TMI Blog2022 (8) TMI 1481X X X X Extracts X X X X X X X X Extracts X X X X ..... reditor to the Corporate Debtor or in simple term, if there is no disbursal then even Financial Debt will not attract Section 7 of the Code, as it looks from the bare reading of Section 5(8) of the Code in order to qualify under Section 7 of the Code, the following basic ingredients are a requirement to get covered under Section 7 of the Code: a). The Creditor must be a Financial Creditor and be covered by Section 5(7) (8) of the Code; b). The Financial Debt must be owed by the Corporate Debtor. However, the default may be occurred in respect of that Financial Creditor or any other Financial Creditor.; c). Financial Debt to carry interest element and be disbursed against the consideration of time value of money; d). Money borrowed against the payment of interest; e). Investment made with the object of profit sharing from revenue generated will also not be covered within the ambit of Section 7 of the Code; f). Award received under Arbitration and Conciliation Act, 1996 or amount emerged from the Settlement Agreement will not come within the purview of Section 7 of the Code. Even the Applicant has mentioned in the Form-1, Part-IV total amount of debt guaranteed as on 31st Oc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of money and includes- .. (c) any amount raised pursuant to any note purchase facility or the issue of bonds, notes, debentures, loan stock or any similar instrument 7. Therefore, the plea taken by the Corporate Debtor is devoid of merits and stands rejected for the reasons recorded herein above. The evidence placed by the financial creditor is sufficient to ascertain the existence of a default on the part of the corporate debtor. The Financial Creditor has fulfilled all the requirements of law and proposed the name of the Resolution Professional for appointment of IRP. Hence, the Application stands Admitted and the commencement of the Corporate Insolvency Resolution Process is initiated . 3. This is the Case of Share subscription cum Shareholders agreement by and between IL FS Trust Company Ltd. (as Trustee to the India REIT fund Scheme IV) (the Investor) and Mr. Raj Singh Gehlot (the Promoter Ambience Pvt. Ltd. (Developer Ambience Projects and Infrastructure Pvt. Ltd.) the SPV executed on 28.05.2011. 4. The relevant Agreement appearing at pg.109 of the APB are as under: (a) SPV, Investor, Promoter and the Developer are hereinafte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) Investor debentures shall mean the optionally convertible debentures of Rs. 10 each issued as per the terms and conditions specified in Schedule 4 hereto by the SPV to the Investor against the whole or part of Investor Contribution or any further contribution by the Investor in the SPV (excluding Additional Investor Contribution). (i) Project shall mean the development of residential apartments and commercial spaces on 3 parcels of land of 14.82 acres, 0.05 acres and 2.76 acres, aggregating to a total land area of 17.63 acres, situated at Sector 22, Old Delhi Gurgaon Road, Gurgaon so as to achieve Saleable Area (excluding car parks), with a total FSI of 13,43,935 (Thirteen Lakh forty Three Thousand Nine Hundred and thirty Five) square feet at 1.75 times of area of all three parcels of land. A minimum of 14.82 acres of land out of the total 17.63 acres of land is to be used for residential group housing development. (j) Project Land shall mean the land required for the development of the Project as per the Business Plan, aggregating to a total land area of 17.63 acres situated at sector 22, Old Delhi Gurgaon Road, Gurgaon and more appropriately describe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iliates for the surrender of all rights with respect to the Project Land in favour of the SPV by the Developer or its Affiliates. (n) Clause 1A.3 Capital Structure The capital structure of the SPV pursuant to the issuance of Investor Debentures and Developer Debentures against the Investor Contribution and the developer Contribution, which issuance shall happen on the date of infusion of Investor Contribution by the Investor into the SPV, shall be as described below: Securities Investor (Rs.) Developer and Promoter (Rs.) Equity Shares 98,000 1,02,000 Class A Shares 100,000 -- Class B Shares -- 100,000 Investor Debentures 134,93,63,430 -- Developer Debentures -- 14,044,43,570 TOTAL 134,95,61,430 140,46,45,570 (o) C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... romoter/developer/Investor over and above the issue price of the developer Securities or Investor Securities, as the case may be, shall be considered as part of their respective share in the distribution of balance revenues/cash flows as above. 5. It was also stated by the Ld. Sr. Counsel for the Appellant that the Respondent No. 1 is a trustee of (India REIT fund Scheme-IV) which is registered as a venture capital fund for making investments in securities of venture capital undertakings engaged in real estate property management, infrastructure and allied sectors in India. 6. It was also stated by the Ld. Sr. Counsel for the Appellant that the IRP appointed by the Adjudicating Authority to conduct the CIRP of the Corporate Debtor by the impugned order is under move to be substituted which is pending before the Adjudicating Authority :in any case here the IRP has been made as Respondent No. 2. However, Respondent No. 2 has no authority to act as the IRP of Corporate Debtor when the financial Creditor has already moved the proposal for changing him. 7. As stated above the Share Subscription cum Shareholder Agreement is the Principal agreement between Vistra ITCL, Corporat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ores by Vistra ITCL INR 208 Crores by Ambience 11. It was also stated by the Ld. Counsel that once the project progressed requirement of additional funds were expressed by the Joint Venture Company. This shortfall was funded by Respondent No.1 by providing further unsecured loan of over Rs. 323 Crore as further additional contribution. 12. The SHA was amended for the first time on 3 September 2011, wherein it was inter alia agreed between the parties that the Debentures issued by JV Company to Vistra ITCL and Ambience shall not carry any guaranteed coupon payment. It may be noted that the originally the Debentures issued by JV Company was to carry a coupon rate of 15% per annum. After the amendment, even the debentures issued by JV Company did not provide for any consideration for time value of the debentures. 13. The Amended Agreement are reproduced below for ease of convenience. 14. Thereafter Second Amendment to the Shareholder Agreement was made on 07.02.2012 and the same was reproduced below for the purpose of linking. 15. It was also stated by the Ld. Sr. Counsel for the Appellant that all the Investment mad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpany would be possible, and that JV Company must explore additional options to raise funds for completion of the Project. It is important to note that Vistra ITCL admits that the funding was only made into JV Company for the construction and development of the Project by JV Company. q. By a letter dated 31st March 2016, Vistra ITCL sent an Event of Default Notice to Ambience, the Promoter and JV Company raising frivolous disputes alleging breach of milestones of construction as represented in the Business Plan and certain non-compliance of the reporting requirements as stipulated in the SHA. It is crucial to note that even as per Vistra ITCL, the event of default only pertained to milestone events and purported non-compliance of reporting requirement. There was no allegation or claim of any outstanding payment or return of investment by Ambience under the SHA. r. From the event of default notice, it is clear that the only grievance of Vistra ITCL under the SHA was with regard to non-completion of the Project within the agreed milestone and reporting of certain corporate actions. There was no dispute/allegation with regard to any debt or claim of any outstanding payment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oper, Promoter and JV Company in its various communications, and more specifically referred in the notice dated May 20, 2016 and letter dated September 2016, sent on behalf of the Investor to the Promoter, developer and JV COMPANY, are collectively referred to as the ( Disputed Items ). N. Since the Developer and Promoter have denied the Disputed Items, the developer, Promoter and the Investor had several meetings to amicably resolve the disputed items in good faith and eventually referred the matter to conciliation; P the Parties have by mutual consent and with the assistance of the Conciliator, arrived at a settlement in relation to the disputes that arose between them. aa. Vistra ITCL and Ambience consequently agreed to treat the Settlement Agreement as an Arbitral Award on consent terms which was specifically to be enforced under the provisions of the Arbitration and Conciliation Act, 1996. The Parties were aware of the existence of the I B Code and had expressly intended the Award to be enforced only under the Arbitration and Conciliation Act, 1996. bb. Under Clause 2.2 of the Settlement Agreement, it was agreed that Vistra ITCL would be paid I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... indicate that the entire case is based on the non-payment of the purchase price as per the schedule of payment set out in the Settlement Agreement. Vistra ITCL makes out no case against Ambience in the underlying transaction in relation to any debt or default emanating from a financial transaction. Vistra ITCL admits that the investments were made only to JV Company but seeks to recover the same from Ambience only by relying on the Settlement Agreement / Consent Award. Relevant extract of the Form - 1 is below: Part IV PARTICULARS OF FINANCIAL DEBT FOR EACH APPLICANT 1. TOTAL AMOUNT OF DEBT GRANTED As on 31.10.2018 Rs. 234,69,62791/- are in default. As per Settlement Agreement dated 07.04.2017 the total liability of the Corporate Debtor is of Rs. 200,00,00,000/- (Rupees Two Hundred Crore Only) DATE OF DISBURSEMENT The date of disbursement of the aforesaid amount were as follows: a. The amount of Rs. 35,95,61,430/- was disbursed to Ambience Projects and Infrastructure Pvt. Ltd. on 30.05.2011. The applicant was entitled to recove ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecured) and is not interested in the financial affairs/debt resolution of Ambience. The insolvency application was clearly thus filed for purposes other than resolution of insolvency and only as an abusive tactic to expedite debt recovery and enforce the award. 19. The Ld. Sr. Counsel submitted that in spite of the fact as stated as above the Adjudicating Authority has admitted the Respondents application under the Code against Corporate Debtor without going into the objections the issue raised by Corporate Debtor. In view of above facts circumstances he has sought the relief to set aside the impugned order dated 21.12.2020 passed by Adjudicating Authority etc. 20. The Ld. Sr. Counsel for Respondent No.1/Vistra ITCL India Ltd.as stated as follows: (i) It is financial Creditor to the Corporate Debtor viz., Ambience Pvt. Ltd. for the following reasons 3.1. The Debt owed to Vistra ITCL (India) Limited (hereinafter FC ) is a Financial Debt in as much as :- (a) The debt is in respect of Optionally Convertible Debentures (OCD) of Rs. 10 each held by the Financial Creditor (after the redemption of 4,38,54,311 OCD; this unpaid total OCDs being 13, 49,36,343 val ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ins undisputed that the repayment obligation along with interest under Settlement Agreement was also repeatedly defaulted by the Appellant, Ambience Pvt. Ltd. and the SPV on 07.04.2017 due to non-payment of interest, and thereafter on 30.09.2017 and 28.02.2018 by non-payment of principal and interest. 3.6. The Settlement Agreement is only a sequel to the earlier Agreements, and in any case the Settlement Agreement treats the total amount as debt payable with interest, which cannot be denied by the Corporate Debtor in the capacity as a promoter/developer as both of them are jointly and severally liable for amounts due to the financial Creditor having signed the agreements jointly. 3.7. Since no disbursement was made directly to the CD, the Debt would not constitute a financial debt is per-se misconceived and contrary to law. It is submitted that the Financial Debt as defined Section 5 (8) of the Code is a means and includes as has been reiterated by the Hon ble Supreme Court in Pioneer Urban Land and Infrastructure Ltd. v Union of India (2019) 8 SCC 416 82. This statement of the law, as can be seen from the quotation hereinabove, is without citation of any autho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... catch all provision, which includes wide array of transactions. 3.9 B.V.S. Lakshmi vs. Geometrix Laser Solutions Pvt. Ltd. reported in MANU/NL/0221/2017, the National Company Law Appellate Tribunal (hereinafter NCLAT ) has held that it is not necessary to show disbursal to the corporate debtor. 3.10 Disbursement to CD is not an essential condition to constitute a Financial Debt under Section 5(8) of the Code. This is evident from inclusion of Guarantees etc., (where there is no disbursement to Guarantor) within the ambit of Section 5 (8) (f) of the Code. Furthermore, Disbursement that was made to the subsidiary of the CD under the Subscription Agreement was made on the strength of the Representations, Warranties and Obligations undertaken by the CD, including the obligation of repayment of the debt and redemption of Debentures. IV. Relationship between CD and FC is that of joint venture partners under the Subscription Agreement, and therefore, the amounts due would this does not amount to a Financial Debt is also untenable and misconceived. 4.1 Initiation of CIRP Process under Section 7 of the Code is filed arises out of a Financial Instrument in the na ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ettlement Agreement. 4.7 Similarly, the Respondent No. 1 is seeking repayment of Unrepaid Loan of Rs. 43,90,28,330 amounting to Rs. 89,81,75,506/- as on Insolvency commencement Date, the liability of which continues to be that of the CD even under the Settlement Agreement. V. Petition under section 7 is based on the Outstanding Financial debt namely 1.34 crores of Debentures and Unsecured Loan of Rs. 37,62,81,916 regard to which there has been a default by the Corporate debtor, which liability has been recreated and undertaken in the Settlement Agreement by the Corporate debtor. 5.1 The Subscription Agreement defies FC as Investor , the Appellant as Promoter , the CD as Developer and Ambience Projects and Infrastructure Private Limited as SPV 5.2 CD and Appellant have represented to the Investor that the Promoter either directly or through Affiliates have won the bid to acquire the Project Land. Promoter and the developer have jointly agreed and undertaken to convey the Project Land in favour of the SPV. 5.3 CD and Promoter have agreed to convey the Project Land at Agreed Price being a sum of 275,42,07,000. Clause 5.3 of the Subscription agreemen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unsecured loans in the sum of INR 21,13,92,540/- and Debentures comprised in debenture Certificate No. 3, Folio No. I-01, Distinctive No. 011-43854311 in the sum of INR 57,68,37,929/-. Materially, no monies have been received by the FC after filing Application under Section 7 of IBC. b) INR 65 crores on or before 30 September 2017 together with simple interest @ 6% p.a. with effect from date of payment of such amount by investor till 30 September 2017. c) INR 70 crores on or before 30 September 2017 together with simple interest @ 6% p.a. with effect from date of payment of such amount by investor till 28 February 2018. 5.13 In case of default, the rate of interest chargeable from date of default would be 14% p.a. till actual date of payment. 5.14 The Settlement Agreement was executed in conciliation proceedings under Part III of the arbitration and Conciliation Act, 1996. 5.16 In present case, (i) the underlying transaction is a financial debt (ii) and the application is based out of a Settlement Agreement. 6.3 The Settlement Agreement is still an Agreement/Contract demonstrating commercial effect of borrowing, whereunder the amounts raised by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itors holding 16.332% was absent (2 members). 25. We have gone through the submissions made by the Ld. Counsel/Ld. Sr. Counsel of the parties, documents available on record and the related provisions of law and are having following observations: (i) It is not in dispute that there is no Shareholders Agreement rather it has been confirmed by the party the available record also reveals by Annexure 3, Annexure-4 Annexure -5 Pg 107 to 191 of the Appeal Paper Book that there is a Share Subscription cum Shareholder Agreement made on 28.05.2011 involving Respondent no.1/Corporate debtor, Appellant and the SPV. The SPV for the construction development of the Project and accordingly the Investment will be made into the SPV by the Investor/Respondent No.1, Developer, Corporate Debtor into the SPV/Joint Venture Company. (ii) All the Investments have been made in the SPV/Joint Venture Company. The Shareholder Pattern of the SPV has stated above and appearing at Pg- 117 is as under: Clause 1A.1 Capitalization and funding of the SPV (a) As of Effective Date, the shareholding pattern of the SPV is as follows: Shareholder Number of Share ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... equivalent to Investor Contribution in the SPV on the Closing Date which is treated as debt to the SPV and in future if the Investor infuses Investor Contribution in the SPV, the SPV shall be obligated to fully repay the debt to the Affiliate on the same day on which the Investor invests Investor Contribution in the SPV. If the SPV does not repay the debt to the Affiliate on the same day the Investor invests the Investor Contribution, then the SPV shall be obligated to pay an interest of 20% per annum on such debt amount in addition to the amount of the debt from the date of infusion of the Investor Contribution by the Investor. (iv) It has also not been disputed that the Respondent no.1 is holding 49% of the equity shares of the Joint Venture Company Corporate Debtor was holding 51% of the Joint Venture Company. The Investment has been made by both the parties into the Joint Venture Company. (v) In order to prove that Respondent No.1 is a financial Creditor of Corporate debtor it has to meet the following conditions of the Code. Accordingly , we are reproducing Section 5 (7) Section 5 (8) as given below: (7) financial creditor means any person to whom a financi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erred with a major, rather pivotal, role in the processes contemplated by Part II of the Code. It is the financial creditor who lends finance on a term loan or for working capital that enables the corporate debtor to set up and /or operate its business; and who has specified repayment schedules with default consequences. The most important feature, as this Court has said, is that a financial creditor is, from the very beginning, involved in assessing the viability of the corporate debtor who can, and indeed, engage in restructuring of the loan as well as reorganization of the corporate debtor s business when there is financial stress. Hence, a financial creditor is not only about in terrorem clauses for repayment of dues; it has the unique parental and nursing roles too. In short, the financial creditor is the one whose stakes are intrinsically interwoven with the well-being of the corporate debtor. (ix) Para- 46 of the judgement states that applying the aforementioned fundamental principles to the definition occurring in Section 5 (8) of the Code, we have not an iota of doubt that for a debt to become financial debt for the purpose of Part II of the Code, the basic elements a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and any obligation arising there under will not amount to a financial debt as held in the following cases: a. In Shubankar Bhowmik v. Union of India W.P. (C) (PIL) No. 4/2022, Division Bench, Hon ble Tripura High Court has held that Decree Holder, although recognized as Creditor under S. 3(10), are a different class of creditor and cannot be treated as Financial Creditor or an Operational Creditor under I B Code, 2016 as follows: [11] The interest recognized is that in the decree and not in the dispute that leads to the passing of the decree. This is apparent from the fact that decree holders as a class of creditors are kept separate from financial creditors and operational creditors . No divisions or classification is made by the statute within this class of decree holders. The inescapable conclusion from the aforesaid discussion is, that the IBC treats decree holders as a separate class, recognized by virtue of the decree held. The IBC does not provide for any malleability or overlap of classes of creditors to enable decree holders to be classified as financial or operational creditors This view was affirmed by the Hon ble Supreme Court of India in SLP (C) 6104/20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts the enforcement of a decree/Arbitral Award using the provisions of IBC. (i) G Eswara Rao v. SASF, Judgment dtd. 7.2.2020 internal para. 26, pg. 22 (ii) Sushil Ansal v. Ashok Tripathy, Judgment dtd. 14.08.2020- internal para. 23, pg.29 (iii) HDFC Bank v. Bhagwan Das Auto Finance Ltd. Judgment dtd. 9.12.2019. (iv) C. Shivakumar Reddy v. Dena Bank, Judgment dated 18.12.2019 (v) IARCL v. Jayant Vitamins, Judgment dated 17.12.2019. 26. We are making it clear that Investment made in SPV/Joint Venture through Share Subscription Shareholders Agreement will not come within the purview of Section 7 R/w Section 5(8) of the Code . 27. It is also further stated that to get it covered under Section 7 R/w Section 5 (7) (8) of the Code that there must be disbursal of fund by the Financial Creditor to the Corporate Debtor or in simple term, if there is no disbursal then even Financial Debt will not attract Section 7 of the Code, as it looks from the bare reading of Section 5(8) of the Code in order to qualify under Section 7 of the Code, the following basic ingredients are a requirement to get covered under Section 7 of the Code: a. The Creditor must be a Financ ..... X X X X Extracts X X X X X X X X Extracts X X X X
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