TMI Blog2022 (9) TMI 395X X X X Extracts X X X X X X X X Extracts X X X X ..... 6,60,573.71/- and documents evidencing financial debts were annexed in the said application and relevant date of default was also indicated. The Financial Creditor further mentioned that audited financial statements of the Corporate Debtor including FY ending 31.03.2019 consistently acknowledge liability of amount payable. The financial arrangement made between the Financial Creditor and the Corporate Debtor clearly falls in definition of Debt, Financial Debt and Default. Therefore, the Financial Creditor had right to move an Application filed under Section 7 of the I B Code, 2016. As a result of the Respondent company defaulting in the payment of these coupons (interest) to the Appellant, the Appellant instituted CIRP against the Respondent under Section 7 of the I B Code, 2016. It is settled law that role of the Adjudicating Authority has been clearly elaborated under I B Code, 2016. The Adjudicating Authority is required to admit the Petition under Section 7(5)(a) of the I B Code, 2016 where the Debt is due and was not paid. Alternatively, the Adjudicating Authority under Section 7(5)(b) can reject the Petition if there was no Debt. This is to be done within 14 day ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thority had referred the Parties in Section 7 Application of I B Code, 2016 proceedings, for Mediation under Section 442 of the Companies Act, 2013. As a matter of fact, this Tribunal had already noted that power of the Adjudicating Authority, (National Company Law Tribunal), under Section 442 of the Companies Act, 2013 is limited to the proceedings under the Companies Act, 2013, but not in the matter related to I B Code, 2016. Hence, this Tribunal, without any hesitation, holds that the impugned order dated 13.05.2022, in petition, passed by the Adjudicating Authority, (National Company Law Tribunal, Hyderabad Bench), is not inconformity with the I B Code, 2016, and the same is clearly unsustainable in Law, and sets aside the same in furtherance of substantial cause of justice. Appeal allowed. - Company Appeal (AT)(CH) (Ins) No. 271 of 2022 & I.A. Nos. 581 & 582 of 2022 - - - Dated:- 7-9-2022 - [ Justice M. Venugopal ] Member ( Judicial ) And [ Naresh Salecha ] Member ( Technical ) For the Appellants : Mr. P. H. Arvindh Pandian , Sr. Advocate For the Respondents : Dr. K. Ravichandran , PCS. Ms. S. Manjula Devi , Advocate JUDGMENT ( Virtual Mode ) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ieved (including the Appeal typed set of papers, pleadings projected by the respective Learned Counsels of the `Parties , perused the main Petition filed before the `Adjudicating Authority in the matter of `Section 241 242 of the Companies Act, 2013 , to appreciate the whole gamut of issues involved coupled with the issues concerned in earlier Petition (before the `Adjudicating Authority ), which were referred to `IAMCH as well as `Petition pursuant to which impugned order dated 13.05.2022 was issued by the `Adjudicating Authority , (`National Company Law Tribunal , Hyderabad Bench). The `Appellant / Whitestock Limited is a Financial Creditor and operated as Special Purpose Vehicle ( SPV ) established in `Cyprus and is beneficially owned by State General Reserve Fund The Respondent i.e., Prajay Holdings Private Limited ( Corporate Debtor) is engaged in business of Construction and Real Estate Development Activities having Registered Office in Hyderabad, Telengana. The `Authorised Share Capital of the `Company is Rs. 260 crore. Mr. Vijay Sen Reddy Dantapalli is one of the promoters of Corporate Debtor and was earlier Chairman Managing Di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rporate Debtor . Any change, in `Business Plan was required to be made with the consent of the Financial Creditor . This arrangement, also entitled the Financial Creditor to nominate `Two Directors . 5. The project was to be completed within a period of seven years from the start of construction after getting all due approvals i.e., by 19.02.2019. As per WIA , the `Financial Creditor was entitled to receive coupon payments at 11% per annum commencing from 03.11.2011, during the development period. Furthermore, at the expiry of the development period, all or any portion of the `Outstanding Principal Amounts that were not re-paid, was to be `converted into Shares, based on a `Conversion Price . 6. In the original Petition before the Adjudicating Authority (vide C.P. No. 468/241/HDB/2018), the `Financial Creditor brought out to the notice that the Financial Creditor had not received any `return of investment in any form and alleged regarding systemic, long standing `mis-management and `malaise by the Corporate Debtor was noticed affecting the project and the investment of the Financial Creditor badly. It was further alleged that Financial Creditor was exclud ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tment made and broad terms and conditions for the same, this `Tribunal had already noted in the preceding paragraphs. The `Appellant had subscribed to and purchased (from LB Hyderabad Investments I LLC) around 2,82,151 equity shares and 12,44,265 `compulsorily convertible debentures (CCDs ) of the Respondent company, through the `Investment Agreement dated August 03, 2011 (Investment Agreement ) and the `Sale and Purchase Agreement dated June 15, 2011 ( Sale and Purchase Agreement ). The Appellant holds 22% equity shareholding in the Respondent company. 11. The Learned Counsel for the Appellant stated that they had instituted a Company Petition under Sections 241 and 242 of the Companies Act, 2013 against the `Corporate Debtor , its Parent Entity, Subsidiary, Directors, Promoters and purported Additional Directors / Directors before the ` Adjudicating Authority as per C.P. No. 468/241/HDB/2018 ( Section 241 Petition ). The grievances of the `Financial Creditor in the Section 241 Petition were, inter alia, the exclusion of the Appellant from the governance of the Respondent company, non-service of `notices of `Board / Shareholders Meetings upon the Appellant and its ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... further alleged that while the issues and reliefs sought for by the `Financial Creditor in Section 241 Petition under the Companies Act, 2013, was with respect to return of funds siphoned off by the `Corporate Debtor , `Financial Creditor s participation in Corporate Debtor s management, etc., the reliefs sought in the `Insolvency Petition are with respect to the `Financial Debt , due to the `Financial Creditor , with respect to the `Principal Amount invested and `unpaid interest accrued , on the `Coupons , payable on the `CCDs , held by the `Financial Creditor with the `Corporate Debtor which were due and not paid, thus, the `Default , took place in terms of Section 7 of I B Code. The `Adjudicating Authority failed to appreciate this difference and had wrongly recorded that there was a nexus between the `amounts claimed as `Financial Debt in the `Insolvency Petition and that in the Section 241 Petition. 14. The Learned Counsel submitted that as per settled law, only options available to the `Adjudicating Authority , while adjudicating a petition under Section 7 of the I B Code, 2016 are: - (a) to admit the petition under Section 7(5)(a) of the I B Code, 2016 wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the Adjudicating Authority in the impugned order had observed that the Respondent was not an Insolvent Company and that it was of the considered view that Respondent should be given some more time to repay the debt etc. had directed the Respondent / Corporate Debtor to repay the balance debt or the amount as settled with the Appellant within a period of six months failing which the Appellant / Petitioner would be at liberty to file a fresh petition for admission, which in the considered opinion of this Tribunal is in negation of the principles laid down at paragraph 30 of the judgement of the Hon ble Supreme Court in Innovative Industries Ltd. Vs. ICICI Bank (2018) 1 SCC page 407. Therefore, this Tribunal holds that the Adjudicating Authority had exceeded its jurisdiction by taking the defense of the Corporate Debtor, especially in the absence of any Reply or objections projected by the Corporate Debtor. Consequently, this Tribunal interferes with the impugned order, since it suffers from patent legal infirmities. The instant Appeal succeeds. 18. The Learned Counsel contended that by action of the `Adjudicating Authority referring parties in Section 7 of I B Code, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... default in payment of the debt there would be no option to the Adjudicating Authority(NCLT) but to admit the petition under Section 7 of the I B Code, 2016 22. The Appellant had moved a Company Petition in CP.No.468/241/HDB/2018 and the `Adjudicating Authority vide impugned order dated 24.12.2021 referred case to IAMCH for `Mediation , admittedly, with the consent of both sides. 23. In the said impugned order dated 24.12.2021 in Para Nos.5, 12 and 13, the `Adjudicating Authority had given full background and clear reasons for referring the case for `Mediation to `IAMCH . The Learned Counsel pleaded that the Appellant being a `Shareholder with 22% `Equity cannot come to the `Adjudicating Authority for initiating the `CIRP against the `Corporate Debtor . The Learned Counsel stated that `CCD are liable to be converted into Equity Shares and if the Appellant is aggrieved by any failure to convert the CCDs into Equity Shares, he may seek `Arbitration or `Resolution of `dispute as per Agreement and cannot proceed under I B Code, 2016. 24. The Learned Counsel cited the case of Vijay PalGarg Ors. Vs. Pooja Bahry (Liquidator in the matter of Gee Ispat Privat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... I B Code, 2016 which is as under: - 3(11). debt means a liability or obligation in respect of a claim which is due from any person and includes a financial debt and operational debt; Since, the term `Claim is mentioned in above definition of `Debt , we need to refer to definition of `Claim under Section 3(6) of I B Code, 2016, which as under: - 3(6). claim means- (a) A right to payment, whether or not such right is reduced to judgment, fixed, disputed, undisputed, legal, equitable, secured or unsecured; (b) Right to remedy for breach of contract under any law for the time being in force, if such breach gives rise to a right to payment, whether or not such right is reduced to judgment, fixed, matured, unmatured, disputed, undisputed, secured or unsecured; The Financial Creditor and Financial Debt is also defined under Section 5(7) Section 5(8) of the I B Code, 2016, which as under: - (7) financial creditor means any person to whom a financial debt is owed and includes a person to whom such debt has been legally assigned or transferred to; (8) financial debt means a debt alongwith interest, if any, which is disbursed against ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Corporate Debtor , through the `Investment Agreement dated 03.08.2011 ( Investment Agreement ) and the `Sale and Purchase Agreement dated 15.06.2011 ( Sale and Purchase Agreement ). Financial Creditor holds 22% equity shareholding in Corporate Debtor. Financial Creditor was entitled to receive Coupons (interest) at the rate of 10% and 11% per annum on the CCDs held in the Respondent company. The Financial Creditor alleged that no payment was made by the Corporate Debtor and therefore the Financial Creditor filed CP (IB) No. 17/7/HDB/2021 under Section 7 of the I B Code, 2016 and Rule 4 of the I B Code, 2016 (Application to Adjudicating Authority Rules, 2016). In the said application, total outstanding default amount on the date of filing the application was shown as Rs. 274,26,60,573.71/- and documents evidencing `financial debts were annexed in the said application and relevant date of default was also indicated. The Financial Creditor further mentioned that audited financial statements of the Corporate Debtor including FY ending 31.03.2019 consistently acknowledge liability of amount payable. 30. Therefore, it is clear to us that financial arrangement made between the F ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elaborated under I B Code, 2016. The `Adjudicating Authority is required to admit the Petition under Section 7(5)(a) of the I B Code, 2016 where the `Debt is due and was not paid. Alternatively, the `Adjudicating Authority under Section 7(5)(b) can reject the `Petition if there was no `Debt . This is to be done within 14 days from the receipt of Petition under Section 7 based on records made available. 33. The Learned Counsel for the Respondent highlighted that recently in Vidarbha Industries Power Limited v Axis Bank Limited, 2022 SCC Online SC 841, the Supreme Court of India, held as follows We are clearly of the view that the Adjudicating Authority(NCLT as also the Appellate Tribunal (NCLAT) fell in error in holding that once it was found that a debt existed and a Corporate Debtor was in default in payment of the debt there would be no option to the Adjudicating Authority(NCLT) but to admit the petition under Section 7 of the I B Code, 2016 . Taking note of the above cited judgment, we find that the present case and its facts and circumstances are not exactly same or similar circumstances. 34. There are several judgments of the Hon ble Supreme Court of I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tries 12, a two-Judge Bench of this Court has explained the ambit of Section 7 I B Code, 2016, and held that the Adjudicating Authority only has to determine whether a de fault has occurred i.e. whether the debt (which may still be disputed) was due and remained unpaid. If the Adjudicating Authority is of the opinion that a default has occurred, it has to admit the application unless it is incomplete. Speaking through Rohinton F. Nariman, J., the Court has observed: (SCC pp. 438-39, paras 28 30) *28. When it comes to a financial creditor triggering the process, Section 7 becomes relevant. Under the Explanation to Section 7(1), a default is in respect of a financial debt owed to any financial creditor of the corporate debtor-it need not be a debt owed to the applicant financial creditor. Under Section 7(2), an application is to be made under sub-section (1) in such form and manner as is prescribed, which takes us to the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016. Under Rule 4, the application is made by a financial creditor a in Form 1 accompanied by documents and records required therein. Form 1 is a detailed form in 5 parts, whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r I B Code, 2016 and settled case laws, we find that prima-facie there was `Debt of more than 1 crore which was admittedly not paid resulting into `Default and thereby meeting the requirement of Section 7 of I B Code, 2016. The `Adjudicating Authority should have taken into consideration and taken decision on admissibility or otherwise of Petition filed before the `Adjudicating Authority in CP (IB) No. 17/7/HDB/2021, as per law rather than referring for `Mediation to `IAMCH was done in Section 241 Application. The `Adjudicating Authority had referred to `Application filed under Section 422 of the Companies Act, 2013. 36. We, therefore, are not in a position to agree to ratio of the `Adjudicating Authority on this aspect of referring the `Application filed under Section 7 of the I B Code, 2016 for `Mediation under Section 422 of the Companies Act, 2013. Issue No.(ii) Whether, petitions made under Section 241 of the Companies Act, 2013 can be equated with Application filed under Section 7 of the I B Code, 2016. (a) Before examining above issues, we need to refer to the relevant section 241 242 of the Companies Act, 2013 as well as Section 7 of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s purely regarding initiation of CIRP for default of debt of more than Rs. 1 crore by the Corporate Debtor and the power to the Tribunal (Adjudicating Authority) has been defined in Section 7(5) quoted above. (e) The purpose of Section 241 of the Companies Act, 2013 cannot be equated with Section 7 of the I B Code, 2016. Similarly, the powers of the Tribunal under Section 242 of the Companies Act, 2013 w.r.t oppression and mismanagement are quite comprehensive in comparison to Section 7 which grants limited powers to the `Adjudicating Authority of either acceptance or rejection of the claims made by the `Financial Creditor based on details of claims along with evidence produced by him. (f) As such we find that the petitions made under Section 241 of the Companies Act, 2013 cannot be equated with Application filed under Section 7 of the I B Code, 2016 and the `Adjudicating Authority is required to treat these petitions on a separate footing as per law and take decision accordingly. (g) We, therefore, find that `Adjudicating Authority erred in tagging the Application filed under Section 7 of I B Code, 2016 with Application filed under Section 241 of the Compani ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Authority after going through the pleadings of both the Appellant and the Respondent w.r.t. remedies available under Section 7 of the I B Code and Section 442 of the Companies Act, 2013 , noted in Para 13 of the impugned order dated 13.05.2022 as herein under :- Needless to emphasise that mediation when successful lay the disputes to rest finally hence parities need to be encouraged for resolving their differences and disputes through mediation . (e) This `Tribunal notes that the `Adjudicating Authority has referred 442 i.e. Mediation and Conciliation Panel . He has adverted to the ingredients of sub-section 2 3 of the Section 442 of the Companies Act, 2013 , which are as hereunder :- 442. (2) Any of the parties to the proceedings may, at any time during the proceedings before the Central Government or the Tribunal or the Appellate Tribunal, apply to the Central Government or the Tribunal or the Appellate Tribunal, as the case may be, in such form along with such fees as may be prescribed, for referring the matter pertaining to such proceedings to the Mediation and Conciliation Panel and the Central Government or Tribunal or the Appellate Tribunal, as the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s immaterial whether it was solvent or insolvent qua other creditors. The I B Code would not permit the Adjudicating Authority to make a roving enquiry into the aspect of solvency or insolvency of the Corporate Debtor except to the extent of the Financial Creditors or the Operational Creditors, who sought triggering of Corporate Insolvency Resolution Process. 7. The Adjudicating Authority clearly landed in error by observing that the course adopted by it was warranted on the principle of ease of doing business, ignoring the fact that such course was not available to it, ease of doing business only being an objective of the legislation viz. I B Code along with other objectives specified in the preamble, which are sought to be achieved through CIRP process. 8. For the aforesaid reasons, we are unable to persuade ourselves to go along and support the impugned order. The Appeal is allowed and impugned order is set aside. The Adjudicating Authority is directed to pass an order of admission in respect of the Application filed by the Appellant-Operational Creditor under Section 9 of the I B Code within two weeks of communication of this order. However, the Adjudicating Auth ..... X X X X Extracts X X X X X X X X Extracts X X X X
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