TMI Blog2022 (12) TMI 144X X X X Extracts X X X X X X X X Extracts X X X X ..... the provisions of goods or services. We are not in position to treat the money brought it as Financial Debt. The basic element of the Financial Debt that such disbursement should be for consideration of Time Value of Money is not directly evident here. Admittedly, the Appellants have brought in more than Rs. 17 Crore, however it will not automatically fall in the definition of debt and more so of financial debt in relation to the Corporate Debtor. Since it cannot be classified as financial debts, the Appellants cannot be treated as financial creditor - the Resolution Professional s reason are directed to not include claims of the Appellants in the Resolution Plan as Financial Debt and also due to the fact that the Appellant being related party which has been confirmed by the Adjudicating Authority in the impugned order is found to be correct. Whether the impugned order passed by the Adjudicating Authority was incorrect holding the Appellants as related parties keeping in view provisions on I B Code 2016 and IBBI rules and regulations? - HELD THAT:- In the present Appeal, it is clear that the Appellants have been handling day-to-day operations of the corporate debtor. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... No. 2/ Resolution Applicant JUDGMENT ( Virtual Mode ) NARESH SALECHA , MEMBER ( TECHNICAL ) 1. These two Appeals , CA (AT) (CH) (Ins) 316 of 2022 and CA (AT) (CH) (Ins) 312 of 2022, have been projected against the Impugned Order dated 30.05.2022, passed by the Adjudicating Authority ( National Company Law Tribunal , Bengaluru Bench, Bengaluru) in IA No. 06 of 2022 in CP (IB) No. 144/BB/2017 and IA No. 166 of 2021 in CP (IB) No. 144/BB/2017. 2. The Adjudicating Authority ( National Company Law Tribunal , Bengaluru Bench, Bengaluru) while passing the Impugned Order in IA No. 06 of 2022 in CP (IB) No. 144/BB/2017 dated 30.05.2022, had observed the following: In the circumstances and for the aforesaid reasons, the Revised Plan dated 10.12.2021 ( Resolution Plan ) as approved by the CoC and submitted by M/s Sri Kauvery Medical Care (India) Limited (annexed to the Application as Annexure-A16) is here by approved. The Resolution Plan so approved shall be binding on the Corporate Debtor and its employees, members, creditors, including the Central Government , any State Government or any local authority to whom a debt in respect of the payment o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r. Brief Facts: 6. The Appellants , who are Husband and Wife, together own a Partnership Firm Aayug Multi Speciality Hospitals , through which they sought to invest in to M/s Yashomati Hospitals Private Limited (in short Corporate Debtor ) which was undergoing Financial Difficulty . The majority Shareholder and the Chairman are residents of Russia who met with the Appellants in Germany and an Agreement (in brief the Term Sheet ) was agreed between them. As per the Term Sheet , the Appellants would invest upto Rs. 25 Crore in the Corporate Debtor and would receive proportional Shareholding of Rs.1 Crore for 1% of the Shareholding . 7. According to the Appellants, Rs.17,74,66,098/- was invested in Corporate Debtor to pay off the dues of the Corporate Debtor , including Bank Loans, Unpaid Employee Dues, to install new equipment and to clear various other Dues. The Corporate Debtor was not in operation for years, before the Appellants , took over and invested money, to revive the Corporate Debtor . 8. In Breach of Agreement , as per Term Sheet , after investment made by the Appellant , the Corporate Debtor had failed to issue Share ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The Respondent 1 rejected all the claims of the Appellants. 30.05.2022 Adjudicating Authority dismissed the Application filed by the Appellants and approved the Resolution Plan submitted by the Respondent 2 ignoring the claims of Appellants Appellant s Submissions: 13. The Learned Counsel for the Appellant submitted that the present Appeal has been filed, challenging the Order dated 30th May 2022, passed by the Adjudicating Authority , dismissing Application No. 166 of 2021 , upholding the contentions of the Resolution Professional that the Appellants are Related Parties and not Financial Creditors of the Yashomati Hospitals Private Limited ( Corporate Debtor ). 14. The Learned Counsel for the Appellant submitted that the Appellants had disbursed huge amounts, to the extent of Rs.17.74 Crore (excluding any interest thereof) to the Corporate Debtor which was utilized for paying the debts, running the operations, etc. of the Corporate Debtor . 15. The Learned Counsel for the Appellant assailed action of the Respondent No.1 to keep away the Appellant as Stakeholder of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wledged by the State Bank of India and the amount paid by the Appellants towards this loan is Rs. 5,51,28,057, excluding Interest. (ii) The second claim is with regards to equipments which were brought into the Corporate Debtor by the Appellants. It is also not out of place to state that the 1st Respondent wrote to the Appellants to take back the Equipment as the Resolution Plan was approved. (iii) The Third Claim is for various unpaid dues of the Employees of the Corporate Debtor , which was cleared. (iv) The fourth Claim is for the various operational expenses incurred by the Appellants on behalf of the Corporate Debtor. 21. The Learned Counsel for the Appellant emphasised that the Respondents are not disputing the amounts being spent for the Corporate Debtor but are only challenging the character of the investment. 22. The Learned Counsel for the Appellant submitted that the Impugned Order is ex facie contrary to the facts on record and should be set aside and the Appellants are to be declared as Financial Creditors of the Corporate Debtor . The impugned order correctly holds that the Appellants have invested a sum of Rs.17,74,66,098/- being t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rther the provisions of the Companies Act, 2013 in Section 42 (6) clearly brings out the fact that if shares have not been allotted, amounts are to be refunded with interest. 27. The Learned Counsel for the Appellant also cited the case of Kushan Mitra vs. Amit Goel [CA (AT) (Ins) No. 128 of 2021] reported in 2021 SCC OnLine NCLAT 858 before the Hon ble National Company Law Appellate Tribunal, New Delhi, where it was held that money that has been brought in to a company as share application money or money brought in as an investment in lieu of promised issuance of share would fall under Section 42 (6) of the Companies Act, 2013. 42(6). Offer or invitation for subscription of securities on private placement (6) A company making an offer or invitation under this section shall allot its securities within sixty days from the date of receipt of the application money for such securities and if the company is not able to allot the securities within that period, it shall repay the application money to the subscribers within fifteen days from the expiry of sixty days and if the company fails to repay the application money within the aforesaid period, it shall be liable to r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he ratio of Radha Exports India Private Limited (supra) and Sesa Goa Limited and Ors. (Supra) is not applicable to the facts of this case. Further, a three Judge Bench of this Tribunal in Uniexcel Developers Pvt. Ltd. Vs. Uniexcel Ltd., Company Appeal (AT) Ins. No. 962 of 2019 has concurred with the finding of the Adjudicating Authority and held that in case of non-refund of Share Application Money within 60 days of receipt of the money, the money will be treated as Deposit and would change its character to fall within the definition of Financial Debt . 28. Since the same attracts interest as per the provisions of the Companies Act, 2013, the same has a Time Value for Money , and would be Financial Debt , under the Insolvency and Bankruptcy Code, 2016. Accordingly, in that case a Section 7 Application was held to be maintainable. 29. The Learned Counsel for the Appellant explained the next issue on which the Appellants claims has been rejected is the ground that the Appellants had not submitted the relevant documents to support the claim. The Learned Counsel for the Appellant submitted this to be contrary to the records as submitted in the Claim Forms where the re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce protects the insiders of a company or corporation against dealings with the outsiders. However suspicion of irregularity has been widely recognized as an exception to the doctrine of indoor management. The protection of the doctrine is not available where the circumstances surrounding the contract are suspicious and therefore invite inquiry. Para-112. This exception was highlighted in the English case of J.C Houghton Co. v. Nothard, Lowe Wills Ltd, [1927] 1 KB 246 (CA) where the case involved an agreement between fruit brokers and fruit importing company. There was an allegation that the agreement was entered into by the company's directors without authority. It was held that the nature of transaction was found to have been such as to put the plaintiffs on inquiry. To this effect Lord Justice Sargant held:- Cases where the question has been as to the exact formalities observed when the seal of a company has been affixed, such as Royal British Bank v. Turquand, 6 E. B. 327, or the County of Gloucester Blank v. Rudry Merthyr, c., Co., [1895] 1 Ch 629, are quite distinguishable from the present case. In re Fireproof Doors, Ltd., sup., tends rather against than ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arned Counsel for the Appellants stated that the Appellants are not Key Managerial Personnel of the Corporate Debtor at the relevant time period and though the Appellant No. 2 was appointed as the Chief Operation Officer of the Corporate Debtor , the same was not a permanent position but rather was renewed periodically and anyway, the last renewal expired by 2020 itself. Further, the Appellants were not directors of the Corporate Debtor . Admittedly, the brother of the Appellant No. 2 was an Additional Director for a short period of a few months, the same is not relevant at the date of the Corporate Insolvency Resolution Process . The relevant date to test a relationship of related party as per Phoenix Arc Pvt. Ltd. vs. Spade Financial Services, [(2021) 3 SCC 475] is the date on which the relationship of being a related party is tested. Para-103. Thus, it has been clarified that the exclusion under the first proviso to Section 21(2) is related not to the debt itself but to the relationship existing between a related party financial creditor and the corporate debtor. As such, the financial creditor who in praesenti is not a related party, would not be debarred from bei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e promoter/director of the Corporate Debtor) over these entities is clear, and allowing them in the CoC would definitely affect the other independent financial creditors. 35. The Learned Counsel for the Appellant, therefore, submitted that the Appellants are the Financial Creditors and not related parties of the Corporate Debtor and even if they are treated as related party, it cannot change the fact that they are still Financial Creditors of the Corporate Debtor having spent more than Rs. 17 Crores for the benefit of the Corporate Debtor . 36. The Learned Counsel for the Appellant concluded his arguments with a prayer that the present appeal be allowed, and the Appellants be treated as Financial Creditors and be paid in accordance with all the other financial creditors i.e., 100% of the amount claimed. Respondent s Submissions: 37. The Learned Counsel for the Respondents gave facts of the case and stated that the present Appeal is filed challenging the order of the Adjudicating Authority upholding the action of the 1st Respondent in treating the Appellants as related parties. 38. The Learned Counsel for the Respondents brought out that the ori ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... also highlighted that even as per the admitted by the Appellants, they did not bring the entire amount of Rs. 25 crores because of disputes between the Promoters and the Appellant which cannot be the subject matter of resolution by this Tribunal in its summary jurisdiction. 45. The Learned Counsel for the Respondents also argued that the Appellants should work on the remedies as available in the Dispute Resolution Mechanism set out in the term sheet against the Promoter Director. 46. The Learned Counsel for the Respondents stated that the Appellant had paid amount to the State Bank of India , only as per an agreement with the Promoter Director in the capacity of a Personal Guarantor and not on behalf of the Corporate Debtor and the consideration for whatever the appellants have done was the transfer of shares by the Promoter Director as such and without any consideration from the Corporate Debtor . 47. The Learned Counsel for the Respondent said that the CIRP process commenced on 16.03.2021 and admittedly there were disputes between the Appellant and the Promoter Director even before the commencement of the Corporate Insolvency Resolution Process and not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fined in Section 3 (11) of IBC 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; (d) Since, the term claim is mentioned in above definition of debt, there is a need to refer to definition of claim under Section 3(6) of IBC which is 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; (e) 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 disbu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s a person to whom an operational debt is owed and includes any person to whom such debt has been legally assigned or transferred; (g) These definitions make the distinction between Operational Debt and Financial Debt. As seen from above, financial debt is an inclusive and non-exhaustive definition given under Section 5(8) of the I B Code to mean a debt alongwith interest, if any, which is disbursed against the consideration for time value of money. Financial creditors have relationship with the entity as financial contract, like loan or security etc. Whereas, an operational debt as defined under section 5(21) of I B Code, 2016 signifies a claim in respect of the provisions of goods or services. (h) At this juncture, it may be worthwhile to refer to pronounce judgment on this issue to determine whether investment made by the Appellants fall in the definition of debt and if so, whether this is financial debt or operational debt or any other debt. The Hon ble Supreme Court of India in case Phoenix Arc Pvt. Ltd. vs Ketulbhai Ramubhai Patel on 3 February, 2021 reported in (2021) 2 SCC 799gave its verdict defining in following paragraphs. Para 5 - Aggrieved by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Chapter VIII of the Indian Contract Act, 1872 deals with Of Indemnity and Guarantee . Section 124 defines Contract of indemnity and Section 126 defines Contract of guarantee . Section 126 which is relevant for the present case is as follows: Section 126. Contract of guarantee , surety , principal debtor and creditor . -A contract of guarantee is a contract to perform the promise, or discharge the liability, of a third person in case of his default. The person who gives the guarantee is called the surety ; the person in respect of whose default the guarantee is given is called the principal debtor , and the person to whom the guarantee is given is called the creditor . A guarantee may be either oral or written. Para 29 - (a) to (i) of Section 5(8) would be falling within the ambit of 'financial debt' only if it carries the essential elements stated in the principal Clause or at least has the features which could be traced to such essential elements in the principal clause. In yet other words, the essential element of disbursal, and that too against the consideration for time value of money, needs to be found in the genesis of any debt before it may ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orate Debtor who were based in Russia. It is seen from the term sheet signed which include the clause wherein, the Appellants was supposed to bring in the amount of Rs. 25 Crores, for the benefit of the Corporate Debtor , to be used for the purpose of clearing debts of the State Bank of India, payment to workers for outstanding dues, bring in plant and machinery required for operation of Corporate Debtor and for other expenses for Corporate Debtor . In return of such investment of the Appellant the Promoter Director were required to allot shares to appellants to extent of 25% of share capital. The Appellants were also entitled to nominate two directors to board of directors and the Appellant No. 2 was supposed to be nominated as the Chief Executive Officer of the Corporate Debtor . (k) Considering the facts of the case, provision in I B Code, 2016 and abovementioned cited judgements, we are not in position to treat the money brought it as Financial Debt . The basic element of the Financial Debt that such disbursement should be for consideration of Time Value of Money is not directly evident here. Admittedly, the Appellants have brought in more than Rs. 17 Cror ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r or a relative of key managerial personnel of the corporate debtor; (c) A limited liability partnership or partnership firm in which a director, partner, or manager of the corporate debtor or his relative is a partner; (d) a private company in which a director, partner, or manager of the corporate debtor is a director and holds along with his relatives, more than two percent. of its share capital; (e) a public company in which a director, partner, or manager of the corporate debtor is a director and holds along with relatives, more than two percent. of its paid-up share capital; (f) anybody corporate whose board of directors, managing director or manager, in the ordinary course of business, acts on the advice, directions or instructions of a director, partner or manager of the corporate debtor; (g) any limited liability partnership or a partnership firm whose partners or employees in the ordinary course of business, acts on the advice, directions, or instructions of a director, partner, or manager of the corporate debtor; (h) any person on whose advice, directions or instructions, a director, partner or manager of the corporate debtor is accustomed to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Following are the relevant definition in the I B Code, 2016. Section 5(26) of IBC, 2016 - Resolution plan means a plan proposed by resolution applicant for insolvency resolution of the corporate debtor as a going concern in accordance with Part II; Section-5(25) of IBC resolution applicant means a person, who individually or jointly with any other person, submits a resolution plan to the resolution professional pursuant to the invitation made under clause (h) of sub-section (2) of section 25;] Section 25, provide for Duties of Resolution Professional : (1) It shall be the duty of the resolution professional to preserve and protect the assets of the corporate debtor, including the continued business operations of the corporate debtor. (2) For the purposes of sub-section (1), the resolution professional shall undertake the following actions, namely: - (a) take immediate custody and control of all the assets of the corporate debtor, including the business records of the corporate debtor; (b) represent and act on behalf of the corporate debtor with third parties, exercise rights for the benefit of the corporate debtor in judicial, quasi-judicial ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lution Professional is required to examine that the resolution plan submitted by various applicants is complete in all respects, before submitting it to the Committee of Creditors. The Resolution Professional is not required to take any decision, but merely to ensure that the resolution plans submitted are complete in all respects before they are placed before the Committee of Creditors, who may or may not approve it. The fact that the Resolution Professional is also to confirm that a resolution plan does not contravene any of the provisions of law for the time-being in force, including Section 29A of the Code, only means that his prima facie opinion is to be given to the Committee of Creditors that a law has or has not been contravened. Section 30(2)(e) does not empower the Resolution Professional to decide whether the resolution plan does or does not contravene the provisions of law . (e) Hon'ble Supreme Court in Ebix Singapore Private Limited vs. Committee of Creditors of Educomp Solutions Limited and Another-2021 SCC OnLine SC 707- Para132- While the above observations were made in the context of a scheme that has been sanctioned by the Court, the Resolution Plan ..... X X X X Extracts X X X X X X X X Extracts X X X X
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