2025 (6) TMI 460 - AT - IBC

Maintainability of section 7 application - initiation of CIRP - financial debt within the meaning of IBC or not - submission of suo motu Resolution Plan which was not considered - challenge to process and issuance of fresh Form G without final constitution of the CoC. Whether Suraksha Realty Ltd. and Sheth Developers Pvt. Ltd. are Financial Creditors of the Corporate Debtor? - HELD THAT - The fact remains that the order dated 16.03.2023 declaring Suraksha Realty Ltd. and Sheth Developers Pvt. Ltd. as Financial Creditors has become final having not been questioned by any stakeholders and in pursuance of the said order dated 16.03.2023 Resolution Professional has included both Suraksha Realty Ltd. and Sheth Developers Pvt. Ltd. in the CoC. The CIRP process is a time bound process and when Adjudicating Authority decides the claim of a particular creditor unless the said order is challenged in the higher forum thus the finality of the said claim has to be respected to permit the CIRP process to be completed within time bound period. We thus hold that the order dated 16.03.2023 declaring Suraksha Realty Ltd. and Sheth Developers Pvt. Ltd. as Financial Creditors having become final the said question cannot be allowed to be raised in these Appeals which have been filed challenging the order dated 13.05.2024 deciding IA No.357 of 2023 and IA No.358 of 2023 filed by Suraksha Realty Ltd. and Sheth Developers Pvt. Ltd. with regard to claim of interest and claim of being Secured Creditors - there are no substance in the objection raised by Learned Counsel for the Arrow Engineering Ltd. that Suraksha Realty Ltd. and Sheth Developers Pvt. Ltd. are not Financial Creditors. Whether Suraksha Realty Ltd. and Sheth Developers Pvt. Ltd. are Secured Financial Creditors of the Corporate Debtor in view of the MoU dated 26.12.2009 coupled with deposit of title with the common agent (Escrow Agent)? - whether mortgage is created by deposit of title under Section 58(f) of the Transfer of Property Act in the facts of the present case? - HELD THAT - The present is a case where documents of title were handed over to the escrow agent along with the letter dated 26.12.2009. The letter dated 26.12.2009 have been noted by us in foregoing paragraphs which letter is from Corporate Debtor along with Suraksha Realty Ltd. and Sheth Developers Pvt. Ltd. to Kanga Company Advocates Solicitors - The letter thus require the documents to be held in escrow and paragraph 3 further mentioned that Kanga Company Advocates Solicitors to handover the title deeds to the Developers once the Joint Development Agreement is executed amongst us in terms of the MOU in favour of the Developers and the same is registered . It is relevant to note that the Corporate Debtor was well aware of the Rehabilitation Scheme sanctioned by BIFR. Scheme itself noted that the debts are various banks secured creditors and government departments. Corporate Debtor has to be presumed to be well aware that the mortgage right cannot be legally or validly created in assets which are subject matter of Rehabilitation Scheme framed by BIFR hence the deposit of title was with limited purpose and intent which is reflected in the letter dated 26.12.2009. Thus looking at the anvil of Section 58(f) intent on the part of the Corporate Debtor to create a mortgage by deposit of title is not reflected in the transaction. In this context we may need to notice certain judgments relied by parties. Judgment of the Hon ble Supreme Court in Rachpal Mahraj vs. Bhagwandas Daruka and Others 1950 (5) TMI 43 - SUPREME COURT has been relied by Arrow Engineering Ltd. In the above case the Hon ble Supreme Court had occasion to consider Section 58(f) and Section 59 of the Transfer of Property Act 1882. In paragraph 5 of the judgment the Hon ble Supreme Court held that when the debtor deposits with the creditor the title deeds of his property with intent to create a security the law implies a contract between the parties to create a mortgage and no registered instrument is required under Section 59 as in other forms of mortgage. The question to be considered is as to whether essential ingredients requisite as noticed above are fulfilled in the present case or not. It is already noticed that the deposit of title deeds by the debtor was not with intent to create a mortgage rights in the Corporate Debtor assets rather than the title documents were deposited with the escrow agent to keep with escrow agent till the obligation under MoU is fulfilled. The transaction when look into all attended circumstances and intent of the parties clearly indicate that there was no intent for creating mortgage. The present is not a case where the claim of Suraksha Realty Ltd. and Sheth Developers Pvt. Ltd. to declare them as secured creditors is being resisted by the Resolution Professional on the ground that the charge has not been registered under Section 77 of the Companies Act 2013 hence the above judgment has no application. It is satisfied that in the facts of the present case by deposit of title deeds by letter dated 26.12.2009 to the escrow agent which was documented by MoU no mortgage was created within the meaning of Section 58(f). The decision of the Resolution Professional and the Adjudicating Authority holding that Suraksha Realty Ltd. and Sheth Developers Pvt. Ltd. does not have any security interest in the assets of the Corporate Debtor is upheld - the claim of the Suraksha Realty Ltd. and Sheth Developers Pvt. Ltd. to claim mortgage rights on the assets has to be rejected. Whether the order of the Adjudicating Authority passed in IA No. 357 of 2023 and IA No.358 of 2023 holding that Appellant Suraksha Realty Ltd. and Sheth Developers Pvt. Ltd. are entitled for 18% interest is sustainable? - HELD THAT - The issue in the present proceeding in the CIRP process was with regard to financial debt within the meaning of I B Code. Financial Debt is defined in Section 5 Sub-section (8) of the I B Code which contains the definition. Section 5(8)(f) provides for a financial debt with regard to any amount raised under any other transaction. There is no dispute between the parties that amount of Rs.132 Crores was advanced by Suraksha Realty Ltd. and Sheth Developers Pvt. Ltd. Even if the MOU dated 26.12.2009 was declared unenforceable by Hon ble Supreme Court by its order dated 12.05.2016 the amount of Rs.132 Crores received by the Company cannot be negated. We have already held that the decision of the Adjudicating Authority declaring that the Suraksha Realty Ltd. and Sheth Developers Pvt. Ltd.are financial creditors by its order dated 16.03.2019 has become final having not been challenged by any stakeholder - From the pleadings made by the Corporate Debtor in the proceedings before the Bombay High Court under Section 9 of the Arbitration and Conciliation Act it is indicated that the Company made submission that the amounts are to be refunded with interest. Thus both the parties are under clear understanding that amount advanced by Suraksha Realty Ltd. and Sheth Developers Pvt. Ltd. has to be refunded with interest. Whether Adjudicating Authority by the impugned order could have reduced the claim of Arrow Engineering Limited to the extent of Rs.40.75 Crores without giving an opportunity to the Arrow Engineering Ltd.? - HELD THAT - Specific prayers were made in the application to reject the claim of Arrow Engineering of Rs.265, 97, 10, 569/- and admit claim of only Rs.40, 75, 00, 000/-. When issues in the said applications are still pending there was no occasion for issuing any direction by the Adjudicating Authority for reducing the claim of Arrow Engineering to Rs.40.75 Crores. We thus are of the view that the impugned order dated 13.05.2023 in far as it direct for reducing the claim of Arrow Engineering to Rs.40.75 Crores is unsustainable. It is made clear that decision to set aside the said direction is on the basis that said order was passed without giving opportunity of submission to the Arrow Engineering in violation of principles of natural justice. No opinion expressed on the merits of the application and said issue need to be decided while deciding IA No.703 of 2023 and IA No.697 of 2023 in accordance with law. Whether the conclusion of the Adjudicating Authority that Resolution Professional accepted inflated claim of Central Bank of India are sustainable especially when Central Bank of India was neither heard nor was made party to IA No. 357 of 2023 and IA No.358 of 2023? - HELD THAT - Both Suraksha Realty Ltd. and Sheth Developers Pvt. Ltd. have filed separate IAs being IA No.703 of 2023 and 697 of 2023 praying for rejection of claim of Central Bank of India. Prayers made in IA No.703 of 2023 we have already noticed above were with regard to Central Bank of India to reject the claim of Central Bank of India Financial Creditor in its entirety. When separate applications have already been filed by the Suraksha Realty Ltd. and Sheth Developers Pvt. Ltd. praying for rejection of claim of Central Bank of India there was no occasion to make adverse observation by the Adjudicating Authority against the Central Bank of India while deciding IA No.357 of 2023 and IA No.358 of 2023. The observation of the Adjudicating Authority in the impugned order that Resolution Professional has accepted the inflated claim of Central Bank of India deserves to be set aside. Observation has been made against Central Bank of India and direction for re-examination has been passed without giving an opportunity to the Central Bank of India to have its say is unsustainable. Whether the Adjudicating Authority committed error in exercise of its jurisdiction in directing replacement of the Resolution Professional and there were sufficient material on the record to make adverse observations against the Resolution Professional? - HELD THAT - The advisory issued by the IBBI cannot be said to furnish any foundation for replacement of Resolution Professional from its present assignment as Resolution Professional of the Corporate Debtor. Thus the said decision also cannot furnish any basis for replacement of Resolution Professional from the present assignment - there are no sufficient reasons to allow replacement of Resolution Professional and order passed by the Adjudicating Authority in IA No.357 of 2023 and IA No.358 of 2023 directing for replacement of Resolution Professional deserves to be set aside. The Adjudicating Authority by the impugned order has directed for appointment of another Resolution Professional one Mr. Sanjay Borad who has continued to discharge functions of Resolution Professional during pendency of the appeal. Thus the order of the Adjudicating Authority directing replacement of Resolution Professional is unsustainable and deserve to be set aside the consequence of which is that new IRP stand replaced. Whether there was any basis for issuing direction for conducting a detailed Forensic Audit by KPMG as directed by the Adjudicating Authority in the impugned order? - HELD THAT - A perusal of the impugned order indicate that no stakeholders made any prayer for directing for any forensic audit. The issues which were under consideration before the Adjudicating Authority were issues regarding nature of claim quantum of the claim which were all in the domain of the Resolution Professional. The Resolution Professional has taken a decision which decision was under challenge before the Adjudicating Authority by the Suraksha Realty Ltd. and Sheth Developers Pvt. Ltd. whose claim of interest and prayer to be declared as Secured Creditor was rejected. When the CIRP process was already over despite extensions granted by the Adjudicating Authority at this stage there was no necessity for issuing any direction for forensic audit. The quantum of claim nature of claim and the adjudication of claim were on the basis of claims filed and materials received in the CIRP process as well as affidavit. No stakeholders having made any complaint or having requested for any forensic audit direction to carry on forensic audit shall further delay the CIRP process which is already delayed and running beyond the timeline. There was no occasion to direct for forensic audit by the Adjudicating Authority. The Adjudicating Authority committed error in issuing direction to conduct detailed forensic audit. The issues did not relate to forensic audit rather issues before the Adjudicating Authority related to nature of claim and quantum of claim. Whether Appellant- Shree Ram Vessel Scrap Pvt. Ltd. has made out a case for interfering with the direction in Para 42(vi)(k) and 43(D) of the order dated 13.05.2024 passed by the Adjudicating Authority in IA No.358 of 2023? - HELD THAT - Appellant has not been able to submit the Resolution Plan with within the timeline allowed. Appellant was informed by the Resolution Professional that the CoC has not taken decision to extend the timelines for submission of Resolution Plan. Appellant has further submitted that it has filed an application IA No.723 of 2024 seeking direction to issue fresh Form G and earlier filed IA No.456 of 2024 seeking direction for consideration of the proposal of the Resolution Plan of the Appellant. According to the Appellant the said applications are still pending. Application filed by the Appellant on the above issues being still pending the direction issued by the Adjudicating Authority in Paras which have been impugned in the present appeal cannot be set aside at the instance of the Appellant. It is only observed that it is always open for the Appellant to press his applications IA No.456 of 2024 and IA No.723 of 2024 before the Adjudicating Authority. Conclusion - i) The order dated 16.03.2023 declaring Suraksha Realty Ltd. and Sheth Developers Pvt. Ltd. as Financial Creditors having become final the said question cannot be allowed to be raised in these Appeals. ii) Looking at the anvil of Section 58(f) intent on the part of the Corporate Debtor to create a mortgage by deposit of title is not reflected in the transaction. iii) The grant of interest @ 18% per annum is sustainable as the financial transaction remains valid despite the MoU being void. iv) Reduction of Arrow Engineering Ltd. s claim without hearing violates principles of natural justice and is set aside. v) Adverse observations against Central Bank of India without hearing are unsustainable and set aside. vi) The Adjudicating Authority has jurisdiction to replace the Resolution Professional but the grounds must be sufficient and substantiated; here the replacement was unwarranted. vii) The CIRP process shall be completed within two months after decision on pending applications with the period of interim stay excluded and extended till 17.10.2025. Appeal disposed off.

Summary

The Appeals arise from the Corporate Insolvency Resolution Process (CIRP) of the Corporate Debtor, involving multiple Financial Creditors and the Resolution Professional (RP). The core issues relate to the classification and admission of claims of certain creditors, the status of these creditors as secured or unsecured, the propriety of the RP's conduct and decisions, and procedural fairness in the adjudication of claims and replacement of the RP.

Issues Presented and Considered:

The Tribunal identified the following key issues for determination:

I. Whether Suraksha Realty Ltd. and Sheth Developers Pvt. Ltd. qualify as Financial Creditors of the Corporate Debtor.

II. Whether Suraksha Realty Ltd. and Sheth Developers Pvt. Ltd. are Secured Financial Creditors by virtue of the MoU dated 26.12.2009 and deposit of title deeds with an escrow agent.

III. Whether the Adjudicating Authority's order awarding 18% interest to Suraksha Realty Ltd. and Sheth Developers Pvt. Ltd. is sustainable.

IV. Whether the Adjudicating Authority erred in reducing the claim of Arrow Engineering Ltd. without affording it an opportunity to be heard.

V. Whether adverse observations against the Central Bank of India regarding inflated claims are sustainable, especially when Central Bank was not a party to the relevant proceedings.

VI. Whether the Adjudicating Authority rightly exercised jurisdiction in directing replacement of the Resolution Professional and whether sufficient material existed for adverse observations against the RP.

VII. Whether the direction for a detailed forensic audit by KPMG was justified.

VIII. Whether Shree Ram Vessel Scrap Pvt. Ltd. made out a case for interference with directions restricting fresh resolution plans.

IX. Reliefs to which the appellants are entitled.

Issue-wise Detailed Analysis:

Issue I: Status of Suraksha Realty Ltd. and Sheth Developers Pvt. Ltd. as Financial Creditors

The MoU dated 26.12.2009 between the Corporate Debtor and these entities involved advances of Rs.132 Crores, with a provision for refund with 18% interest if the joint development agreement was not executed. The Adjudicating Authority, in its order dated 16.03.2023, held that these advances acquired the character of financial debt under Section 5(7) and 5(8) of the Insolvency and Bankruptcy Code (IBC), 2016. The RP admitted their claims as Financial Creditors accordingly.

Arrow Engineering Ltd. contended that the order was passed without hearing them and challenged the status, but their application for impleadment was rejected and the order was not appealed. The Tribunal held that the order declaring Suraksha Realty Ltd. and Sheth Developers Pvt. Ltd. as Financial Creditors had attained finality and could not be reopened in these appeals. The CIRP process being time-bound, finality in such determinations is essential.

Conclusion: Suraksha Realty Ltd. and Sheth Developers Pvt. Ltd. are Financial Creditors of the Corporate Debtor, and this status is final.

Issue II: Whether Suraksha Realty Ltd. and Sheth Developers Pvt. Ltd. are Secured Financial Creditors

They claimed security interest by way of mortgage created through deposit of title deeds with an escrow agent, as per the letter dated 26.12.2009. The RP rejected the claim of security on grounds that:

• The alleged mortgage was not registered under the Companies Act, rendering it void.
• The deposit of title deeds was with an escrow agent, not the creditor, and was intended only to hold documents pending completion of obligations.
• The Corporate Debtor denied any intention to create a mortgage.
• The MoU and related documents were declared void by the Supreme Court as violating the Rehabilitation Scheme sanctioned by BIFR.

The Tribunal analyzed the legal framework under Section 58(f) of the Transfer of Property Act, 1882, which recognizes mortgage by deposit of title deeds with intent to create security. It emphasized that intent is crucial. The letter and surrounding circumstances showed the deposit was for escrow purposes, not to create mortgage. The Supreme Court's prior judgment declared the MoU void and without legal force, negating any rights under it.

Reliance on precedent judgments clarified that if parties reduce their bargain to writing, such document requires registration to create a charge. Here, the MoU was unregistered and void.

Conclusion: Suraksha Realty Ltd. and Sheth Developers Pvt. Ltd. do not hold any security interest or mortgage rights and are not Secured Financial Creditors.

Issue III: Entitlement to Interest @18%

The Adjudicating Authority awarded interest @18% per annum to Suraksha Realty Ltd. and Sheth Developers Pvt. Ltd. Arrow Engineering Ltd. challenged this on the ground that the MoU was void and interest was payable only if the MoU was terminated by the developers, which was not the case.

The Tribunal noted that despite the MoU being void, the financial transaction of Rs.132 Crores advanced remains a financial debt. The Corporate Debtor's own balance sheets acknowledged the debt and the obligation to refund with interest. The MoU's clause 17 provided for reasonable construction of void provisions to achieve parties' intentions. The Corporate Debtor's reply in arbitration proceedings accepted liability to refund with interest.

Conclusion: The award of interest @18% per annum to Suraksha Realty Ltd. and Sheth Developers Pvt. Ltd. is sustainable.

Issue IV: Reduction of Arrow Engineering Ltd.'s Claim Without Hearing

The RP admitted Arrow Engineering's claim at Rs.265 Crores, but the Adjudicating Authority reduced it to Rs.40.75 Crores without hearing Arrow Engineering. Arrow Engineering's application for impleadment in the relevant IA was rejected, denying it opportunity to present its case.

The Tribunal held that such reduction without hearing violates principles of natural justice. Pending applications challenging Arrow Engineering's claim remain undecided, and the Adjudicating Authority's order restricting the claim is set aside without prejudice to merits.

Conclusion: The reduction of Arrow Engineering Ltd.'s claim without hearing is unsustainable and set aside.

Issue V: Adverse Observations Against Central Bank of India

The Adjudicating Authority observed that the RP admitted an inflated claim of Central Bank of India and directed re-examination. However, Central Bank was neither party nor heard in the relevant proceedings.

The Tribunal held that such adverse observations without opportunity to be heard are unsustainable. Pending applications challenging Central Bank's claim remain to be decided independently.

Conclusion: Observations against Central Bank of India are set aside for violation of natural justice.

Issue VI: Replacement of Resolution Professional and Adverse Observations

The Adjudicating Authority replaced the RP citing his alleged acceptance of inflated claims and failure to admit certain claims. The RP contended that no procedural requirements under Section 27 of IBC for removal were followed and that no evidence of bias or collusion was produced.

The Tribunal recognized that while the Adjudicating Authority has jurisdiction under Rule 11 of NCLT Rules and Section 60(5) of IBC to replace the RP in appropriate cases, the grounds relied upon here were unfounded and adverse observations were unsubstantiated. The IBBI's advisory on non-disclosure of past employment was not a sufficient basis for removal.

The Tribunal relied on precedents confirming the Adjudicating Authority's power to replace the RP but emphasized that the power must be exercised on proper grounds.

Conclusion: The order directing replacement of the RP is set aside; the RP's removal lacked sufficient foundation.

Issue VII: Direction for Forensic Audit

The Adjudicating Authority ordered a forensic audit by KPMG despite no stakeholder requesting it and the issues before the Authority being limited to claim classification and quantum.

The Tribunal held that such direction was unwarranted and would further delay the CIRP, which was already extended and delayed. The forensic audit was not germane to the issues under consideration.

Conclusion: Direction for forensic audit is set aside as unnecessary and prejudicial to timely completion of CIRP.

Issue VIII: Relief Sought by Shree Ram Vessel Scrap Pvt. Ltd.

The Appellant sought permission to submit a resolution plan after the deadline. The RP and CoC had refused extension of time.

The Tribunal observed that the Appellant failed to submit the plan within the prescribed timeline and that applications seeking extension or fresh invitation were pending. The Tribunal did not interfere with the Adjudicating Authority's directions but left the Appellant free to pursue pending applications.

Conclusion: No interference granted; pending applications to be decided by the Adjudicating Authority.

Issue IX: Reliefs to Appellants

The Tribunal's final directions included:

• Dismissing appeals challenging denial of secured creditor status to Suraksha Realty Ltd. and Sheth Developers Pvt. Ltd.
• Allowing appeals filed by the RP, setting aside the order replacing him and restoring him as RP; directing handover of records from the interim RP.
• Setting aside the order reducing Arrow Engineering Ltd.'s claim.
• Directing the Adjudicating Authority to decide pending applications challenging claims of Arrow Engineering Ltd. and Central Bank of India within 60 days.
• Deleting adverse observations against Central Bank of India.
• Dismissing appeal by Shree Ram Vessel Scrap Pvt. Ltd. with liberty to pursue pending applications.
• Setting aside the direction for forensic audit.
• Directing reconstitution of CoC and continuation of CIRP within two months after decision on pending applications.
• Excluding the period of interim stay from the CIRP timeline and extending CIRP till 17.10.2025.
• Parties to bear their own costs.

Significant Holdings:

"The order dated 16.03.2023 declaring Suraksha Realty Ltd. and Sheth Developers Pvt. Ltd. as Financial Creditors having become final, the said question cannot be allowed to be raised in these Appeals."

"Looking at the anvil of Section 58(f), intent on the part of the Corporate Debtor to create a mortgage by deposit of title is not reflected in the transaction."

"The Hon'ble Supreme Court has specifically held that no right shall accrue to the Suraksha Realty Ltd. and Sheth Developers Pvt. Ltd. on the basis of the MoU dated 26.12.2009."

"The grant of interest @ 18% per annum is sustainable as the financial transaction remains valid despite the MoU being void."

"Reduction of Arrow Engineering Ltd.'s claim without hearing violates principles of natural justice and is set aside."

"Adverse observations against Central Bank of India without hearing are unsustainable and set aside."

"The Adjudicating Authority has jurisdiction to replace the Resolution Professional but the grounds must be sufficient and substantiated; here the replacement was unwarranted."

"Direction for forensic audit was unnecessary and prejudicial to timely completion of CIRP."

"The CIRP process shall be completed within two months after decision on pending applications, with the period of interim stay excluded, and extended till 17.10.2025."