Axis Bank Limited vs Value Infracon India Private Limited & ...

National Company Law Appellate Tribunal Principal Bench, New Delhi I.A. No. 1502 of 2020 & I.A. No. 1503 of 2020 in COMPANY APPEAL (AT) (INSOLVENCY) No. 582 of 2020 (Arising out of Order dated 05th February, 2020 passed by National Company Law Tribunal, Principal Bench, New Delhi, in CA No. 639/2019 in C.P. No. (IB)- 22(PB)/2018).

IN THE MATTER OF:

Axis Bank Limited

A Scheduled Bank included under Second Schedule of the Reserve Bank of India, Act 1934 and a Banking Company incorporated under the Companies Act, 1956.

Registered Office: Trishul 3rd Floor, Opposite Samartheshwar Temple Law Garden Ellisbridge, Ahmedabad, Gujarat - 380006, India. ...Appellant

Versus

1. Value Infracon India Private Limited (Under Corporate Insolvency Resolution Process)

A Private Limited Company

Registered Office: 715, Naurang House, 21 K.G. Marg, ...Corporate Debtor/ Cannaught Place, New Delhi - 110001. Respondent No. 1

Through/Represented by

Sanjay Kumar Singh Reg No. IBBI/IPA-002/IP-N00188/2017- 2018/10505

Registered Office: 033, Windsor, Grand Forte, Plot No. 76, Sigma - 4, Greater Noida, ...Resolution Professional UP - 201310. -2-

2. Value Infra Buyers Association ..Resolution Applicant/ 4/8, Block - 4, Ashok Nagar (Tilak Nagar), Respondent No. 2 New Delhi - 110018.

Appellant: Mr. Sharad Tyagi, Ms. Yukti Makan & Ms. Gayatri, Advocates. Respondents: Mr. Sanjay Kumar Singh, (in person) for R-1/RP. Mr. Neeraj Kumar Gupta, Advocate for R-2.

JUDGEMENT

[Per; Shreesha Merla, Member (T)]

1. Challenge in this Appeal namely Company Appeal (AT) (Insolvency) No.

No. 582 of 2020 is to the Impugned Order dated 05.02.2020, passed in CA

No. 639/2019 in CP No. (IB)-22(PB)/2018 passed by the Learned

Adjudicating Authority (National Company Law Tribunal, Principal Bench,

New Delhi), dismissing the Application as devoid of merit. By the Impugned

Order, the Learned Adjudicating Authority has observed as follows:-

"This is an application filed by Axis Bank Ltd. against the RP representing the corporate debtor seeking reliefs as follows:-

"a. Allow the present application, declare Applicant Ban as a 'secured financial creditor' in the present transaction forming subject matter of the present proceeding and direct Resolution Professional to treat present Applicant Bank as 'secured financial creditor' with claim amount as mentioned in Claim Form having been field by way of "Form-C" with the Resolution Professional and accord Applicant Bank all rights and privileges of a secured financial creditor and also proportionate voting rights in the forthcoming meeting of Committee of Creditors.

b. In case if any Resolution Plan commenced the amount so received from the CD should be equally appropriated as per the proportionate share of the secured creditors.

c. In case company goes into Liquidation direct the official liquidator to distribute the sale proceeds amount as per section 53 (B) (II).

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d. Direct the Resolution Professional/Liquidator, in case any amount is refunded to the home buyers, the said amount must be first utilised to pay the loan amounts as set out under the proof of claim submitted by the Applicant Bank;"

On perusal of this application, it appears this bank advanced loan to the home buyers of the corporate debtor. In view of it, now the bank is asking this Bench to pass an order declaring him a secured financial creditor of the corporate debtor and also to allow him to sit in the CoC. We are of the view that this bank cannot be called as a creditor to the corporate debtor because the loans are given to the home buyers of the corporate debtor.

Therefore, we have not found any merit in this application, hence dismissed as misconceived.

CA-2231(PB)/2020

List on 28.02.2020."

2. Succinctly put, the facts in brief are that the Section 7 Application

filed by M/s. Daimler Financial Services Private Limited against the

'Corporate Debtor' was admitted on 04.05.2018; a Public Announcement

was made by the IRP inviting claims on 09.05.2018; M/s. Axis Bank

hereinafter referred to as the 'Appellant' filed its claim amounting to

Rs.15,76,14,801/- on 20.09.2018 vide email, but the Office of the IRP

refused to accept the Hard Copy; the RP rejected the document of the

Appellant for want of documents on 07.10.2018; the Appellant submitted

the claims once again with the relevant documents, but the same was not

accepted; and thereafter the Appellant choose to file this Application before

the Adjudicating Authority.

3. On 03.04.2019, the Appellant preferred an Application under Section

60(5) before the Adjudicating Authority seeking a direction to consider the

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Appeal as a 'Secured Financial Creditor' for the claim amount mentioned in

Form-C. The Adjudicating Authority vide the Impugned Order rejected the

Application.

4. Submissions of Learned Counsel appearing on behalf of the

Appellant:

 Learned Counsel for the Appellant vehemently contended that the

Adjudicating Authority directed the RP to consider the claim of the

Appellants in the light of the decree/recovery certificate issued by the

Debt Recovery Tribunal (DRT) as the recovery certificates have been

issued jointly against the Home Buyers and the 'Corporate Debtor'.

Therefore, the Appellant who is a certificate holder in the DRT

proceedings, cannot be put outside the purview of the definition of

Creditor as defined under Section 3(10) of the Insolvency &

Bankruptcy Code, 2016 (hereinafter referred to as the 'Code').

 The Successful Resolution Applicant made claim waiver from existing

Security Interest/lien to be created over the Flats in favour of the

Appellant by considering the claims of Home Buyers and in this

situation the Appellant would neither get any money nor security for

it, as invested by granting loans to Home Buyers.

 Learned Counsel argued that the allottees are getting the refund of

their money under the Resolution Plan in settlement of their claims,

there is a possibility that the Home Buyers would not deposit these

amounts with the Appellant Banks in settlement of their dues, despite

the fact that lien over the said Flat has already been acknowledged by

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the 'Corporate Debtor' in its separate 'Permission to Mortgage' letter

issued to the Appellant at the time of disbursement of the loans. The

Appellant has given a list of 42 Home Buyers who have already

transferred their respective rights under the Flats in favour of the

Appellant as evident from the lien marked by the 'Corporate Debtor' in

favour of the Appellant. The subrogation clause mentioned in the

standard tri-partite Agreement, the Power of Attorney by the Home

Buyer is in favour of the Appellant and other documents executed by

the Home Buyers are also in favour of the Appellant.

 Learned Counsel placed reliance on the definitions of Sections 3(10),

5(7) & 3(34) of the Code in support of his Arguments.

 In the present case, the Appellant has advanced loan to 42 Home

Buyers, out of which, the Appellant has filed recovery Applications

against 41 allottees as well as the 'Corporate Debtor' before the DRT

for recovery of debts.

 The Appellant holds the decree in its favour from DRT against 31

allottees as well as the 'Corporate Debtor'. Proceedings against 10

allottees are still sub judice.

 Learned Counsel for the Appellant vehemently denied the allegation

that no due diligence was done prior to financing sanctioning of loans.

He submitted that the Technical Appraisal is an internal document of

the Bank and there is nothing to do with the disbursal of loans.

Learned Counsel further contended that para 19 of 'Pioneer Urban

Land & Infrastructure Ltd. & Anr.' Vs. 'Union of India & Ors.' reported in

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(2019) 8 SCC 416, does not discuss security interest and therefore

cannot be made applicable to the facts of the instant case.

5. Submissions of the Learned Counsel appearing on behalf of First

Respondent/Resolution Professional representing the 'Corporate

Debtor':

 Except for the tri-partite Agreement there is no document which has

been signed by all the three parties. The liability to repay the loan is

on the individual Home Buyers as stated in the tri-partite Agreement.

 The Appellant is claiming to be the 'Secured Creditor' and contended

that they have security interest in the property of the 'Corporate

Debtor'. Admittedly no 'charge' was created under Section 77 of the

Companies Act, 2013 in favour of the Appellant.

 The definition of the 'Financial Creditor' under Section 5(8) of the Code

was amended to include Home Buyers as the 'Financial Creditors' by

inserting explanation under clause 5(8)(f) and accordingly it has been

provided for the real estate allottees to be recognised as 'Financial

Creditor'. It does not provide that the Banks advancing loans to the

real estate allottees for booking of the Real Estate units would be

considered as 'Financial Creditors' in any case.

 The Hon'ble Apex Court in 'Pioneer Urban Land & Infrastructure Ltd. &

Anr.' (Supra) has observed that Home Buyers are to be considered as

'Financial Creditors' irrespective of the fact 'whether he has borrowed

money from the Banks or agreed to pay instalments under the

Agreement for sale or whether he does it from his own finances'.

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 The recovery certificate from DRT has been obtained by misleading

DRT by pleading that the Flats are mortgaged with the Appellant.

None of the units are mortgaged with the Appellant Bank. The

certificates were issued ex-parte.

 It is strenuously argued by the RP that the Appellant had never

produced the entire set of documents either before the RP or before

the Adjudicating Authority. Even in this Appeal, the documents

pertaining to the 44 Flats have not been produced. Only an Excel

Sheet has been filed praying for consideration of the claims which

amounts to more than Rs.15 Crores/-.

 The Appellant has not done any due diligence before advancing the

loans. As an example, Learned Counsel contended that one Mr. Rawat

was sanctioned a Loan on 30.03.2014 for Flat No. F-021, when the

Project was not even approved as on that date.

 Out of the 44 Flats, 26 Flats have already been sold and Sale Deed

was executed by the 'Corporate Debtor' even before the issuance of the

recovery certificate.

6. Learned Counsel for Respondent No. 2 has adopted the submissions

made in the Reply of Respondent No. 1 and hence for the sake of brevity we

do not wish to repeat the same.

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Assessment:

7. The central point in this Appeal is whether the Appellant/M/s. Axis

Bank can be considered as a 'Financial Creditor' on account of its having

sanctioned and released housing loans to some of the allottees who have

purchased Flats/units in the Project floated by the 'Corporate Debtor'.

8. It is not disputed that M/s. Axis Bank has sanctioned loans to 44

Home Buyers/Allottees who have purchased units/Flats, in the Project

floated by the 'Corporate Debtor'. Home Buyers were included as 'Financial

Creditors' vide Amendment dated 06.06.2018. Section 5(8) of the Code reads

as follows:-

"5. Definitions.--In this Part, unless the context otherwise requires,--

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

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

(a) money borrowed against the payment of interest;

(b) any amount raised by acceptance under any acceptance credit facility or its de-materialised equivalent;

(c) any amount raised pursuant to any note purchase facility or the issue of bonds, notes, debentures, loan stock or any similar instrument;

(d) the amount of any liability in respect of any lease or hire purchase contract which is deemed as a finance or capital lease under the Indian Accounting Standards or such other accounting standards as may be prescribed;

(e) receivables sold or discounted other than any receivables sold on non-recourse basis;

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(f) any amount raised under any other transaction, including any forward sale or purchase agreement, having the commercial effect of a borrowing;

[Explanation.--For the purposes of this sub-clause,--

(i) any amount raised from an allottee under a real estate Project shall be deemed to be an amount having the commercial effect of a borrowing; and

(ii) the expressions, "allottee" and "real estate Project" shall have the meanings respectively assigned to them in clauses (d) and (zn) of section 2 of the Real Estate (Regulation and Development) Act, 2016 (16 of 2016);]

(g) any derivative transaction entered into in connection with protection against or benefit from fluctuation in any rate or price and for calculating the value of any derivative transaction, only the market value of such transaction shall be taken into account;

(h) any counter-indemnity obligation in respect of a guarantee, indemnity, bond, documentary letter of credit or any other instrument issued by a bank or financial institution;

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

(Emphasis Supplied)

9. The Hon'ble Supreme Court in paras 18 and 19 in 'Pioneer Urban Land

& Infrastructure Ltd. & Anr.' (Supra) has observed as follows:-

"18. It can be seen that the Insolvency Law Committee found, as a matter of fact, that delay in completion of flats/apartments has become a common phenomenon, and that amounts raised from home buyers contributes significantly to the financing of the construction of such flats/apartments. This being the case, it was important, therefore, to clarify that home buyers are treated as financial creditors so that they can trigger the Code under Section 7 and have their rightful place on the Committee of Creditors when it

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comes to making important decisions as to the future of the building construction company, which is the execution of the real estate Project in which such home buyers are ultimately to be housed.

19. Shri Shardul Shroff, whose dissent was provided to us in the form of an e-mail, after finding that self- financed home buyers may be financial creditors, but a home buyer who is a borrower is not, then went on to state:

"8. If the home buyers have taken loans from banks, then it is such lenders who should be on the table on the CoC as special status creditors.

9. Our report ought to be altered to the extent that home buyers financiers should be treated as unsecured financial creditors and they should be representatives of the home buyers. There should be no direct right given to home buyers to be on the CoC."

Even the dissent of Shri Shroff recognises that in the case of home buyers, who have taken loans from banks, such banks ought to be on the Committee of Creditors. If such banks ought to be on the Committee of Creditors as representatives of the home buyers, and they are to vote only in accordance with the home buyer's instructions, why should the home buyer himself then not be on the Committee of Creditors, and why should it make any difference as to whether he has borrowed money from banks in order to pay instalments under the agreement for sale or whether he does it from his own finances? These matters have not been addressed by the dissenting view which in principle, as we have seen, supports home buyers who have taken loans as against home buyers who have used their own finances. Perhaps the real reason for Shri Shroff's dissent is the fact that unsecured, as opposed to secured, financial creditors are being put on the Committee of Creditors. If there is otherwise good reason as to why this particular group of unsecured creditors, like deposit holders, should be part of the Committee of Creditors, it is difficult to appreciate how such a group can be excluded."

(Emphasis Supplied)

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10. It is clear from the principle laid down by the Hon'ble Supreme Court

in 'Pioneer Urban Land & Infrastructure Ltd. & Anr.' (Supra) that it is the

Home Buyer who should be considered as 'Financial Creditors' of the

'Corporate Debtor' whether he has self financed his flat or has exercised his

choice of taking a loan from the Bank.

11. Additionally, we are of the considered view that as per Section 77 of

the Companies Act, 2013 every security interest has to be registered with the

Registrar within 30 days of its creation and admittedly no 'charge' has been

created against any of the property of the 'Corporate Debtor' in favour of the

Appellant. At this juncture, we reproduce Section 77 of the Companies Act,

2013 which is as follows:-

"77. Duty to register charges, etc. - (1) It shall be the duty of every company creating a charge within or outside India, on its property or assets or any of its undertakings, whether tangible or otherwise, and situated in or outside India, to register the particulars of the charge signed by the company and the charge- holder together with the instruments, if any, creating such charge in such form, on payment of such fees and in such manner as may be prescribed, with the Registrar within thirty days of its creation:

Provided that the Registrar may, on an application by the company, allow such registration to be made -

(a) in case of charges created before the commencement of the Companies (Amendment) Act, 2019, within a period of three hundred days of such creation; or

(b) in case of charges created on or after the commencement of the Companies (Amendment) Act, 2019, within a period of sixty days of such creation, on payment of such additional fees as may be prescribed:

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Provided further that if registration is not made within the period specified -

(a) in clause (a) to first proviso, the registration of the charge shall be made within six months from the date of commencement of the Companies (Amendment) Act, 2019, on payment of such additional fees as may be prescribed and different fees may be prescribed for different classes of companies;

(b) in clause (b) to the first proviso, the Registrar may, on an application, allow such registration to be made within a further period of sixty days after payment of such ad valorem fees as may be prescribed.

Provided also that any subsequent registration of a charge shall not prejudice any right acquired in respect of any property before the charge is actually registered.

Provided also that this section shall not apply to such charges as may be prescribed in consultation with the Reserve Bank of India.

(2) Where a charge is registered with the Registrar under sub-section (1), he shall issue a certificate of registration of such charge in such form and in such manner as may be prescribed to the company and, as the case may be, to the person in whose favour the charge is created.

(3) Notwithstanding anything contained in any other law for the time being in force, no charge created by a company shall be taken into account by the liquidator appointed under this Act or the Insolvency and Bankruptcy Code, 2016, as the case may be, or any other creditor unless it is duly registered under sub- section (1) and a certificate of registration of such charge is given by the Registrar under sub-section (2).

(4) Nothing in sub-section (3) shall prejudice any contract or obligation for the repayment of the money secured by a charge."

It is not denied that there is no registered 'charge' created on the asset

or property as contemplated under Section 77 of the Companies Act, 2013.

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Further, there is no submission made on behalf of the Bank as to whether

any steps were taken under Section 78 of the Companies Act, 2013. The

ratio of 'Indiabulls Housing Finance Ltd.' Vs. 'Mr. Samir Kumar Bhattacharya

and Anr.' passed by this Tribunal in Company Appeal (AT) (Insolvency) No.

830 of 2019 regarding "Registration of charge" is squarely applicable to the

facts of this case.

12. A perusal of the documents shows that none of the Home Buyers

appeared in any of the proceedings before the DRT whereby the recovery

certificates were obtained.

13. The correspondence dated 23.04.2014 addressed by M/s. Value

Infracon India Private Limited to the Manger Axis Bank reads as follows:-

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We find force in the contention of the Learned Counsel for the

Respondent that a mere 'Permission to Mortgage' is of no relevance in the

absence of not having 'registered a charge' under Section 77 of the

Companies Act, 2013.

14. The relevant clause of the tri-partite Agreement entered into between

the Home Buyers, the developer and the Appellant/M/s. Axis Bank is

reproduced as hereunder:-

"It is agreed by and between the parties to this Agreement that in case if the BORROWER fails to honour the commitment, the developer/BUILDER shall inform the BANK and the BANK shall have the right to pay the Sale consideration and get it registered either in BANK's name or its nominee. Likewise in the event the Borrower defaults in payment of instalments then, in such an event also, the Bank shall have the right to inform about such default on the part of the Borrower to the Builder and shall accordingly have the right to write to the Builder cancellation of Agreement executed between the Builder and the Borrower, where after the Bank shall have the right to pay the Sale consideration and get the subject property registered either in the Bank's name or in the name of the Bank's nominee."

15. It can be seen from the material on record that Axis Bank had

rendered financial assistance for the purpose of booking units in the Project

floated by the 'Corporate Debtor' and had a tie-up with the 'Corporate

Debtor' for procuring business from the Home Allottees. The Home Loan

Agreements in these cases were made individually by the Borrowers. As per

standing instructions, the money in the account of the Home Allottees was

disbursed automatically to the 'Corporate Debtor'. Tri-partite Agreement is

only by way of security that the developer would withhold the allotment in

the event of default by the allottee. The Bank had sought security by

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creating mortgage of the residential units for the loans availed by the Home

Buyers and the 'Corporate Debtor' had given permission for the same to

enable the Home Buyer to procure financial assistance.

16. From the aforenoted clause in the tri-partite Agreement entered into

between the Home Buyer, the Axis Bank and the 'Corporate Debtor', it is

evident that in case of any default by the Borrower, the Bank would have the

right to write to the builder for cancellation of Agreement executed between

the developer and the Borrower, whereafter the Bank shall have the right to

pay the sale consideration and get the subject property registered. There is

no material on record to evidence that any such cancellation has taken

place. The Home Loan Agreement read with the Demand Letters and the

Allotment Letter clearly specify that when there is a 'default' on behalf of the

Home Allottee a penalty interest would have to be paid by the allottee to the

Bank. Therefore, the 'default' aspect is to be seen vis-a-vis the Home Allottee

and the Appellant Bank only. It is contended by the Respondent that though

the Allotment Letter shows that the payments were construction linked, the

Bank released the entire amount prior to completion of construction.

17. Be that as it may, we are of the considered view that this subject

matter cannot be viewed from such a narrow compass. It is definitely not the

scope and objective of the Code to include Banks/Financial Institutions

which have advanced loans to Home Buyers to be considered as 'Financial

Creditors' and included in the CoC, specifically in the light of the fact the

liability to repay the Home Loan is on the individual Home Buyers. This

would defeat the very spirit and objective of the Code aiming at Resolution

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and maximisation of the assets of the 'Corporate Debtor'. Presence of a mere

tri-partite Agreement does not change the character of the amount borrowed

by the Home Buyer vis-a-vis the Bank and vis-a-vis the 'Corporate Debtor'.

Viewed from any angle, the Appellant cannot be included as a 'Secured

Financial Creditor' in this case and hence we find no reasons to interfere

with the well-reasoned Order of the Adjudicating Authority.

18. From all the aforenoted reasons, this Appeal fails and is accordingly

dismissed. No Order as to costs. The corresponding I.A No. 1502 of 2020 &

I.A. No. 1503 of 2020 are also disposed of.

19. Registry is directed to upload the Judgement on the website of this

Tribunal and send the copy of this Judgement to the Learned Adjudicating

Authority (National Company Law Tribunal, Principal Bench, New Delhi)

forthwith.

[Justice Anant Bijay Singh] Member (Judicial)

[Ms. Shreesha Merla] Member (Technical)

NEW DELHI 20th December, 2021

ha

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