Vinita Agarwala & Ors. vs Power Pack Steel Industries Pvt. Ltd.

“PART 4

PARTICULARS OF FINANCIAL DEBT (Financial Creditor 1)
1.	TOTAL AMOUNT OF DEBT GRANTED DATE (S) OF DISBURSEMENT	I. The Corporate Debtor had approached the Financial Creditor 1 for a short term Business loan for a sum of Rs. 40,00,000/- (Rupees Forty Lakhs Only) on 29th June, 2017. The said Loan Amount was disbursed by the Financial Creditor to the Corporate Debtor on the said

date vide a RTGS transfer made to the Corporate Debtor's bank i.e. Federal Bank, IFSC Code No -FDRL0001196, A/c No11960200053249 under UTR No HDFCR52017062998853644. The terms of the said short term loan was that the principal would be paid on demand and that the principal would carry interest @ 15% per year. The Corporate Debtor received the said loan amount. A copy of the Bank account statement reflecting the payment of the loan sum by the Financial creditor to the Corporate debtor loan amount is annexed hereto and is marked with the letter "C1". The Corporate Debtor promised to repay the loan amount on 31st March, 2018. On several and repeated requests for payment of the loan amount the Corporate Debtor had promised the Financial Creditor 1 that it would repay the entire loan amount on 30th June, 2018. The Corporate Debtor has, though belated, paid the interest amount on the loan amount of Rs. 40,00,000/-after deducting TDS therefrom upto 31st March, 2018. The payment of interest was always by way of a Bank Transfer. It is pertinent to mention herein that though TDS has been deducted by the Corporate Debtor for the amounts paid in 2018-19 the same has not been deposited with the Statutory authorities as such the Financial Creditor has written to the Corporate

“10.

The alleged Financial Creditors being engaged in the trade of iron and steel, since long had placed verbal orders with the Corporate Debtor from time to time for supply of finished steel round of different sizes and shape and also made advance payments to the Corporate Debtor. It is submitted that due to adverse market conditions the manufacturing process of the said finished steel rounds as ordered by the said alleged Financial Creditors was delayed and the Corporate Debtor as per its oral commitment, paid interest on the amount received after deduction of tax at source to the alleged Financial Creditors.”

“5.

Definitions. –(8) “financial debt” means a debt alongwith interest, if any, which is disbursed against the consideration for the time value of money and includes–

(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);]”

“12.

In this case as per the averments of the petitioners that the respondent/corporate debtor received the loans from the petitioners. If so, it is done in violation of the bar provided under section 73(1) of the Companies Act 2013. Section 23 of the Indian Contract Act 1872 runs as follows:

“23.

What consideration and objects are lawful, and what not. The consideration or object of an agreement is lawful, unless-it is forbidden by law; or is of such a nature that, if permitted, it would defeat the provisions of any law; or is fraudulent; or involves or implies, injury to the person or property of another; or the Court regards it as immoral, or opposed to public policy. In each of these cases, the consideration or object of an agreement is said to be unlawful. Every agreement of which the object or consideration is unlawful is void.

13.

According to section 23 of contract Act 1872 any transaction or contract entered between the parties are void if the said transaction is forbidden by any law or if such transaction is permitted it would defeat any provision of law. In our case according to the petitioners/Financial creditors the short-term loans advanced by them were received by the Respondent/corporate debtor. This is against the bar provided under section 73(1) R/w 2(31) of The Companies Act 2013, further if this transaction is permitted it will lead to defeat the Section 73(1) of The Companies Act, so the transaction or contract as averred by the petitioners in the Petition is Void as Provided under Section 23 of Indian Contract Act 1873.

18.

As referred supra in view of the definition of word "deposit" defined in section 2(31) of the Companies Act 2013 and in Rule 2 (1)(c) of The Companies (Acceptance of Deposits) Rules 2014, deposit includes the receipt of money by way of loan also and from public means from any person or persons in the country which includes the petitioners. In the situation the meek defence taken on the petitioner side is unsustainable.

19.

For the reasons stated above the transactions or contracts entered by the financial creditors as projected by them with the corporate debtor are void. When the transactions are void, no right accrues upon any person in pursuance of the void transactions, in consequence the claim made by the financial Creditors in the petition is unenforceable and the petition is liable to be dismissed.

20.

In view of the conclusion arrived on the admitted case of the petitioners/Financial Creditors that the transactions/contracts entered by the financial creditors with corporate debtor is void, there is no need to decide the character of amount advanced by them.

In fine the petition is DISMISSED.”

“73.

Prohibition on acceptance of deposits from public. (1) On and after the commencement of this Act, no company shall invite, accept or renew deposits under this Act from the public except in a manner provided under this Chapter:

Provided that nothing in this sub-section shall apply to a banking company and non-banking financial company as defined in the Reserve Bank of India Act, 1934 (2 of 1934) and to such other company as the Central Government may, after consultation with the Reserve Bank of India, specify in this behalf.

(2)

A company may, subject to the passing of a resolution in general meeting and subject to such rules as may be prescribed in consultation with the Reserve Bank of India, accept deposits from its members on such terms and conditions, including the provision of security, if any, or for the repayment of such deposits with interest, as may be agreed upon between the company and its members, subject to the fulfilment of the following conditions, namely:-

(a)

issuance of a circular to its members including therein a statement showing the financial position of the company, the credit rating obtained, the total number of depositors and the amount due towards deposits in respect of any previous deposits accepted by the company and such other particulars in such form and in such manner as may be prescribed;

(b)

filing a copy of the circular along with such statement with the Registrar within thirty days before the date of issue of the circular;

[(c) depositing, on or before the thirtieth day of April each year, such sum which shall not be less than twenty per cent. of the amount of its deposits maturing during the following financial year and kept in a scheduled bank in a separate bank account to be called deposit repayment reserve account;]

* * *

(e)

certifying that the company has not committed any default in the repayment of deposits accepted either before or after the commencement of this Act or payment of interest on, [such deposits and where a default had occurred, the company made good the default and a period of five years had lapsed since the date of making good the default;] and

(f)

providing security, if any for the due repayment of the amount of deposit or the interest thereon including the creation of such charge on the property or assets of the company:

Provided that in case where a company does not secure the deposits or secures such deposits partially, then, the deposits shall be termed as "unsecured deposits" and shall be so quoted in every circular, form, advertisement or in any document related to invitation or acceptance of deposits.”

“76.

Acceptance of deposits from public by certain companies. (1) Notwithstanding anything contained in section 73, a public company, having such net worth or turnover as may be prescribed, may accept deposits from persons other than its members subject to compliance with the requirements provided in sub-section (2) of section 73 and subject to such rules as the Central Government may, in consultation with the Reserve Bank of India, prescribe:

Provided that such a company shall be required to obtain the rating (including its networth, liquidity and ability to pay its deposits on due date) from a recognised credit rating agency for informing the public the rating given to the company at the time of invitation of deposits from the public which ensures adequate safety and the rating shall be obtained for every year during the tenure of deposits:

Provided further that every company accepting secured deposits from the public shall within thirty days of such acceptance, create a charge on its assets of an amount not less than the amount of deposits accepted in favour of the deposit holders in accordance with such rules as may be prescribed.

(2)

The provisions of this Chapter shall, mutatis mutandis, apply to the acceptance of deposits from public under this section.”

“2.

Definitions.— (31) "deposit" includes any receipt of money by way of deposit or loan or in any other form by a company, but does not include such categories of amount as may be prescribed in consultation with the Reserve Bank of India;”

“76A. Punishment for contravention of section 73 or section 76.- Where a company accepts or invites or allows or causes any other person to accept or invite on its behalf any deposit in contravention of the manner or the conditions prescribed under section 73 or section 76 or rules made thereunder or if a company fails to repay the deposit or part thereof or any interest due thereon within the time specified under section 73 or section 76 or rules made thereunder or such further time as may be allowed by the Tribunal under section73,-

(a)

the company shall, in addition to the payment of the amount of deposit or part thereof and the interest due, be punishable with fine which shall not be less than [one crore rupees or twice the amount of deposit accepted by the company, whichever is lower] but which may extend to ten crore rupees; and

(b)

every officer of the company who is in default shall be punishable with imprisonment which may extend to [seven years and with fine] which shall not be less than twenty-five lakh rupees but which may extend to two crore rupees,

* * *

Provided that if it is proved that the officer of the company who is in default, has contravened such provisions knowingly or wilfully with the intention to deceive the company or its shareholders or depositors or creditors or tax authorities, he shall be liable for action under section 447.]”

“19. Applicability of sections 73 and 74 to eligible

companies.- Pursuant to provisions of sub-section (2) of section 76 of the Act, the provisions of sections 73 and 74 shall, mutatis mutandis, apply to acceptance of deposits from public by eligible companies.

Explanation.- For the purposes of this rule, it is hereby clarified that in case of a company which had accepted or invited public deposits under the relevant provisions of the Companies Act, 1956 and rules made under that Act (hereinafter known as "Earlier Deposits") and has been repaying such deposits and interest thereon in accordance with such provisions, the provisions of clause (b) of sub-section (1) of section 74 of the Act shall be deemed to have been complied with if the company complies with requirements under the Act and these rules and continues to repay such deposits and interest due thereon on due dates for the remaining period of such deposit in accordance with the terms and conditions and period of such Earlier Deposits and in compliance with the requirements under the Act and these rules;

Provided further that the fresh deposits by every eligible company shall have to be in accordance with the provisions of Chapter V of the Act and these rules”

“3.

Definitions. –(6) “claim” means –

(a)

a right to payment, whether or not such right is reduced to judgment, fixed, disputed, undisputed, legal, equitable, secured, or unsecured;

(b)

right to remedy for breach of contract under any law for the time being in force, if such breach gives rise to a right to payment, whether or not such right is reduced to judgment, fixed, matured, unmatured, disputed, undisputed, secured or unsecured;”

“30.

On the other hand, as we have seen, in the case of a corporate debtor who commits a default of a financial debt, the adjudicating authority has merely to see the records of the information utility or other evidence produced by the financial creditor to satisfy itself that a default has occurred. It is of no matter that the debt is disputed so long as the debt is “due” i.e. payable unless interdicted by some law or has not yet become due in the sense that it is payable at some future date. It is only when this is proved to the satisfaction of the adjudicating authority that the adjudicating authority may reject an application and not otherwise.”

“32.

There is no second opinion of an important fact that distinction between "deposits" and "loans" may not be a significant factor for interpreting the word, "deposit". One cannot ignore a candid fact that "maturity of claim", "default of claim" or "invocation of guarantee" has no nexus in regard to the filing of claim before the "interim resolution professional" under section 18(1)(b) of the "Insolvency and Bankruptcy Code" and the "resolution professional" under section 25(2)(e) of the Code.

33.

As per the "Companies (Acceptance of Deposits) Rules, 2014", the term "deposit" is defined under rule 2(1)(c) in an inclusive fashion. The meaning of "deposit" is elongated by covering receipts of money in any other form. For approaching the jurisdiction of the "Tribunal" as per section 74(2) of the "Companies Act, 2013", even a partial failure by the company to repay the deposit was sufficient.

34.

Be that, as it may, in the light of detailed qualitative and quantitative discussions, resting on the fact that the "respondent"/"corporate debtor" under the "recurring investment plan" had assured to provide the investors' interest on their investment sum along with the investment amount, for the "time value of money" (of course based on the amounts of investments made by the investors) and in view of the fact that the "respondent"/"corporate debtor" failed in its commitment to offer the allotment and/or the possession of the "plots of land" as promised by it or pay the assured returns, or repay the sums collected by it along with interest on the maturity of the schemes, etc., this "Tribunal" comes to a consequent conclusion that the "appellant's" position is that of a "financial creditor" as per section 5(7) read with section 5(8) of the "Insolvency and Bankruptcy Code" and that there is default in payment of the accepted amounts by the "respondent"/"corporate debtor". In short, the "respondent"/"corporate debtor" squarely comes within the ambit of definition of "financial debt" and the contra conclusions arrived at by the "Adjudicating Authority" (National Company Law Tribunal, New Delhi Bench-V) to the effect that "the amount which the applicants deposited does not come under the definition of 'debt' and further that it was unable to accept the contention of the applicants that there was a default in payment of debt, are incorrect, invalid the same is set aside by this 'Tribunal' to secure the ends of justice. Likewise, the other observation made by the 'Adjudicating Authority' in the impugned order that the applicants are at liberty to file an appropriate application under Chapter V of the Companies Act, 2013 is also set aside. Resultantly, the "appeal" succeeds.”

“42.

On a careful consideration of respective contentions and in view of the fact that the Respondent/Corporate Debtor had accepted certain amounts from the Appellant and credited the interest in a consistent manner against such amounts for a continuous period of five years, as pleaded by the Appellant and also that the ‘Corporate Debtor’ had accepted money from the Appellant against the payment of interest and bearing in mind the payment of interest on the amounts borrowed by the Respondent Company is nothing but a consideration for the time value of money and in as much as the ‘interest’ is the compensation paid by the borrower to the lender for using the lender's money over a period of time, this Tribunal comes to an inevitable and inescapable conclusion that the Appellant's status is that of a ‘Financial Creditor’ as per Section 5(7) read with Section 5(8) of the Code and that there is a default in payment of the accepted amounts by the Respondent/CD and in short, the Respondent/Corporate Debtor comes within the purview of the definition of ‘Financial Debt’. Viewed in that perspective, the contra view taken by the Adjudicating Authority in coming to the conclusion that the application filed by the Appellant/Financial Creditor is not maintainable for initiation of Section 7 of the Code is clearly unsustainable in the eye of law, as held by this Tribunal, to prevent an aberration of justice. Consequently, the Appeal succeeds.”

“22.

But in no case the debt advanced by the Company to a corporate body can be held to be unrecoverable only because of the reason that there was a irregularity in advancement of the loan which became a debt to a third party or in other words the CD cannot take the shelter of Section 186 of the Act to deny its liability to return the amount taken by it being a corporate body which is due and payable.

23.

The decision in the case of M. Sai Eswara Swamy (Supra) is not applicable to the present controversy because in that case the basic issue was as to whether the company petition was filed by the person without having the authority of the board through resolution. In this regard, the finding has been recorded in the said case is that “thus, we are affirmed the finding of Ld. Tribunal that there is no board resolution authorising the petitioner to file the petition, therefore, the petition is not maintainable”. It has also held that with the aforesaid we are of the view that the Tribunal has rightly held that the petition is not maintainable, therefore, no interference is called for in the impugned order. The said appeal was dismissed summarily and no reasoning was given in this regard that if there is violation of Section 186 then the CD can take the plea that the transaction has become void and is not liable to repay the same.

24.

The argument of the Respondent that a written financial contract is necessary for providing debt has been negated by this Court in the case of Agarwal Polysacks Ltd. (Supra) in which the following observations has been made:—

11.

We need to test the submission of learned counsel for the Respondent that the written financial contract is necessary for proving debt. A financial contract supported by financial statements as evidence of the debt is one of the documents contemplated in Regulation 8(2) but that is not exclusive requirement for proving existence of debt. Financial contract thus can very well be furnished to prove the financial debt but a plain reading of Regulation 8(2) indicate that it is not mandatory that existence of financial debt has to be proved by a financial contract. For example : records available with an information utility can very well be used as proof for existence of financial debt. Further, financial statements showing that the debt has not been paid is also one of the clauses in Regulation 8(2) by which existence of debt can be proved.

25.

The Appellant has already proved on record about the amount which was disbursed as it has not been disputed and that the said amount is a debt fully reflected in its balance sheet continuously as an unsecured loan and had not been paid despite the fact that repeated demands were made through five demand notices, therefore, it falls within the definition of default on the part of the Respondent.

26.

Hence, once the debt and default has been proved, therefore, the Tribunal has committed a patent error in dismissing the application filed under Section 7 of the Code and consequently, the present appeal is hereby allowed and the impugned order is set aside though without any order as to costs.

I. As, if any, are hereby closed.”

“1.

Delay condoned.

2.

Issue notice, returnable on 17.11.2025.

3.

In the meantime, parties are directed to maintain status.”

“13.

Coming to the next submission advanced by the CD that loan extended was not in accordance with Section 186 of the Companies Act, 2013, the said issue has been considered by the Adjudicating Authority from paragraphs 39 to 45. It is useful to notice paragraph 41 of the impugned order, which is as follows:

“41.

Thus, provision of Section 186 explicitly provides that a Company cannot advance loan to any person or body corporate exceeding 60% of its paid-up share capital, free reserves and securities premium account or one hundred per cent of its free reserves and securities premium account, whichever is more. In the instant case, the loan amount of Rs. 2,50,00,000/- (Rupees Two Crore Fifty Lakh Only) is provided in the year 2015; however, from the balance sheet of the Financial Creditor, it evident that in the year 2015, the paid up capital of the Financial Creditor was Rs. 66,42,500/- (Rupees Sixty Six Lakh Forty Two Thousands Five Hundred Only) with Reserve and Surplus amounting to Rs. 1,246,422,050/- (Rupees One Hundred Twenty Four Crores Sixty Four Lakhs Twenty Two Thousands and Fifty Only). Thus, in the year 2015, the total shareholders fund were amounting to Rs. 1,253,064,550/- (Rupees One Hundred Twenty Five Crores Thirty Lakhs Sixty Four Thousands and Five Hundred Fifty Only).

14.

The Adjudicating Authority has, thus, returned a finding that loan extended by the Financial Creditor to the CD was not in violation of Section 186 of the Companies Act, 2013.

15.

Learned Counsel for the Appellant in support of his submissions has placed reliance on the judgment of this Tribunal Pancham Studios Pvt. Ltd. v. Konark Aquatics & Exports Pvt. Ltd. - Company Appeal (AT) (Ins.) No. 406 of 2024. In the above case, application under Section 7 filed by the Financial Creditor was rejected by the Adjudicating Authority. One of the submissions raised before the Adjudicating Authority was that loan was in violation of Section 186 of the Companies Act, 2013. The submission regarding violation of Section 186 has been noticed and this Tribunal has allowed the Appeal and set aside the order of Adjudicating Authority dismissing Section 7 application. In paragraph 21 of the order, this Tribunal has made following observation:

“21.

Much emphasis has been laid by the Respondent as well as the Tribunal about non-adherence to the provision of Section 186 of the Act. Section 186(2)(a) of the Act says that “no company can directly or indirectly give any loan exceeding 60% of its paid up share capital free reserves and securities premium account of its free reserves and securities premium account whichever is more”. However, Section 186(13) provides for punishment for violation of the provisions of the section. It provides that “the Company shall be punishable with fine which shall not be less than Rs. 25000 but which may extend to Rs. 5 lakh and officer of the company who is in default shall be punishable with imprisonment for a term which may extend to two years and with fine which shall not be less than Rs. 25000 but which may extend to Rs. 1 lakh.”

16.

This Tribunal held that CD cannot take the shelter of Section 186 to deny its liability to return the amount taken by it being a corporate body which is due and payable. In paragraph-22 of the judgment, following has been observed:

“22.

But in no case the debt advanced by the Company to a corporate body can be held to be unrecoverable only because of the reason that there was a irregularity in advancement of the loan which became a debt to a third party or in other words the CD cannot take the shelter of Section 186 of the Act to deny its liability to return the amount taken by it being a corporate body which is due and payable.”

17.

The above judgment of this Tribunal in no manner supports the submission of the Appellant, rather, this Tribunal has rejected the said challenge raised by the CD in the said case.”

“Heard Ld. Sr. Counsel for the Appellant. He submits that the Appellant is a Director and 50% Shareholder of both the Financial Creditor Companies i.e. Vision Infotel India Pvt. Ltd. and Vision Infracon India Pvt. Ltd. There is a deadlock in the Financial Creditor Company Mr. K Siva Rama Krishna Kancharla who holds remaining 50% share of the Financial Creditors Companies is a Managing Director and his wife holds 4% shareholding in the Respondent Company (Corporate Debtor). The Appellant has requested several times to Mr. K Siva Rama Krishna Kancharla to sign the board resolution to initiate legal proceedings against the Respondent Company but he refused to sign the Board Resolution. Ld. Adjudicating Authority has dismissed the Application under Section 7 of the IBC on the ground that no board resolution authorizing the Petitioner (Appellant herein) to file the Petition is filed alongwith the Petition. In this regard, it is submitted that Shareholder/Director of the Company can initiate action on behalf of the Company if the same is in the interest of the Company and the Board is not pursuing the same. As per doctrine of derivative action the Appellant being 50% shareholder and director of the Petitioner Company can maintain the Petition under Section 7 of the IBC. For this purpose, he placed reliance on the Judgment of Hon'ble Bombay High Court in the case of Onyx Musicabsolute Com Pvt. Ltd. v. Yash Raj Films Pvt. Ltd., 2008 SCC OnLine Bom 636, Judgment of Hon'ble Calcutta High Court in the case of Star Light Real e-State (Ascot) Morisus Pvt. Ltd. v. Jagriti Trade Services Pvt. Ltd., AIR 2018 Cal 173 and Federal Court Reports Dr. Satya Churn Law v. Rameshwar Prasad Bajoria, Civil Appeal No. LXV of 1949

2.

Ld. Sr. Counsel for the Appellant submits that Ld. Adjudicating Authority has dismissed the Petition under Section 7 of the IBC on the other ground that no Board Resolution was passed to advance loan under Section 186 of the Companies Act, 2013. It is submitted that such board resolution is not required when the Corporate Debtor in his balance sheet acknowledging the debt. Thus, Ld. Adjudicating Authority has erroneously dismissed the Petition as not maintainable.”

“7.

Ld. Adjudicating Authority has also held that no Board Resolution was filed in regard to advance loan to Corporate Debtor Company as required under Section 186 of the Companies Act, 2013. In this regard, Ld. Sr. Counsel for the Appellant submitted that the Corporate Debtor Company in his balance sheet acknowledged the debt. Therefore, such resolution is not required to maintain the petition under Section 7 of the IBC. We are not convinced with this argument. We found no flaw in the findings of Ld. Adjudicating Authority.

8.

With the aforesaid, we are of the view that Ld. Adjudicating Authority has rightly held that the Petition is not maintainable. Therefore, no interference is called for in the impugned order.

Thus, the Appeal is dismissed summarily without notice to the Respondent. No order as to costs.”

“5.

After hearing Ld. Sr. Counsels for the parties, we have considered the submissions, undisputedly there is no board resolution authorizing the appellant to file the petition under Section 7 of the IBC and filed this Appeal as there is deadlock in the Financial Creditors Company.”

“11.

We have duly considered the arguments advanced by the learned counsel for both the parties and perused the records carefully. The short question before us is whether in the facts of the present case, there is sufficient evidence before the Adjudicating Authority to establish that the section 7 application was filed collusively and with mala fide intention by the appellants which was good enough to attract section 65 of the Insolvency and Bankruptcy Code and consequential recall of the initiation of the corporate insolvency resolution process of the corporate debtor.”

“24.

Pointing out another incidence of infraction of the Companies Act, it was submitted that the corporate debtor being a private company was not eligible under section 76 of the Companies Act, 2013 to accept any loan from the appellants as they were not members or shareholders of the corporate debtor. This further goes to expose the fraud played upon the Adjudicating Authority into believing normal business entries to be loan entries. Further, under section 186(2)(a) of the Companies Act, a company cannot grant a loan exceeding 60 per cent. of its paid-up share capital. Appellant No. 1 had paid-up share capital of only Rs. 10 lakhs but had allegedly given a loan amounting to Rs. 50 lakhs. Moreover, there is no special board resolution authorising the said loan exceeding the limits during the year 2016. This also shows that these transactions were not loan transactions but transactions undertaken with a different motive but given the garb of a loan transaction.”

“16.

Having heard the learned counsel for all the parties, it is important to restate a few fundamentals. Given the object of the IBC as delineated in paras 25 to 28 of Swiss Ribbons (P) Ltd. v. Union of India [Swiss Ribbons (P) Ltd. v. Union of India, (2019) 4 SCC 17] [“Swiss Ribbons”], it is clear that the IBC is a special statute dealing with revival of companies that are in the red, winding up only being resorted to in case all attempts of revival fail. Vis-à-vis the Companies Act, which is a general statute dealing with companies, including companies that are in the red, the IBC is not only a special statute which must prevail in the event of conflict, but has a non obstante clause contained in Section 238, which makes it even clearer that in case of conflict, the provisions of the IBC will prevail.”