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Judgment
ASHOK BHUSHAN, J.
This Appeal by a Suspended Director of the Corporate Debtor, M/s. West Star Constructions Pvt. Ltd. has been filed challenging the Order dated 06.03.2024, by which Section 7 Application filed by Respondent M/s. Kalibre Associates Pvt. Ltd. (under Liquidation) has been admitted.
In the Appeal, Notices were issued on 15.04.2024, and following Interim Order was passed:
“Issue notice. Counsel for the Liquidator and Counsel for the IRP accepts notice. Respondents may file reply within three weeks.
Learned Counsel for the IRP submits that the publication has been issued, claim has been received and CoC has already been constituted.
Let CoC may proceed but no decision shall be taken with regard to any resolution plan.
List the appeal on 16.05.2024.”
Reply has been filed by Respondent No. 1. Both the Parties were heard on 05.09.2024. Both the Parties have also filed their Written Submissions.
Brief facts necessary to be noticed for deciding the Appeal are:
i. M/s. Kalibre Associates Pvt. Ltd., advanced an amount of ₹1,00,00,000/- to the Corporate Debtor, M/s. West Star Constructions Pvt. Ltd. on 20.11.2010.
ii. The Corporate Debtor was engaged in business operation relating to providing consultancy services in real estate business.
iii. Insolvency Proceedings, commenced against M/s. Kalibre Associates Pvt. Ltd. by Order dated 18.01.2019.
iv. Mr. Mohan Lal Jain was Resolution Professional (`RP’) of M/s. Kalibre Associates Pvt. Ltd.
v. Resolution Professional sent a letter dated 18.07.2019 to the Corporate Debtor stating that an amount of ₹1,00,00,000/- is due plus interest which may be remitted to M/s. Kalibre Associates Pvt. Ltd.
vi. Liquidation Proceedings commenced against M/s. Kalibre Associates Pvt. Ltd. by Order dated 02.01.2020. Mohanlal Jain was appointed as Liquidator of the M/s. Kalibre Associates Pvt. Ltd. Another Notice dated 20.07.2020 was sent to the Corporate Debtor on behalf of M/s. Kalibre Associates Pvt. Ltd., requesting the Corporate Debtor to pay ₹1,00,00,000/- with 12% interest within seven days.
vii. Liquidator had filed an Application before the Adjudicating Authority, seeking prior approval of the Adjudicating Authority for instituting suit/legal proceedings on behalf of the M/s. Kalibre Associates Pvt. Ltd.
viii. Adjudicating Authority permitted the Liquidator to take all steps in accordance with provisions of law by Order dated 21.02.2022.
ix. An Application under Section 7 was filed by M/s. Kalibre Associates Pvt. Ltd. against the Corporate Debtor, claiming a Financial Debt of
₹1,00,00,000 and `date of default’ was mentioned as 18.07.2019.
x. The Application under Section 7 was filed by Liquidator of the M/s. Kalibre Associates Pvt. Ltd. on 04.01.2024. Notices were issued by Adjudicating Authority on 01.02.2024. Financial Creditor was directed to serve Notice on the Corporate Debtor. No one appeared on 26.02.2024. Adjudicating Authority directed to proceed Ex-Parte against the Corporate Debtor on the second date of hearing and on next date, Adjudicating Authority vide Order dated 06.03.2024, admitted Section 7 Application. Aggrieved by which Order this Appeal has been filed.
We have heard Mr. Saurabh Jain, Learned Counsel appearing for the Appellant and Mr. Anirban Bhattacharya, Learned Counsel appearing for the Respondent No. 1. Mr. Abhishek Nair has appeared on behalf of the Interim Resolution Professional (`IRP’).
Learned Counsel for the Appellant challenging the Impugned Order submits that Adjudicating Authority committed an error in admitting Section 7 Application, since Notices were never served on the Corporate Debtor and the Adjudicating Authority on second date of hearing proceeded Ex-Parte against the Corporate Debtor. Order impugned has been passed Ex-Parte to the Corporate Debtor. Corporate Debtor had no opportunity to place its defence. It is submitted that the Corporate Debtor is engaged in business operation of providing consultancy services in real estate business. The Respondent No. 1 Company approached the Corporate Debtor seeking the services of the Corporate Debtor in October 2010. Respondent No. 1 Company, agreed to pay ₹1,00,00,000/- of the security amount for research in market. In result amount of ₹1,00,00,000/- was paid by Respondent Company to the Corporate Debtor on 20.11.2010. The Corporate Debtor issued a Performa Invoice dated 15.12.2012 of ₹1,20,00,000/-. Tax invoices were not issued subsequently an amount of ₹1,00,00,000/- was shown as security in the books of the Corporate Debtor. It is submitted that no loan was extended by Respondent Company to the Corporate Debtor nor there was any Loan Agreement or any other document to prove a financial transaction. The Liquidator of the Respondent No. 1 Company without any basis proceeded to file Section 7 Application against the Corporate Debtor. It is submitted that leave was taken by Liquidator from the Adjudicating Authority to take steps for recovery of the amount of M/s. Kalibre Associates Pvt. Ltd., which did not entitled the Liquidator to file Section 7 Application, proceeding under Section 7 are not proceeding for recovery of any debt and Liquidator has wrongly initiated proceeding under Section 7. It is submitted that there was no Financial Debt nor any material was shown by Liquidator to prove the debt as Financial Debt. NeSL Certificate Report filed by the Financial Creditor mentioned deemed to be authenticated without their being any response by the Corporate Debtor. There was no Loan Agreement nor the disbursement for any time value of money. Adjudicating Authority committed error in admitting Section 7 Application. It is submitted that amount was given as security to the Corporate Debtor by M/s. Kalibre Associates Pvt. Ltd. for services which was rendered by the Corporate Debtor.
Mr. Anirban Bhattacharya Learned Counsel for the Respondent refuting the submission of the Counsel for the Appellant contends that Adjudicating Authority has rightly granted leave to the Liquidator under Section 33(5) of the Insolvency and Bankruptcy Code, 2016 (for short `The IBC’ or `The Code’) to institute suits/legal proceedings, including filing of Section 7 Application and the Application filed by the Liquidator under Section 7 against the Corporate Debtor was in accordance with the leave granted by the Liquidator and the Application cannot be said to be not maintainable. It is submitted that in the Balance Sheet of the Financial Creditor, the amount is mentioned as “loan advances” in the Balance Sheet of the Financial Year 2017-18 and as on 18.01.2019. There being debt of ₹1,00,00,000/- due on Corporate Debtor. Liquidator to protect the interest of the Financial Creditor has to take all steps and the filing of Petition under Section 7 was well within jurisdiction. It is
submitted that RP has sent a Notice to the Corporate Debtor demanding an amount of ₹1,00,00,000/- with interest by Notice dated 18.07.2019 and the amount became due on 18.07.2019, when Demand Notice was issued. It is pleaded that the amount having been reflected as “loan advance” in the Balance Sheet of the Financial Creditor, it was a Financial Debt within meaning of Section 5(8). It is submitted that even if receipt of amount of ₹1,00,00,000/- is considered to be Security Deposit, in that case also there exists Financial Debt since the Corporate Debtor was liable to refund the Security Deposit. It is submitted that NeSL record filed by the Financial Creditor, fully proved the debt and default and the Adjudicating Authority did not commit any error in relying on the NeSL Certificate in holding the debt and default. The Corporate Debtor has not shown to have render any kind of services to the Corporate Debtor for payment of amount of ₹1,00,00,000/-which was paid by the Financial Creditor to the Corporate Debtor on 20.11.2012. It is submitted that in the Balance Sheet of the Corporate Debtor, also the amount of ₹1,00,00,000/- is reflected as “other long-term liabilities” which also clearly proves existence of the Financial Debt.
We have considered the submissions of the Counsel for the Parties and perused the record.
There is no dispute between the Parties that amount of ₹1,00,00,000/-was transferred by M/s. Kalibre Associates Pvt. Ltd. to the Corporate Debtor on 20.11.2010. Part IV of Section 7 Application contains the particulars of debt in following words:
“Part – IV
PARTICULARS OF FINANCIAL DEBT
1.
TOTAL AMOUNT
That
as
per the records of the
OF DEBT GRANTED
Corporate Debtor available with the
DATE(S) OF
Liquidator
an
amount
of
Rs.
DISBURSEMENT
1,00,00,000/- (Rupees One Crore
Only) was disbursed by the
Financial Creditor as loans and
advances to the Corporate Debtor
on 20.11.2010 vide Cheque No.
32001426
The disbursement of loans and
advances is clearly reflected in the
bank statement of the Financial
Creditor.
A copy of the Bank Statement and
copy of the Ledger of the Corporate
Debtor as maintained by the
Financial
Creditor
is
annexed
herewith
and
marked
as
ANNEXURE- 5.
2.
AMOUNT CLAIMED
Amount
Claimed to
be
in
TO BE IN DEFAULT
default:
Rs.
1,00,00,000/-
AND THE DATE ON
(Rupees One Crore Only).
WHICH THE
DEFAULT
OCCURRED
Date of Default: 18.07.2019 (Date
of Demand letter issued by the IRP)
Limitation in normal course would
have
ended
on
18.07.2022.
However,
vide
order
dated
23.03.2020 the Hon’ble Supreme
Court of India in “In Re:
Cognizance
for
extension
of
limitation”,
the
limitation period
stopped
running.
Further,
vide
order
dated
10.01.2022 passed
by the Hon’ble Supreme Court of
India
in
“Miscellaneous
Application No. 21 of 2022 in
Miscellaneous Application No. 665
of 2021 in SMW(C) NO. 3 OF 2020
In Re: Cognizance for extension
of limitation” para 5, the order
dated
23.03.2020
was
restored
and
in
continuation
of
the
Subsequent order dated
08.03.2021, 27.04.2021 and
23.09.2021, it was directed that
the period from 15.03.2020 till
28.02.2022 shall stand excluded
for the purposes of limitation as
may be prescribed under any
general or special laws in respect of
all judicial or quasi-judicial
proceedings.”. Therefore, after
excluding the said period from
15.03.2020 till 28.02.2022, the
limitation period would end on
02.07.2024.”
In the documents, the Respondent Company has filed the copy of the default of record as registered with NeSL and Bank Statement of M/s. Kalibre Associates Pvt. Ltd., reflecting the payment to the Corporate Debtor. Audited Financial Statement of Financial Creditor as on 31.03.2018 and Provisional Balance Sheet as on 18.01.2019 of the Financial Creditor and Audited Financial Statement of the Corporate Debtor for Financial Year ending as on 31.03.2019 and Audited Financial Statement ending on 31.03.2020 and 31.03.2021 as well as 31.03.2022. Copy of Demand letter dated 18.07.2019 was also filed.
It is to be noted that Orders passed by the Adjudicating Authority admitting Section 7 Application is Ex-Parte Order, since the Corporate Debtor could not appear before the Adjudicating Authority. It is the case of the Appellant that Notices were not served. However, it is not necessary to enter into issue as to whether Notices were served on the Appellant or not? Fact remains that Order passed by the Adjudicating Authority was an Ex-Parte Order.
First submission which has been pressed by the Counsel for the Appellant is that Liquidator of M/s. Kalibre Associates Pvt. Ltd. has no jurisdiction to file Section 7 Application against the Corporate Debtor. He had taken leave from the Adjudicating Authority to recover the dues of the Company in Liquidation i.e., M/s. Kalibre Associates Pvt. Ltd. It ought to have taken steps for recovery and not to file Application under Section 7.
The above submissions have been refuted by the Counsel for the Liquidator and submitted that in the Application filed by Liquidator, a specific prayer was made seeking prior approval to institute suits/legal proceedings on behalf of the Corporate Debtor, including filing of the Section 7 of the Code. The Appellant has brought on the record copy of the Order dated 21.02.2022 passed in the Liquidation Proceedings of M/s. Kalibre Associates Pvt. Ltd. in I.A. No. 5846/2021, which was filed by the Liquidator following Order was passed:
“IA-5846/2021- By filing this IA, the applicant has prayed for granting prior approval to the Applicant to institute suits / legal proceedings on behalf of the CD including filing applications under Section 7 of the Code for initiation of CIRP against the Companies/Borrowers of the Corporate Debtor having outstanding dues of above Rs.1,00,000 / (Rupees One Lakh Only) to Rs. 3,00,000 /- (Rupees Three Crores Only) for recovery of dues/default committed by such companies/borrowers in payment of their debt. Heard the Ld. Counsel appearing for the Applicant and perused the averments made in the application. Considering the submissions and the averments made in the application, we hereby allow the prayer. The Liquidator is directed to take all steps in accordance with the provision of law.
With this, the present IA stands disposed of.”
When we look into the Order, it is clear that prayers made in the Application has been allowed by the Adjudicating Authority, the prayers made in the Application has been noticed in the Order itself, were “for granting prior approval to institute suits/legal proceedings on behalf of the Corporate Debtor, including filing of the Section 7 Application of the Code for initiation of the CIRP against the Company/borrowers of the Corporate Debtor, having outstanding dues…”. The approval granted by the Adjudicating Authority, thus was clearly permitted filing of Section 7 Application also. Thus, we accept the submission of the Counsel for the Liquidator that Order dated 21.02.2022 clearly permitted the Liquidator to file an Application under Section 7 against the borrowers. Thus, submission of the Appellant on this ground cannot be accepted.
The submission of the Appellant which have been advanced before us is that there was no Financial Debt and the amount was advanced by the M/s. Kalibre Associates Pvt. Ltd. towards the security for payment towards services, which was to be rendered by the Corporate Debtor. Corporate Debtor was engaged in business of providing consultancy service regarding the real estate and carrying out the research in the market. It is the case of the Appellant that Financial Creditor had approached the Corporate Debtor, seeking their services an amount of ₹1,00,00,000/- was extended as security, for the payment against the services. Appellant’s case is that Performa Invoice of ₹1,20,00,000/- was also issued by Corporate Debtor, which Performa Invoice has been brought on record as (Annexure A-2) to the Appeal, which Performa Invoice is as follows:
Section 7 Application which was filed by the Liquidator claimed debt as a Financial Debt and it was pleaded in Part IV that amount of ₹1,00,00,000/-was disbursed by the Financial Creditor as loans and advance to the Corporate Debtor on 20.11.2020. The Balance Sheet of the Financial Creditor has been brought on the record in the Balance Sheet of 2017-18 under the heading short terms loans and advances, name of Corporate Debtor is mentioned in the end where an amount of ₹1,00,00,000/- was mentioned both as on 31.03.2017 as and on 31.03.2018. The same amount of ₹1,00,00,000/- is further reflected in the provisional Balance Sheet as on 18.01.2019, whereunder Para 2.12 short-term loans and advances amount of ₹1,00,00,000/- was mentioned against the name of Corporate Debtor as on 18.01.2019. From the Balance Sheet, it is clear that loans and advances are grouped under the same heading.
There being no dispute that amount of ₹1,00,00,000/- was transferred to the Corporate Debtor on 20.11.2010 and from the Balance Sheets, annual Financial Statements of the M/s. Kalibre Associates Pvt. Ltd., which is on record, it is clear that same amount of ₹1,00,00,000/- is reflected till 18.01.2019, that is when the provisional Balance Sheet was prepared prior to the initiation of the CIRP. The above facts make it clear that there was no interest component in the amount of ₹1,00,00,000/- since none of the Financial Statements, any interest provided for.
We are conscious that payment of interest is not necessary condition for a debt to be treated as a Financial Debt. Financial Debt can also be a debt without any interest. However, the precondition for amount to be treated as a Financial Debt is disbursement for time value of money.
Section 5(8) provide as follows:
“5. In this Part, unless the context otherwise requires,—
(8) “financial debt” means a debt alongwith interest, if any, which is disbursed against the consideration for the time value of money and includes—
(a) money borrowed against the payment of interest;
(b) any amount raised by acceptance under any acceptance credit facility or its de-materialised equivalent;
(c) any amount raised pursuant to any note purchase facility or the issue of bonds, notes, debentures, loan stock or any similar instrument;
(d) the amount of any liability in respect of any lease or hire purchase contract which is deemed as a finance or capital lease under the Indian Accounting Standards or such other accounting standards as may be prescribed;
(e) receivables sold or discounted other than any receivables sold on non-recourse basis;
(f) any amount raised under any other transaction, including any forward sale or purchase agreement, having the commercial effect of a borrowing;
Explanation. -For the purposes of this sub-clause,-
(i) any amount raised from an allottee under a real estate project shall be deemed to be an amount having the commercial effect of a borrowing; and
(ii) the expressions, “allottee” and “real estate project” shall have the meanings respectively assigned to them in clauses (d) and (zn) of section 2 of the Real Estate (Regulation and Development) Act, 2016 (16 of 2016);]
(g) any derivative transaction entered into in connection with protection against or benefit from fluctuation in any rate or price and for calculating the value of any derivative transaction, only the market value of such transaction shall be taken into account;
(h) any counter-indemnity obligation in respect of a guarantee, indemnity, bond, documentary letter of credit or any other instrument issued by a bank or financial institution;
(i) the amount of any liability in respect of any of the guarantee or indemnity for any of the items referred to in sub-clauses (a) to (h) of this clause.”
The Notice which was issued by the RP to the Corporate Debtor prior to filing of the Section 7 Application has also been brought on record which was issued by the RP Mohan Lal Jain, who is now working as a Liquidator. In the said Demand Notice, the claim was made of ₹1,00,00,000/- plus interest and subsequent in Notice dated 20.07.2020 which was issued on behalf of the Liquidator payment of ₹1,00,00,000/- with 12% interest was claimed.
When we look into Part IV of the Section 7 Application, it is clear that in the amount claimed, no interest is demanded. Thus, it is now admitted case of the Respondent Company that there was no interest payment. When it is admitted that there was no interest payment of ₹1,00,00,000/- burden was on the Respondent, i.e., Applicant before the Adjudicating Authority to prove that debt is a Financial Debt. The Liquidator who has filed the Application under Section 7 has only relied the Balance Sheets of the Financial Creditor and the Corporate Debtor as well as NeSL Report.
The amount of ₹1,00,00,000/- given to the Corporate Debtor, was under the heading loans and advances, to prove that the said amount was loan. There is no other material available on the record nor any Loan Agreement or any other acknowledgement by the Corporate Debtor.
The Appellant has also brought on the record the Financial Statement of Corporate Debtor which has also been referred to in the Section 7 Application filed by the Respondent Company. Financial Statement of the Corporate Debtor, there is Note No. 3 which deals with long-term borrowings and Note 4 deals with the other long-term liabilities. Note 6 deals with the short-term borrowings. It is useful to extract the Balance Sheet of the Corporate Debtor as on 31.03.2019, Note 3 to Note 9 which is as follows:
NOTE NO. 3
LONG TERM BORROWINGS
in Rs.
31st March 2020
31st March 2019
A. Term Loans
B. Deposits:
a) From Related Parties:
S.C. Garments Pvt Ltd
14685000.00
14658000.00
Sewa International Fashions
20684100.00
20570800.00
Ltd.
b) From others
Nischay Finvest Pvt Ltd
500000.00
500000.00
Total Long Term Borrowings
35869100.00
35755800.00
NOTE – 4
As at
As at
OHER LONG TERM
31.03.2020
31.03.2019
LIABILITIES
Security Received from NIIT
26100000.00
26100000.00
Kaliber Associates
10000000.00
10000000.00
Total
36,100,000.00
36,100,000.00
NOTE – 5
Also at
Also at
LONG TERM PROVISIONS
31.03.2020
31.03.2019
NIL
NIL
NOTE – 6
Also at
Also at
SHORT TERM BORROWINGS
31.03.2020
31.03.2019
a) Loans and advances from
-
-
related parties
b) Deposits
-
-
Total
-
-
NOTE – 7
Also at
Also at
Trade Payables
31.03.2020
31.03.2019
-
-
-
-
-
-
NOTE – 8
OTHER CURRENT
Also at
Also at
LIABILITIES
Cheque Issue but Not Present
31.03.2020
31.03.2019
into Bank
-
-
-
-
NOTE – 9
Also at
Also at
31.03.2020
31.03.2019
SHORT TERM PROVISIONS
(a) Provision for employee
-
-
benefits:
-
-
(b) Others
Audit Fees Payable
227,506.00
199,926.00
227,506.00
199,926.00
Total Provisions
227,506.00
199,926.00
When we look into the Financial Statement of the Corporate Debtor, it is clear that long-term borrowings are separately provided for and other long- term liabilities are separately mentioned in Note 4 and with regard to two entries under other long-term liabilities, it is mentioned as:
NOTE – 4
As at
As at
OHER LONG TERM
31.03.2020
31.03.2019
LIABILITIES
Security Received from NIIT
26100000.00
26100000.00
Kaliber Associates
10000000.00
10000000.00
Total
36,100,000.00
36,100,000.00
The above entry indicates that Corporate Debtor in its Balance Sheet has not shown the amount as borrowing rather the said amount has been shown as security receipt from M/s. Kalibre Associates Pvt. Ltd.
Learned Counsel for the Respondent relying on the Judgment of the Hon’ble Supreme Court in the matter of `Global Credit Capital Ltd. & Anr.’ Vs. `Sach Marketing Pvt. Ltd. & Anr.’ reported in 2024 SCC OnLine SC 649, submits that even the security can be treated to be a Financial Debt. Learned Counsel for the Appellant has relied on Paragraphs 14, 17 & 18 of
the Judgment, which are as follows:
“14. Where one party owes a debt to another and when the creditor is claiming under a written agreement/arrangement providing for rendering ‘service’, the debt is an operational debt only if the claim subject matter of the debt has some connection or co-relation with the ‘service’ subject matter of the transaction. The written document cannot be taken for its face value. Therefore, it is necessary to determine the real nature of the transaction on a plain reading of the agreements. What is surprising is that for acting as a Sales Promoter of the beer manufactured by a corporate debtor, only a sum of Rs. 4,000/- per month was made payable to the first respondent. Apart from the sum of Rs. 4,000/- per month, there is no commission payable to the first respondent on the quantity of sales. Clause (6) provides for termination of the appointment by giving thirty days' notice. Though clause (10) provides for the payment of the security deposit by the first respondent, it is pertinent to note that there is no clause for the forfeiture of the security
deposit. The amount specified in clause (10) has no correlation whatsoever with the performance of the other conditions of the contract by the first respondent. As there is no clause regarding forfeiture of the security deposit or part thereof, the corporate debtor was liable to refund the security deposit after the period specified therein was over with interest @21% per annum. Since the security deposit payment had no correlation with any other clause under the agreements, as held by the NCLAT, the security deposit amounts represent debts covered by subsection (11) of Section 3 of the IBC. The reason is that the right of the first respondent to seek a refund of the security deposit with interest is a claim within the meaning of subsection (6) of Section 3 of the IBC as the first respondent is seeking a right to payment of the deposit amount with interest. Therefore, there is no manner of doubt that there is a debt in the form of a security deposit mentioned in the said two agreements.
To decide whether the second condition had been fulfilled, it is necessary to refer to the factual findings recorded in the impugned judgment. The NCLAT has referred to the letter dated 26th October 2017 addressed by the corporate debtor to the first respondent. We have perused a copy of the said letter annexed to the counter. By the said letter, the corporate debtor informed the first respondent that for the year 2016-2017, the corporate debtor had provided the interest amounting to Rs. 18,06,000/- in the books of the corporate debtor and that the sum will be credited to the account of the first respondent on the date of payment of TDS. In paragraph 21 of the impugned judgment, it is held that the financial statement of the first respondent for the Financial Year 2017-2018 shows revenue from the interest on the security deposit. It is also held that the amounts were treated as long-term loans and advances in the financial statement of the corporate debtor for the Financial Year 2015-2016. Moreover, in the financial statement of the corporate debtor for the Financial Year 2016-2017, the amounts paid by the first respondent were shown as “other long-term liabilities”. Therefore, if the letter mentioned above and the financial statements of the corporate debtor are considered, it is evident that the amount raised under the said two agreements has the commercial effect of borrowing as the corporate debtor treated the said amount as borrowed from the first respondent.
Therefore, we have no hesitation in concurring with the NCLAT's view that the amounts covered by security deposits under the agreements constitute financial debt. As it is a financial debt owed by the first respondent, sub-section (7) of Section 5 of the IBC makes the first respondent a financial creditor.”
From Paragraph 4 of the above Judgment of the Hon’ble Supreme Court, it is clear that Hon’ble Supreme Court has held that it is necessary to find out the real nature of the transaction to find out the nature of debt. The said Judgment of the Hon’ble Supreme Court was rendered after considering the Written Agreement between the Parties and considering the terms and conditions, one of the Agreements term was that the minimum security of ₹53,15,000/- with a Company which will carry interest @ 21% p.a. and further interest was to be provided on ₹7,85,850/- @ 21%. In the present case, there is no consideration of transaction as a Security Deposit by the Adjudicating Authority and without there being any consideration by the Adjudicating Authority on the nature of the transaction, we are not able to accept submission of the Counsel for the Respondent that even if the amount is treated as a Security Deposit, it will be a Financial Debt. As held by the Hon’ble Supreme Court in `Global Credit Capital Ltd. & Anr.’ (Supra), the real nature of the transaction has to be found out before coming to the conclusion that whether debt is a Financial Debt or not?
In the facts of the present case, the Adjudicating Authority in the Impugned Order has relied on record of default by NeSL and held that Report is sufficient evidence to arrive at the conclusion to an amount of debt. There can be no dispute that report of NeSL is an important piece of evidence, but in the facts of the present case where the Corporate Debtor has no opportunity to place its defence, it cannot be said that reliance on NeSL Certificate was conclusive evidence to come to the conclusion that there was a Financial Debt.
Adjudicating Authority in Paragraph 3 of the Order has noticed the Balance Sheets maintained by the Corporate Debtor. Although the Balance Sheets have been noticed, but the Adjudicating Authority failed to notice that long-term borrowing and long-term liabilities have been mentioned under two different heads. Hence, non-mention of the amount of ₹1,00,00,000/- under the heading long-term borrowing has to be given some meaning and purpose. Long-term liabilities can be different kind of liabilities which may be an Operational Debt, Financial Debt or any other nature of debt. However, the real nature of transaction between the parties needs to be examined and adjudicated by the Adjudicating Authority before admitting Section 7 Application.
In the present case, the Corporate Debtor unfortunately could not appear before the Adjudicating Authority to raise his defence, hence in the facts of the present case, we are of the view that ends of justice be served in remitting the matter before the Adjudicating Authority for fresh consideration with liberty to the Appellant to file its Reply within three weeks. We are satisfied that there is no appropriate consideration of the real nature of transaction on basis of which Section 7 Application was filed by the Adjudicating Authority.
Learned Counsel for the Respondent has also placed reliance on the Judgment of this Tribunal in the matter of `Arunkumar Jayantilal Muchhala’ Vs. `Awaita Properties Pvt. Ltd. & Anr.’ in Comp. App. (AT) (Ins.) No. 121/2023. From the Paragraph 18 of the Judgment it is noted that the amount has been shown under the heading of long-term borrowing that unsecured loan Related Parties. In Paragraph 18 of the Judgment following was observed:
“18. In the present case, the Respondent No. 1 has submitted a bank certificate to substantiate the disbursal of funds to the Corporate Debtor and validated the same with the Annual Reports and Balance Sheets of the Corporate Debtor to show that it was a loan. Respondent No. 1 has placed on record the Balance Sheet of the Corporate Debtor wherein this amount has been shown under the head of ‘Long Term Borrowings - Unsecured loan from Related Parties’. This clearly evidences that the disbursal was a loan. Even the notice sent by the Respondent No. 1 on 20.02.2018 as placed at pages 58- 59 of the APB clearly stated that they had extended a loan to the Corporate Debtor to meet its working capital requirements repayable on demand at an interest rate of 15% p.a. Keeping in mind that there was no document/agreement in respect of the loan amount, it is quite natural that there was no document/agreement which determined the payment of interest and the rate of interest but that cannot be a ground for assuming that the loan was not interest-bearing. It is an undisputed fact that the Respondent No. 1 has not placed on record any document which shows that the disbursal made was in the nature of loan wherein interest was specifically payable. Be that as it may, we are of the considered opinion that the IBC does not provide for any prescriptive requirement for the Financial Creditor to place on record formal written agreements/documents between the parties to establish that the disbursal made was in the form of loan with interest. Given this background we therefore find that the Adjudicating Authority committed no error in holding that there was a financial debt owed by the Corporate Debtor to Respondent No. 1.”
The Financial Statement of Financial Creditor where it is mentioned as loan and advances and the Financial Statement of Corporate Debtor where it is mentioned as long-term liabilities have already been noticed by us in proceeding Paragraph of this Judgment. As observed, there is no appropriate consideration by the Adjudicating Authority, regarding nature of debt and
without completely looking to the Balance Sheets of the Corporate Debtor, Adjudicating Authority has admitted Section 7 Application relying on only NeSL Report.
Learned Counsel for the Respondent has also relied on the Judgment of this Tribunal in the matter of `Vipul Himatlal Shah & Anr.’ Vs. `Teco Industries & Anr.’ in Comp. App. (AT) (Ins.) No. 470/2022. This Tribunal in Paragraph 16 has observed that the Adjudicating Authority or Appellate Authority are not required to further examine the record maintained by the Information Utility, more so when the record on the Information Utility is deemed authenticated and no dispute or refutation of the said record has been done by the Corporate Debtor earlier. In the present case as noticed above, Appellant unfortunately, could not appear before the Adjudicating Authority and case proceeded Ex-Parte against him. Undoubtedly Report of the NeSL is relevant evidence, but it cannot be conclusive proof for nature of transaction. A three Member Bench of this Tribunal in the matter of `Dheeraj Wadhawan’ Vs. `Yes Bank Ltd. & Anr.’ in Comp. App. (AT) (Ins.) No. 953 of 2021, decided on 16.03.2022, while dealing with information recorded in the Information Utility had observed that record of Information Utility is relevant but record of Information Utility is not conclusive proof. Following was held in Paragraph 31 of the Judgment:
“31. As noted above, there being no default by the principal borrower on 01.08.2019, all subsequent action by the Bank on the alleged default dated 01.08.2019 are unsustainable. Hence, information recorded in the information utility on the strength of loan recall notice dated 18.11.2019 in no manner can be read as material to prove that default was committed by the Bank on 01.08.2019. Under the statutory scheme, the record of information utility is relevant but record of information utility is not conclusive proof of any default and a Corporate Debtor is always at liberty to disapprove the statement as contained in the information utility record.”
The Adjudicating Authority has to advert to nature of transaction for coming to the conclusion that there is a Financial Debt on basis of which Section 7 Application can be admitted. More so, when in the present case, it is not even the case of the Respondent that there was any interest payable, no material has been shown to prove that the amount given to the Corporate Debtor of ₹1,00,00,000/- was disbursement towards time value of money. Amount is of ₹1,00,00,000/- is shown right from 2010 to 2020 and in the Balance Sheet of the Corporate Debtor, the amount is shown as Security amount as long-term liability.
From the facts as noticed above, we are satisfied that ends of justice be served in remitting the matter for fresh consideration before the Adjudicating Authority, with liberty to the Appellant to file a Reply within 3 weeks from today.
In result, Appeal is allowed Order dated 06.03.2024 is set aside. Appellant is allowed three weeks time to file a Reply to Section 7 Application before the Adjudicating Authority. The Respondent under Section 7 Application will also have opportunity to file a Rejoinder to the Reply within two weeks thereafter. Parties may request the Adjudicating Authority to fix a date after six weeks for fresh consideration of Section 7 Application. We make it clear that our observations made in the Orders have been made only for purposes of deciding the Appeal and may not be treated any conclusive opinion on the issues which are open to consideration in Section 7 Application. Adjudicating Authority may proceed to decide Section 7 Application in accordance with law, without being influenced by any of the observations made in this Appeal.