2022 (8) TMI 1481 - AT - Insolvency and Bankruptcy

Maintainability of section 7 application - initiation of CIRP - 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.) - Financial Debt or not - HELD THAT - It is made 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 . 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 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 October 2018 Rs. 234, 69, 62, 791/- are in default as per Settlement Agreement dated 07.04.2017. This suggests that Section 7 of the Code is being invoked pursuant to Settlement Agreement which is not permissible under Section 7 of the Code. The order of Adjudicating Authority cannot be sustained - appeal allowed.

Summary

Issues Involved:
1. Legality of the order dated 21.12.2020 passed by the Adjudicating Authority initiating CIRP of Ambience Pvt. Ltd.
2. Determination of whether the Respondent No.1 is a financial creditor of the Corporate Debtor.
3. Validity of invoking Section 7 of the IBC based on a Settlement Agreement/Arbitral Award.
4. The role and appointment of the IRP.

Detailed Analysis:

1. Legality of the Order Initiating CIRP:
The appeal challenges the order dated 21.12.2020 by the Adjudicating Authority (NCLT, New Delhi) which admitted the case under Section 7 of the IBC, initiating the Corporate Insolvency Resolution Process (CIRP) for Ambience Pvt. Ltd. The Adjudicating Authority admitted the case based on the existence of financial debt and the default by the Corporate Debtor, as evidenced by the payment of Rs. 65 crore and the obligations under the settlement agreement.

2. Determination of Financial Creditor Status:
The core issue is whether Respondent No.1 qualifies as a financial creditor of the Corporate Debtor. According to Section 5(7) and Section 5(8) of the IBC, a financial creditor is someone to whom a financial debt is owed, and financial debt involves disbursement against the consideration for the time value of money. The Tribunal observed that the investments made by Respondent No.1 were into the Joint Venture Company (SPV) and not directly to the Corporate Debtor. Consequently, the Tribunal concluded that Respondent No.1 cannot be considered a financial creditor of the Corporate Debtor since no disbursement was made directly to the Corporate Debtor.

3. Validity of Invoking Section 7 Based on Settlement Agreement/Arbitral Award:
The Tribunal emphasized that an Arbitral Award or Settlement Agreement cannot be enforced under Section 7 of the IBC. A decree holder is not classified as a financial creditor under the IBC, and any obligation arising from such an award does not constitute a financial debt. The Tribunal referred to several precedents, including the Supreme Court's judgment in 'Anuj Jain vs. Axis Bank' and other NCLAT decisions, which clarified that the essential element of financial debt is the disbursement against the consideration for the time value of money. The Tribunal concluded that the Settlement Agreement dated 07.04.2017, which was treated as an Arbitral Award, does not qualify as a financial debt under the IBC.

4. Role and Appointment of the IRP:
The IRP's appointment and remuneration were discussed in the first and second meetings of the Committee of Creditors (CoC). The IRP's fees were proposed and approved for certain months, but the resolution for subsequent months' fees did not receive the required majority vote. The Tribunal noted that the IRP's appointment and remuneration issues were procedural and did not affect the substantive determination of the financial creditor status or the validity of the CIRP initiation.

Conclusion:
The Tribunal allowed the appeal, setting aside the order of the Adjudicating Authority dated 21.12.2020. It concluded that Respondent No.1 is not a financial creditor of the Corporate Debtor, and the CIRP initiation based on the Settlement Agreement/Arbitral Award is not permissible under Section 7 of the IBC. The Tribunal reiterated that investments in the SPV through Share Subscription and Shareholders Agreement do not fall within the purview of financial debt as defined under the IBC.