TMI Blog2020 (8) TMI 741X X X X Extracts X X X X X X X X Extracts X X X X ..... om thereof, not in the year 2013, Conceding everything as stated by the applicants, then also the debt claim would remain barred by limitation. The NCLT rightly refused to admit the application under Section 7 of the IBC, holding the same to be barred by limitation. The Appellate Tribunal has erred in law in reversing the judgment and order of the earlier Adjudicating Authority. The Adjudicating Authority rightly rejected the application as barred by limitation. The Appellate Authority patently erred in law in reversing the decision of the adjudicating authority and admitting the application. Existence of financial debit - HELD THAT:- Explanation to Section 5(8) which relates to real estate projects is of no relevance in the facts and circumstances of this case. The payment received for shares, duly issued to a third party at the request of the payee as evident from official records, cannot be a debt, not to speak of financial debt. Shares of a company are transferable subject to restrictions, if any, in its Articles of Association and attract dividend when the company makes profits. Appeal allowed. - CIVIL APPEAL NO. 7474 OF 2019 - - - Dated:- 28-8-2020 - JUSTICE AR ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rporated under the Companies Act, 1956 on or about 19th July, 2004, to take over the business of the proprietorship concern, M/s Radha Exports, along with its assets and liabilities. The Appellant Company states that as on 19th July, 2004, the proprietorship concern, M/s Radha Exports had a loan liability of ₹ 1,11,85,350/-, which was taken over by the Appellant Company. 7. On 19th July, 2004, when the Appellant Company was incorporated as a Private Limited Company, to take over and continue the business of the proprietorship concern, M/s Radha Exports, the Respondents requested the Appellant Company to convert a sum of ₹ 90,00,000/- from out of the said outstanding loan as share application money for issuance of shares in the Appellant Company, in the name of the Respondent No.2, and the same was confirmed by the Respondents, by their aforesaid letter dated 11th January, 2011 addressed to the Deputy Commissioner of Income Tax, Company Circle V(3), Chennai. The said letter, a copy of which is enclosed to the Paper Book, reads: ..I have requested to transfer a sum of ₹ 90,00,000/- (Rupees Ninety Lakhs) to my wife A/c. Mrs. Shoba Jayaram for allotment of sha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ansaction between the Appellant Company and the Respondents. 13. However, by a legal notice dated 19th November, 2012, the Respondents called upon the Appellant Company to repay to the Respondents a sum of ₹ 1,49,60,000/- alleged to be the outstanding debt of the Appellant Company, repayable to the Respondents as on 19th July, 2004. 14. By a letter dated 5th December, 2012, the Appellant Company refuted the claim of the Respondents, whereupon the Respondents filed petition being CP No.335 of 2013 in the High Court of Madras under Sections 433 (e) (f) and 434 of the Companies Act 1956, for winding up of the Appellant Company. The said petition was transferred to the Chennai Bench of NCLT and re-numbered TCP/301/(IB)/2017. 15. The averments made in the winding up petition ex facie show that the claim of the Respondents was hotly disputed. In that the Respondents claimed that letters attributed to them, even letters addressed by them to the Income Tax Authorities were forged. Some of the averments are extracted hereinbelow: 6. .The petitioners state that the respondent s directors who pretended to be the well-wishers of the petitioners, knew all the facts and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly against the petitioners, but also against the Government Departments. 15. The petitioner states that the directors of the respondent company had forged the signatures of the 2nd petitioner. In all the documents submitted to the Registrar of Companies from the inception of the respondent company including the resignation and the DIN Application form and obtained DIN number to remove the 2nd petitioner from the directorship, which the directors of the respondent company made the 2nd petitioner as a director to their convenience. 16. Allegations of forgery and fraud are not decided in proceedings under Sections 433 and 434 of the Companies Act 1956 for winding up of a company. Such disputes necessarily have to be adjudicated in a regular suit, on the basis of evidence, including forensic examination reports. 17. By an order dated 4th August 2017 the NCLT dismissed the said winding up petition, on the ground that the Respondents had failed to comply with the provisions of Section 7(3)(b) of the Insolvency and Bankruptcy code, 2016, hereinafter IBC , with the liberty to file a fresh petition, if so advised. 18. On 7th December 2017, the Respondents issued a fresh d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f payments. 24. The relevant parts of the said judgment and order of the Chennai Bench of NCLT are extracted herein below for convenience. 9. To prove that ₹ 90,00,000 was treated as share application money, the Corporate Debtor filed a letter (Annexure-A2) these Applicants together addressed to the Income Tax Department on 11.01.2011 confirming the first applicant requesting the corporate debtor to transfer a sum of ₹ 90,00,000 to his wife (Second Applicant) for allotment of shares in the Corporate Debtor. Not only about this request, the corporate debtor counsel says, the Applicants themselves stated that they advanced monies to M/s. Radha Exports during the Financial Years 2001- 2002, 2002-2003 and 2003-2004 and amount outstanding from the said the partnership firm on 31.03.2004 is ₹ 1,39,60,000. The letter dated 11.01.2011 addressed by the Applicants to the Deputy Commissioner of Income Tax is as follows:... 10. In addition to the above letter, the Corporate Debtor has also placed another letter dated 11.01.2011 Second Applicant addressed to the Deputy Commissioner of Income Tax confirming that she requested the Corporate Debtor to allot shares ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le on record, even if the Corporate Debtor statement is taken as true, the limitation would start running from the year 2007. Since the winding up petition was filed in the year 2013, even from the year 2007, these Applicants could have filed winding proceedings within three years from thereof, not in the year 2013, Conceding everything as stated by the applicants, then also the debt claim would remain barred by limitation. 25. On or about 13th February 2019, the Respondents filed Company Appeal (AT) (INS) NO.224/19 before the Appellate Tribunal, challenging the order dated 19th December 2018 passed by the NCLT, dismissing the petition of the Respondents under Section 7 of the IBC. 26. The Appellant Company filed a Counter Statement before the Appellate Tribunal, and the Respondents filed a Rejoinder thereto. Pursuant to the directions of the Appellate Tribunal, additional pleadings were also filed. 27. On 13.08.2019 the Appellant Company caused Notice to Produce Documents to be issued to the Respondents calling upon Respondents to produce certified true copies of the Statement of Accounts of the Respondents maintained with HSBC Bank, Punjab National Bank and Indian Over ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a default takes place, in the sense that a debt becomes due and is not paid, the insolvency resolution process begins. Default is defined in Section 3(12) in very wide terms as meaning non-payment of a debt once it becomes due and payable, which includes non-payment of even part thereof or an instalment amount. For the meaning of debt , we have to go to Section 3(11), which in turn tells us that a debt means a liability of obligation in respect of a claim and for the meaning of claim , we have to go back to Section 3(6) which defines claim to mean a right to payment even if it is disputed. The Code gets triggered the moment default is of rupees one lakh or more (Section 4). The corporate insolvency resolution process may be triggered by the corporate debtor itself or a financial creditor or operational creditor. A distinction is made by the Code between debts owed to financial creditors and operational creditors. A financial creditor has been defined under Section 5(7) as a person to whom a financial debt is owed and a financial debt is defined in Section 5(8) to mean a debt which is disbursed against consideration for the time value of money. As opposed to this, an operatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... jection of such application, as the case may be. 33. The proposition of law which emerges from Innoventive Industries Ltd. (supra) is that the Insolvency Resolution Process begins when a default takes place. In other words, once a debt or even part thereof becomes due and payable, the resolution process begins. Section 3(11) defines debt as a liability or obligation in respect of a claim and the claim means a right to payment even if it is disputed. The Code gets triggered the moment default is of ₹ 1,00,000/- or more. Once the Adjudicating Authority is satisfied that a default has occurred, the application must be admitted, unless it is otherwise incomplete and not in accordance with the rules. The judgment is however, not an authority for the proposition that a petition under Section 7 of the IBC has to be admitted, even if the claim is ex facie barred by limitation. 34. On the other hand, in B.K. Educational Services Pvt. Ltd. v. Parag Gupta and Associates (2019) 11 SCC 633, this Court held:- 42. It is thus clear that since the Limitation Act is applicable to applications filed under Sections 7 and 9 of the Code from the inception of the Code, Article 137 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... firm M/s. Radha Exports to the Respondent was ₹ 1,39,60,000/- as on 31st March, 2004. The said letter has been extracted in full in Paragraph (9) of the judgment and order dated 19th December, 2018 of NCLT. 40. There are, as observed above cogent records including letters signed by the Respondent Nos. 1 and 2 which evince that on 6th October, 2007, Respondent No.2 resigned from the Board of the Appellant Company and at that time the Respondent No.2 requested the Appellant Company to treat the share application money of ₹ 90,00,000/- as share application money of Mr. M. Krishnan and to issue shares for aforesaid value to Mr. M. Krishnan. The amount was to be treated as a personal loan from the Respondent No.2 to Mr. M. Krishnan. A personal Loan to a Promoter or a Director of a company cannot trigger the Corporate Resolution Process under the IBC. Disputes as to whether the signatures of the Respondents are forged or whether records have been fabricated can be adjudicated upon evidence including forensic evidence in a regular suit and not in proceedings under Section 7 of the IBC. 41. It is, however, made clear that the observations made above, with regard to limita ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... standards as may be prescribed; (e) receivables sold or discounted other than any receivables sold on nonrecourse basis; (f) any amount raised under any other transaction, including any forward sale or purchase agreement, having the commercial effect of a borrowing; (g) any derivative transaction entered into in connection with protection against or benefit from fluctuation in any rate or price and for calculating the value of any derivative transaction, only the market value of such transaction shall be taken into account; (h) any counter-indemnity obligation in respect of a guarantee, indemnity, bond, documentary letter of credit or any other instrument issued by a bank or financial institution; (i) the amount of any liability in respect of any of the guarantee or indemnity for any of the items referred to in sub-clauses (a) to (h) of this clause; xxx xxx xxx 7. Initiation of corporate insolvency resolution process by financial creditor.- (1) A financial creditor either by itself or jointly with other financial creditors, or any other person on behalf of the financial creditor, as may be notified by the Central Govt. may file an applicat ..... X X X X Extracts X X X X X X X X Extracts X X X X
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