Ajay Shivajirao Jadhav vs Netafim Agricultural Financing Agency ...

[Arising out of Order dated 03.03.2023 passed by the Adjudicating Authority/National Company Law Tribunal, Mumbai Bench - IV, in CP (IB) No. 464/MB-IV/2021]

IN THE MATTER OF: Ajay Shivajirao Jhadav, Suspended Director, Shraddha Energy & Infraprojects Private Limited "Shraddha House", CTS No. 1206 A, Plot No. 887-A, Shirole Road, Off J. M. Road, Shivajinagar, Pune 411004. ...Appellant

Versus

1. Netafim Agricultural Financing Agency Private Limited 1602 & 1603, 16th Floor, The Affaires, Plot No. 9, Sector 17, Palm Beach Road, Sanpada, Navi Mumbai - 400705 ...Respondent No. 1

2. Shraddha Energy & Infraprojects Private Limited, Through - Ajay Ganesh Marathe, IRP 201 Aadhar Height, Opposite Bhagshala Maidan, Dombivli Also at: Shraddha House, CTS No. 1206A/1, Plot No. 887 A Shirole Road, Off J M Road, Pune - 411004. ...Respondent No. 2

Present: For Appellant : Mr. Abhijeet Sinha & Mr. Prakhar Tandon, Advocates.

For Respondents : Mr. Gaurav Mitra, Mr. Siddharth S. Chapalgaonkar, Mr. Adit Singh, Ms. Sneha Botwe & Mr. Sameer Walinbe, Advocates

Company Appeal (AT) (Insolvency) No. 338 of 2023 Page 1 | 17

(04.07.2023)

NARESH SALECHA, MEMBER (TECHNICAL)

1. The present appeal has been filed under Section 61 of the Insolvency

& Bankruptcy Code, 2016 (in short 'Code') against the 'impugned order'

dated 03.03.2023 in CP (IB) 464 (MB)/2021 passed by the 'Adjudicating

Authority' (National Company Law Tribunal, Mumbai Bench, - IV), whereby

the 'Adjudicating Authority', admitted Section 7 application of Netafim

Agricultural Financing Agency Pvt. Ltd. (in short 'NAFA') i.e., 'Respondent

No. 1'/ the 'Financial Creditor' against the Shraddha Energy & Infraprojects

Pvt. Ltd./ the 'Corporate Debtor'.

2. Aggrieved by the same, the 'Appellant' has preferred the present

appeal.

3. Heard the Counsel for Parties and perused the records made available

including cited judgments.

4. Learned Counsel for the Appellant stated that the 'Corporate Debtor'

is engaged in the business of production of sugar from sugarcane crops

grown by its registered farmers in its common area. Learned Counsel for

the Appellant further stated that on 03.10.2013, the 'Respondent No. 1'

which is Non-Banking Financial Company (in short 'NBFC') entered into a

tripartite agreement with the 'Corporate Debtor' along with Netafim

Irrigation (India) Pvt. Ltd. (in short 'NIIPL') which is a sister concern of

'Respondent No. 1' engaged in the manufacture and supply of irrigation

equipment/ systems. Learned Counsel for the Appellant stated that in

Company Appeal (AT) (Insolvency) No. 338 of 2023 Page 2 | 17 terms of the said tripartite agreement, the 'Corporate Debtor' hired NIIPL for

supply and installation of drip irrigation systems in the registered/

recommended farms which would supply the sugar to the 'Corporate

Debtor'.

5. Learned Counsel for the Appellant submitted that the relevant clause

of the tripartite agreement describes the relationship along with the rights

and obligations of the parties. Learned Counsel for the Appellant stated that

during the period 2013-14, the 'Respondent No. 1' disbursed loan amount to

995 farmers based on the Tripartite Agreement dated 03.10.2013 and one

separate 'Deed of Guarantee' entered between the 'Corporate Debtor' and

'Respondent No.1' on 03.10.2013. Learned Counsel for the Appellant

further stated that the 'Corporate Debtor' was only a 'Guarantor' and not the

'Principal Borrowers' who in the present case were the 995 farmers to whom

the drip irrigation systems were supplied with the help of funds provided by

the 'Respondent No. 1' to such farmers. Learned Counsel for the Appellant

submitted that on 07.04.2021, the 'Respondent No. 1' issued a legal notice

invoking the 'Deed of Guarantee' dated 03.10.2013 and called upon the

'Corporate Debtor' to clear the outstanding dues of the farmers who had

defaulted in making payment for the alleged debt. The said notice was

replied by the 'Appellant' on behalf of the 'Corporate Debtor' on 16.04.2021

denying any outstanding payment to be made by the 'Corporate Debtor' to

the 'Respondent No. 1'.

6. Learned Counsel for the Appellant submitted that as prevalent

practice in sugar industry, the sugar factory on behalf of all such farmers

Company Appeal (AT) (Insolvency) No. 338 of 2023 Page 3 | 17 approached the 'Financial Creditor' for loan and in the present case also the

loans were given to such farmers by the 'Respondent No. 1' who

unfortunately could not pay on time due to draught conditions etc.,

Learned Counsel for the Appellant further submitted that the 'Respondent

No. 1' had filed application under Section 7 of the Code before the

'Adjudicating Authority' for alleged default amount of Rs. 5,41,34,813/-.

7. Learned Counsel for the Appellant emphasised that the 'Respondent

No. 1' failed to initiate suitable action on time against the 'Principal

Borrowers' i.e., the farmers in terms of the agreement which stipulated that

in case of the default committed by the farmers, the 'Respondent No. 1' had

six month's time to take action against the 'Corporate Debtor' which was not

taken. Learned Counsel for the Appellant also stated that the 'Respondent

No. 1' failed to explain delay from 2014 to 2021 as to why no action was

taken by the 'Respondent No. 1' to recover outstanding deeds from farmers-

borrowers.

8. Learned Counsel for the Appellant submitted that the 'Corporate

Debtor' is solvent going concern company with 650 employees supporting

more than 8000 farmers and there was no compulsion on the 'Adjudicating

Authority' to admit Section 7 application of the Respondent No. 1' keeping in

view Section 7(5)(a) of the Code, where the word 'may' has been used along

with the ratio given in the judgment of Hon'ble Supreme Court of India

passed in the case of Vidarbha Industries Power Limited Vs. Axis Bank

Limited reported in [Civil Appeal No. 4633 of 2021].

Company Appeal (AT) (Insolvency) No. 338 of 2023 Page 4 | 17

9. Learned Counsel for the Appellant stated that the application of the

'Respondent No. 1' before the 'Adjudicating Authority' under Section 7 of the

Code was barred by limitation and should have been rejected by the

'Adjudicating Authority'. Learned Counsel for the Appellant further stated

that the 'Adjudicating Authority' has not considered its legal, technical and

factual objections while passing the 'impugned order'.

10. Summarising his arguments, Learned Counsel for the Appellant urged

this 'Appellate Tribunal' to allow his appeal and dismiss the 'impugned

order'.

11. Per-contra, Learned Counsel for the Respondents explained the

business model. Learned Counsel for the Respondents stated that all three

parties i.e., the 'Respondent No. 1' as 'Financial Creditor', the 'Corporate

Debtor and 'NIIPL' entered into a Tripartite Agreement on 03.10.2013 to

support the 'Corporate Debtor in procuring the sugarcane production from

995 farmers in order to produce sugar in the plant of the 'Corporate Debtor'.

Learned Counsel for the Respondents stated that the NIIPL which indeed is

the sister concern of the 'Respondent No. 1', is in the business of

manufacturing and supplying of drip irrigation systems which are used by

the farmers. Learned Counsel for the Respondents further submitted that

the such drip irrigations are required by the farmers and since such farmers

are not in position to finance the same, the sugar factory (the 'Corporate

Debtor' in present case) agrees to enter the agreement with the 'Financial

Creditor' by way of continuing Deed of Guarantee in favour of the 'Financial

Creditor', guaranteeing the 'Financial Creditor ' to repay the amount due

Company Appeal (AT) (Insolvency) No. 338 of 2023 Page 5 | 17 from the recommended farmers of the 'Corporate Debtor' who have

defaulted.

12. Learned Counsel for the Respondents submitted that in the present

case, the tripartite agreement was entered into, according to which loans

were disbursed by the 'Financial Creditor' to the loan accounts of the

farmers of the borrowers for making payment to 'NIIPL' and based on which

drip irrigation systems were supplied by 'NIIPL' to the recommended farmers

of the 'Corporate Debtor'. Learned Counsel for the Respondents stated that

the 'Corporate Debtor' in turn used to pay back the 'Financial Creditor' on

behalf of such recommended farmers after sale of sugar produced using

sugarcane procured from such farmers to whom drip irrigation systems were

provided. Learned Counsel for the Respondents pointed out that the

Respondent No. 1 is 'NBFC' conceived with core objective for offering

financing in the value chain of micro irrigation activities.

13. Learned Counsel for the Respondents submitted that as per general

arrangements and terms & conditions of the Agreement entered into, the

'Corporate Debtor's responsibilities included deducting the principal and

interest outstanding from such farmers-borrower's sugarcane sale proceeds

and to pay the same to the 'Financial Creditors'. Learned Counsel for the

Respondents stated that the 'Respondent No. 1' used to send monthly

management information system (MIS) reports as written certificate to the

'Corporate Debtor' from time to time providing the outstanding repayment

status and list of defaulting borrowers. Learned Counsel for the

Respondents stated that as on 31.03.2021, 580 farmer borrowers were in

Company Appeal (AT) (Insolvency) No. 338 of 2023 Page 6 | 17 default of Rs. 5,41,34,813/- and the 'Financial Creditor' had to invoke the

guarantee for repayment of entire outstanding amount vide legal notice

dated 07.04.2021 calling the 'Corporate Debtor' to pay within 7 days and

since the 'Corporate Debtor' did not pay by 15.04.2021, default occurred on

15.04.2021.

14. Learned Counsel for the Respondents pointed out that as per Clause 5

of the Tripartite Agreement dated 03.10.2013, it is the liability of the sugar

factory/ 'Corporate Debtor' to repay the loan amount including interest

which is also covered in Clause 14 of the said Tripartite Agreement.

15. Learned Counsel for the Respondents emphasised that as per Clause

12 of the Deed of Guarantee dated 03.10.2013, it was a 'Deed of continuing

Guarantee' which required the 'Corporate Debtor' to repay the amount dues

from the recommended farmers who have defaulted in making payment to

the 'Financial Creditor'/ 'Respondent No. 1' as this was a collective

continuing guarantee. Learned Counsel for the Respondents stated that out

of 995 farmer borrowers, 580 farmer-borrowers defaulted in making due

payments to the 'Respondent No. 1' and subsequent to his legal notice dated

07.04.2021 to the 'Corporate Debtor', the 'Corporate Debtor' vide its reply

dated 16.04.2021 refused to repay the amount.

16. Learned Counsel for the Respondents refuted the averments of the

'Appellant' regarding claim debarred by limitation and submitted that the

'Corporate Debtor' has made payment of liability even during the pendency

of proceeding before the 'Adjudicating Authority'. Learned Counsel for the

Respondents therefore argued that it was full responsibility of the 'Corporate

Company Appeal (AT) (Insolvency) No. 338 of 2023 Page 7 | 17 Debtor' to pay the guaranteed amount and which was being done by the

'Corporate Debtor' from time to time and therefore there is no valid

argument regarding limitation in the present appeal.

17. Learned Counsel for the Respondents cited the judgments of

Margaret Lalita Samuel Vs. Indo Commercial Bank Limited [(1973 AIR

(SC) 102] and Syndicate Bank Vs. Channaveerappa Belerei & Ors.

[(2006) AIR (SC) 1874] to support his case of responsibility of the 'Corporate

Debtor' based on the Deed of continuing Guarantee.

18. Learned Counsel for the Respondents submitted that in the present

case the accounts of defaulting farmers borrowers are current as their

accounts have not been settled. Learned Counsel for the Respondents

further submitted that in terms of Section 3(11), 5(8) and 5(8)(i) of the Code

there is no bar on maintainability against the 'Corporate Debtor' who

provided guarantee to more than one person.

19. Concluding his arguments, Learned Counsel for the Respondents

submitted that the 'Appeal' deserves to be dismissed with costs.

20. From the above averments of the parties, two main issues emerges

which are required to be deliberated and settled by this 'Appellate Tribunal'

i.e., whether the application filed under Section 7 was debarred by law of

limitation and the second issue is regarding the liability of the 'Corporate

Debtor' based on the tripartite agreement and Deed of continuing

Guarantee.

21. In order to examine these issues, it will be necessary to look into the

relevant sections of the Code, the relevant clauses of the tripartite

Company Appeal (AT) (Insolvency) No. 338 of 2023 Page 8 | 17 agreement and Deed of Guarantee and the cited judgments. These read as

under :-

a) Laws- Section 7(5)(a), Section 3(11), 5(8) and 5(8)(i) of the Code.

"3. Definitions. -

(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;

5. Definitions. -

(8) "financial debt" means a debt alongwith interest, if any, which is disbursed against the consideration for the time value of money and includes-

(i) the amount of any liability in respect of any of the guarantee or indemnity for any of the items referred to in sub-clause (a) to (h) of this clause;"

(Emphasis Supplied)

b) Except of the Tripartite Agreement dated 03.10.2013 :-

"TRI PARTITE AGREEMENT (THE "Agreement") BETWEEN Netafim Irrigation (India) Private Limited (NIIPL) AND Shraddha Energy & Infra Projects Pvt. Ltd. (Maa Bageshwari Sugar Unit).

AND Netafim Agricultural Financing Agency Pvt. Ltd.

(NAFA)

Company Appeal (AT) (Insolvency) No. 338 of 2023 Page 9 | 17 This Agreement is made on 03.10.2013 ("Effective Date") by and between:

*** WHEREAS, NAFA is interested in the scheme of financing the Farmers in Sugar Factory's command area/ catchment/ operative area as defined by its internal guidelines. Issued from time to time, and is proposing to provide financial assistance to registered sugarcane farmers of Sugar Factory for purchasing drip/ micro irrigation system, and WHEREAS NETAFIM, NAFA and Sugar Factory wish to reduce in writing the details regarding the proposed products and services required by Sugar Factory from NIIPL and NAFA, including (without limitation) the precise Bill of Materials, nature of the services, the mechanism or process, applicable time-table and schedule for completion of installation, quality standards, co-ordination with farmers and related agencies, price, fee, charges and payment structure and the primary terms governing the business relationship sought to be created by and between NIIPL, NAFA and Sugar Factory.

NOW THEREFORE, in consideration of the mutual covenants and subject to the terms and conditions hereinafter set forth, NIIPL, NAFA and Sugar Factory, intending to be legally bound, mutually covenant and agree as follows :

***

(II) WARRANTIES GIVEN BY SUGAR FACTORY AND GENERAL CONDITIONS OF THE CONTRACT

1) Sugar Factory shall select and identity the Farmers with mutual consent of NIIPL, it being understood that Sugar

Company Appeal (AT) (Insolvency) No. 338 of 2023 Page 10 | 17 Factory shall identify the Farmers/ coordinate for identification of the Farmers.

2) Sugar Factory shall facilitate purchase of NIIPL drip irrigation and fertigation systems in such Farmer's field.

4.) Sugar Factory shall facilitate procurement of loans by the Farmers from NAFA for supply and installation of NIIPL drip irrigation and fertigation systems in such Farmer's field.

6.) Sugar Factory, as per their Board Resolution dated 03.10.2013 shall provide a liability guarantee to NAFA up to the facility limit as per the agreed upon terms of arrangement between NAFA and Sugar Factory.

BILLS AND PAYMENT

8.) The Sugar Factory shall provide an undertaking to NAFA to recover from the Farmers, the outstanding loan amount as per the terms and conditions as stated in Annexure V and pay principal amount plus interest (outstanding amount)till the closure of loans from the proceeds payable to the Farmers after purchasing the sugar cane from them. Notwithstanding anything contained herewith, in case of any default from the Farmers, in supplying sugarcane to the Sugar Factory, the Sugar Factory shall pay principal amount plus accrued interest (outstanding amount) as per the terms of the Credit Arrangement Letter till the closure of such loans including the penal charges (for the delayed period) within a period of 6 months from the repayment/ instalment repayment due date, during which NAFA and Sugar Factory jointly shall initiate & undertake recovery activities to recover the due/s from the defaulted farmer. Even if the Sugar Factory pays for the outstanding amount on behalf of the defaulted farmer, the recovery efforts shall continue

Company Appeal (AT) (Insolvency) No. 338 of 2023 Page 11 | 17 till the entire overdue amount is recovered/ collected from the defaulted farmer.

(Emphasis Supplied)

22. At first, we would like to take up the issue of limitation raised by the

'Appellant'. It is seen from the tripartite agreement that certain warranties

were given by the 'Corporate Debtor' and the same also contained general

conditions of the contract. As per Sub-clause 5 of the tripartite agreement it

is responsibility of the 'Corporate Debtor' for making payment in case of

default by the farmer. The sub-Clause 5 reads as under :-

"The Sugar Factory shall provide an undertaking to NAFA to recover from the Farmers, the outstanding loan amount as per the terms and conditions as stated in Annexure V and to pay principal amount plus interest (outstanding amount) till the closure of loans from the proceeds payable to the Farmers after purchasing the sugar cane from them. Notwithstanding anything contained herewith, in case of any default by any of the Farmers in supplying sugarcane to the Sugar Factory or default from the Sugar Factory in purchasing such sugarcane from the Farmers, the Sugar Factory shall pay principal amount plus interest (outstanding amount) to NAFA as per the repayment schedule and terms till the closure of such loans."

(Emphasis Supplied)

It is therefore clear that the 'Corporate Debtor' was obliged for

collection and deduction of principal and interest of the farmers loan and

make payment to the 'Respondent No. 1'.

Company Appeal (AT) (Insolvency) No. 338 of 2023 Page 12 | 17

23. Similarly, it is noted from the Deed of Guarantee signed on

03.10.2013 between the 'Corporate Debtor' and the 'Financial Creditor',

loans granted to the farmer - borrowers are secured by unconditional and

irrevocable guarantee of the Corporate Debtor.

24. The relevant Clause of the Deed of Guarantee dated 03.10.2013 reads

as under :-

"WHEREAS (1) Guarantor has requested the Lender to lend and advance to the registered sugarcane growing farmers under the command area of the Guarantor (hereinafter referred to as the "Borrower (s)")various term loans on the terms and conditions contained in the relevant loan (the "Loan Agreement(s) ") (The total Sum is hereinafter referred to as the "Loan") (2) One of the terms on which the said Loan was agreed to be granted by the Lender to the Borrower(s) was that the said Loan would, inter alia, be secured by an unconditional and irrevocable guarantee of the Guarantor, being these presents.

(3) The Guarantor, at the request of the Borrower(s) and in consideration of the Lender having extended/agreed to extend/continues to extend the said Loan to the Borrower

(s), on the representation of the Borrower(s) has agreed to execute this Deed in favour of the Lender on the terms and in the manner hereinafter appearing.

NOW THIS DEED WITNESETH AS FOLLOWS

2. *** In the event of any default on the part of the Borrower (s) to comply with or perform any of the terms, conditions and

Company Appeal (AT) (Insolvency) No. 338 of 2023 Page 13 | 17 covenants contained in the Loan Agreement(s), the Guarantor unconditionally and irrevocably undertakes that it shall, upon demand, forthwith pay to the Lender without any demur or protest and without questioning the legality or propriety and notwithstanding any dispute between the Borrower(s) and the Lender, all the amounts payable by the Borrower(s) under the Loan Agreement (s) together with interest of @24% p.a. on the amounts so demanded in the event of any delay in their making the payment to the Lender in terms of the notice of demand issued in this behalf by the Lender***

8. To give effect to this Deed, the Lender may act as though the Guarantoris the principal debtor to the Lender.

11. Deed shall be irrevocable and the obligations of the Guarantor hereunder shall be unconditional

12. This Deed shall be a continuing one and shall remain in full force and effect till such time the Borrower(s) repay in full the Loan together with all interest, liquidated damages, costs, charges and all other monies that they may from time to time become due and payable and remain unpaid to the Lender under the Loan Agreement.

13. A certificate in writing signed by a duly authorized official of the Lender shall be conclusive evidence against the Guarantor of the amount for the time being due to the Lender from the Borrower(s) in any action or proceeding brought on this Deed against the Guarantor.

14. The Guarantor is aware of the terms of the Loan Agreements) and hereby agrees and undertake to comply with the applicable terms and conditions accordingly."

(Emphasis Supplied)

Company Appeal (AT) (Insolvency) No. 338 of 2023 Page 14 | 17

25. From above it is clear that the Deed of Guarantee is continuing one

and is to remain in force till such time the borrowers repay the loans. It is

also observed that monthly MIS have been provided by the Respondent No.

1 to the 'Corporate Debtor' on regular basis relating to outstanding debts

from the farmer - borrowers. Subsequently on the default by farmer-

borrowers, the 'Financial Creditors' invoked the Deed of Guarantee dated

03.10.2013 for repayment of outstanding dues through legal notice dated

07.04.2021 which has been replied by the 'Corporate Debtor' on 16.04.2021

denying outstanding dues. The application under Section 7 was filed by the

'Respondent No. 1' on the basis of breach of guarantee and inability of the

'Corporate Debtor' to repay the outstanding dues and therefore breach of

guarantee date becomes the cause of action as well as the date of default as

indicated in Part IV of the Application under Section 7 was 15.04.2021,

whereas the Respondent No. 1 filed the application under Section 7 on

24.04.2021 which is fully covered under Limitation Act, 1963. Hence,

averments of the 'Appellant' that the application was barred by limitation

does not succeed.

26. As regard, the second contention raised in the 'Appeal' regarding the

liability of the 'Corporate Debtor' is based on the tripartite agreement and

Deed of continuing Guarantee, both documents signed on 03.10.2013. In

this connection, we have already examined the various clauses of the Deed

of Guarantee entered into between the 'Corporate Debtor' and the

'Respondent No. 1' and accordingly it is clear that in case of default of

farmer- borrowers in repaying the loan amount, the 'Corporate Debtor' was

Company Appeal (AT) (Insolvency) No. 338 of 2023 Page 15 | 17 liable under unconditional and irrevocable Deed of Guarantee. The Deed of

Guarantee also clearly mentioned that the Deed is a continuing one and

shall remain in force till all money are paid by the borrower. In the present

case, as required in the agreement, the Respondent No. 1, sent from time to

time the list of outstanding debts from the farmer- borrowers to the

Corporate Debtor' in form of the monthly MIS. It is also undisputed fact

that from time to time the Financial Creditor has received the payment of

dues and only on the default, the legal notice was issued and based on the

continuing Deed of Guarantee and the 'Corporate Debtor' was called upon to

settle outstanding dues on account of farmer- borrowers loans within seven

days and due to non-payment of such loans, amounting to Rs.

5,41,34,813/-, the date of default was treated as 15.04.2021.

27. In view of all above, it is evident that there was clear liability on the

part of the 'Corporate Debtor' to make the payment on demand on breach/

default by farmer- borrowers and hence, the 'Adjudicating Authority' has

passed correctly the 'impugned order' treating outstanding money as a

financial debt of more than Rs. 1 Crore for which default took place on

15.04.2021 and therefore, rightly approved initiation of the CIRP against the

'Corporate Debtor'.

28. The other issue raised by the Appellant regarding the applicability of

Vidarbha Industries Power Limited (Supra) is not directly relevant,

looking into the various facts and circumstances as brought out in the

present appeal.

Company Appeal (AT) (Insolvency) No. 338 of 2023 Page 16 | 17

29. As regard, the cited judgments both by the 'Appellant' as well as the

'Respondents', the same have been looked into. It is settled position in the

law that the Deed of continuing guarantee is valid and same has been

correctly invoked by the Financial Creditor in the present case. There is no

legal embargo on this issue.

30. After careful consideration of all the facts, averments made by all

parties, cited judgments, we do not find any error in the challenged

'impugned order'. The 'Appeal' being devoid of any merit is dismissed. No

costs. Interlocutory Applications, if any, are closed.

[Justice Ashok Bhushan] Chairperson

[Naresh Salecha] Member (Technical)

Simran

Company Appeal (AT) (Insolvency) No. 338 of 2023 Page 17 | 17