Anita Jindal vs M/S Jindal Buildtech Private Limited & ...

National Company Law Appellate Tribunal Principal Bench, New Delhi COMPANY APPEAL (AT) (INSOLVENCY) No. 512 of 2021 Arising out of the order dated 26.03.2021 passed by National Company Law Tribunal, Chandigarh Bench, Chandigarh in C.P. (IB)-70/Chd/HP/2019

IN THE MATTER OF:

Anita Jindal ...Appellant

Versus

1. M/S JINDAL BUILDTECH PVT. LTD. Through the Interim Resolution Professional Having Registered Office At: Village Kishanpura Baddinalarh Road, Baddi, District Solan, Himachal Pradesh ...Respondent No. 1

2. VINAY YADAV Residing At: 38A, Mianwali Colony, Gurgaon, Haryana ...Respondent No. 2

For Appellant: Mr. Abhijeet Sinha, Advocate.

For Respondent: Ms. Priya Hingorani, Sr. Advocate with Mr. Himanshu Yadav, Advocate for R-2.

Ms. Swati Saluja, Advocate for Financial Creditor.

JUDGEMENT

[Per: Ms. Shreesha Merla, Member (T)]

1. The Appellant, the Shareholder and Ex-Director of the Corporate

Debtor/M/s Jindal Buildtech Pvt. Ltd. has preferred this Appeal under

Section 61 of the Insolvency and Bankruptcy Code, 2016 (herein after referred

to 'the Code') against the Impugned Order dated 26.03.2021 passed by the

Learned Adjudicating Authority (National Company Law Tribunal,

Chandigarh Bench, Chandigarh) in C.P. (IB)-70/Chd/HP/2019, admitting the Section 7 Application preferred by the second Respondent/Mr. Vinay Yadav.

By the impugned order the Adjudicating Authority, while admitting the

Section 7 Application observed as follows:-

"10. Section 7(5)(a) of the Code is as follows:

5) Where the Adjudicating Authority is satisfied that -

(a) a default has occurred and the application under sub-section (2) is complete, and there is no disciplinary proceedings pending against the proposed resolution professional, it may by order, admit such application."

11. In the present case, the concurrence of default is evidenced by the details furnished by the petitioner including cheque bearing No.000221 dated 01.09.2016 amounting to Rs. 57,00,000 and cheque bearing No.000222 dated 01.09.2016 amounting to Rs. 30,50,000 (Annexure-C (Colly)). It can be seen that aforesaid cheques were dishonoured due to "Insufficient Balance" as evident from cheque Return Memo dated 05.12.2016, 21.11.2016 and 30.11.2016 attached as Annexures D, E & F respectively. The financial creditor has also issued a Legal notice dated 19.10.2018 (Annexure-G) through its counsel demanding full payment of pending amount. Original postal receipts and tracking report showing the delivery of Legal notice dated 19.10.2018 are found at Annexure-H (Page Nos. 31-36). The petitioner has attached bank statements showing an amount of Rs. 57,00,000/- transferred to the corporate debtor from the account of his Sole Proprietorship Firm i.e. M/s Ultracon International and Rs. 40,00,000/- from his own account as Annexure-l. (colly). It is evident from the contents of the petition that the corporate debtor has defaulted in the repayment of amount to the financial creditor."

2. Submissions of the Ld. Counsel appearing on behalf of the

Appellant.

• It is submitted by the Ld. Counsel for the Appellant that the second

Respondent has falsely represented himself to be a Financial Creditor of

the Corporate Debtor, as the money in question was the never advanced to

the Corporate Debtor as financial debt, but, in fact, the same amount was

2|Page Company Appeal (AT) (Insolvency) No. 512 of 2021 deposited to open and operate some joint depots to sale and distribute

goods manufactured by the Corporate Debtor.

• The Corporate Debtor furnished three cheques only with an intention to

provide security of the subject amount.

• The Section 7 Application was filed by the second Respondent without

appending any document to show that the amount in question is of loan

amount; any financial agreement to establish on what terms and

conditions the purported 'short term loan' was advanced to the Corporate

Debtor; never furnished the detailed record of the default of the default

recorded with the information utility as mandated under Section 7(3) of the

Code; did not file adequate evidence to prove that the Corporate Debtor

owed a 'financial debt' to the Creditor.

• Mere reliance on the bank statements to allege that some money in the

nature of financial debt was given to the Corporate Debtor, does not satisfy

the requirements of a 'financial debt' as defined under the Code.

• The audited Financial Statements of the Corporate Debtor for the FY 2018-

19 and FY 2017-18 show the amount as 'advances from customer" this

establishes that the said amount does not have consideration for the time

value of money.

• Non-reply to a legal notice does not amount to any admission as to whether

the amount deposited in the account was a loan. The petition has been

filed only as a pressure tactic against the solvent Corporate Debtor claiming

an amount of Rs. 87,50,000/- to be amount in default arising out of two

cheques of Rs. 57,00,000 and Rs. 30,50,000/- issued by the Corporate

3|Page Company Appeal (AT) (Insolvency) No. 512 of 2021 Debtor in favour of the second Respondent, which had returned on account

of insufficient funds.

• It is submitted that in the ongoing proceedings under Section 138 of the NI

Act, the Corporate Debtor had already paid an amount of Rs. 67,90,000/-

vide a Demand Draft dated 09.09.2019. As per the directions of the Trial

Court, the Corporate Debtor paid interest @ 6% p.a and the second

Respondent did not oppose the plea of the Corporate Debtor for closure of

the proceedings before the JMIC, Gurgaon. Furthermore, the second

Respondent has accepted the amount and did not challenge the orders of

the Trial Court. Therefore, any claim including interest thereupon arising

out of the said cheque amounting to Rs. 57,00,000/- is wholly mis-

conceived. Even assuming the claim of the second Respondent is correct,

the present amount due is only Rs. 30,50,000/-.

• It is submitted that in order to put an end to the dispute, without prejudice

to its contentions, the Appellant had annexed a Demand Draft of Rs.

30,50,000/-, but the Respondent, with an intention to extract more money

is now demanding interest at exorbitant rate of 18% p.a.

• The Ld. Counsel for the Appellant has placed reliance on the Judgment of

Hon'ble Supreme Court in Pioneer Urban Land Vs. UOI, (2019) 8 SCC 416

in support of his case that "the 'disbursal' must be money and must be

against consideration for the 'time value of money', meaning thereby, the

fact that such money is now no longer with the lender, but is with the

borrower, who then utilises the money"

4|Page Company Appeal (AT) (Insolvency) No. 512 of 2021 • Learned Counsel stressed that this Code should not be used for 'Recovery'

of money and that it is essentially meant for 'Resolution'.

• The Ld. Counsel for the Appellant also placed reliance on the ratio of the

Hon'ble Supreme Court in UoI Vs. Watkins, AIR 1966 SC 275, wherein it

was held as follows:-

"It was pointed out that the plaintiff had given notice to the defendant claiming rent at the rate of Rs. 4 per ton per month and there was no protest on behalf of the defendant and, therefore, it must be taken that there was an implied agreement between the parties that rent would be paid at that rate, i.e., at the rate of Rs. 2,400 per month. We do not think there is any warrant for this submission. Merely because the plaintiff had claimed storage charges at the rate of Rs. 4 per ton per month and there was silence on the part of the defendant, it cannot be deemed that there was acquiescence on the part of the defendant and that there was an implied undertaking on its part to pay godown rent at that rate."

3. Submissions of the Ld. Counsel appearing on behalf of the second

Respondent:

• It is submitted that the first Respondent/Corporate Debtor had admitted

in the reply to the Section 7 Application under the heading preliminary

objections "that the Corporate Debtor had taken a short-term loan of Rs.

Ninety-Seven Lakhs and assured its return within a year and also returned

a sum of Rs. Nine Lakhs Fifty Thousand to the Financial Creditor. It is

submitted that this amount of Rs. 9,50,000/-was paid on 11.05.2016 prior

to the filing of Section 7 Application. In September, 2016 the Respondent

No. 1/Corporate Debtor issued two cheques dated 01.09.2016 to the

second Respondent for a total amount of Rs. 87,50,000/-, but the same

5|Page Company Appeal (AT) (Insolvency) No. 512 of 2021 were returned unpaid and hence proceedings under Section 138 of the NI

Act were initiated against the Corporate Debtor.

• A Legal Notice dated 19.10.2018 was duly served upon the first Respondent

on 25.10.2018, who reiterated the mutually agreed terms for advancement

of the aforesaid loan being based on assurances of assured return along

with interest @ 18 % p.a thereon. Pursuant to the order dated 07.08.2019

under the NI Act, the Corporate Debtor paid a total sum of Rs.67,90,000/-

out of which Rs. 57,00,000/- towards the discharge of the principal sum

Rs. 10,88,000/- towards the interest component on the said amount and

Rs. 2,000/- towards cost.

• It was never the case of the Appellant before the Adjudicating Authority

that the second Respondent was not a Financial Creditor and the debt due

was not a financial debt. Legal Notice dated 19.10.2018 reiterating the

terms of loan including interest @ 18% p.a was never replied to, disputed

or objected to by the Corporate Debtor. Hence, adverse inference ought to

be drawn against the Corporate Debtor. In the reply dated 06.08.2019, the

Corporate Debtor had not challenged the maintainability of the Section 7

Application nor disputed the financial debt. Hence, the Adjudicating

Authority has rightly held that there is a 'debt' and 'default' in payment of

the financial debt and is more than Rs. 1,00,000/-, as admitted the

application.

• Ld. Counsel for the second Respondent placed reliance on the Judgments

of the Hon'ble Supreme Court in 'Orator Marketing Pvt. Ltd.' Vs.

'Samtex Desinz Pvt. Ltd.' (MANU/SC/0487/2021), wherein the Apex

6|Page Company Appeal (AT) (Insolvency) No. 512 of 2021 Court has held that 'even a person who gives a term loan to a Corporate

Debtor, free of interest, falls within the ambit of Financial Creditor, is

defined under the Code'.

• The Learned Sr. Counsel also relied on 'Metropolis Travels & Resorts (I) Pvt.

Ltd.' Vs. 'Sumit Kalra and Ors.' 98 (2002) DLT 573, 'ICRI Research Pvt. Ltd.'

Vs. 'Bon Lon Securities Ltd.', MANU/DE/4833/2018, 'Rangappa' Vs.

'Mohan', AIR 2010 SC 1898, 'Madhusudan Tanita' Vs. 'Amit Chorarira'

MANU/NL/0374/2020, 'Innoventive Industries Ltd.' Vs. 'ICICI Bank', (2018)

1 SCC 407, and 'Swiss Ribbons Pvt. Ltd. & Ors.' Vs. 'Union of India (UOI) &

Ors.', (2019) 4 SCC 17, in support of their case that if the Adjudicating

Authority is satisfied that there is a 'debt' and a 'default', the Section 7

Application is required to be admitted.

• The Appellant has erroneously placed reliance on the Notification dated

24.03.2020 issued by the Ministry of Corporate Affairs (MCA), Government

of India as default in the repayment of the outstanding loan occurred on

21.11.2016, 30.11.2016 and 05.12.2016, much prior to the date of

notification and moreover the Section 7 Application was filed way back in

December, 2018.

• It is submitted that the Appellant has falsely stated in the present Appeal

that though the Corporate Debtor moved an Application dated 19.01.2021

to grant an opportunity for hearing but the Adjudicating Authority passed

the impugned order dated 26.03.2021 without affording any such

opportunity. In fact, the said application dated 19.01.2021 was allowed

and the order dated 12.01.2021 was recalled. The Adjudicating Authority

7|Page Company Appeal (AT) (Insolvency) No. 512 of 2021 heard all the submissions advanced by the Corporate Debtor and reserved

the orders vide order dated 27.01.2021.

• Under the ambit of Section 7 of the Code, the Adjudicating Authority is to

only determine whether a 'default' has occurred and whether the 'debt',

which may still be disputed, was due and remained unpaid. The deposit of

the said demand draft does not remove the existence of default as existed

and as on the date of filing of the Section 7 Application. Moreover, the said

Demand Draft was by M/s Jindal Buildsys Limited and not the Appellant

herself. M/s Jindal Buildsys Limited is already facing insolvency

proceedings before the Adjudicating Authority for several defaults and

hence the Adjudicating Authority has rightly admitted the Section 7

Application.

Assessment:

4. After hearing the submissions of both the parties at length, we are of

the considered view that the main issue which arises for consideration in this

Appeal is whether the Section 7 Application admitted against a Solvent

Company, in the background where the Company has issued two cheques as

security for the amount lent, and one cheque amount has been paid,

(pursuant to the Order of the Trial Court under Section 138 of the NI Act,

1881, to compound one of the cases), and for the balance second cheque

amount, does the initiation of Insolvency Proceedings fall within the ambit of

the scope, objective and spirit of the Code which is 'Resolution' and not

'Recovery'? Whether the Adjudicating Authority while admitting a Section 7

Application, as in this case, examine only if there is a 'Debt' and 'Default' but

8|Page Company Appeal (AT) (Insolvency) No. 512 of 2021 also assess if the intent of the Applicant is primarily only 'Recovery of the

dues'?

5. For better understanding of the case on hand, a few dates are

important:

• It is the case of the second Respondent that an amount of

Rs.97,00,000/- was lent to the 'Corporate Debtor' as 'Short-Term Loan'

in December 2015, to be repaid within a period of one month.

• On 11.05.2016, an amount of Rs.9,50,000/- was paid towards part-

payment of the loan.

• On 01.09.2016, the 'Corporate Debtor' issued two post-dated cheques

for Rs.57,00,000/- and Rs.30,50,000/-, which had being presented,

were returned unpaid on 21.11.2016 and 05.12.2016 respectively.

• In 2017, the second Respondent filed two separate cases under Section

138 of the NI Act, 1881 before the District Court, Gurgaon, Haryana.

• On 30.11.2018, a Section 7 Petition was filed being CP (IB) No.

70/CHD/HP/2019 before the Adjudicating Authority, Chandigarh

Bench seeking initiation of Insolvency Resolution against the 'Corporate

Debtor', claiming an amount of Rs.87,50,000/- as the amount of

default.

• On 09/09/2019, the 'Corporate Debtor' paid an amount of

Rs.57,90,000/- to the second Respondent before the Trial Court in

proceedings under Section 138 of the NI Act.

6. At this juncture, it is relevant to reproduce part IV and V of the

Application filed by the second Respondent:

9|Page Company Appeal (AT) (Insolvency) No. 512 of 2021 10 | P a g e Company Appeal (AT) (Insolvency) No. 512 of 2021 11 | P a g e Company Appeal (AT) (Insolvency) No. 512 of 2021

7. From the aforenoted particulars of 'Financial Debt', it is clear that the

amount claimed as 'default' is Rs.87,50,000/- which is inclusive of cheque

amount of Rs.57,00,000/- issued on 01.09.2016 and against which the

'Corporate Debtor' paid an amount of Rs.67,90,000/- vide a Demand Draft

dated 09.09.2019 before the Trial Court to compound one of the cases. It is

an admitted fact that the said payment led to the closure of Case No. 1505 of

2017 which was filed for the dishonour of the cheque of Rs.57,00,000/-.

12 | P a g e Company Appeal (AT) (Insolvency) No. 512 of 2021

8. We note that the second Respondent had accepted an amount of

Rs.67,90,000/- which was computed at 6% interest. This Order has not been

challenged and has attained finality. The relevant portion of the subject Order

of the Trial Court is reproduced as hereunder:

9. In Part IV of the Application, the debt amount is claimed to be

Rs.87,50,000/-. It is pertinent to mention that the said Application was filed

on 30.11.2018 while there were parallel proceedings for recovery of the

amount under Section 138 of the NI Act, 1881 before the District Court,

Gurgaon.

10. The argument of the Learned Counsel for the Appellant that the

Notification dated 24.03.2020 issued by the Central Government increasing

the threshold to Rs.1Crore/- is retrospective in nature and is applicable to

this case, is untenable as we are of the view that the amounts claimed pertain

13 | P a g e Company Appeal (AT) (Insolvency) No. 512 of 2021 to the period prior to the date of Notification. We also do not wish to delve into

the other submissions of the Appellant regarding the nature of transactions,

absence of Financial Contract, non-registration of debt with the information

utility whether interest at 18% per annum was ever concluded between the

parties except for reference in the legal Notice issued by the second

Respondent. This Tribunal is of the earnest view that taking into

consideration the facts and circumstances of the attendant case on hand, the

issue with respect to Admission of Section 7 Petition is required to be decided

on the touchstone of the ratio of the Hon'ble Supreme Court in 'Vidarbha

Industries Power Limited' Vs. 'Axis Bank Limited', 2022 SCC OnLine SC

841, wherein the Hon'ble Apex Court has observed as follows:

"55. When an application is filed under Section 7(2) of the IBC, the Adjudicating Authority (NCLT) is required to ascertain the existence of a default from the records of the information utility or any other evidence furnished by the financial creditor under sub-section (3) of Section 7 of the IBC, within 14 days of the date of receipt of the application.

56. Section 7(5)(a) of the IBC, on which much emphasis has been placed both by Mr. Gupta and Mr. Mehta, provides that where the Adjudicating Authority (NCLT) is satisfied that a default has occurred and the application under sub-Section (2) of the IBC is complete and there is no disciplinary proceeding against the proposed Resolution Professional, it may by order, admit such application. If default has not occurred, or the application is incomplete, or any disciplinary proceeding is pending against the proposed Resolution Professional, the Adjudicating Authority (NCLT) may reject such application in terms of Section 7(5)(a) of the IBC, but after giving the applicant opportunity to rectify the defect.

57. Both, the Adjudicating Authority (NCLT) and the Appellate Tribunal (NCLAT) proceeded on the premises that an application must necessarily be entertained

14 | P a g e Company Appeal (AT) (Insolvency) No. 512 of 2021 under Section 7(5)(a) of the IBC, if a debt existed and the Corporate Debtor was in default of payment of debt. In other words, the Adjudicating Authority (NCLT) found Section 7(5)(a) of the IBC to be mandatory. The Adjudicating Authority (NCLT) was of the view that Section 7(5)(a) did not admit any other interpretation, with which the Appellate Tribunal (NCLAT) agreed.

58. The Appellate Tribunal (NCLAT) affirmed the finding of the Adjudicating Authority (NCLT) that the Adjudicating Authority was only required to see whether there had been a debt, and the Corporate Debtor had defaulted in making the repayments. These two aspects, when satisfied, would trigger Corporate Insolvency. Since the Adjudicating Authority (NCLT) did not consider the merits of the contention of the Respondent Corporate Debtor, the only question in this appeal is, whether Section 7(5)(a) is a mandatory or a discretionary provision. In other words, is the expression 'may' to be construed as 'shall', having regard to the facts and circumstances of the case.

59. Referring to the judgment of this Court in Swiss Ribbons (supra), the Adjudicating Authority (NCLT) held that the imperativeness of timely resolution of a Corporate Debtor, who was in the red, indicated that no other extraneous matter should come in the way of expeditiously deciding a petition under Section 7 or under Section 9 of the IBC.

60. There can be no doubt that a Corporate Debtor who is in the red should be resolved expeditiously, following the timelines in the IBC. No extraneous matter should come in the way. However, the viability and overall financial health of the Corporate Debtor are not extraneous matters.

61. The Adjudicating Authority (NCLT) found the dispute of the Corporate Debtor with the Electricity Regulator or the recipient of electricity would be extraneous to the matters involved in the petition. Disputes with the Electricity Regulator or the Recipient of Electricity may not be of much relevance. The question is whether an award of the APTEL in favour of the Corporate Debtor, can completely be disregarded by the Adjudicating Authority (NCLT), when it is claimed that, in terms of the Award, a sum of Rs. 1,730 crores, that is, an amount far exceeding the claim of the

15 | P a g e Company Appeal (AT) (Insolvency) No. 512 of 2021 Financial Creditor, is realisable by the Corporate Debtor. The answer, in our view, is necessarily in the negative.

62. In our view, the Appellate Authority (NCLAT) erred in holding that the Adjudicating Authority (NCLT) was only required to see whether there had been a debt and the Corporate Debtor had defaulted in making repayment of the debt, and that these two aspects, if satisfied, would trigger the CIRP. The existence of a financial debt and default in payment thereof only gave the financial creditor the right to apply for initiation of CIRP. The Adjudicating Authority (NCLT) was require to apply its mind to relevant factors including the feasibility of initiation of CIRP, against an electricity generating company operated under statutory control, the impact of MERC's appeal, pending in this Court, order of APTEL referred to above and the over all financial health and viability of the Corporate Debtor under its existing management.

63. As pointed out by Mr. Gupta, Legislature has, in its wisdom, chosen to use the expression "may" in Section 7(5)(a) of the IBC. When an Adjudicating Authority (NCLT) is satisfied that a default has occurred and the application of a Financial Creditor is complete and there are no disciplinary proceedings against proposed resolution professional, it may by order admit the application. Legislative intent is construed in accordance with the language used in the statute.

64. The meaning and intention of Section 7(5)(a) of the IBC is to be ascertained from the phraseology of the provision in the context of the nature and design of the IBC. This Court would have to consider the effect of the provision being construed as directory or discretionary.

65. Ordinarily the word "may" is directory. The expression 'may admit' confers discretion to admit. In contrast, the use of the word "shall" postulates a mandatory requirement. The use of the word "shall" raises a presumption that a provision is imperative. However, it is well settled that the prima facie presumption about the provision being imperative may be rebutted by other considerations such as the scope of the enactment and the consequences flowing from the construction.

16 | P a g e Company Appeal (AT) (Insolvency) No. 512 of 2021

66. It is well settled that the first and foremost principle of interpretation of a statute is the rule of literal interpretation, as held by this Court in Lalita Kumari v. Government of Uttar Pradesh If Section 7(5)(a) of the IBC is construed literally the provision must be held to confer a discretion on the Adjudicating Authority (NCLT)".....

"83. The Adjudicating Authority (NCLT) failed to appreciate that the question of time bound initiation and completion of CIRP could only arise if the companies were bankrupt or insolvent and not otherwise. Moreover the timeline starts ticking only from the date of admission of the application for initiation of CIRP and not from the date of filing the same.

84. In Swiss Ribbons (supra) this Court considering the vires of the IBC observed as follows:--

"43. A financial creditor may trigger the Code either by itself or jointly with other financial creditors or such persons as may be notified by the Central Government when a "default" occurs. The Explanation to Section 7(1) also makes it clear that the Code may be triggered by such persons in respect of a default made to any other financial creditor of the corporate debtor, making it clear that once triggered, the resolution process under the Code is a collective proceeding in rem which seeks, in the first instance, to rehabilitate the corporate debtor. Under Section 7(4), the adjudicating authority shall, within the prescribed period, ascertain the existence of a default on the basis of evidence furnished by the financial creditor; and under Section 7(5), the adjudicating authority has to be satisfied that a default has occurred, when it may, by order, admit the application, or dismiss the application if such default has not occurred. On the other hand, under Sections 8 and 9, an operational creditor may, on the occurrence of a default, deliver a demand notice which must then be replied to within the specified period. What is important is that at this stage, if an application is filed before the adjudicating authority for initiating the corporate insolvency resolution process, the corporate debtor can prove that the debt is

17 | P a g e Company Appeal (AT) (Insolvency) No. 512 of 2021 disputed. When the debt is so disputed, such application would be rejected."

85. The judgment of this Court Swiss Ribbons (supra), which was rendered in the context of a challenge to the vires of the IBC, does not consider the question of whether Section 7(5)(a) of the IBC is mandatory or discretionary. It is well settled that a judgment is a precedent for the question of law that is raised and decided. The language used in a judgment cannot be read like a statute. In any case, words and phrases in the judgment cannot be construed in a truncated manner out of context"....

..............................................................................

"91. 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 IBC."

.............................................................................

(Emphasis Supplied)

11. In the instant case, proceedings under NI Act, 1881 commenced in the

Year 2017; Section 7 Application was filed, on 10.11.2018, the 'Corporate

Debtor' paid an amount of Rs.67,90,000/- before the Trial Court to compound

one of the cases on 09.09.2019 and which led to the closure of Case No.

1505/2017; the second Respondent accepted an interest at 6% per annum

before the Trial Court. This Tribunal vide Order dated 30.11.2021 recorded

the submission of the Appellant that they are ready and willing to pay the

second cheque amount of Rs.30,50,000/- and to show their bona fide have

annexed the Demand Draft at Page 101 of the Appeal Book.

12. Learned Sr. Counsel appearing for the second Respondent submitted

that the total debt including interest due @18% p.a. is Rs.87,76,100/- till

26.03.2021, which is the date of initiation of the CIRP. Learned Sr. Counsel

18 | P a g e Company Appeal (AT) (Insolvency) No. 512 of 2021 for second Respondent strenuously argued that the amount lent is a

'Financial Debt' and that the second Respondent is a 'Financial Creditor' and

the debt is acknowledged in the books of accounts and hence the Adjudicating

Authority was right in admitting the Section 7 Application, keeping in view

the admitted 'debt' & 'default'. Reliance was placed on the Judgements of the

Hon'ble Supreme Court in 'Innoventive Industries Ltd.' (Supra) and 'Orator

Marketing Pvt. Ltd.' (Supra). While, we find force in the submissions of the

Ld. Sr. Counsel that there is 'debt' and a 'default' what should also be

examined is whether the intent for initiation of CIRP is 'Recovery' or

'Resolution.'

13. It is pertinent to mention that the second Respondent in para 14 of their

Reply and in para 40 of their objections have never refuted the submission of

the Appellant that 'the 'Corporate Debtor' 'is a going concern' and a viable unit

and has great commercial prospects... and that the 'Corporate Debtor' in their

Reply dated 07.08.2019 have clearly stated that they had the bona fide

intention of returning the pending amount'. The case of the Second Respondent

is that despite being a viable unit, the Appellant has defaulted in paying these

amounts. Having accepted interest at 6% per annum, it is the case of the

Appellant that the second Respondent is now claiming an interest at 18% per

annum. Be that as it may, the Adjudicating Authority, is not a 'debt collection

forum'. The Hon'ble Supreme Court in a catena of Judgements has held that

IBC tackles 'Insolvency and Bankruptcy' and that it is not the objective of the

IBC that CIRP should be initiated to penalise a Solvent Company for non-

19 | P a g e Company Appeal (AT) (Insolvency) No. 512 of 2021 payment of dues. The scope and objective of IBC is to bring about 'Resolution'

of an Insolvent Debtor and is definitely not a 'Recovery Proceeding'.

14. The Preamble of IBC is carefully worded to describe the spirit and

objective of the Code to be 'Reorganisation' and 'Insolvency Resolution',

specifically omitting the word 'Recovery'. The Parliament has made a

conscious effort to ensure that there is a significant difference between

'Resolution' and 'Recovery'. The Hon'ble Supreme Court has time and again

observed that the fundamental intent of IBC is 'maximising the value of assets'

in the process of 'Resolution'. In 'Mobilox Innovations Private Limited' Vs.

'Kirusa Software Private Limited', (2018) 1 SCC 353, the Hon'ble Apex

Court has examined in detail the United Nations Legislative Guide on

Insolvency, in which the IBC finds its roots. Any Application to commence

CIRP can be denied when the Creditor is using Insolvency as an inappropriate

substitute for Debt Recovery Procedures. If IBC is purely used for the purpose

of Debt Recovery, particularly when the amounts due are small, and the

Company is a solvent entity and is a going concern, the question of

'Reorganising' or 'Resolution of the Company' does not arise. This Tribunal in

'Binani Industries Limited' Vs. 'Bank of Baroda & Anr.', Company

Appeal (AT) (Ins.) No. 82 of 2018, has differentiated between 'Recovery' and

'Resolution' and has observed that IBC is not a Recovery Proceeding.

'Recovery' dispossesses the 'Corporate Debtor' of its assets while a Resolution

is an effort to keep it afloat. Further, this Tribunal in 'Asset Advisory

Services' Vs. 'VSS Projects', CP (IB) No. 96/7/HDB (2017), and also in

'Praveen Kumar Mundra' Vs. 'CIL Securities Ltd.', 2019 SCC OnLine

20 | P a g e Company Appeal (AT) (Insolvency) No. 512 of 2021 NCLAT 334, has noted that CIRP cannot be initiated with fraudulent and

malicious intent 'for any purpose other than the Resolution of Insolvency or

Liquidation' and therefore it is clearly covered under Section 65 of the Code.

15. Section 65(1) of the Code reads as hereunder:

"65. Fraudulent or malicious initiation of proceedings.--(1) If, any person initiates the insolvency resolution process or liquidation proceedings fraudulently or with malicious intent for any purpose other than for the resolution of insolvency, or liquidation, as the case may be, the Adjudicating Authority may impose upon such person a penalty which shall not be less than one lakh rupees, but may extend to one crore rupees."

(Emphasis Supplied)

16. Though the aforesaid Section does not expressly mention 'Debt

Recovery Action' under 'for any purpose other than resolution of insolvency..',

keeping in view the factual occurrence of the events of this particular matter,

we hold that the 'intent' may not be a 'malafide intent', but is nevertheless a

fundamental attempt to obtain an edge/ advantage / an upper hand in

'recovering their dues'. At this juncture we place reliance on the judgment of

The Hon'ble Madras High Court in 'S.T. Sahib' Vs. 'Hasan Ghani Sahib',

1956 SCC OnLine Mad 344', wherein the Hon'ble High Court has examined

the word 'malice' and observed that 'malice' would mean 'inappropriate' and

wrongful motive to use the law in a manner other than its 'legally appointed

and appropriate purpose'. The Hon'ble Madras High Court has further

observed that a wrongful motive need not be a mala fide intent, it could simply

be an attempt to attain an advantage.

21 | P a g e Company Appeal (AT) (Insolvency) No. 512 of 2021

17. This Tribunal is of the ernest view that seeking to initiate CIRP, in the

factual matrix of the attendant case, is only with an intention for 'Recovery' of

their dues and opposes the very spirit, point and purpose of the Code. We

hold that 'A Recovery Proceeding' of this nature does fall within the scope and

ambit of the words 'for any purpose other than Resolution', as defined under

Section 65 (1) of the Code. Having regard to the facts and circumstances of

the case on hand, this Appeal is allowed and the Order of the Adjudicating

Authority is set aside. In effect, Order(s) passed by Ld. Adjudicating Authority

appointing 'Interim Resolution Professional', declaring moratorium, freezing

of account and all other Order(s) passed by Adjudicating Authority pursuant

to the Impugned Order, are set aside. We are conscious of the fact that

pursuant to an interim direction of this Tribunal, the constitution of the CoC

has remained stayed. The Adjudicating Authority will now close the

proceedings. The first Respondent Company is released from all the rigours

of law and is allowed to function independently through its Board of Directors

with immediate effect.

18. Needless to add, the second Respondent may avail other remedies in

accordance with law, to 'recover' its dues.

[Justice Anant Bijay Singh] Member (Judicial)

[Ms. Shreesha Merla] Member (Technical) NEW DELHI 4th August, 2022 himanshu/sheetal

22 | P a g e Company Appeal (AT) (Insolvency) No. 512 of 2021