Vasudev Bissa vs M/s. PDB Venture Pvt. Ltd.

Per: Justice Sharad Kumar Sharma, Member (Judicial):

The challenge in the instant Company Appeal is to the impugned order dated 07.01.2024, as it was rendered by the Learned NCLT, Bengaluru Bench, in CP(IB) No. 20/BB/2023, by virtue of which the Section 7 Application preferred by the Respondent (M/s. PDB Venture Pvt. Ltd.), the Financial Comp. App (AT) (CH) (Ins) No.431/2024 Page 1 of 8 Creditor, was directed to be admitted, and as a consequence, CIRP proceedings were directed to be commenced against the Corporate Debtor, M/s. Arisu Retail Private Limited of which Mr. Vasudev Bissa is a Director.

The brief facts which require consideration herein for adjudication of the instant Company Appeal, particularly in the context of the submissions of the Learned Counsel for the Appellant, are from the perspective that the admission of the proceedings under Section 7 of the I&B Code, at the behest of Respondent No. 1, was bad in law, because the alleged loan of Rs.2,05,00,000/-(Rupees Two Crores Five Lakhs Only), which was treated as a debt due from the Corporate Debtor, was said to have been given on the basis of an “oral agreement”. The Learned Counsel for the Appellant contends that, under corporate law, no financial assistance can be extended to a Corporate Debtor on the basis of an oral agreement, as such a concept is alien to procedural requirements. Hence, he argues that since the very foundation of the proceedings rests upon an alleged oral agreement relating to the extension of financial assistance of Rs. 2,05,00,000/-, the same cannot constitute a valid basis for initiation of proceedings under Section 7 of the I&B Code.

The Appellant, in his capacity as Director/Promoter of the Corporate Debtor, admits that he met the Respondent/Financial Creditor in July 2020, and that they agreed to extend a loan of Rs.2,05,00,000/-. According to the Appellant’s own pleadings, it was agreed that the said financial assistance would be independent of all other financial transactions between the Corporate Debtor and the Financial Creditor. It is also an admitted case of the Appellant that the financial borrowing did take place, and the amount was disbursed in ten tranches, including the last tranche of Rs.25,00,000/- having been disbursed on 21.09.2020, which itself demonstrates the borrowing of debt by the Appellant.

It is the Appellant’s own admitted case that the company partially repaid the amount, but since the payment of the amount was not substantiated by proof, the proceedings under Section 7 of the I&B Code were initiated by the Respondent. The Appellant further admits that as against the loan advances, an interest of 7% was agreed to be paid, amounting to Rs.7,44,780/-, and that Tax deducted at source (TDS), on the said amount has been deducted as reflected in Form 16A submitted under Rule 31(1)(b) of the Income Tax Act, 1961. The Learned Counsel for the Respondent argued that since the Appellant’s own pleadings and documents, including Form 16A, show that TDS was deducted, the financial assistance of Rs.2,05,00,000/- stands established, and cannot be denied merely because it is alleged to be based on an oral agreement—which is not prohibited in law, so long as it is supported by the books of accounts or other authenticated documents.

The concept of an “oral agreement” becomes relevant only to the extent that, for initiation of proceedings under Section 7 of the I&B Code, the essential requirement is to establish default and existence of debt. The Appellant admits that, the amount exchanged hands in July 2020, interest was paid, and the transaction was reflected in the balance sheet of the Corporate Debtor. Thus, the basic ingredients of Section 7(3) were satisfied, since the debt due and default stood established and also got reflected in the balance sheet of the Appellant.

The Appellant has pointed out that two civil suits—Suit No.142/2022 and 144/2022 - are pending on the same issue, the Learned Counsel for the Respondent has argued to the contrary that the pendency of the suits has no relevance for the initiation of proceedings under Section 7 of the I&B Code. To deny liability, the Appellant referred to objections filed before the Learned Tribunal on 08.01.2024, claiming that no material document was produced to establish the existence of the debt.

The Appellant further submitted that reference to the balance sheet cannot be accepted conclusively as proof of payment. The Learned Counsel for the Respondent has countered by stating that for proceedings under Section 7 of the I&B Code, entries in the balance sheet or supporting documents are sufficient to justify initiation. He referred to entries in the balance sheet for the year ending 31.03.2021, particularly Page 3 (Page 94 of the Appeal), reflecting the existence of a debt and contended that these entries sufficiently demonstrated that the amount was due, constituting a financial debt.

We are of the opinion that the entries in the balance sheet, particularly those relating long-term advances in Column 9 and interest paid, reflect that long-term advances were extended, though not secured loans. The Appellant attempted to distinguish the correspondence dated 24.09.2020 issued by Director Mr. Mohammed Sulaiman, acknowledging receipt of Rs. 2,05,00,000/- and agreeing to repay the same by 30.09.2022. We are of the view that such acknowledgment itself constitutes a debt due, particularly since Mr. Mohammed Sulaiman, then and thereafter, continued to be a Director, as evident from the Annual General Meeting notice dated 12.12.2021. Even the bank statement referred to by the Appellant cannot negate the TDS and balance sheet entries, which collectively establish the loan transaction and the default on 30.09.2022.

The Learned Counsel for the Appellant argued that the Board Resolution dated 15.07.2020 which forms the basis of the grant of loan was not found in the Director’s Report which has been filed with RoC and therefore the alleged Board Resolution dated 15.07.2020 cannot be relied upon, to which Learned Counsel for the Respondent has countered by saying that conducting board meetings is an internal matter of the Respondent which cannot be challenged by the Appellant.

The Learned Tribunal based on appreciation of evidence derived from the respective pleadings has come to a conclusion that owing to Covid-19 financial crunch, the Corporate Debtor had approached the Financial Creditor for financial assistance, which was agreed with specific conditions and it was settled between them that repayment would be made by 30.09.2022, with interest payable on the principal.

The Respondent had placed Form-D on record, before Learned Adjudicating Authority containing proof of advances made and proof of disbursement. The Adjudicating Authority noted that there were continuous financial transactions between the parties and that the amount was duly reflected in the books and that entries in the balance sheet for the financial year 2020-21 showed that the loan amount was transferred for business purposes and reflected under Long-Term Borrowings (Unsecured).

During the proceedings, the Respondent produced additional documents, including Form D and acknowledgments signed by former Director Mr. Mohammed Sulaiman, which further established default.

A weak attempt was made by the Appellant to argue that Mr. Mohammed Sulaiman was merely a “nominee director”, but the Tribunal rejected this as misleading, since records showed he was a Director since 26.02.2020, including during financial year 2020-21. Form-D dated 25.01.2024 also recorded the date of default as 30.09.2022. Thus, the Learned Tribunal rightly held that his acknowledgment of loan dated 24.09.2020 was binding on the Corporate Debtor.

The solitary argument emphasised by the Appellant was whether a loan could be based on an oral agreement. However, in view of the acknowledgment dated 24.09.2020, the reflection of the loan amount in Income Tax records and balance sheets, and the date of default in Form-D (30.09.2022), the Learned Adjudicating Authority rightly concluded that the financial debt and default stood established.

We are of the view that once the Appellant’s own documents – balance sheet, TDS forms, correspondence, and acknowledgment – establish the transaction of Rs.2,05,00,000/-, the defence of an "oral agreement" cannot be accepted. The Appellant's own pleadings admit the financial relationship and disbursal of the loan. Hence, the attempt to colour the transaction as merely based on an agreement is unacceptable.

Owing to the fact that, in accordance with Section 7 of the I&B Code, the factum of debt stands established by the supporting documents, the argument that the loan is non-existent on the grounds of an oral agreement, is not acceptable owing to the own admissions made by the Appellant, and the recordings in the Impugned Order, by virtue of which the proceedings under Section 7 of the I&B Code, was commenced by admission of the application filed under Section 7 of the I&B Code. The entries made in the balance sheet, as well as, the reflection of the interest which had accrued on the basis of the agreement as referred to in Para 2 of the Impugned Order and as shown in the TDS Form-16 A, show the existence of loan transaction and liability payable. Hence, admission of debt made under Section 7 of I&B Code, is absolutely sustainable in view of the findings recorded in the Impugned Order and the exception attempted to be carved out since remains un-established would stand ‘denied’. The Impugned Order admitting the Appellant to CIRP proceedings, under Section 7 of the I&B Code, does not suffer from any error, and it doesn’t call for any interference. Accordingly, the same is ‘dismissed’.