52.50 Crores. Against that, it received an advance of Rs.1.35 Crores from an interested buyer with whom the Financial Creditor and the Corporate Debtor also entered into a Tripartite Agreement on 11.10.2017.

Ld. Counsel submits that the Corporate Debtor and the Guarantors were confident of meeting the OTS obligations for the actionable claims to the benefit of the Corporate Debtor through arbitration and insurance claim and other sundry debtors of more than Rs.92.0 Crores from State owned Electricity Boards etc. However, the Financial Creditor cancelled the OTS and filed the petition. Ld. Counsel submits that since the Corporate Guarantor had faith in the statements given by the RP/Liquidator in the CoC meetings, it filed one-liner counter on 20.11.2019 not objecting to the Section 7 petition. At that time, the actionable claims were approximately of Rs. 649.48 Crores. Because of inaction on the part of RP/Liquidator, the promoters approached the Hon’ble High Court in the writ petitions questioning their inaction.

Ld. Counsel submits that the objective of IBC is to maximize the assets belonging to the Corporate Debtor which the RP/Liquidator has miserably failed because of the directions of the bank/Financial Creditor. It resulted into minimization of assets of the Corporate Debtor which tantamounts to collusive fraud by the Bank/RP/Liquidator. Ld. Counsel referred the case of Swiss Ribbons supra and A.V. Papayya supra to contend that fraud vitiates all judicial acts whether in rem or in personal. Ld. Counsel submits the current value of the land is more than Rs.110.00 Crores but in the MOM dated 12.05.2022, the Liquidator has stated that the value of the share of the company is zero and it would not fetch any value to the Corporate Debtor.

Ld. Counsel referred the proceedings dated 01.04.2025 where it was recorded as under:

Ld. Counsel submits that the issue raised during the hearing was with regard to the transactions to the OTS proceedings. Ld. Counsel submits that the Corporate Debtor, VEL is at the stage of dissolution. The counter claim filed by the Corporate Debtor was dismissed purely because of the negligence of the RP/Liquidator. Ld. Counsel submits that the Corporate Guarantor has been continuously protesting and objecting to the dereliction of duty by the CoC and RP in maximizing the assets of the Principal Borrower. The RP/CoC have deliberately neglected the book debts that were due from the Electricity Boards though they should have approached the appropriate forum to recover the book debts and actionable claims but they conveniently abandoned the claims. The bank cancelled the OTS exactly at that time when approvals from CMDA sought by the Prospective Buyer were pending and thus scuttled the entire OTS proceedings which is nothing but a fraud played against the Corporate Guarantor.

We have given our thoughtful consideration to the rival contentions and perused the record.

For a company to be admitted into CIRP under the IBC, three elements are necessary viz.,

A perusal of petition and the documents reveals that the Corporate Debtor Victory Electricals Limited (VEL) had availed loan facilities for Rs.134.88 Crores vide sanction letter dated 22.04.2008 from the Consortium of Lenders including the Financial Creditor. The Respondent stood as Guarantor to the loan facilities towards the repayment of loans. It mortgaged a property in favour of the Principal Creditor which fact was recorded in the Memorandum of Extension of Mortgage of Title Deeds dated 31.12.2008. It signed a revival letter on 01.06.2012 acknowledging its liability for repayment of all outstanding dues etc. The guarantee was a continuing guarantee. The Corporate Debtor failed to repay the loan facilities and its account was declared as NPA. The Principal Borrower / Corporate Debtor offered an OTS proposal vide letter dated 18.05.2016 to the Financial Creditor for settlement of its dues. The Financial Creditor approved the OTS for Rs.69.50 Crores vide letter dated 06.10.2016 on certain terms and conditions which were accepted by the Principal Borrower including the Respondent. The Principal Borrower failed to pay the OTS amount as per the agreed terms which made the Financial Creditor cancel the OTS. As on 31.07.2019, an amount of Rs.275,01,28,558.93 became due and payable by the Principal Borrower. One of the creditors of the Principal Borrower filed a petition under Section 7 of IBC, 2016 vide CP/872/2018 and the Principal Borrower was admitted to CIRP vide an order dated 10.04.2019. Since no resolution plan came, the liquidation proceedings were initiated against the Principal Borrower vide an order dated 19.11.2019. During the CIRP and the liquidation process, Mr. Chinnam Poorna Chandra Rao was the IRP/RP/Liquidator.

The record reveals that the group company of Principal Borrower i.e. Victory Transformers and Switchgears Ltd. (VTSL) had also availed loan facilities vide sanction letter dated 13.01.2007 from the State Bank of India. The Respondent was also the Guarantor to that loan being one of the group company of above two companies. When VTSL failed to repay the loan, its account was declared NPA. On 18.05.2016, VTSL sent an OTS proposal to the bank which the bank accepted on 06.10.2016 for an OTS amount of Rs.17.0 Crores. When VTSL failed to honour the OTS, the bank cancelled the OTS on 03.05.2018 and issued a Demand Notice. As on 30.11.2018, a sum of Rs. 175,76,35,263/- became due and payable by VTSL. The Financial Creditor filed a petition under Section 7 of IBC which was admitted vide an order dated 01.05.2019 in CP/1515/2018.

This petition under Section 7 of IBC was filed on 06.09.2019. On the petition, the Respondent filed a two liner reply stating that it has no objection in admitting the petition. The Tribunal after hearing the parties and perusing the record, held that the debt as claimed is time-barred and dismissed the petition vide an order dated 06.01.2021. Against the order, the Petitioner preferred an appeal and the Hon’ble NCLAT vide an order dated 10.01.2023, set aside the order with directions to the Tribunal to hear the parties again. The relevant portion of order is reproduced as under:

The Respondent filed a detailed reply with condone delay application which was declined to be taken on record vide an order dated 24.07.2023. The Respondent preferred an appeal against the order and the Hon’ble NCLAT vide an order dated 05.06.2024, permitted the Respondent to file supplementary counter affidavit. The Respondent filed a detailed counter including the application under Section 65 of IBC against the Financial Creditor.

In the present case, debt and default is not in dispute. This petition under Section 7 of IBC has been filed on 06.09.2019. The last acknowledgment of debt was made on 06.10.2016, thus the petition is within the period of limitation. The Petitioner has also placed the documents as detailed in para-8 supra which support the case of the Petitioner as to the amount of debt and the default committed by the Respondent.

The Corporate Guarantor/Respondent has raised a contention that this petition has been filed with fraudulent and malicious intent, thereby attracting Section 65 of the Insolvency and Bankruptcy Code, 2016, and warrants consequences under Section 75 of the Code.

It was contended that RP/Liquidator failed to recover almost an amount of Rs. 649,47,03,194/- of book debts, claims and actionable claims which were the receivables and the assets of the Corporate Debtor and its group companies. There was immense possibility of OTS dated 06.10.2016. The value of 8.99 acres of land with the Financial Creditor was more than Rs.110.0 Crores but in the MOM dated 12.05.2022, the Liquidator stated the value of shares of the Corporate Debtor as zero and stated that it would not fetch any value to the Corporate Debtor. It was contended that VEL and VTSL were the companies engaged in the manufacturing of Power Transformers. They used to supply transformers to the State Electricity Boards etc. which constituted 80% of sales. Because of the default committed by the Electricity Boards, the Corporate Debtor slipped into the category of NPA. Ld. Counsel has contended that the Corporate Debtor submitted an OTS on 18.05.2016 which was accepted. Against the OTS obligations, a payment of Rs.2,82,50,000/- was made out of which, Rs.1,35,00,000/- was paid in advance for sale of 8.99 acres of land but the Bank did not co-operate and cancelled the OTS exactly when approvals from CMDA were pending. The Corporate Debtor has filed a declaratory suit challenging the OTS cancellation which is pending. The RP/Liquidator despite confirming during the meetings that he will pursue the recovery of book debts and actionable claims, did not properly exercise his powers and duties and caused huge losses to the companies.

Section 65 of the IBC, 2016 empowers the Adjudicating Authority to impose a penalty on any person who initiates insolvency resolution process fraudulently or with malicious intent for any purpose other than resolution of the Corporate Debtor. Section 65 of IBC, 2016 is extracted hereunder,

The Hon’ble NCLAT in the case of Getz Cables Pvt. Ltd. v. State Bank of India and Anr. Company Appeal (AT) (Insolvency) No.1953 of 2024 considered the scope of the terms fraudulent and malicious intent. Simply to put, fraud consists of elements of deceit coupled with injury whereas malice is a wrongful act done without lawful justification. The relevant paragraphs of the order are extracted hereunder,

The Hon’ble NCLAT in the case of Monotrone Leasing Pvt. Ltd. Vs. PM Cold Storage Pvt. Ltd. Company Appeal (AT) (Insolvency) No. 99 of 2020, held that a petition under Sections 7, 9, or 10 of the IBC cannot be rejected solely on the ground of lack of intent for resolution, unless there is explicit documentary proof of fraudulent or malicious intent. Therefore, it is not enough that there is an absence of lack of intent for resolution of the corporate debtor but there is necessary mandate for fraud or malicious intent. The relevant paragraph is extracted hereunder

The Hon’ble NCLAT in the case of Amour Infrastructure LLP Vs. Digital Integrated Technologies Pvt. Ltd. (Company Appeal (AT) (Ins.) No. 884 of 2022 & I.A. No. 2458 of 2022), held that an Adjudicating Authority cannot make a finding of fraud/ malice unless it is specifically pleaded and backed by documentary evidence. The relevant paragraphs are extracted hereunder:

The Hon’ble NCLAT in the case of Wave Megacity Centre Pvt. Ltd. vs. Rakesh Taneja & Ors. (2023), held that that Section 10 cannot be permitted as a device to shield the Corporate Applicant from liability of fraudulent activities or siphoning of funds. It was held that in cases where fraud or malicious intent has been demonstrated, the Adjudicating Authority is not bound to initiate CIRP against the Corporate Applicant under Section 10 of IBC, 2016. The relevant paragraph is extracted below.

Based on the precedents discussed above, it is clear that Section 65 being penal in nature, requires strict proof to demonstrate such fraud or malicious intent and cannot be invoked on the basis of suspicion tactical irregularities or unsubstantiated assertions. The Hon’ble National Company Law Appellate Tribunal (NCLAT) in Monotrone Leasing Pvt. Ltd. Vs. PM Cold Storage Pvt. Ltd., [2020] ibclaw.in 21 NCLAT, has reaffirmed this principle, holding that a petition under Sections 7, 9, or 10 of the IBC cannot be rejected solely on the ground of lack of intent for resolution, unless there is explicit documentary proof of fraudulent or malicious intent. The relevant paragraph is extracted below:

This principle has also been reinforced in the case of M/s. Flycreative Online Private Limited v. GO Airlines (India) Limited (Int. Petition No. 68/2023), the Hon’ble National Company Law Tribunal (NCLT), New Delhi, wherein the Tribunal examined the allegations of fraudulent and malicious intent in insolvency proceedings. The Tribunal emphasized that for an application to be considered malicious under Section 65, there must be substantial and corroborative evidence proving fraudulent intent. It was observed that merely failing to inform creditors about the intention to file for insolvency does not, by itself, establish malice unless supported by concrete evidence. The relevant paragraph is extracted below:

On a consideration of the reply filed by the Financial Creditor and the documents, we do not find substance in the application filed by the Respondent/Corporate Guarantor. In the instant case, the account of the Corporate Debtor was declared NPA in the year 2012. This petition was filed in 2019. The Corporate Debtor was not in operation even prior to its accounts was declared NPA. The OTS proposal was given in 2016. It was approved on certain terms and conditions. The Corporate Debtor failed to honour the OTS as per the terms and the Financial Creditor cancelled the OTS in 2018. It was only thereafter the petition was filed. The order for initiating CIRP against the Corporate Debtor was passed in 2019. It may be true that the maximum supply of the Corporate Debtor was to the Electricity Boards and there could be trade receivables / book debts but there is no document showing the effort put in by the Corporate Debtor to recover the debts from the Electricity Boards before the initiation of CIRP. As per the tally data, referred in para-22 & 23 supra, the Corporate Debtor vide its mail dated 17.07.2019, had informed the Liquidator that it is better to write-off the debts of the other debtors as not recoverable. Although the Liquidator sought the details from the erstwhile management of the Corporate Debtor of above accounts so that he could independently examine the recoverability of the amounts but the management informed that all the records were lying in the factory. The Liquidator did not find any record pertaining to the debtors and thereafter, the management affirmed that no further records pertaining to the matter are available with them and these debts should be written off as non-recoverables. Further, in the Balance Sheet as on 09.04.2019 i.e. insolvency commencement date, the trade receivables were shown as Rs.5,62,19.563/-.

As regards OTS, the bank had approved the OTS for Rs.69.50 Crores vide dated 06.10.2016. Since the Principal Borrower did not comply with the terms of OTS, the bank cancelled the OTS on 03.05.2018. It is not the case that the bank did not sympathetically consider the proposal given by the Corporate Debtor including the Respondent. As seen from the record, the Liquidator got conducted the valuation of the assets of the Corporate Debtor and after getting the fair value and the liquidation value, he conducted the auction of the assets of the Corporate Debtors VEL and VTSL and realized the amounts. The RP/Liquidator has also been pursuing the cases instituted by the Corporate Debtor as referred in para-24 supra. As regards the land mortgaged with the Financial Creditor, the Liquidator also initiated the action.

There is no material to indicate that RP/Liquidator was not vigilant or diligent in recovering the actionable claims of the Corporate Debtor. He informed the CoC/SCC from time to time about the action taken. Since most of the actionable claims had become time-barred even prior to initiation of CIRP, no blame can be put on the RP/Liquidator that he did not make any effort to recover the actionable claims of the Corporate Debtor to maximise the assets of the Corporate Debtor.

As regards the arbitral proceedings, it has been explained by the Liquidator that he discussed cost-benefit analysis and the chances of recovery of actionable claims with the bank. The bank voted for the abandonment in view of the reasons supra. There is no quarrel on the legal proposition that fraud vitiates the judicial acts whether in rem or in personal but in the instant case, we do not find any material showing that any fraud was played by the RP/Liquidator or the Financial Creditor. Further, there is no material to indicate that the RP/Liquidator conveniently abandoned the claims against the debtors.

It is pertinent to mention that the bank also got conducted the forensic audit of the accounts of the Corporate Debtor and reported the matter to CBI. Against conducting of the forensic audit, the Financial Creditor filed the writ petitions before the Hon’ble Telangana High Court which are pending.

On a consideration of materials placed on record, we find that there is a debt and default. The Respondent was the Guarantor to the loan in respect of which default was committed by the Corporate Debtor VEL. As per Section 128 of the Indian Contract Act, the liability of the guarantor is coextensive with that of the Borrower. It is well settled that simultaneous to the initiation of CIRP against the Corporate Debtor, insolvency proceedings can be initiated against the Guarantor. In the instant case, the debt of the Financial Creditor has not been cleared. As such, by virtue of the Guarantee Deed, the Respondent/Corporate Guarantor is liable to pay the dues of the Corporate Debtor. It was held in the case of Innoventive Industries Ltd. supra that the Tribunal at the stage of admission of the petition, has to see the debt and default. In the present case, initial default occurred on 09.03.2012 under the Working Capital facilities and on 31.05.2012 under the Term Loan facilities. The Borrower submitted the OTS proposal on 13.03.2014 and subsequently on 06.10.2016 acknowledging the liability. This petition has been filed on 06.09.2019 and therefore within the three years period of limitation.

The Corporate Guarantor / Respondent has not demonstrated any such deceit, ill will or lawfully unjust intention of the Financial Creditor in initiating CIRP proceedings or corresponding injury suffered by such Corporate Guarantor / Respondent.

The objections are mere assertions unsupported by material evidence. No supporting forensic or statutory material has been produced as envisaged in Amour Infrastructure (supra), and thereby, the allegations of the Corporate Guarantor remain unsubstantiated. There is no material to show that the financial creditor has initiated the CIRP fraudulently or with malicious intent for any purpose other than for the resolution of insolvency of the Corporate Debtor which are the sine qua non for taking action under Section 65 of IBC. We find that the objections raised in the present petition when measured against the precedents, fall short of the standard required. The application filed by the Respondent/Guarantor vide IA/2006/2024 is accordingly dismissed.

In the light of what has been stated above, the petition under Section 7 filed by the Financial Creditor i.e. State Bank of India for initiating CIRP against the Respondent/Corporate Guarantor, Hackbridge Hewittic and Easun Limited is admitted.

The Financial Creditor has proposed the name of Mr. Chinnam Poorna Chandra Rao with Registration Number: IBBI/IPA-003/IPA-N000119/2017-18/11298) as the Interim Resolution Professional (“IRP”) who has also filed his consent in Form–2. Upon verification from the IBBI website, it is seen that the Authorization for Assignment is granted to the said IRP till 31.12.2025. Further, he is the same person who has been conducting the liquidation proceedings against the Companies / Corporate Debtors VEL & VTSL. We therefore appoint Mr. Chinnam Poorna Chandra Rao as the Interim Resolution Professional. The proposed IRP who is appointed shall take forward the process of Corporate Insolvency Resolution of the Corporate Guarantor. The IRP appointed shall take in this regard such other and further steps as are required under the Statute, more specifically in terms of Section 15,17,18 of the Code and file his report within 20 days before this Bench. The powers of the Board of Directors of the Corporate Guarantor shall stand superseded as a consequence of the initiation of the CIRP in relation to the Corporate Guarantor in terms of the provisions of IBC, 2016.

The Financial Creditor is directed to pay a sum of Rs. 3,00,000/-(Rupees Three Lakhs only) to the Interim Resolution Professional to meet out the expenses and to perform the functions assigned to him in accordance to Regulation 6 of Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016.

As a consequence of the petition being admitted in terms of Section 7 of the Code, the moratorium as envisaged under the provisions of Section 14(1) and as extracted hereunder shall follow in relation to the Corporate Debtor:

However, during the pendency of the moratorium period in terms of Section 14(2) (2A) and 14(3) as extracted hereunder:

The duration of the period of moratorium shall be as provided in Section 14(4) of the Code and for ready reference reproduced as follows:

Based on the above terms, the petition stands admitted in terms of Section 7(5) of IBC, 2016 and the moratorium shall come in to effect as of this date. A copy of the order be communicated to the Financial Creditor as well as to the Corporate Guarantor above named by the Registry. In addition, a copy of the order be also forwarded to IBBI for its records. Further, the Interim Resolution Professional above named who is figuring in the list of Resolution Professionals forwarded by IBBI be also furnished with copy of this Order forthwith by the Registry, who will also communicate the initiation of the CIRP in relation to the Corporate Guarantor to the Registrar of Companies concerned.