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TMI Blog2022 (7) TMI 927X X X X Extracts X X X X X X X X Extracts X X X X ..... ct investigation into fraudulent and malicious initiation of the present proceedings by the Financial Creditor; b.) Pass an order/direction(s) dismissing the present Petition purportedly filed under Section 7 of the Code by the Financial Creditor; c.) Pass an order/direction(s) imposing penalty on the Financial creditor and FRL in accordance with Section 65(1) of the Code; 2. On perusal of the Application, it reveals that the applicant is a company based in Unites States of America and listed on the NASDAQ Global Select Market, who invested an amount of Rs 14,310,000,000/- (Indian Rupees Fourteen Billion Three Hundred Ten Million) in Future Coupons Private Limited ("FCPL") and acquired 49% equity share capital in FCPL, for the ultimate benefit of Future Retail Limited ("FRL"). As part of the abovementioned transaction, the following agreements were entered into amongst the Applicant, FRL, FCPL and the Promoters of the Future group: (a) A shareholder's agreement dated 12.08.2019 ("FRL SHA") was executed amongst FRL, FCPL and the Biyanis. Under the FRL SHA, FCPL was accorded negative, protective, special and material rights with respect to FRL, including, in particular, FRL ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Whereas, an Emergency Arbitrator acknowledged that FRL has prima facie materially breached the terms of the Agreements to the detriment of the Applicant. Accordingly, paragraph 285(c) of the EA Order, inter alia, prohibited FRL from taking any steps directly or indirectly to transfer/dispose/alienate/encumber FRL's Retail Assets. The said paragraph has been reproduced herein below: "(a) the Respondents are injuncted from taking any steps in furtherance or in aid of the Board Resolution made by the Board of Directors of FRL on 29 August 2020 in relation to the Disputed Transaction, including but not limited to filing or pursuing any application before any person, including regulatory bodies or agencies in India, or requesting for approval at any company meeting; (b) the Respondents are injuncted from taking any steps to complete the Disputed Transaction with entities that are part of the MDA Group; (c) without prejudice to the rights of any current Promoter Lenders, the Respondents are injuncted from directly or indirectly taking any steps to transfer/dispose/alienate/encumber FRL's Retail Assets or the shares held in FRL by the Promoters in any manner without the prior wri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dated 02.02.2021 and prima facie observed that the EA Order was a valid order under Section 17(1) of the A&C Act and shall be deemed to be an order of the Court for all purposes and shall be enforceable under the Code of Civil Procedure, 1908 ("CPC") as provided for under Section 17(2) of the A&C Act. FRL preferred an appeal against the abovementioned order, being FAO(OS) (Comm) No. 21 of 2021 whereby, the Division Bench of the Delhi High Court on 08.02.2021 stayed the 02.02.2021 Order while allowing the Single Judge in the EA Enforcement Proceedings to pass a detailed order, uninfluenced by any prima facie observations". Further, on 18.03.2021, the Hon'ble Delhi High Court passed a detailed judgement in the EA Enforcement proceedings, whereby it rejected all the objections raised by FRL disputing the validity of the EA Order and held that FRL, FCPL and the Biyanis were in deliberate, wilful and continuous violation of the Binding Injunctions and are liable for consequences as per Order XXXIX Rule 2A of the CPC and restrained FRL, and its promoters from taking any further action in violation of the EA Order. Being aggrieved by the EA Enforcement Judgment, FRL, FCPL and the Biyanis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y on its forehead and has to be set aside in regular court proceedings as being illegal. This is felicitously stated in several judgments - See Krishnadevi Malchand Kamathia v. Bombay Environmental Action Group, (2011) 3 SCC 363 (at paragraphs 16 to 19), and Anita International v. Tungabadra Sugar Works Mazdoor Sangh, (2016) 9 SCC 44 (at paragraphs 54 and 55). As a matter of *fact, in Tayabbhai M. Bagasarwalla v. Hind Rubber Industries (P) Ltd. (1997) 3 sec 443, this Court has unequivocally held that even if an order is later set aside as having been passed without jurisdiction. For the period of its subsistence, it is an order that must be obeyed.... 40. However, learned counsel for the Respondents referred to and relied upon the classic passage in Kiran Singh v. Chaman Paswan, (1955) 1 SCR 117 (at page 122) and various other judgments following it to contend that in * cases of inherent lack of jurisdiction, it would be open to a party to ignore an award by an Emergency Arbitrator. They also referred to the judgment in CIT v. Pearl Mechanical Engineering & Foundry Works (P) Ltd., (2004) 4 SCC 597*, where this Court spoke of the jurisdiction of a court or tribunal by stating tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ounsel for the Applicant argued that despite being aware of the Binding Injunctions and Applicant's pre-existing contractual rights, the Financial Creditor along with 25 other lenders of FRL executed the Framework Agreement. It is shocking to submit that as many as 26 banks, out of whom many were nationalized public sector banks (including the Financial Creditor) which deal with public money, proceeded to enter into the Framework Agreement despite having complete knowledge of the fact that the same would be in derogation of pre-existing contractual rights of the Applicant and in violation of Binding Injunctions. As per clause 5.1 of the Framework Agreement, FRL undertook to monetize its 'Specified Business' which comprised of the small-format stores of FRL. The Applicant submits that FRL's lenders were of complete knowledge of the binding injunctions prior to the execution of the framework agreement. FRL regularly issued disclosures to the Indian Stock Exchanges notifying them about the passing of the EA Order and other material developments in the Arbitration Proceedings as well as related proceedings before Delhi High Court and was available in the public domain as well as also w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng Documents. 6.2 No Contravention The execution and delivery by the Borrower of this Agreement and/or the other Financing Documents to which the Borrower is a party, or its compliance with or performance of the terms and provisions hereof or thereof do not: (a) contravene any provision of any Applicable Law or any order, writ, injunction or decree of any court or Government Entity; (b) conflicts, or is inconsistent with, or results in a breach of, any of the terms, covenants, conditions or provisions of, or constitutes an event of default (howsoever such terms arc defined or described) under, any indenture, mortgage, undertaking, deed of trust, credit/loan agreement, any security document or any other agreement, contract or instrument to which the Borrower is a party or by which its property or assets is bound or to which they may be subject or results in the creation or imposition of (or the obligation to create or impose) any security interest upon any of the property or assets of the Borrower. 6.4.1 There are no Legal Proceedings pending or any written notices received which would result into any Legal Proceedings, in India or any other jurisdiction, (a) against ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ary 1, 2022 wherein FRL informed its lenders that it has outstanding lease liabilities are merely INR 250 Crores. Subsequently, FRL, vide its disclosure dated 09.03.2022, intimated to the Indian Stock Exchanges that it has received termination notices on March 7, 2022 and March 8, 2022 in respect of subleased properties from entities belonging to the MDA Group. Vide the said letter, FRL also state that such subleased properties aggregated to 835 retail stores and have been contributing approximately 55% to 65% of the retail operations of FRL. The fraudulent handover of the Retail Assets as disclosed vide the February 26 Disclosure and the March 9 Disclosure was in violation of the Binding Injunctions whereby, FRL was injuncted from directly and indirectly alienating its Retail Assets in favour of any party, particularly the MDA Group. It is also pertinent to note that FRL did not give any details whatsoever of the arrangements under which entities of the MDA Group had issued the said termination notices. FRL, vide another disclosure dated 16.03.2022 to Indian Stock Exchanges, for the first time narrated the entire fraudulent stratagem in order to maliciously handover the Retail Ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 10. The Ld. Senior Counsel for the Applicant further submitted that the alienation of a major portion of the Retail Assets in favour of the MDA Group through the fraudulent stratagem, FRL issued a disclosure dated 23.04.2022 to the Indian Stock Exchanges disclosing the failure of the Scheme on account of the secured creditors (including the Financial Creditor) voting against the Scheme. Additionally, a similar disclosure dated 23.04.2022 was also issued by Reliance Industries Limited to the Indian Stock Exchanges and it was just a strategic decision, as 55-65% of the retail revenue operations of FRL had already been taken over by the MDA Group through the fraudulent stratagem. This demonstrates further collusion between MDA Group, FRL, and its lenders, as immediately after voting against the Scheme, the Financial Creditor filed the Section 7 Petition. The Applicant submits that FRL, through the Financial Creditor herein, seeks to achieve initiation of CIRP against itself in order to take undue advantage of the impact of moratorium period contemplated under Section 14 of the Code in order to defeat the contractual rights of the Applicant with regard to the Retail Assets and to sc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as filed in a petition filed under Section 7 of the Code by a third-party intervenor who was the beneficiary of an arbitral award against the Corporate Debtor, it was observed by the Hyderabad Bench of the Hon'ble Adjudicating Authority that "the mere fact that if moratorium order is passed, proceedings already initiated against the Corporate Debtor will be kept pending, by itself is not a ground to disqualify the Financial Creditor from filing application under Section 7 of the I&B Code against the Corporate Debtor. The applicant being a third party, has no locus standi to question initiation of proceedings under Section 7 of the I&B Code against the Corporate Debtor." The Ld. Senior Counsel for the Financial Creditor argued that the Applicant has miserably failed to establish the essential requirements of Section 65 of the Code in its Application. Section 65 lays down a rigorous and exacting standard for holding that initiation of a Section 7 petition is fraudulent or filed with malicious intent for a purpose other than resolution of insolvency. Therefore, fraud or malice must lie in "initiation' of a Petition u/s. 7 and such initiation should be for a purpose other than res ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ide intention, in order to provide the Corporate Debtor with an opportunity to repay its debt obligations. In this regard, it is submitted that during COVID-19, RBI issued a Circular dated 06.08.2020 titled "Resolution Framework for Covid-19 Related Stress", permitting the borrowers and lenders to restructure debt / borrowing on account of COVID-19 related stress. Therefore, the FA was merely another lifeline given to the Corporate Debtor to enable it to repay its debts. Furthermore, the Financial Creditor has security over the assets of the CD, which predates not just execution of the FA and also the EA Order. 13. In addition to this, the financial creditor further submitted that the FA does not violate the EA Order or the Orders of the Hon'ble High Court of Delhi. As argued by Amazon to show that the Lenders had knowledge of the EA Order, it is submitted that the issue of whether or not the Lenders had knowledge of the EA Order is irrelevant since ex-facie the FA is not in breach of the EA Order. The relevant extract of para 285 of the EA Order is reproduced hereinunder: "(a) the Respondents are injuncted from taking any steps in furtherance or in aid of the Board Resolution m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... espect of the existing facilities, any contract binding on it and/or under the Applicable Law to enable it the monetization of the Specified Business and utilise the realisations from monetization of the Specified Business for repayment/prepayment of the Facilities as specified herein." The Ld. Senior Counsel for the Financial Creditor further asked to note that the dispositive part of the EA Order, in Para 285(c) merely states that the Corporate Debtor will not sell any asset without obtaining the consent of Amazon. Therefore, from a reading of Clause 5.1.2 of the FA it is evident that the FA is entirely consistent with the EA Order, insofar as under the FA, the Corporate Debtor was required to obtain all necessary consents, clearances and approvals before proceeding with the sale of the specified assets. Clearly therefore, the FA does not contemplate a breach of any contract or applicable law, and in fact expressly requires all consents, approvals and clearances to be obtained as may be required to monetize such assets and even otherwise, it is a matter of record that no sale of any stores has been conducted by FRL pursuant to the FA till date. Therefore, the question of FA bei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y relief, interim or final. On this ground alone i.e., for suppression of relevant and material facts, the Intervention Application is liable to be dismissed at the threshold. 15. In relation to the scheme of arrangement, the Financial Creditor submitted that it was proposed by Future Group and MDA Group and the Lenders were not a party to the same. The scheme of arrangement proceeded in accordance with directions of the Hon'ble Adjudicating Authority. The passing of the board resolution dated 29.08.2020 in relation to such scheme of arrangement to MDA group being alleged to be in violation of the EA Order has no connection with the Financial Creditor herein and the allegation of collusion of the Lenders with Corporate Debtor and MDA group in this regard is entirely baseless, misleading and a mere attempt to stray from the subject matter of the present proceedings i.e. existence of debt against the Corporate Debtor. Moreover, at the time of voting by the secured creditors, the Financial Creditor and the other Lenders had opposed the scheme of arrangement as admitted in the present Intervention Application itself. The scheme of arrangement thus stands abandoned due to the adver ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sued a public notice (in leading English, Hindi and Marathi dailies) stating that the facilities availed by the Corporate Debtor from the Lenders are secured inter alia by charge over the moveable fixed assets and current assets (including receivables, stock, spares, inventories, cashflows) of the Corporate Debtor, and any person dealing with the same shall transact with such assets subject to the charge of the Lenders which can be pursued and enforced against such person dealing with these assets. It is pertinent to note that in the L.A. No. 1405 of 2022 filed by the Financial Creditor herein seeking interim reliefs against alienation of assets by the Corporate Debtor and also cessation of office by key managerial persons, the Financial Creditor has categorically pleaded that the Corporate Debtor had entered into a tripartite arrangement with the landlords and MDA group without any intimation to the Lenders for realignment of lease/license agreements. It came to the knowledge of the Financial Creditor from media reports that the MDA group had terminated the said leases/ licences and had taken over the stores. Further, the Financial Creditor has moved this Hon'ble Adjudicating Auth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t for the purpose of the inquiry under Section 7 of the Code, the Hon'ble Adjudicating Authority is to be satisfied that a "default" has occurred in the payment of a "debt', which has become due and payable. It is submitted that in the instant case, the existence of debt as well as the occurrence of default has been duly established. Even Amazon has acknowledged the distressed financial situation of FRL in the Application. 19. After hearing both the parties and on perusal of material on record, we are of the view that the FA has been signed within the ambit of the RBI Circular by all the 26 Lenders and the question of FA being in violation of any injunctions does not arise as no sale of any assets has happened and seeking consent of Amazon under Clause 5.1.2 was not breached. Moreover, FA does not violate the EA Order or the orders of the Hon'ble High Court of Delhi, as the two orders of the Single Judge of the Hon'ble High Court of Delhi - (i) dated 02.02.2021 (directing FRL to maintain status quo with respect to its assets); and (ii) dated 18.03.2021 (holding that EA Order is enforceable in India and directing FRL to not act in contravention thereof) were not ope ..... 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