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2025 (5) TMI 858 - AT - IBCAdmission of section 7 application - financial debt exceeding the threshold prescribed under Section 7 of the Insolvency and Bankruptcy Code 2016 - existence of debt and default or not. Whether there has been debt of more than Rs. 1 Crore to meet the threshold as stipulated under Section 7 of the Code and whether there has been default by the Corporate Debtor? - HELD THAT - The money indeed was disbursed by the Financial Creditor to the Corporate Debtor as well as to supplier of the machinery i.e. Respondent No. 4 based on the instruction of the Corporate Debtor. It is also fact that the total money disbursed was more than Rs. 1 Crore. We observe that the Corporate Debtor vide letter dated 18.01.2012 advised the Financial Creditor to disbursed an amount of Rs. 45, 11, 110/- to the account of the Corporate Debtor and Rs. 1, 12, 40, 024/- in favour of Respondent No. 4. The necessary documentations have been annexed in the appeal. Thus the money was paid as a loan by the Respondent No.1/Financial Creditor to the Corporate Debtor /Respondent No. 2 and therefore it is clearly established that the said amount meet the threshold criteria as stipulated under Section 7 of the Code. Whether there has been default or not? - HELD THAT - It need to be appreciated that the proper and legally enforceable loan agreement was executed between the Financial Creditor and the Corporate Debtor. It is reiterated that the money was transferred by the Financial Creditor in the accounts of the Corporate Debtor and in the accounts of the machine supplier i.e. Respondent No. 4 at the instructions of the Corporate Debtor. Hence the arguments of the Appellant that there has been connivance between the Respondent No. 1 and Respondent No. 4 and therefore alleged financial debt cannot be legally enforced is not tenable. The Impugned Order clearly establish the facts regarding debt and default which are basic ingredients to admit application under Section 7 of the Code. Conclusion - i) The arbitral award dated 21.02.2018 which crystallized the outstanding amount payable by the Corporate Debtor of Rs.1, 42, 95, 144 along with interest @12% which constitutes a financial debt under Section 5(8) of the Code and the non-payment of this award amount amounts to a default. ii) The Impugned Order clearly establish the facts regarding debt and default which are basic ingredients to admit application under Section 7 of the Code. Appeal dismissed.
1. ISSUES PRESENTED and CONSIDERED
The core legal questions considered in this appeal include:
2. ISSUE-WISE DETAILED ANALYSIS Existence of Financial Debt and Default The legal framework governing the admission of a Section 7 application under the Code requires the existence of a financial debt and default by the Corporate Debtor. Section 5(8) of the Code defines "financial debt," and Section 7 mandates the Adjudicating Authority to admit the application if the financial creditor proves default. Relevant precedents include the Supreme Court's rulings in Innoventive Industries Limited vs. ICICI Bank and subsequent judgments clarifying that the Adjudicating Authority's role is limited to verifying the existence of a financial debt and default, not adjudicating disputes beyond these parameters. The Court noted that the Corporate Debtor availed a loan facility of Rs. 1,66,40,134 from the Financial Creditor to finance machinery purchases. The loan was repayable in 60 monthly installments with interest at 7.96% per annum. The loan agreement and related documents, including the sanction letter and charge registration, were undisputed. The Financial Creditor issued a loan recall-cum-arbitration notice on 28.11.2012 due to non-payment, and arbitration was invoked as per Clause 32 of the loan agreement. The sole Arbitrator passed an award on 21.02.2018 directing payment of Rs. 1,42,95,144 plus interest at 12%, which attained finality after dismissal of challenges before the Delhi High Court and the Supreme Court. The Court found that the award crystallized the outstanding financial debt and that the Corporate Debtor's failure to pay constituted default. The application under Section 7 was thus maintainable and properly admitted. Effect of Arbitration Award as Crystallization of Debt The Court relied on settled legal principles that an arbitral award, once final and binding, crystallizes the debt and constitutes a financial debt under the Code. The award's finality was confirmed by the dismissal of the Section 34 challenge and the Supreme Court's refusal to grant further relief. The Court emphasized that the Financial Creditor's right to initiate CIRP arises from the default in payment of the award amount, in line with precedents such as Dena Bank v. C. Shivkumar Reddy and Kotak Mahindra Bank Ltd. v. A. Balakrishnan. Disbursement of Loan Amount and Allegations of Breach The Appellant contended that the Financial Creditor breached the loan agreement by prematurely disbursing the entire pending loan amount to the machinery supplier without authorization, relying on a purported letter dated 18.11.2011. The Appellant alleged this caused prejudice and invalidated the debt claim. The Court examined documentary evidence, including the communication dated 18.01.2012, which explicitly instructed disbursement of Rs. 1,21,40,024 to the machinery supplier and Rs. 45,11,110 to the Corporate Debtor. The Arbitrator rejected the Appellant's allegations of fabrication and held the disbursement valid and in accordance with the agreement. The Court held that the Appellant's claims of breach and collusion were unsupported and did not affect the existence or enforceability of the financial debt. Impact of Contractual Disputes with Machinery Supplier The Appellant raised issues regarding non-delivery of machinery, changes in purchase orders following the government ban on gutkha/pan masala products, and alleged failure of the supplier to refund excess amounts. The Court noted that such disputes are contractual in nature and fall outside the scope of insolvency proceedings. The Adjudicating Authority correctly observed that these issues do not negate the debt and default owed to the Financial Creditor. The Court reiterated that remedies against the machinery supplier lie in separate legal forums and cannot bar the admission of the insolvency petition under Section 7. Allegations of Procedural Irregularities in Arbitration The Appellant alleged procedural irregularities in arbitration, including reliance on proforma invoices and exclusion of the machinery supplier from proceedings. The Court found these contentions to be attempts to re-agitate settled disputes already adjudicated by the Arbitral Tribunal. The Court emphasized the principle of finality in arbitration and held that the Appellant cannot reopen these issues in the insolvency forum, consistent with the Arbitration and Conciliation Act, 1996. Admission of Section 7 Application and Role of Adjudicating Authority The Court underscored that the Adjudicating Authority's function under Section 7 is limited to verifying the existence of financial debt and default. The Adjudicating Authority correctly admitted the application after satisfying these criteria, supported by the arbitral award and record of default. The Court found no error or irrationality in the Impugned Order and rejected the Appellant's claim that the admission was unreasoned or contrary to settled law. 3. SIGNIFICANT HOLDINGS "The arbitral award dated 21.02.2018 which crystallized the outstanding amount payable by the Corporate Debtor of Rs.1,42,95,144 along with interest @12% which constitutes a financial debt under Section 5(8) of the Code, and the non-payment of this award amount amounts to a default." "The dispute, between the Corporate Debtor and the Manufacturer to whom the loan amount was disbursed on the instructions of the Corporate Debtor, cannot be a ground to scuttle the proceedings under section 7 of the Code as long as debt and default is proved." "The Adjudicating Authority has to merely examine whether there is 'debt' and 'default'." "The Appellant's claims of breach and collusion between the Financial Creditor and the supplier are not tenable and do not affect the existence or enforceability of the financial debt." "The principle of finality of arbitration proceedings precludes re-examination of the arbitral award in insolvency proceedings." "The Appellate Tribunal finds no error in the Impugned Order admitting the Corporate Debtor into the Corporate Insolvency Resolution Process under Section 7 of the Code." In conclusion, the Court upheld the admission of the insolvency petition under Section 7, affirming that the financial debt and default were established through the arbitral award and related documents, and that contractual disputes or allegations of impropriety in disbursement do not negate the debt or bar insolvency proceedings. The appeal was dismissed as devoid of merit.
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