Entegra Limited vs Shree Maheshwar Hydel Power ...

(Arising out of the Order dated 27.09.2022 passed by the National Company Law Tribunal Kolkata Bench in TP (IBC)/1(KB)2022, T.A.(IBC)/1(KB)2022, T.A. (IBC)/1(KB)2022)

IN THE MATTER OF:

Entegra Limited Niranjan 99 Marine Drive Mumbai - 400002 ...Appellant

Versus

1. Shree Maheshwar Hydel Power Corporation Ltd. Through Interim Resolution Professional, Apoorv Sarvaria, Registered office at: Abhayanchal Parisar, Post Mandaleshwar Mandelshwar - 451221, Madhya Pradesh Address for communication: Suite No. 1, 19 Park Area, Karol Bagh, Opposite Ajmal Khan Park, Central, NCT of Delhi-110005 Email ID: cirp.shreemaheshwar@gmail.com ...Respondent No. 1

2. Power Finance Corporation Ltd. Urjanidhi, 1, Barakhamba Lane, Connaught Place, New Delhi 110001 ...Respondent No. 2

Present

For Appellant: Mr. Abhishek Puri, Mr. Surbhi Gupta & Mr. Sahil Grewal, Advocates.

For Respondent: Mr. Ramji Srinivasan, Sr. Adv. with Mr. Deepak Khurana, Monalika, Adv. Mr. Gajanad Krodhiwal, Mr. Aditya Rathee & Mr. Shivam Rajpal, Adv. for RP/R1 -2- Comp. App. (AT) (Ins.) No. 1287 & 1291 of 2022

JUDGEMENT

(26.11.2024)

NARESH SALECHA, MEMBER (TECHNICAL)

Preliminary

1. The present appeal has been filed by Entegra Limited who is the

Appellant herein, for challenging the Order dated 27.09.2022 passed by the

National Company Law Tribunal, Kolkata Bench ('Adjudicating Authority')

in TP (IBC)/1(KB)2022, T.A.(IBC)/1(KB)2022, T.A. (IBC)/1(KB)2022 upon

reference and Order dated 08.10.2021 in TP 258 of 2019 in CP (IB)

111/7/NCLT/AHM/2018 with Inv. P. 53 of 2018, Inv. P 54 of 2018 and IA 60

of 2020 passed by the Adjudicating Authority, NCLT, Indore Bench, at

Ahmedabad (together referred to as "Impugned Judgment"), whereby two

judges of the Adjudicating Authority have admitted the petition filed under

Section 7 of the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to

as "Code") against Respondent No. 1,

2. The Appellant is Promoter of the Respondent No. 1 i.e., Shree

Maheshwar Hydel Power Corporation Ltd. ('SMHPCL') who is the Corporate

Debtor and being represented through its IRP, is the Respondent No. 1 herein.

The Power Finance Corporation Ltd. ('PFC') is the Respondent No. 2, who is

the Financial Creditor of the Respondent No. 1.

-3-

Comp. App. (AT) (Ins.) No. 1287 & 1291 of 2022

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

including the cited judgements.

Submissions of the Appellant

4. It is the case of the Appellant that he is the Promoter of Respondent No. 1

holding 29,17,20,330 shares of face value of Rs. 10/- each which constituted

58.43% of the total paid up capital of the Respondent No. 1. The Appellant gave

the background of the Promoters, the Appellant, the Respondent No. 1 and its

genuine intentions to complete 400 MW power project in power starved

Madhya Pradesh. The Appellant stated that, it was he who initiated the project

and provided all initial funding which demonstrate his true desire for

implementation of the Project. The Appellant stated that looking to huge funds

requirement, he approached lenders. The Appellant stated that the project was

on right path but external factors like Narmada Bachao Andolan ('NBA') etc.

derailed the project, which was further aggravated due to short sighted approach

of the Lenders and their greed to recover money at the cost of the project itself.

The Appellant stated that the Lenders especially the Respondent No. 2 are fully

responsible for the present state of affairs of the Respondent No. 1. The

Appellant assured that given a chance again he will pull back the project and

complete the project.

5. In this background, the Appellant stated that the Respondent No. 2 filed

an application under Section 7 of the Code for initiation of Corporate -4- Comp. App. (AT) (Ins.) No. 1287 & 1291 of 2022

Insolvency Resolution Process ('CIRP') in respect of Respondent No. 1 for

alleged default of Rs. 2789.42 Crores before the Adjudicating Authority, Indore

at Ahmedabad Bench on 16.02.2018 which was decided on 08.10.2021 with

split judgments and finally the Impugned Order on 27.09.2022 was delivered by

Member (Judicial) of Kolkata Bench.

6. The Appellant submitted that the Respondent No. 2 illegally converted

debt into equity and also illegally invoked pledged shares and according such

illegal acts of Respondent No. 2, the shareholding of the Appellant in

Respondent No. 1 was reduced from 58.43% to 12.29% of paid-up share capital

of Respondent No. 1.

7. The Appellant conceded that the Respondent No.2 has now cancelled the

shares held by the Respondent No. 2 on account of illegal conversion of

subordinate debt into equity on 18.12.2019 and restored the shares which were

invoked by the Respondent in favour of the Appellant on 23.09.2019.

8. The Appellant pleaded that the Project is very important, however, due to

NBA and other related issues, the project was pushed back and as a

consequence the German Financers brought in by the Appellant withdrew from

the project resulting in the project coming to a halt in 2001.

9. The Appellant submitted that looking to the national importance of the

project, Madhya Pradhesh (GoMP) sanctioned (a financial guarantee of Rs. 400

Crores) to enable the Respondent No. 1 to raise the public bonds Optionally -5- Comp. App. (AT) (Ins.) No. 1287 & 1291 of 2022

Fully Convertible Debentures (OFCD). The Lenders were requested to provide

the balance funds required to complete the project and in this background, the

Respondent No. 2, as lead lender along with other lenders came forward to

finance Respondent No. 1.

10. The Appellant assailed the conduct of the Respondent No. 2 who tried to

fish in the troubled water and took advantage of precarious financial condition

of the project by putting unnecessary pre-condition for further funding for the

project forcing the Appellant and the Respondent No. 1 to arbitrary terms and

conditions which required changes in Article of Association ('AoA') to make it

subordinate to dictum of the lenders especially the Respondent No. 2.

11. The Appellant cited few such pre conditions which included condition

like consultation with the Respondent No. 2 as condition precedent in

appointment of the Chairman, the Managing Director and the Director Finance

('DF') of Respondent No. 1 and further stipulated that Lender's Nominee

Directors will be involved in the management of the Respondent No. 1.

Similarly, the Lender's Auditors would also be involved in periodic reviews of

various commercial transactions during the Trust and Retention Account

('TRA') transactions. The Appellant submitted that he had no option but to

accept such conditions of the Respondent No. 2 which took away effectively the

management of the Respondent No. 1 out of control of the Appellant and

therefore he can't be held responsible for failure of the Respondent No. 1. -6-

Comp. App. (AT) (Ins.) No. 1287 & 1291 of 2022

12. The Appellant submitted that as per amended AoA, no decision could

take place without approval of atleast three out of four nominee Directors of the

Lenders which demonstrate that the management completely shifted to

'Management Team' comprising of the Chairman, Managing Director, and DF

of Respondent No. 1, all of whom were appointed with consent of Respondent

No. 2. The Appellant highlighted the few important changes in Articles in AoA

like to Article 2: Definition of "Pledged shares of S. Kumars", Article 89(2),

Article 105, 108, 109, 134, etc., which completely restricted the rights of the

Promoters and gave the Lenders especially the Respondent No. 2 complete

control of Respondent No. 1.

13. The Appellant castigated the Respondent No. 2 who is the real cause for

mismanagement of the project despite being in control since 2005 and did not

release the funds from TRA account at the right time and rather diverted funds

for servicing the interest payable to Respondent No. 2, putting the Respondent

No. 1 under financial distress.

14. It is the case of the Appellant that such unlawful actions of Respondent

No. 2 put the Project into jeopardy. The Appellant highlighted that although he

was not required to bring in any funds as the effective management of

Respondent No. 1 was taken over by the Respondent No. 2, still in interest of

the project, the Appellant arranged Rs. 377 Crores of Term Loan from SBI,

pumped in himself Rs. 155 Crores on Direct Equity and further organized -7- Comp. App. (AT) (Ins.) No. 1287 & 1291 of 2022

Rs. 200 Crores of OTD from Strategic Investors, Rs. 217.50 Crores of OFCD

subscription from YES Bank and Rs 80 Crores of unsecured loan. The

Appellant tried to highlight that the Respondent No. 2 diverted more than 42%

of these funds to serve its own interest which resulted in further cost escalation

of the project.

15. The Appellant submitted that since the project was not going ahead as per

Plan, around 2014, GoMP constituted a High Level Committee ('HLC') for the

purpose of finding the way forward to complete the project, comprising of

representatives of GoMP, Ministry of Power ('MoP'), Government of India

('GoI') Promoters, Respondent No. 2 and Lenders and the committee gave its

Report on 02.05.2015 giving three scenarios of further course of action.

"(I) By 02.08.2015 the existing promoter will arrange Rs.600 crores as well as

debt of Rs.1100 Crores at concessional rates to achieve the stipulated electricity

tariff of Rs. 5.32.

II. NHPC/NHDC will take over the company and Respondent No. 2 will be

amenable to infusing equity or additional debt as well as lowering interest rate

for existing debt with support from lenders so that the tariff is at Rs. 5.32 per

unit.

III. Cancellation of PPA- M.P. Power Management Company limited cancels

the existing Power Purchase Agreement."

-8-

Comp. App. (AT) (Ins.) No. 1287 & 1291 of 2022

16. The Appellant submitted that the Scenario-I could not be achieved due to

non co-operation of the Respondent No. 2 and subsequently, the Respondent

No. 2 unilaterally declared Option I as "failed" to pursue its own interpretation

of Option 2 by forcibly taking 51% of the shares of Respondent No. 1 in tandem

with other Lenders. The Appellant emphasized that as per HLC, the equity

holding of the Appellant sould not have been reduced below 26%.

17. The Appellant further submitted that Respondent No 2 continued to

sabotage various funding proposals initiated by the Appellant and further due to

restrictive clauses inserted in Amended AoA like 80B, 89(2), 108 and 109, 134,

Article 105(d) and 126, etc., it became difficult for the Appellant to find

investors or seek additional funds. The Appellant brought out that in the year

2011, a Strategic Investor at the request of the Appellant Promoter also invested

Rs.100 Crores to complete the project, however Respondent No. 2 being in

control of the TRA, chose not to release this fund for actual project works and

rather tried to divert these funds to subserve its own interest.

18. The Appellant submitted that the Respondent No. 2 declared the loan

accounts of Respondent No. 1 as NPA on 31.03.2012, while the Respondent

No. 1 was under control of Respondent No. 2.

19. The Appellant submitted that due to complete mismanagement by the

Respondent No. 2 the Appellant was forced to file a complaint to Registrar of

Company ('RoC') Ahmedabad seeking to conduct an inquiry under section -9- Comp. App. (AT) (Ins.) No. 1287 & 1291 of 2022

206(4) of the Companies Act, 2013 regarding conduct of affair of Respondent

No. l and as a result the RoC marked the Respondent No. 1 as "management

disputed" company on 29.04.2016 and initiated enquiry.

20. The Appellant assailed the conduct of Respondent No. 2 who despite

undergoing inquiry by the RoC, sought to invoke all the shares pledged by the

Appellant Promoters as "Security Agent" of all lenders on 19.05.2016 and

further, vide notice dated 18.12.2015 and 27.05.2016 sought partial conversion

of the subordinate loan of Rs. 375 Crores into equity shares to make the

Promoters as minority shareholders from majority shareholder. The Appellant

highlighted that notice itself contained the 30 days response time and despite

this provision, without waiting for completion of the timeline, transfer of share

were approved by nominee directors of the Lenders in the board meeting held

on 01.07.2016. The Appellant further stated that in the same meeting, the

Respondent No. 2 partially converted subordinate debt extended by the

Respondent No. 2 to Respondent No. 1 into equity and thereby the Respondent

No. 2 illegally asserted shareholding of 23.32% of Respondent No. 1.

21. The Appellant stated that based on his complaint, the RoC Gwalior on

21.10.2017, delivered the report under Section 206 of the Companies Act, 2013

whereby it was held that the lenders were responsible for violation of provisions

of Companies Act, 2013 and were responsible for unsatisfactory state of affairs

of Respondent No. 1, since, the management control of the Respondent No. 1 -10- Comp. App. (AT) (Ins.) No. 1287 & 1291 of 2022

was taken over by the Lenders especially the Respondent No. 2 w.e.f.

25.11.2005. The Appellant criticized the Respondent No. 2, who after getting

such adverse remarks from RoC, filed a frivolous application under Section 241

& 242 of the Companies Act, 2013 against the Promoters which has been

rejected at various legal fora including by the Hon'ble Supreme Court of India.

The Appellant stated that the Tribunal gave its order on 15.06.2017 in Company

Petition No. 175/ 241-242/ NCLT/ AHM/ 2017; this Appellate Tribunal gave its

order in Company Appeal (AT) No. 237 of 2017 on 12.03.2018 and the Hon'ble

Supreme Court of India passed the judgment on 18.05.2018 in Civil Appeal No.

5028 of 2018, holding the Respondent No. 2 as responsible for making mess of

the Respondent No. 1. The Appellant stated that the funds movement from

TRA account was completely regulated and controlled by Lenders especially the

Respondent No. 2 and thereby the Promoters had no executive powers in

conduct of the affair of the Respondent No. 1. The Appellant stated that the said

judicial orders held that invocation of shares and partial conversion of

subordinate debt into equity by the Respondent were illegal.

22. The Appellant submitted that the Additional Loan Agreement dated

27.04.2017 was executed by the Respondent No. 2, in contravention to the HLC

report regarding shareholding of the Promoters cannot be lowered than 26%.

The Appellant emphasized that the Respondent No. 2 had malicious intentions

to create default on part of Respondent No. 1 with respect to the Additional -11- Comp. App. (AT) (Ins.) No. 1287 & 1291 of 2022

Loan Agreement dated 27.04.2017 through non-disbursal of the interest

component and referred to Notice of Drawdown dated 02.05.2017 issued to

Respondent No. 2, through which drawdown (disbursal) of Rs. 435 Crores was

sought, which was sanctioned by Respondent No. 2. The Appellant stated that

out of this sanctioned amount, Rs. 10 Crores was earmarked towards Interest/

Interest during Construction ('IDC') and Rs. 88 Crores towards Financial

Charges. However, Respondent No. 2, only disbursed Rs. 384. 59 Crores but did

not release the interest component, in an attempt to fraudulently and mala-fide

create a situation of default for Respondent No. 1. The Appellant mentioned that

disbursal of these amounts was entirely in the hands of Respondent No. 2, since

it was in control of the affairs of the Respondent No. 1 as also the TRA accounts

of Respondent No. 1.

23. The Appellant submitted that Respondent No. 2 issued Loan Recall

Notice dated 17.01.2018 on the manufactured and fraudulent ground of non-

payment of interest as ensuring payment of Interest during construction was the

obligation of Respondent No. 2 himself. The Appellant stated that on the basis

of the mala-fide Loan Recall Notice dated 17.01.2018, Respondent No. 2

fraudulently sought to initiate insolvency proceedings against Respondent No. 1

by filing the Insolvency Petition bearing No. CP (IB) 111/2018 before NCLT,

Ahmedabad on 16.02.2018 -12- Comp. App. (AT) (Ins.) No. 1287 & 1291 of 2022

24. The Appellant stated that this Appellate Tribunal taking a pragmatic

approach vide the order dated 19.05.2018 directed that the matter could be

resolved by GoMP and GOI and accordingly the GoMP constituted a task force

on 18.04.2019 to find a way out for implementation of project. The Appellant

stated that the Promoter vide Letters dated 03.08.2018 and 19.10.2018 issued to

Respondent No. 2, presented a concrete offer of funding from Cantor Fitzgerald

Europe on 16.10.2018 and one of pre-conditions for such investment was that

"All litigation to be put on hold" which was not agreed by the Respondent No.

2. The Appellant submitted that vide e-mail dated 05.11.2018, the

Promoter/Appellant also submitted a draft MoU to Respondent No. 2, however,

Respondent No. 2 re-drafted the terms and conditions of the MoU only in July

2019.

25. It is the case of the Appellant that despite no debt being due from the

Respondent No. 1, in the interest of the Project, the MoU was executed between

Respondent No. 2, the Respondent No. 1 and the Promoters (Appellant) on

22.07.2019. The Appellant emphasized that the term of the MoU was to subsist

till 12 months and only by this time if the MoU was not implemented, only then

MoU could have been terminated and the period between 22.07.2019 till

22.07.2020 was to be treated as a calm period to ensure that viability of the

Project can be assessed, AoA can be amended, the BoD is reconstituted, -13- Comp. App. (AT) (Ins.) No. 1287 & 1291 of 2022

ownership is reverted to the Promoter/Appellant, Settlement plans can be

executed and interim finance can be brought into the Company.

26. The Appellant submitted that by 5.12.2019, Respondent No. 2 had

already started pursuing the Insolvency Petition and did not withdraw it as

clearly contemplated under Clause 1 and Clause 9 of the MoU, but the

Respondent No. 2 and the remaining lenders were not returning the entire

shareholding of the Promoter which had been illegally invoked by Respondent

No. 2. The Appellant stated that similarly no assistance was being provided for

amendment to the AoA by Respondent No. 2. The Appellant stated that the new

investors sought to be brought in by the Promoter/Appellant lost interest in the

Respondent No. 1 and the Task Force decided that since the IBC petition was

being pursued by Respondent No. 2, it could per-force not do anything. This

clearly shows that failure to execute the MoU was solely on account of

Respondent No. 2.

27. The Appellant defended his action that in light of the this adverse attitude

of the Respondent No. 2, no occasion arose for the Promoter/Appellant to bring

in funds of Rs. 10 Crores into Respondent No. 1 as per Clause 3 of the MoU.

The Appellant emphasized that these clauses contemplated that only upon

appointment of new KMPs, the Promoters would make payment of Rs. 10

Crores to the Respondent No. 1 for the purposes of the day-to-day expenses of

the Respondent No. 1. The Appellant submitted that for the purposes of -14- Comp. App. (AT) (Ins.) No. 1287 & 1291 of 2022

executing the MoU, only Zero date was of significance (which was achieved on

07.09.2019 upon deposit of Rs. 1 Crores by the Promoter/Appellant). Thus, the

Appellant submitted that in view of Clause 11 of the MoU, no alleged debt is

even otherwise due by the Respondent No. 1 under the Loan Agreements and if

at all, the Respondent No. 2 could only seek for repayment/ settlement in terms

of the MoU which deferred the payment dates for all the Loan Agreement

mentioned in the subject Loan Recall Notice for a period of one year from

22.07.2019.

28. The Appellant stated that the control of the Respondent No. 1 remained

with Respondent No. 2 and other Lenders since 2005 and even after signing of

the MoU dated 22.07.2019, only the MD appointed by Respondent No. 2 was

replaced with MD appointed by the Appellant under the MoU i.e. Mr. ML

Gupta but due to repeated breach of the MoU by Respondent No. 2, Mr. ML

Gupta resigned on 28.02.2020.

29. The Appellant submitted that Section 7 application of the Respondent No.

2 was listed before the Hon'ble Bench comprising of Dr. Deepti Mukesh and

Virendra Kumar Gupta wherein after hearing parties, orders were reserved. On

08.10.2021, the Bench pronounced a split verdict since they could not arrive at a

consensus. Thereafter, for the purpose of reference under Section 419(5) of

Companies Act, 2013 draft issues were framed by the Judicial member. -15-

Comp. App. (AT) (Ins.) No. 1287 & 1291 of 2022

30. The Appellant stated that issues framed for reference by the Judicial

Member and technical member were thereafter assigned to Special Benches of

NCLT, Kolkata comprising of a single judicial member by the President, NCLT,

New Delhi vide order dated 21.02.2022. however, the same could not be drafted

and pronounced as the said Special member demitted office. The matter was

thereafter referred to the Special Bench comprising of J. Rohit Kapoor, Member

(judicial) who heard the referred matter on 26.07.2022, 28.07.2022, 29.07.2022

and thereafter, reserved the order on 01.08.2022 and the impugned order was

pronounced on 27.09.2022 , admitting the Insolvency Petition filed by

Respondent No. 2 and rejecting the Intervention Application No. IA 53/ 2018 [

TA (IBC) No. 1/ KB/2022] and Application u/s 65 of the Code bearing no. IA

60 of 2020 [ TA (IBC) No. 2/ KB/ 2022 ].

31. The Appellant submitted that the Respondent No. 2 is not a "financial

creditor" under Section 7 of the Code and rather, if at all would be a "corporate

applicant" in terms of section 5(5) of the Code, as the Respondent No. 2 himself

was in control the affairs and the management of the Respondent No. 1 since

2005.

32. The Appellant submitted that the Code clearly mandates that where the

Applicant seeking to initiate insolvency process falls in the definition of a

"Corporate Applicant" under the Code, any application of initiation of CIRP

Process in case of any "default" by a Corporate Debtor has to be made under -16- Comp. App. (AT) (Ins.) No. 1287 & 1291 of 2022

Section 10 of the Code, in terms of Section 10(3) of the Code, a special

resolution passed by shareholders of the corporate debtor has to be obtained for

filing of the application. It is the case of the Appellant that the Respondent No. 2

to escape scrutiny of the Adjudicating Authority has surreptitiously filed the

present petition under Section 7 of the Code.

33. The Appellant submitted that the Hon'ble Supreme Court in Embassy

Property Developments Pvt. Ltd. v. State of Karnataka [2019 SCC Online SC

1542 held that a person acting on behalf of the Company before various fora and

authorities and thereafter, sought to file an Insolvency Petition in the guise of a

"Financial Creditor" cannot do so. The Appellant submitted that the Section 7

application of Respondent No. 2 should have been dismissed as Respondent No.

2 was not a "Financial Creditor" and rather was admittedly a "related party" of

Respondent No. 1 at the time of filing the present insolvency application and

even thereafter. The Appellant refuted the allegation of the Respondent No. 2

that there was a "financial debt" in terms of few documents like, Loan

Agreement dated 04.12.1998, Amendatory and Restated Agreement dated

16.09.2005, Common Loan Agreement dated 29.09.2006, Subordinate Loan

Agreement dated 29.09.2006, Master Restructuring and Loan Agreement dated

22.06.2010 and Additional Loan agreement dated 27.04.2017.

34. The Appellant submitted that the argument of Respondent No. 2 that even

where some quantum of financial debt is found to be due and payable, the -17- Comp. App. (AT) (Ins.) No. 1287 & 1291 of 2022

Section 7 application is maintainable is fallacious since there is no "financial

debt" and consequently no default has arisen on account of Respondent No. 1,

since, the Respondent No. 2 himself is responsible for mess of the Respondent

No. 1 and for non-payment of interest amounts under the Additional Loan

Agreement which was not disbursed by Respondent No. 2 and therefore, there is

no default by the Respondent No. 1 of any debt due and payable. The Appellant

submitted that there is no mention regarding date of occurrence of default

despite the clear instructions for providing these details as per the Form 1 and

date of default has not been mentioned in the Loan Recall Notice either.

35. The Appellant emphasized that an act of engineering by the Respondent

No. 2 a purported default by not disbursing the interest component sanctioned

by way of the Notice of Drawal, clearly tantamount to malafide initiation of the

CIRP in violation of Section 65 of the Code.

36. The Appellant submitted that various loan agreements have been entered

into by Respondent No. 2 while in complete control of the Respondent No. 1.

This Appellate Tribunal held that the Subordinate term loan agreement dated

29.09.2006 had been executed by Respondent No. 2 in violation to Proviso of

Section 63(3) of Companies Act. It is the case of the Appellant that all the

Loans in the present matter are intrinsically linked to each other and draw

reference from the preceding Loan Agreements, therefore, setting aside of even

one subsequent Loan Agreement, would completely invalidate all past loan -18- Comp. App. (AT) (Ins.) No. 1287 & 1291 of 2022

agreement, therefore, there can't be any debt due and default on part of

Respondent No. 1.

The Appellant argued that initiating Section 7 application based on such

illegal Loan Agreements, tantamount to malicious and fraudulent initiation of

Insolvency which is barred under Section 65 of the Code. The Appellant stated

that the Additional Loan Agreement dated 27.04.2017 was entered into by

Respondent No. 2 despite knowing that the said Agreements were void-ab-initio

and illegal, and therefore, no "financial debt" can be said to be due or payable

under such an illegal and invalid Agreement.

37. The Appellant submitted that the Recitals L-O of the Additional Loan

Agreement dated 27.04.2017 and the Sanction Letter dated 12.01.2017 clearly

indicate that the basis of the Additional Loan Agreement was the operation of

Scenario-II proposed by the HLC, but the Scenario No. II did not envisage the

Additional Loan Agreement by Respondent No. 2, rather Scenario-II suggested

real Equity infusion into Respondent No.1 Company by CPSU like

NHPC/NHDC to the extent of 51% and the promoters' holding not dropping

below 26%. The Appellant further argued that, therefore, all the Loan

Agreements are sham and collusive transactions carried out at the behest of

Respondent No. 2 wearing the cap of the Lender on one hand, the Lender-led

management on the other hand. The Appellant stated that BoD of the

Respondent No. 1 accepted these Loans and signed Loan Agreements while -19- Comp. App. (AT) (Ins.) No. 1287 & 1291 of 2022

wearing the hat of the "Borrower", therefore, these transactions cannot be

treated as "Financial Debt".

38. The Appellant sated that the Loans provided under Loan Agreements are

barred by Limitation especially since the Lenders declared the Respondent No.

1 an NPA on 31.03.2012 qua these loans, thereafter, much beyond the period of

3 years, Respondent No. 2 executed the Additional Loan Agreement dated

27.04.2017 with Respondent No. 1, to revalidate the Loans which already stood

time barred.

39. The Appellant submitted that the Minutes of Board meeting and the

Balance Sheets of the Respondent No. 1 were prepared by KMPs appointed by

Respondent No. 2 as the Lead lender and approved by the Board which was

completely under the control of Respondent No. 2 and other Lenders since

2005. Therefore, any such alleged acknowledgement in any Balance Sheet BoD

minutes cannot be relied upon. The Appellant reiterated that initiation of CIRP

is for ulterior purposes and Section 65 of the Code is applicable as CIRP is with

malicious intent for any purpose other than for resolution of the Corporate

Debtor.

40. Concluding his remarks, the Appellant strongly urged this Appellate

tribunal to dismiss the Impugned Order to protect the Respondent No. 1

(Corporate Debtor) and the Promoters of the Respondent No. 1. -20-

Comp. App. (AT) (Ins.) No. 1287 & 1291 of 2022

Submissions of Respondent No. 2

41. Per contra, the Respondent No. 2 denied all the averments made by the

Appellant treating these as misleading and malicious.

42. The Respondent No. 2 gave his version of series of events since 1995 to

present day and tried to present a complete picture to demonstrate complete

failure of the Appellant as Promoter, again and again, in all respect. The

Respondent No. 2 submitted that the Appellant failed to meet obligations of

original loan account, Service Level Agreement ('SLA'), Default Payment

Guarantee ('DPG') etc. The Respondent No. 2 stated that the Appellant could

not even meet MoU conditions despite Respondent no. 2 returning invoked

shares and returning partially debt converted shares and further appointing Mr.

M.L. Gupta as MD who was nominee of the Appellant. The Respondent No. 2

stated that the Appellant had neither any intention to revive the Respondent No.

1 nor financial and managerial capacity to do and therefore the Appellant has

chosen wrong path of blame game and accusing Lenders for fraud etc.,

43. The Respondent No. 2 stated that it is undisputed fact that from

01.10.2001 to 31.10.2005, the Project was completely stalled as the promoter

and the Respondent No. 1 failed to infuse requisite equity and funding in the

Project and thereby the Project suffered huge setback.

44. The Respondent No. 2 submitted that Appellant's contention that by

amendment of AoA, the composition of BoD of the Respondent No. 1 was tilted -21- Comp. App. (AT) (Ins.) No. 1287 & 1291 of 2022

in favour of Lenders, thereby the management control of the Corporate Debtor

was transferred to the Lenders is irrelevant and erroneous. To buttress his point,

the Respondent No. 2 highlighted that amendments to AoA were done with the

consent and approval of the shareholders including the Promoter during the

process of the revalidation of the financial facilities to the Respondent No. 1 and

all Lenders including GoMP were involved in the said process.

45. The Respondent No. 2 assailed the conduct of the Appellant and the

Respondent No. 1, who failed to maintain the financial discipline in terms of the

financing agreements and defaulted in repayment of interest and outstanding

amounts to the lenders. The Respondent No. 2 mentioned that till 2010, the

lenders (including the Respondent No. 2) had disbursed their total debt

commitment but there was a huge shortfall on the part of the Promoter of the

Respondent No. 1 in bringing in the requisite equity as a result of which the

Project completion got abnormally delayed. The Respondent No. 2 stated that if

the Appellant had timely infused funds and taken proper steps for the

implementation of the Project, there would not have been inordinate delay of

more than 20 years in implementation of the Project which itself reveals lack of

financial and managerial capacity of the Appellant. The Respondent No. 2

submitted that due to lack of commitment from Appellant and the Respondent

No. 1, the loan accounts of the Respondent No. 1 were classified as Non-

Performing Assets ('NPA') on 31.03.2012.

-22-

Comp. App. (AT) (Ins.) No. 1287 & 1291 of 2022

46. The Respondent No. 2 submitted that there are several acknowledgments

of debt and default on part of the Respondent No. 1 for instance while the HLC

was preparing its report, on 17.11.2014, Debt was acknowledged in the Annual

Report/Balance Sheet of the Corporate Debtor for the FY 2013-14 and the said

balance sheet was signed by Sh. Mukul Kasliwal (Promoter) as one of Directors

of the Respondent No. 1. The Respondent No. 1 again acknowledged its

liability/debt in the meeting of the BoD of the Respondent No. 1 held on

29.09.2015, which was attended by the Promoter Sh. Mukul Kasliwal.

47. The Respondent No. 2 gave the background and the events compelling

lenders and the Respondent No. 2 to acquire equity due to operation of law

subsequent to invocation of pledged shares and partial conversion of debt into

shares. The Respondent No. 2 submitted that on 22.03.2016, in an attempt to

implement Scenario-II, a review meeting was held at MoP to discuss the issues

relating to revival of the project and inter-alia, discussed issue regarding

Endorsement of NHPC/NHDC as new 'Promoter' as suggested by HLC,

however, NHPC declined the suggestion and as such as an interim measure, the

Respondent No. 2 along with other lenders were persuaded to get involved in

affairs of the Respondent No. 2 to sustain the revival measures. The

Respondent No. 2 elaborated that the implementation of Scenario II was

envisaged by way of invocation of pledge in favour of various consortium

lenders, and exercise of the conversion right by Respondent No. 2, as entailed -23- Comp. App. (AT) (Ins.) No. 1287 & 1291 of 2022

under the SLA for partially converting Respondent No. 2 's subordinate debt

into equity, in order to acquire majority equity as per the mandate of the HLC

under Scenario-II. The Respondent No. 2 further clarified that on 19.05.2016, a

notice for Invocation of Pledge was issued to the Respondent No. 1 and its

Promoter/pledgor and only thereafter on 27.05.2016, Respondent No. 2 issued a

Notice to the Respondent No. 1 for partial conversion of subordinate debt into

equity.

48. The Respondent No. 2 stated that in this backdrop and by virtue of the

transfer of 6,57,46,779 equity shares of Rs. 10/- each and conversion of

subordinate loan of Rs. 66,10,00,000/- into 6,61,00,000 equity shares of Rs. 10/-

each, Respondent No. 2 became a shareholder of the Respondent No. 1 w.e.f.

from 01.06.2016, holding 13,18,46,779 equity shares of Rs. 10/- each,

constituting 23.32% of the entire shareholding of the Respondent No. 1. The

Respondent No. 2 mentioned that 7 of the Lenders namely PFC, REC, HUDCO,

Central Bank of India, Dena Bank, NICL, had cumulatively acquired 51%

shareholding of the Respondent No. 1, pursuant to the invocation of the pledged

shares and conversion of sub-ordinate loan into equity, which was due to

operation of law.

49. The Respondent No. 2 stated that the efforts of Lenders to revive the

Project were being blocked by the Promoter by way of frivolous complaints

filed with RoC, Gwalior against lenders including the Respondent No. 2 which -24- Comp. App. (AT) (Ins.) No. 1287 & 1291 of 2022

led the Respondent No. 1 being marked as "Management Disputed" company by

the RoC. The Respondent No. 2 elaborated that under these uncertain

conditions created by the Promoters, it became difficult to tie-up funds required

for completion of the Project and to run the day-to-day affairs of the Respondent

No. 1. The Respondent No. 2 stated that he was compelled to file a Petition

under Section 241, 242 & 244 of the Companies Act, 2013 bearing CP. No.

15/1241- 242/NCLT/AHM of 2017 before the NCLT seeking appropriate reliefs

inter-alia, for handing over of records of the Respondent No. 1 from the

erstwhile management, removal of 'Management Disputed' status of the

Corporate Debtor by the RoC.

50. The Respondent No. 2 denied allegation of the Appellant that additional

loan agreement was forced upon them and pointed out that the aforesaid

Additional Loan Agreement was supported by the Promoter Sh. Mukul Kasliwal

in the board meeting dated 02.03.2017, as recorded in the minutes of meeting

that "Shri Mukul Kasliwal specifically requested the Board to record that, the

sanctioning of additional loan to complete the project is a welcome step apart

from all the issues and concerns going on between the Lenders and Promoters

and Lenders will receive support from the promoters as well in view to complete

the project." The Respondent No. 2 emphasized that the Appellant is estopped

from questioning the said Loan Agreement & any argument to the contrary is hit

by doctrine of approbate and reprobate.

-25-

Comp. App. (AT) (Ins.) No. 1287 & 1291 of 2022

51. The Respondent No. 2 also stated that Schedule II of the Additional Loan

Agreement acknowledges the already existing debt of Rs. 1750.93 Crore and

further the Recitals to the Additional Loan Agreement also acknowledged the

previous liabilities of the Respondent No. 1. The Respondent No. 2 highlighted

that Article 2.3(a) of the Additional -Loan Agreement states :-

"The Drawdown under this Agreement shall be subject to the satisfaction of each condition precedent set forth in Article IV hereof. Further, the obligation of the Additional Lender to make disbursement under this Agreement shall be subject to the Borrower performing its obligation and undertakings under this Agreement and the Borrower's compliance with the disbursement procedure stipulated hereunder, including, the submissions by the Borrower of all necessary information, documents, etc. to the satisfaction a/the Additional Lender."

The Respondent No. 2 stated that Article 4.1(ii)(a) provides that "validity

of the Additional Facility as well as its terms and conditions shall be subject to

Government Companies/Lenders holding majority equity in the Project .....

....... ..... "

52. The Respondent No. 2 stated that this negates the pleadings of the

Appellant about alleged management control by the Lenders and submitted that

they are bankers and has no interest in acquiring share capital of Respondent

No. 1 or its management. It is only due to gross failure of the Appellant and the

Respondent No. 1 and decision of MoP, GoI, as well as GoMP, taken in national -26- Comp. App. (AT) (Ins.) No. 1287 & 1291 of 2022

interest, to salvage the project, the Lenders including the Respondent No. 2

agreed to acquire equity by way of invoking pledged shares and partial

conversion of subordinates debts to equity.

53. The Respondent No. 2 stated that on account of acquisition of the

shareholding of Respondent No. 1 by the Lenders having been declared invalid,

further disbursals under the Additional Loan Agreement could not be made, as

the condition precedents as aforesaid for such disbursal could not be fulfilled.

The Respondent No. 2 stated that the interest of Rs. 10 Crores was due to be

payable by the Respondent No. 1 on 15.07.2017, i.e. after the NCLT's Order and

as such this amount could not be disbursed to the Respondent No. 1. The

Respondent No. 2 clarified that at the time of disbursal of Rs. 384 Crores, the

amount of Rs. 10 Crores had not become due for payment by Respondent No. 1,

and therefore, it was not disbursed along with Rs. 384 Crores and further

submitted that any allegations of default having been 'created' or engineered' is

incorrect and baseless as the Respondent No. 1 received the debt and defaulted

in payment of interest on the amounts already disbursed.

54. The Respondent No. 2 submitted that the Respondent No. 1 could not

comply with the terms, conditions and covenants of the Additional Loan

Agreement, based on which Respondent No. 2 had sanctioned the Additional

Debt, inter alia, including conditions provided under Article 2.3 (a) read with

Article IV of the Additional Loan Agreement, occurrence of events adversely -27- Comp. App. (AT) (Ins.) No. 1287 & 1291 of 2022

impacting the ownership of Government companies/ lenders (including

Respondent No. 2) etc., provided under Article 4.1 (ii) (a) and accordingly

Respondent No. 2 could not have, and did not disburse any further money out of

the Additional Facility to the Corporate Debtor. The Respondent No. 2 stated

that the additional loan was sanctioned as part of the revival measures in

accordance to the recommendation of HLC constituted by on the premise that

Government Companies/ Lenders shall hold majority equity in the project.

55. The Respondent No. 2 stated that the first interest payment was due. on

15.07.2017 in terms of Article 7.1(b) read with definition of 'Interest Payment

Dates' which was after the NCLT's Order dated 15.06.2017, the Respondent No.

1 failed to pay the same & subsequent instalments and therefore, Demand

Letters dated 06.07.2017, 01.10.2017 & 05.01.2018 were issued by Respondent

No. 2 to the Respondent No. 1 for non-payment of dues· under the Additional

Loan Agreement.

56. The Respondent No. 2 denied the assertion of the Appellant that

Respondent No. 2 did not make further disbursal of amount under the Draw

Down Notice ('DDN') dated 02.05.2017 and in effect 'created' default and

clarified that the said assertion signifies the reliance on the Additional Loan

Agreement by the Appellant, thus, the Appellant cannot seek to rely upon the

Additional Loan Agreement to the extent it provides for disbursal of amounts, -28- Comp. App. (AT) (Ins.) No. 1287 & 1291 of 2022

however in the same breath ignore the conditions attached to such disbursal or

event aver that the said agreement was not valid.

57. The Respondent No. 2 castigated the Appellant who while on the one

hand objects to the Lenders having previously received interest during

construction ('IDC') from Respondent No. 1 & on the other hand non-disbursal

of the said amount of Rs. 10 crores by the Lenders to Respondent No. 1, which

would then have come back to Lenders as IDC as aforesaid, is being objected

and the Respondent No. 2 submitted that, the defense of default by the appellant

is that the Lenders (especially Respondent No. 2) were not paying themselves

which is again approbation & reprobation.

58. The Respondent No. 2 submitted that in view of the continuous defaults

by the Respondent No. 1, the Respondent No. 2 issued recall notice dated

17.01.2018, demanding the Respondent No. 1 to make payment of the total

outstanding of Rs. 2139.20 Crores including outstanding interest amounts

payable as on 16.01.2018 (excluding costs/delayed charges/other charges etc.),

within 15 days of the receipt of the said notice. The Respondent No. 2 stated

that since the Respondent No. 1 did not make the required payment, the

Respondent No. 2 filed an application under Section 7 of the Code on

16.02.2018 for initiation of CIRP against the Respondent No. 1.

59. The Appellant elaborated that on 12.03.2018. this Appellate Tribunal

dismissed the Appeal filed by Respondent No. 2 against the NCLT's Order -29- Comp. App. (AT) (Ins.) No. 1287 & 1291 of 2022

dated 15.06.2017 and while dismissing the Appeal, inter alia, directed that the

Government of GoMP and GoI, need to urgently consider the way forward in

public interest to get the Project completed. The Respondent No. 2 submitted

that this Appellate Tribunal in the Order dated 12.03.2018 further held that the

Promoter/ Appellant had a responsibility and a duty to manage the Respondent

No. 1 as per the Companies Act in which they have failed. The Respondent No.

2 empathetically submitted that this Appellate Tribunal held categorically that

"the Promoter do not appear to be enthusiastic to get status quo ante restored in

the Articles not inspire confidence that if we strike down these amendments

made on 25.11.2005 (and subsequently) they can take charge and complete the

project which attracts public interest. Promoters have not brought to our

attention that at any time they opposed, or stood up to the gradual takeover."

60. The Respondent No. 2 clarified that in the judgement dated 12.03.2018,

this Appellate Tribunal held that primarily compliances w.r.t. the provisions of

the Companies Act, 2013 for conferring right to convert debt into equity, the

compliance of the Rules framed thereunder for effecting transfer of shares,

requirement of notice for invocation of pledge etc. under the Contract Act, were

not made and accordingly the acquisition of shareholding by the Lenders was

not as per the extant legal procedures and provisions. The Appellant submitted

that this was more on procedural issues and not w.r.t. legal rights of the

Respondent No. 2 to file Section 7 application and as such Section 7 application -30- Comp. App. (AT) (Ins.) No. 1287 & 1291 of 2022

was filed by Respondent No. 2 on 16.02.2018, which was finally admitted after

4 ½ years on 27.09.2022, due to the Promoter - Appellant adopting various

dilatory tactics before the Adjudicating Authority.

61. The Respondent No. 2 strongly refuted the argument raised by the

Appellant that the Section 7 application was 'fraudulent' and 'malicious' and

ought to have been dismissed by invoking Section 65 of the Code solely on the

ground that the Respondent No. 2 did not disburse the amount of Rs. 10 Crore

towards interest under the Additional Loan Agreement dated 27.04.2017 and the

Respondent No. 2, 'created' or 'engineered' a default. The Respondent No. 2

stated that the Appellant has not elaborated as to how ingredients of Section 65

are satisfied. The Respondent No. 2 submitted that in view of failure of the

Appellant-Promoter to implement Scenario-I stipulated in the HLC Report (by

having failed to arrange the committed additional equity of Rs. 600 Crore as

well as debt of Rs. 1100 Crore by 02.08.2015), the Lenders had to acquire

majority shareholding in the Respondent No. 1 by invocation of pledge and

conversion of debt for implementation of Scenario-II. The Respondent No. 2

stated that in order to meet the immediate fund requirements, an Additional

Loan Agreement was executed between Respondent No. 2 and the Respondent

No. 1 for loan of Rs. 600 Crores and disbursed Rs. 384.59 Crores under the said

Loan Agreement, however, further disbursal was prevented as the Appellant -31- Comp. App. (AT) (Ins.) No. 1287 & 1291 of 2022

challenged to the acquisition of shares by the Lenders on technical grounds and

it was decided in favour of the Appellant by legal fora.

62. The Respondent No. 2 stated that as per Article 2.3(a) of the said Loan

Agreement stipulated that "The Drawdown under this Agreement shall be

subject to the satisfaction of each condition precedent set forth in Article IV

hereof and the condition precedent under Article 4.1(ii)(a) provides that

"validity of the Additional Facility as well as its terms and conditions shall be

subject to Government Companies/Lenders holding majority equity in the

Project and based on which Respondent No. 2 had sanctioned the Additional

Loan, could not be complied with, on account of the Orders dated 15.06.2017

and 12.03.2018 passed by the NCLT and by this Appellate Tribunal.

Accordingly, in view of the terms of sanction as aforesaid, Respondent No. 2

could not have disbursed any further amount under the Additional Loan

Agreement to the Respondent No. 1.

63. The Respondent No. 2 emphasized that the Additional Loan Agreement

was executed much prior to this Appellate Tribunal's Order dated 12.03.2018,

and prior to NCLT Order's dated 15.06.2017 in the proceeding arising from the

Petition under Section 241-242 of the Companies Act, 2013. The Respondent

No. 2 stated that since, the acquisition of shareholding of Respondent No. 1 by

the Lenders had been declared invalid vide the said Orders, therefore, further

disbursal of Rs 10 crore towards interest under the Loan Agreement (which was -32- Comp. App. (AT) (Ins.) No. 1287 & 1291 of 2022

due on 15.07.2017) could not be made, as the aforesaid condition precedent of

Govt. Companies/ Lenders holding majority equity in the CD for such disbursal

could not be fulfilled. The Respondent No. 2 stated that the Appellant's

allegation of default having been 'created' or 'engineered' by Respondent No. 2

is baseless.

64. The Respondent No. 2 stated that on the one hand, the Appellant is

contending that money ought to have been disbursed under the SLA and on

other hand the Appellant is seeking to challenge the same SLA, which is

approbation and reprobation and which was welcomed by the Promoters the

Promoter Sh. Mukul Kasliwal himself as recorded in BoD Minutes.

65. The Respondent No. 2 submitted that apart from default under the

Additional Loan Agreement as aforesaid, the Respondent No. 1 was also in

default of the loans granted by Respondent No. 2 under the previous loan

agreements, and therefore, the same by itself, warranted admission of Section 7

Application i.e., debt towards Loan Facilities as on 15.01.2018, Rs. 1,018.19

Crore (principal amount) was due & outstanding from the Respondent No. 1.

The Respondent No. 2 stated that the Respondent No. 1 was also in default of its

liability of Rs. 318.49 crore towards Default Payment Guarantee and liability

towards Guarantee Fee, Facility Agent Fee, Security Agent Fee etc. The

Respondent No. 2 further informed that in addition to these, the Respondent No.

1 also defaulted in discharging its liability of Rs. 103.87 crore towards ZCB -33- Comp. App. (AT) (Ins.) No. 1287 & 1291 of 2022

issued by the Respondent No. 1 for conversion of interest liability on the

outstanding loan in terms of the sanction letter dated 02.03.2005 and the said

liability on is accruing on quarterly basis.

66. The Respondent No. 2 stated that during pendency of Section 7

Application, the GoMP decided to constitute a Task Force on 18.4.2019 for,

inter alia, examining the difficulties being faced by the Project, accordingly, to

give another opportunity to the Promoter and the Respondent No. 1 an MoU

was executed amongst Respondent No. 2, the Respondent No. 1 and Appellant

on 22.07.2019, under which the Appellant had to settle the dues of all the

lenders (PFC, HUDCO, SBI, IFCI, REC, OICL, NICL, GICL, CBoI, IDBI,

Dena Bank). Management of Respondent No. 1 was taken over by the Appellant

& Sh. M.L. Gupta as nominee of the Appellant was appointed as CMD of

Respondent No. 1. The Respondent No. 2 stated that on 06.08.2019, invoked

shares were returned to the Appellant and the same is recorded in the letter

dated 05.03.2020 issued by the Sh. M.L. Gupta the MD appointed by the

Appellant. Further, conversion of debt into equity done by PFC, was also

reversed & accepted by the Board of the Respondent No. 1.

67. The Respondent No. 2 submitted that the MoU stipulated that the

Appellant shall bring in an upfront amount of Rs. 10 crore within three weeks

from appointment of CMD of this choice i.e. by 27.08.2019 (the appointment

having been made on 06.08.2019) and this was first and foremost obligation of -34- Comp. App. (AT) (Ins.) No. 1287 & 1291 of 2022

the Appellant, independent of any other action by any of the parties. The

Respondent No. 2 stated that admittedly, only Rs. 1 Crore, that too in tranches,

was brought by the Appellant and the balance amount of Rs. 9 Crore was never

brought, thus the first default under the MoU was committed by the Appellant

on 27.08.2019 itself. The Respondent No. 2 stated that Clause 11 of the MoU

records that "While submitting the Settlement Plan, the Settlement Plan would

make provision with respect to the various Loans as are mentioned in the Loan

Recall notice dated 17.01.2018 and Schedule B................" thus, the MoU

clearly stipulated repayment of loan granted under the Additional Loan

Agreement dated 27.04.2017 as well as previous loan/liabilities. The Appellant

stated that Clause 22 of the MoU provided "In the event of failure to implement

the contents of this MoU in 12 (twelve) months from the Execution Date, this

MoU shall stand automatically terminated". The Respondent No. 2 submitted

that even as on 24.10.2019, the said amount of Rs 9 Crore had not been infused,

nor was any concrete settlement proposal given to the Lenders. The Respondent

No. 2 pointed out that even in the subsequent meeting of lenders held on

16.12.2019, the Appellant assured that it shall infuse the said amount of Rs. 9

Crore by end of December, 2020, which was also not done. The Respondent

No. 2 empathetically submitted that all these clearly demonstrate lack of will

and intention on part of the Appellant to fulfil MoU conditions and hence he

can't take shelter of MoU at this stage without fulfilling conditions on his part. -35-

Comp. App. (AT) (Ins.) No. 1287 & 1291 of 2022

68. The Respondent No. 2 assailed the Appellant who filed an Application

under Section 65 of the Code on 17.03.2020, much after Original

Orders/Judgments were reserved in his Section 7 application by the predecessor

Bench on 28.02.2020 & therefore being highly belated (two years after filing of

Section 7 Application & that too when orders had been reserved) and filed

baseless Section 65 application as an afterthought to derail the Section 7

application of the Respondent No. 2.

69. The Respondent No. 2 sated that due to the Appellant's utter failure to

implement the MoU, the Task Force constituted by the GoMP was annulled by

the GoMP and it was recorded in the communication dated 27.04.2020 issued

by the Govt. stating that "the second option of suggestions to allow legal

process initiated by the Respondent No. 2 under the Code to reach a logical

conclusion was accepted, making the existence of the Task Force infructuous"

which was not been challenged by the Appellant and has attained finality.

70. The Respondent No. 2 reiterated that on 22.07.2020, upon expiry of one

year from the date of its execution, the MoU stood automatically terminated in

terms of Clause 22 thereof. Even by this date, the Appellant did not bring the

amount of Rs 9 Crores as stipulated in the MoU, which it could have, as his

Section 7 application was still pending and had not been admitted.

71. The Respondent No. 2 submitted that there was no dispute on aspect of

limitation between the Member Technical and the Member Judicial of the -36- Comp. App. (AT) (Ins.) No. 1287 & 1291 of 2022

NCLT, which is evident from the Orders dated 08.10.2021 passed by the said

two Members and the questions framed for reference to the Third Member.

Whilst the Judicial Member has held that the Section 7 Petition is not barred by

limitation, the Technical Member has not given any finding on limitation and no

question has been framed by either of the Members on limitation, therefore, the

issue of limitation attained finality on 08.10.2021 and thus, the present Appeal

insofar as it challenges the said Order on limitation is itself barred by limitation.

The Respondent No. 2 has taken this specific objection in the Reply to Appeal,

to which there is no rebuttal/rejoinder. The Respondent No. 2 stated that

without prejudice to the Application under Section 7 is not barred by limitation,

as the disbursement of debt of Rs. 384.59 crore under the Additional Loan

Agreement dated 27.04.2017 took place in the year 2017 and the Application u/s

Section 7 was filed on 16.02.2018 and the disbursement has been admitted by

the Respondent No. 1 in its Reply filed through Appellant. The Respondent No.

2 also submitted that w.r.t. the debt and default under the previous loan

agreements, the Respondent No. 2 has acknowledged the debt from time to time

and particulars of such acknowledgments have given to this Appellate Tribunal

in a Chart along with brief compilation of relevant documents on record, during

the course of hearing in present appeal on 19.09.2024.

72. The Respondent No. 2 castigated the argument of the Appellant is that the

acknowledgment dated 17.11.2014 i.e. the Balance Sheet of Respondent No. 1 -37- Comp. App. (AT) (Ins.) No. 1287 & 1291 of 2022

for FY 2013-14 was not filed with the Section 7 Application but was filed with

the written submissions. The Respondent No. 2 submitted that the Appellant's

contention is untenable in view of the recent judgment of the Hon'ble Supreme

Court in Axis Bank Ltd. v. Naren Sheth, (2024) 1 SCC 679, wherein it is held

that the documents relating to acknowledgment claiming benefit of Section 18

can be introduced and accepted at the Appellate stage. The Respondent No. 2

also sought to make reliance on the judgment in Asset Reconstruction Co.

(India) Ltd. v. Tulip Star Hotels Ltd., 2022 SCC OnLine SC 944 [Relevant

Paras 49, 62, 76-80] and judgement in the matter of Rajendra Narottamdas

Sheth v. Chandra Prakash Jain, (2022) 5 SCC 600, to buttress this point.

73. The Respondent No. 2 stated that the Annual Report 2013 -14 was filed

with the ROC & is part of public record and this Balance Sheet was signed by

Sh. Mukul Kasliwal (Promoter) as one of Directors of the Respondent No. 1.

The Respondent No. 2 stated that this Balance Sheet has been filed by the

Appellant himself as Annexure-QQ in CP No. 175/2017 (Petition u/s 241-242)

pending before the NCLT, therefore, the plea of the Appellant w.r.t.,

acknowledgement of figures in this balance sheet is erroneous.

74. The Respondent No. 2 also strongly refuted the Appellant's reliance on

the Order dated 12.03.2018 passed by this Appellate Tribunal and stated that it

is misplaced as the Order dated 12.03.2018 was passed by this Appellate

Tribunal in the proceeding arising from Section 241-242 of the Companies Act, -38- Comp. App. (AT) (Ins.) No. 1287 & 1291 of 2022

2013 and therefore has no bearing on the debt or default or Section 7

Application under the Code and cited the judgment of this Appellate Tribunal in

Jagmohan Bajaj v. Shivam Fragrances Pvt. Ltd. & Ors., [(2018) 210 Comp

Cas 84] in support of this pleadings.

75. The Respondent No. 2 stated that this Appellate Tribunal held that "the

Promoter do not appear to be enthusiastic to get status quo ante restored in the

Articles not inspire confidence that if we strike down these amendments made

on 25.11.2005 (and subsequently) they can take charge and complete the project

which attracts public interest.............." and further, in Para 51 of the Order

dated 12.03.2018, this Appellate Tribunal has observed that "The Project has

been delayed endlessly." The Respondent No. 2 submitted that in terms of the

aforesaid Order of this Appellate Tribunal, the Secretary (Power), GoI on

24.03.2018 convened a meeting, which was attended by Promoters, GoMP, PFC

& other Lenders and recorded in the said meeting that all concerned including

Promoters favored resolution of Corporate Debtor under Code.

76. The Respondent No. 2 stated that at five places acknowledgment of debt

has been made by the Respondent no. 1 i.e., on 17.11.2014 - Balance Sheet of

the Respondent No. 1 for Financial Year 2013-14, 29.09.2015- Minutes of

meeting of Board of Directors of Respondent No. 1, 02.03.2017- Minutes of

meeting of Board of Directors of Respondent No. 1, 27.04.2017- Additional -39- Comp. App. (AT) (Ins.) No. 1287 & 1291 of 2022

Loan Agreement- Schedule II and 28.08.2017- Balance Sheet of the Respondent

No. 1 for Financial Year 2016-17

77. The Respondent No. 2 stated that on 11.04.2019, the Respondent No. 1,

through its Managing Director, filed an Affidavit in Reply to the Application

under Section 7 proceeding, pending before the Adjudicating Authority

emphasizing that resolution needs to be found for the Respondent No. 1 and the

said Reply was duly supported by the Board Resolution dated 22.02.2019

passed by the Respondent No. 1.

78. The Respondent No. 2 submitted that a Memorandum of Understanding

was executed amongst PFC, the Respondent No. 1 and Appellant on 22.07.2019

('MoU'), in order to explore a settlement plan by the Respondent No. 1 and the

Appellant, for OTS /Restructuring Scheme for dues of the creditors.

Management of Corporate Debtor was taken over by Appellant and Sh. M.L.

Gupta was appointed as CMD of Corporate Debtor, by the Appellant and on

06.08.2019, invoked shares were returned by the Respondent No. 2 to the

Appellant which is recorded in the letter dated 05.03.2020 issued by the Sh.

M.L. Gupta, who also requested Appellant to create pledge on the said shares in

favour of Respondent No. 2. Further, conversion of debt into equity done by

Respondent No. 2, was also reversed & accepted by the Board of the Corporate

Debtor.

-40-

Comp. App. (AT) (Ins.) No. 1287 & 1291 of 2022

79. The Respondent No. 2 submitted that the MoU, is not relevant for the

Section 7 proceeding as the scope of the Section 7 proceeding is narrow & the

Adjudicating Authority is not a civil court where disputes relating to MoU can

be agitated or specific performance thereof can be sought. The Respondent No.

2 submitted that MoU was executed in order to give an opportunity to Appellant

and Respondent No. 1 to settle the dues of the creditors, however, Appellant and

Respondent No. 1 failed even to come up with a concrete proposal for

settlement of the dues of the lenders, much less paying/settling the same. Thus,

the MoU clearly stipulated repayment of loan granted under, the Additional

Loan Agreement dated 27.04.2017 as well as the DPG liability, apart from the

previous loans.

80. The Respondent No. 2 stated that on 03.12.2019, the nominee director of

Respondent No. 2 on the board of the Respondent No. 1 resigned and thereafter

on 11.12.2019, vide its letter addressed to the Respondent No. 1 and Appellant,

PFC highlighted non-compliance of the provisions of the MoU by the Appellant

and Respondent No. 1. The Respondent No. 2 submitted that the MoU was

entered into pursuant to this Appellate Tribunal Order and the recommendation

of STF, however, as the MoU was not implemented by the Promoter himself,

Respondent No. 2 had no option but to take recourse to the Section 7 Petition

and thus, the contention of the Appellant that Section 7 Petition was not to be -41- Comp. App. (AT) (Ins.) No. 1287 & 1291 of 2022

pursued in light of the MoU, are meaningless in as much as the terms of the

MoU were not even implemented by the Appellant.

81. Concluding his pleadings, the Respondent No. 2 requested to dismiss the

appeal with exemplary cost.

Our Analysis

82. Since, the case has chequered history, it will be important for us to note

down the basic facts of the case before going into the merit of the pleadings by

the Appellants and the Respondents.

History of the Project and Case

83. The history of the project and case has been captured from the pleadings

and submissions made by the parties before us and are summarized as under :-

84. In 1993, Government of Madhya Pradesh ('GoMP') entrusted the

construction and implementation of 400 MW hydroelectric power project

('Project') at Mandaleshwar, Madhya Pradesh ('Project') to the Appellant on

'Build Own Operate and Maintain' basis, Pursuant to which the Respondent No.

1 was incorporated as a Special Purpose Vehicle ('SPV') on 11.05.1993.

85. On 11.11.1994, a Power Purchase Agreement ('PPA') was signed

between the Respondent No. 1 and Madhya Pradesh State Electricity Board

(now Madhya Pradesh Power Management Company Ltd ('MPPMCL') for

purchase of 100% power from the Project. We note that to execute project, the -42- Comp. App. (AT) (Ins.) No. 1287 & 1291 of 2022

Respondent No. 1 approached various banks and Financial Institutions for grant

of various credit facilities on 10.10.1997. The Respondent No. 2 sanctioned a

Rupee Term Loan ('RTL') of Rs. 100 Crores ('RTL 1') and Foreign Currency

Loan of USD 34 Million ('FCL 1 ') additional standby loan of USD 18.9

Million ('FCL 2'). Other lenders also extended financial assistance to the

Respondent No. 1 for the Project.

86. We note that the Promoters could not infuse required equity contribution

between 1998 to 2000, resulting in gap of Rs. 330 Crores in equity funding of

the Project. The Respondent No. 1 approached the GoMP for participation in the

Project equity, to bridge the aforesaid gap. GoMP accorded its approval for a

Stand-By Guarantee Facility of Rs 400 crores so as to enable the Respondent

No. 1 to raise optionally fully convertible debentures ('OFCDs') to the extent of

Rs 400 Crores. The Respondent No. 1 also approached the Respondent No. 2 to

provide a Default Payment Guarantee of Rs. 400 crores ('DPG'), who agreed to

same.

87. We note that despite these developments, the financial closure could not

be achieved by the Respondent No. 1. We also note that the Project cost

escalated from Rs 1565 Crores to Rs 1818 Crores (till 1998) with corresponding

equity required from promoters also increases to Rs 582 Crores till 2005. The

Promoter along with foreign investors could infuse equity of Rs 144 Crores

only.

-43-

Comp. App. (AT) (Ins.) No. 1287 & 1291 of 2022

88. We also take note of the fact that on 02.03.2005, on request of the

Respondent No. 1, the Respondent No. 2 revalidated its financial support of Rs.

325 Crores and the DPG for the OFCDs and sanction letter dated 02.03.2005

was issued. It is significant to note that in terms of the sanction letter dated

02.03.2005, it 'was stipulated that the Respondent No. 2 in consultation with

other lenders will approve the appointments of Chairman, Managing Director

and Director (Finance) on the Board of the Corporate Debtor and accordingly,

AoA of the Respondent No. 1 was amended.

89. The Respondent No. 1 requested the Lenders to disburse more money to

complete the Project and Lenders agreed to convert defaulted portion of interest

in their respective accounts into Zero Coupon Bonds ('ZCB') redeemable over a

period of 20 years after a moratorium of 1 (one) year from the commercial

operation date ('COD') of the Project.

90. We also note that on 16.09.2005, an Amendatory and Restated Agreement

(A&RA) was signed amongst the GoMP, MPSEB, the Respondent No. 2, the

Respondent No. 1 and Appellant and as per Clause 3.3 of the A&RA, it was the

responsibility of the Promoter to achieve financial closure within 180 days of

the signing of the A&RA i.e. by 15.03.2006 and the COD was as defined in the

PPA or 4 years from the effective of GoMP's Counter Guarantee for the

optionally fully convertible debentures.

-44-

Comp. App. (AT) (Ins.) No. 1287 & 1291 of 2022

91. We understand that in September, 2005 Ministry of Power ('MoP')

constituted a task force to revive project. During review meeting held on

24.10.2005 by the Secretary (Power), GoI, it was noted that the restructuring

was based on the starting point of the Promoter bringing in Rs 310 Crores as

Project equity which the Promoter could not be arrange. It was also decided that

the Respondent No. 1, its Promoters and the Lenders should make all out efforts

to restart the Project by 01.11.2005. In this background, the Respondent No. 2

further disbursed Rs 70 Crores till August 2006, however, the Respondent No. 1

could not achieve the financial closure due to non- infusion of equity/funds and

due to such non-achievement of financial closure, the Respondent No. 2 on the

request of the Respondent No. 1 had to sanction additional Rs 375 Crores in the

nature of subordinate loan to facilitate financial closure to ensure

implementation of the Project. Pursuant to this on 29.09.2006, Respondent No.

2 and the Respondent No. 1 executed a Subordinate Loan Agreement ('SLA')

for subordinate loan of Rs. 375 Crores.

92. We note that a Common Loan ('CLA') Agreement was also executed

between the Respondent No. 2, Rural Electrification Ltd., Housing & Urban

Development Corporation Ltd. and the Respondent No. 1 for a loan aggregating

to Rs 834 Crores. Thus, financial closure was achieved with the execution of the

CLA and the SLA and in accordance to the terms of the SLA, the Respondent -45- Comp. App. (AT) (Ins.) No. 1287 & 1291 of 2022

No. 2 had the right to convert a part or full of the subordinate loan into fully

paid up equity shares of the Corporate Debtor at par.

93. We also note that on 30.11.2006, in accordance with the requirements of

the CLA, a Deed of Pledge (Pledge Deed), was also executed in favour of

Respondent No. 2, whereby the Promoter pledged its 29,17,20,330 fully paid up

equity shares of aggregate face value of Rs.291,72,03,300/- held in the

Respondent No. 1, for the benefit of the lenders (including Respondent No. 2),

with a second charge on the said shares in favour of GoMP.

94. We note that due to involvement of multiple lenders and their standalone

financing and security documents led to a requirement of bringing all the

lenders on a common platform in order to achieve uniformity of terms and

conditions amongst all the lenders in relation to the administration and

disbursement of the Credit Facilities and creation of additional Security and its

enforcement, the Respondent No. 1 and the lenders (Respondent No. 2,

HUDCO, REC, Central Bank of India, State Bank of India, Life Insurance

Corporation Ltd., IFCI, Dena Bank, GIC, NIC, IDBI, UIICL, OIC & NIA (14

lenders) entered into Master Restructuring and Loan Agreement (MRLA) on

22.06.2010.

95. We note that since inception of project during 1993 to 2010, the lenders

distributed Rs. 1817 Crores, whereas Promoters could infuse only Rs. 497

Crores out of requirement on their part of Rs. 749 Crores. It is also a fact that -46- Comp. App. (AT) (Ins.) No. 1287 & 1291 of 2022

project was stalled between 2010-2016 and loan accounts of Respondent No. 1

were declared NPA on 31.03.2012.

96. We observe that since the project was not moving forward, a High Level

Committee (HLC) headed by Additional Chief Secretary (Finance), GoMP, was

constituted to suggest the way forward for the Project which included

Respondent No. 1, Appellant, Respondent No. 2, other lenders and promoters

and the HLC's report dated 02.05.2015 was submitted giving three likely

Scenarios to complete project. At this stage, it is important to understand these

three scenarios which reads as under :-

(A) Scenario-I: "Implementation by the present promoter - 90 days' time

allowed till 02.08.2015. Existing promoter will have to arrange additional

equity of Rs. 600 Crore as well as debt of Rs. 1100 Crore at concessional

rates to achieve the MPPMCL stipulated tariff of Rs. 5.32 per unit shall

be applicable."

(B) Scenario-II: "Government companies acquiring/ having majority equity

in project with management control. Project could be taken over by

NHPC Limited, NHDC Limited and that PFC would be amenable to

infusing equity or additional debt as well as lowering of interest rate for

existing debt and with commensurate support from lenders, tariff could

be reduced to Rs. 5.32 per unit which is acceptable to MPPMCL."

-47- Comp. App. (AT) (Ins.) No. 1287 & 1291 of 2022

(C) Scenario-III: "Cancellation of PPA. If scenario I & II above do not

fructify, the last option will be that MPPMCL cancels the existing Power

Purchase Agreement. GoMP and MPPMCL would be burdened on

account of GoMP's counter guarantee of Rs. 400 Crore issued to PFC."

97. Thus, as per the Scenario-I, the Promoter was given 90 days' time till

02.08.2015 to submit a firm and binding proposal regarding arrangement

including, additional equity of Rs. 600 Crores and debt of Rs. 1100 Crores. We

note that the Promoter could not infuse necessary equity and/or arrange the fund

and consequently Scenario-II was initiated.

98. We understand that in order to move forward as per HLC to implement

Scenario II the meeting was called on 22.03.2016 to bring NHPC/NHDC as new

Promoters but NHPC declined the offer. As interim measure, the Respondent

No. 2 along with other lenders agreed to finance more. The Scenario II also

involved invocation of pledged shares of promoters in favour of lenders and

exercise right to partially convert subordinate loan to equity. Accordingly, on

19.05.2016 notice was issued to invoke pledged shares and on 27.06.2016, the

notice was issued to convert subordinate loan of Rs. 66.10 Crores into equity.

By these acts, the Respondent No. 2 became 23.32% equity shareholder of

Respondent No. 1 and Lenders i.e., REC, HUDCO, CBI, Dena Bank, NICL and

Respondent No. 2 cumulatively acquired 51% shares of Respondent No. 1 in

accordance with HLC. We note that this was as per done decision of all -48- Comp. App. (AT) (Ins.) No. 1287 & 1291 of 2022

stakeholder including GoMP, GoI, Lenders and Promoters and not on unilateral

part of the Lenders alone.

99. We note that on 05.11.2016, the Respondent No. 2, on behalf of himself

and other Lenders, issued a Loan Recall Notice to the Respondent No. 1

demanding payment of the outstanding dues but no repayment was made to the

Lenders. In such financial conditions, in order to meet the immediate fund

requirements as part of revival measure of the Project, Respondent No. 2 in

principle agreed to increase the Project cost from Rs. 2760 Crores to Rs. 8121

Cores and requirement of additional debt of Rs. 3022 Crores ('Additional Debt")

for the Project. Subsequently, at the request of the Respondent No. 1, an

Additional Loan Agreement dated 27.04.2017 was executed between

Respondent No. 2 and the Respondent No. 1 for an additional term loan of Rs.

600 Crores and the Respondent No. 2 disbursed Rs. 384.59 Crores. The said

Additional Loan Agreement was entered into by Respondent No. 2 in the

capacity of Lender's Agent, Security Agent and Lender and the terms and

conditions including security creation, for this additional loan was approved in

the extra ordinary general meeting('EGM') of the Respondent No. 1 held on

31.07.2017.

100. We note one contentious issue w.r.t. interest amount of Rs. 10 Crores due

to be payable by the Respondent No. 2 and not paid, whereas remaining amount

was disbursed by Lenders to the Respondent No. 1.

-49-

Comp. App. (AT) (Ins.) No. 1287 & 1291 of 2022

101. We note that NCLT vide order dated 15.06.2017 held that invocation of

pledged share and conversion of debt into equity was not in accordance the

procedures prescribed under the law. The same was confirmed by this

Appellate Tribunal and Hon'ble Supreme Court of India hence the Respondent

No. 2 cancelled these acquired shares and returned to the Respondent No. 1

later.

102. We note that as per SLA, first interest payment became due on

15.07.2017 in terms of Article 7.1 (b) of SLA r/w definition of "Interest

Payment date" which Respondent No. 1 failed to pay. It is the case of

Respondent No. 2 that he issued three demand letters on 06.07.2017, 01.10.2017

and 05.01.2018. On the other hand, it is case of Appellant that this "Interest"

was created by Respondent No. 2 for CIRP only as Respondent No. 1 issue

"Draw Due Notice (DDN) dated 02.05.2017 for Rs. 435 Crores including Rs. 10

Crores but Respondent No. 2 did not pay interest Rs. 10 Crores deliberately.

103. We observe that the Respondent No. 2 issued Recall Notice on

17.01.2018 to Respondent No. 1 recalling outstanding dues of Rs. 2139.20

Crores and pursuant to the same, the Lenders filed application under Section 7

of Code on 16.02.2018. We note that the Respondent No. 1 also defaulted on

Rs. 318.49 Crores for default Payment Guarantor (DPG) and further defaulted to

meet liability of Rs. 103.87 Crores towards ZCB.

-50-

Comp. App. (AT) (Ins.) No. 1287 & 1291 of 2022

104. We have already noted that NCLT vide order dated 15.06.2017 held that

invocation of pledged shares and conversion of partial debt into equity by

Lenders was not in accordance with law. This was upheld by this Appellate

Tribunal vide order dated 12.03.2018 and also directed GoMP & GoI to

urgently consider the way forward. This Appellate Tribunal recorded the

following :-

"the Promoter do not appear to be enthusiastic to get status quo ante restored in the Articles not inspire confidence that if we strike down these amendments made on 25.11.2005 (and subsequently) they can take charge and complete the project which attracts public interest. Promoters have not brought to our attention that at any time they opposed, or stood up to the gradual takeover."

(Emphasis Supplied)

105. In terms of this Appellate Tribunal order dated 12.03.2018, a meeting was

convened of all stakeholder on 24.03.2018 which was attended by Respondent

No. 1, Respondent No. 2, Appellant, GoMP, GoI, Lenders and in Para 17, it was

decided that resolution of the Respondent No. 1 under IBC is best solution

GoMP also supported admission of Section 7 application of the Respondent No.

2 in an Affidavit filed on 03.08.2018 in Section 7 application of the Respondent

No. 2 filed on 16.02.2018. On 11.04.2019, the Respondent No. 1 through MD

filed an affidavit before NCLT that resolution need to be found of Respondent

No. 1.

-51-

Comp. App. (AT) (Ins.) No. 1287 & 1291 of 2022

106. During the pendency of Section 7 application before NCLT, GoMP

formed a Task Force, which decided on 25.05.2019 that Promoter and Lenders

should try to find a way forward and accordingly an MoU was signed amongst

Lenders, Respondent No. 1 and Appellant on 22.07.2019 to explore a settlement

plan by the Appellant for OTS. Accordingly, Respondent No. 2 returned equity

shares due to invocation of pledged shares and partial conversion of debt into

equity bank to the Appellant pursuant to NCLT/this Appellate Tribunal/

Hon'ble Supreme Court of India judgment that these acts of Respondent No. 2

were not in accordance with procedures prescribed under the law.

107. We note that the management of Respondent No. 1 was taken over by the

Appellant and Mr. ML Gupta as nominee of the Appellant was appointed CMD

on 06.08.2019, thereafter, the Respondent No. 2 and Lenders quit management

of Respondent No. 1. This MoU stipulated that the Appellant would bring in an

upfront amount of Rs. 10 Crores within three weeks of appointment of CMD

i.e., dated 27.08.2019, but admittedly the Appellant could bring only Rs. 1 Crore

and could not bring balance of Rs. 9 Crores to Respondent No. 1. This MoU

also provided that loan granted under SLA dated 24.07.2017, DPG liability and

previous loan will be provided in settlement. Further, as per Clause 11 of MoU

i.e., Automatic termination of MoU was to take place if not implemented in 12

months from execution of MoU.

-52-

Comp. App. (AT) (Ins.) No. 1287 & 1291 of 2022

108. As per Clause 19 of MoU, Respondent No. 2 requested Adjudicating

Authority to defer the proceeding under Section 7 of his application. However,

since MoU could not fructify, the Respondent No. 2 proceeded with application

and Adjudicating Authority during hearing on 05.12.2019 recorded the

following :-

"Learned Counsels appeared for both sides have submitted

that "Special Task Force Committee" has been constituted by the State Government (Madhya Pradesh) which is still under consideration. However, we are of the view that, the matter pertains to the year 2018 and the time is essence of the Code no further time can be granted on this aspect, the parties are hereby advised to come prepare with the final argument on the main CP(IB) 111 of 2018 as well as CP(IB) 389 of 2018 along with all pending Interlocutory Application(s)."

(Emphasis Supplied)

109. We note that the final hearing by the Adjudicating Authority was held on

28.02.2020 and order was reserved. However, the same could not be

pronounced as both members of NCLT were transferred to other benches in

May, 2020. The Appellant filed an application under Section 65 of the Code

before the Adjudicating Authority on 27.03.2020 vide IA No. 60 of 2020 i.e.,

after order in Section 7 application was reserved on 28.02.2020. -53-

Comp. App. (AT) (Ins.) No. 1287 & 1291 of 2022

110. We observe that on 20.07.2020, MoU also got automatically terminated

in terms of Clause 22 of MoU.

111. Finally, the Adjudicating Authority gave its verdict in two separate order

wherein the Member (Technical) rejected Section 7 application of the

Respondent No. 2, however, Member (Judicial) admitted Section 7 application

and being split verdict, the matter was referred to the President NCLT who

made reference to Member (Judicial), Kolkata, Mr. Rohit Kapoor on 21.03.2022

under Section 419 (5) of the Companies Act, 2013 who pronounced the

Impugned Order i.e., his judgement on 27.09.2022.

112. We were informed that additional loan of Rs. 600 Crores was supported

by the Promoters i.e., Mukul Kasliwal as recorded in BoD minutes dated

02.03.2017, where it was recorded the following.

"Shri Mukul Kasliwal specifically requested the Board to record that, the sanctioning of additional loan to complete the project is a welcome step apart from all the issues and concerns going on between the Lenders and Promoters and Lenders will receive support from the promoters as well in view to complete the project."

(Emphasis Supplied)

113. We also note that Schedule II of SLA dated 27.04.2017, the existing debts

of Rs. 1750.93 Crores were acknowledged. Further as per Article 2.3 and

Article 4.1 (ii) (a) of SLA provides :-

-54-

Comp. App. (AT) (Ins.) No. 1287 & 1291 of 2022

"Article 2.3

"The Drawdown under this Agreement shall be subject to the satisfaction of each condition precedent set forth in Article IV hereof. Further, the obligation of the Additional Lender to make disbursement under this Agreement shall be subject to the Borrower performing its obligation and undertakings under this Agreement and the Borrower's compliance with the disbursement procedure stipulated hereunder, including, the submissions by the Borrower of all necessary information, documents, etc. to the satisfaction of the Additional Lender."

Article 4.1(ii)(a) provides that "validity of the Additional Facility as well as its terms and conditions shall be subject to Government Companies/Lenders holding majority equity in the Project.............."

(Emphasis Supplied)

114. We consciously note that this SLA and its conditions were agreed to by

all including Promoters and signed on 27.04.2017, much prior to judgments of

NCLT on 15.06.2017 and this Appellate Tribunal's judgment on 12.03.2018 on

an application of Appellant under Section 241 & 242 of the Companies Act,

2013. We are noting these dates as one of the contentions of Appellant is that

the SLA is in violation of NCLT/NCLAT orders. We will discuss the same at

later stage at appropriate place, but suffice to note that the SLA happened much -55- Comp. App. (AT) (Ins.) No. 1287 & 1291 of 2022

prior to NCLT/NCLAT's judgment under Section 241 & 242 of the Companies

Act, 2013.

Findings

115. We note that the differences between the Members of NCLT,

Ahmedabad Bench were framed in their respective split orders which were

referred by the President NCLT to Member (Judicial) NCLT, Kolkata Bench

under Section 419(5) of the Companies Act, 2013.

116. Issue framed by Member (Technical)

"I. Whether, in the facts and circumstances of the case, notice dated 17.01.2018 recalling the loan is bad in law as debt is neither due nor payable as on that date?

II. Whether, in the facts and circumstances of the case, application filed under Section 7 of IBC, 2016 is an instance of malicious initiation of insolvency proceedings in particular for the reason that event of default for non payment of interest during construction period has been created by the Respondent No. 2 itself and, therefore, liable to be rejected under Section 65 of IBC, 2016?

III. Whether, in the facts and circumstances of the case, M/s. Entegra Ltd., being the original promoter and M/s. Power Infrastructure India Ltd. as strategic investor have got locus to intervene in the matter on behalf of the Corporate Debtor?

-56-

Comp. App. (AT) (Ins.) No. 1287 & 1291 of 2022

IV. If point no. I and II above are in affirmative then whether the application U/s of IB Code ought to be rejected?"

(Emphasis Supplied)

Issues framed by the Member (Judicial) :-

"(I) Whether M/s. Entegra Ltd., the original promoter and M/s. Power Infrastructure India as strategic investors, have any locus to intervene in the matter on behalf of the corporate debtor?

(II) Whether, notice dated 17.01.2018 recalling the loan is bad in law.

(III) Whether, present application filed under Section 7 of IBC, 2016 is an instance of fraud/malicious initiation of insolvency proceedings U/s 65 of the Code? (IV) If point No. III above is affirmative then whether the application U/s 7 of the IB Code ought to be rejected on that ground?"

(Emphasis Supplied)

117. From above issues framed by Judicial Member and Technical Member,

the common threads of issues pertains to validity of Recall Notice dated

17.01.2018; whether Section 7 application of Respondent No. 2 is malicious and

fabricated insolvency petition or otherwise, locus of the Appellant and finally

whether Section 7 ought to be rejected or otherwise.

118. Following issues emerges in the present appeal :- -57-

Comp. App. (AT) (Ins.) No. 1287 & 1291 of 2022

(i) Whether there was a debt and default which entitled the Respondent

No. 2 to initiate Section 7 application under the Code and whether

such debt and default was within the period of limitation.

(ii) (a) Whether, the Lenders especially the Respondent No. 2 who was the

Financial Creditor and also allegedly in control of the Respondent No.

1 since, 2005 to 2018, could have initiated present Section 7

application or should have initiated application under Section 10 of the

Code.

(b) Whether the invocation of pledge shares and partial conversion of

debt into equity by the Respondent No. 2 has adverse impact in the

present appeal.

(c) Whether, the Lenders especially the Respondent No. 2 assumed

the role of owners in addition to role of the Lenders after invocation

of pledged shares and partial conversion of debts into equity or the

Lenders were involved in management with limited roles to protect

their loan advanced to the Respondent No. 1.

(iii) Whether, the additional loan agreement dated 27.04.2017 was

fabricated or forced upon the Respondent No. 1 to initiate Section 7

application by the Respondent No. 2 and whether the Recall Notice

dated 17.01.2018 was legal or not.

-58-

Comp. App. (AT) (Ins.) No. 1287 & 1291 of 2022

(iv) Whether, Section 241 and 242 Companies Act, 2013 application filed

by the Appellant who got reliefs from NCLT/ NCLAT and the

Hon'ble Supreme Court of India has any bearing on present Section 7

application.

Since, all these issues are inter-related, inter-connected and inter-dependent,

we shall deal with these issues in conjoint manner in subsequent discussions.

119. Issue (I) Whether there was a debt and default which entitled the

Respondent No. 2 to initiate Section 7 application under the Code and

whether such debt and default was within the period of limitation.

➢ We note that various financial debts i.e., loan was granted from time to

time from 1998 to 2017 by the Respondent No. 2 to the Respondent No. 1

and following are the relevant agreements:-

S.No. Date Documents

1. 04.12.1998 Loan Agreement

2. 16.09.2005 Amendatory and Restated Agreement

3. 29.09.2006 Common Loan Agreement

4. 29.09.2006 Subordinate Loan Agreement

5. 22.06.2010 Master Restructuring and Loan Agreement

6. 27.04.2017 Additional Loan Agreement

➢ We have noted that the Respondent No. 2 sanctioned Rs. 100 Crores

(RTL - 1) and foreign currency loan of Rs. 34 million USD (FCL-1) on

10.10.1997. The Respondent No. 2 further sanctioned additional foreign -59- Comp. App. (AT) (Ins.) No. 1287 & 1291 of 2022

currency loan of USD 18.9 Million to the Respondent No. 1 (FCL-II) on

24.11.1998 and the authorized loan facilities were entered into loan

agreement which was executed between the Respondent No. 1 and

Respondent No. 2 on 04.12.1998.

➢ We have already noted that due to lack of financial arrangements from

Promoters side regarding equity infusion and funds, the financial closure

could not be achieved and as a result of which the project did not see any

progress up to October, 2005.

➢ Subsequently, after intervention of GoMP and GoI and other

stakeholders, the Respondent No. 2 revalidated the loan on 02.03.2005 for

OFCDs which was sanctioned somewhere in March, 2001.

➢ We have already noted earlier the facts regarding amendatory and restated

agreement dated 16.09.2005 and common loan agreement amongst the

lender on 29.09.2006.

➢ We have also recorded that at the request of the Respondent No. 1, the

Lenders also agreed to convert defaulted portion of interest in their

respective accounts into ZCB which was redeemable period 20 years after

mandatory moratorium of one year by the Master Restructuring and Loan

Agreement was executed on 22.06.2010.

➢ It is a significant to note that subsequent to meeting held by Secretary,

Ministry of Power, Government of India on 24.10.2005, it was decided -60- Comp. App. (AT) (Ins.) No. 1287 & 1291 of 2022

that the Promoters will bring in project equity and to achieve financial

closure, Respondent No. 1 at the request of Respondent No. 2 had

sanctioned Rs. 375 Crores in the nature of subordinate loan for which the

subordinate loan agreement was signed on 29.09.2006.

➢ At the request of Respondent No. 1, the Respondent No. 2 sanctioned yet

another additional loan of Rs. 600 Crores, signed additional loan

agreement on 27.04.2017 and against which Rs. 384.59 Crores was

disbursed.

➢ We note that at this stage, the project cost was revised from Rs. 2760

Crores to Rs., 8121 Crores and requirement of additional debt of Rs. 3022

Crores was also factored into.

➢ We note that the Respondent No. 1 could not pay and meet his financial

obligations towards various loan facilities as elaborated in preceding

discussions and as a result of which, the additional financial facilities

granted by the Lenders including the Respondent No. 2 to the Respondent

No. 1, were sanctioned to revive the project.

➢ The disbursal of the loan by the Respondent No. 2 and receipt of the same

by the Respondent No. 1 is undisputed fact. However, what is disputed

by the Appellant as Promoters of Respondent No. 1 is that even though

the financial debt might have been due and payable but there was no

default on account of the Respondent No. 1 for several reasons. It is the -61- Comp. App. (AT) (Ins.) No. 1287 & 1291 of 2022

case of the Appellant that there was no default since the Respondent No.

2 himself was responsible for non-payment of interest amount under

additional financial loan agreement which was not disbursed by the

Respondent No. 2 as such, there was no default by the Respondent No. 1

of any debt due and payable.

➢ The Appellant has been emphasizing mainly on the additional loan

account wherein amount of Rs. 435 Crores was sought based on draw

down notice, out of which Rs. 10 Crores was meant for interest which

was not disbursed by the Respondent No. 2.

➢ It is further the case of the Appellant that the past loan agreement by the

Lenders have deemed to become illegal since subordinate loan agreement

dated 29.09.2006 was sanctioned by BoD in violation of provision of

63(3) of the Companies Act, 2013.

➢ We note the plea of the Appellant that any illegality in the subsequent

loan agreement would completely invalidate of past transactions and past

loan agreements and thus all these previous loan agreements tantamount

to sham agreements.

➢ It is further the case of the Appellant that the additional loan agreement

dated 27.04.2017 entered into Respondent No. 2, despite their knowing

that the said agreement was void-ab-intio and illegal and therefore there -62- Comp. App. (AT) (Ins.) No. 1287 & 1291 of 2022

was no financial debt due and payable under such illegal loan agreements

and therefore there is no question of any default by the Respondent No. 1.

➢ The Appellants another argument is that, since the Respondent No. 2 was

wearing the hats of both as Financial Creditor as well as allegedly in the

management of the Respondent No. 1, there could not be any valid loan

agreement between the Respondent No. 1 & Respondent No. 2.

➢ Further, we have noted the contention of the Appellant that the

Respondent No. 2 kept on entering into further loan agreements only to

utilize such proceeds for service of interest due on loan for previous loans

and not for the project.

➢ Finally, the Appellant argues that the earlier loan agreements are

completely barred by the limitation since the Lenders declared

Respondent No. 1 as NPA on 31.03.2012 qua these loans.

➢ We have perused Section 7 application filed by the Respondent No. 2

before the Adjudicating Authority (NCLT Ahmedabad) bearing CP (IB)

111/2018 on 16.02.2018 along with various annexures forming Part IV of

the Section 7 application. We note that the total amount claimed to be

defaulted has been stipulated as Rs. 2789.42 Crores including outstanding

interest amount payable and other charges as on 15.01.2018.

➢ We have also noted that the working of computation of these total dues

have been indicated in tabular form in computation sheet dated -63- Comp. App. (AT) (Ins.) No. 1287 & 1291 of 2022

15.01.2018 which was annexed as Annexure A-5 of Section 7 application

along with Loan Recall Notice dated 17.01.2018 as Annexure A-6 with

the original Section 7 application.

➢ From Annexure A-5, we note the following.

➢ We further note that details of these amount have been further elaborated

in other pages of the above Annexure A-5, which we have perused but not

repeating herein.

➢ Thus, the Part IV is categorially clear regarding the default amount of

Rs. 2789.42 Crores.

-64-

Comp. App. (AT) (Ins.) No. 1287 & 1291 of 2022

➢ In contrast, the main plea of the Appellant is that the various agreements

are sham agreements. He has taken one specific technical point that Rs.

10 Crores was to be disbursed by the Respondent No. 2 as part of

additional loan agreement which the Respondent No. 2 did not disburse

and hence, the loan recall notice dated 17.01.2018 was allegedly itself

created and fabricated document by the Respondent No. 2 just to create

default on the part of the Respondent No. 1.

➢ On the other hand, we have already noted from the various pleadings of

both the parties specially the Respondent No. 2 that the financial creditors

specially the Respondent No. 2 , kept on pumping the money from time to

time only for revival of the project in so much so that even for financial

closure, which could not be achieved by the Promoters due to non

infusion of equity and fund amount, the Respondent No. 2 had sanctioned

money through the additional loan agreement just to facilitate the

financial closure to be done by the promoters of the Respondent No. 1.

➢ We have already noted that both the GoI and GoMP even tried their best

to revive the project and have been actively involved in consultation with

various stakeholders including the Respondent No. 2 and Promoters and

under these persuasive efforts of both Central and State Governments, the

Respondent No. 2 kept on sanctioning the loans the Respondent No. 1. As

regard the point raised by the Appellant regarding non disbursal of Rs. 10 -65- Comp. App. (AT) (Ins.) No. 1287 & 1291 of 2022

Crores as interest/ IDC, we do not find any merit that this was

deliberately done by the Respondent No. 2 only to initiate Section 7

application. We wonder, if the Respondent No. 2 and other Lenders have

pumped in thousands of Crores of loans to the Respondent No. 1, why

would they hesitate to give additional loan of mere Rs. 10 Crores but for

any legal hurdle as brought out before us w.r.t., judicial orders whereby

the Lenders ceased to be shareholder and therefore, the conditions

precedent of Scenario II of HLC could not have been met and

consequently the Lenders were not obliged to release any more funds to

the Respondent No. 1 including Rs. 10 Crores interest to Respondent

No. 1. We do not find any merit in the arguments of the Appellant on this

ground.

➢ We have taken note that the judicial fora declared the conversions of

pledged shares into equity, as well as partial conversion of debts into

technically not valid due to non following the legal procedure laid down

in the Companies Act, 2013. We do not find that any legal fora treated

the money disbursed or Loan Agreement by Lenders and the Respondent

No. 2 as sham or fabricated as loans which were due and payable and for

which default were committed by the Respondent No. 1.

➢ We note that the project was conceived way back in the year 1993 and

various facilities were granted since 1997 onward by the Respondent No. -66- Comp. App. (AT) (Ins.) No. 1287 & 1291 of 2022

2. The Respondent No. 1 clearly failed to meet his obligation and there

was a clear debt and default by any stretch of imagination. We are not in

a position to accept the plea of the Appellant that the loan agreement was

sham agreement and the Loan Recall Notice dated 17.01.2018 was

fabricated and created documents by Respondent No. 2 just to take the

Respondent No. 1 into insolvency.

➢ We note that the Respondent No. 2 has been funding from time to time by

way of original RTL-I, FCL-I and FCL-II, which Respondent No. 1 failed

to service its obligations. We also note that even later the Respondent

No. 2 sanctioned subsequent loans and finally additional loans of Rs. 600

Crore which the Respondent No. 1 failed to pay. In view of the above

details discussions, we hold that the verdict of Member (Judicial),

Ahmedabad Bench and Member (Judicial), Kolkata Bench to be correct

holding default committed by the Respondent No. 1.

➢ We have also gone through the verdict of Member (Technical) of

Ahmedabad Bench who has noted that Rs. 600 Crores additional loan was

sanctioned in April 2017 and noted however that only Rs. 384 Crores was

disbursed till 05.01.2018 by the Respondent No. 2 and the Respondent

No. 1 was not having any commercial operations during this period as the

project was under construction.

-67-

Comp. App. (AT) (Ins.) No. 1287 & 1291 of 2022

➢ The Member (Technical) of Ahmedabad Bench also noted that the first

installment was due for payment of interest on 15.07.2017 which was not

paid by the Respondent No. 1 and next installment of interests fell due on

15.10.2017 and 15.01.2018 which were also not paid by the Respondent

No. 1.

➢ The Member (Technical ) of Ahmedabad Bench further notes that

"22. ....However, even first instalment of such interest which fell due for payment on 15.07.2017 has not been paid. Further, next two instalments of interest due on 15.10.2017 and 15.01.2018 have also not been paid. The crucial fact is to be noted that disbursement of loan was undergoing till 05.01.2018 and balance loan amount (600 crores minus 384 crores) has not been disbursed at all and, therefore, responsibility for non-completion of project squarely lies on the shoulders of the lenders, who were in complete control of the project at that point of time, It is also noted that the applicant-financial creditor asked the corporate debtor to pay existing debt of Rs. 2139 crores plus interest on the additional loan within 15 days from the date of such recall notice knowing fully well that the corporate debtor was not in a position to do so and such position of the corporate debtor was substantially attributable to the conduct of the applicant-financial creditor itself. This factual position speaks for itself. Further, in our view, a situation of default has been created with the malicious intent to file application under Section 7 of IBC, 2016 so that the petition filed by the -68- Comp. App. (AT) (Ins.) No. 1287 & 1291 of 2022

M/s. Entegra Ltd., being intervener under Section 241-242 of the Companies Act, 2013 can be brought the under moratorium.

25. .....in our opinion, are more than sufficient to hold that application filed under Section 7 is an instance of abuse of process of law. Thus, we are not dealing with their other contentions for the sake of brevity, although, in our opinion, such pleas lend further credence to their claims made in this regard. We may further add that if we dive deep into the sea of controversies only more and more skeletons would came out and which may create further issues for lenders."

29..... In the present case, it further pains us that applicant- financial creditor as is one of the prominent central public sector undertakings and other financial creditors are institutional lenders. Hence, there cannot be any justification for such entities to act in this fashion and a serious introspection is required in their approach to promote the entrepreneurship, make availability of credit and for future growth of the economy. These objects are defined in the preamble to the CODE also. Thus, a person, in a dominant position like this, needs to correct itself. Thus, if all the parties Involved with a view to find an amicable solution as if it was required yesterday would have to act in a positive manner, forgetting the past and relinquishing their egoistic approach. We may further observe that, in the facts and circumstances of the case, even it would not be in the interests of the lenders as well as they may have to take -69- Comp. App. (AT) (Ins.) No. 1287 & 1291 of 2022

substantial hair-cuts and also it may hurt the interests of various other stakeholders.

32. ... In the result, TP 258 of 2019 in CP (IB) 111 of 2018 stands dismissed, being an instance of malicious initiation of insolvency proceedings and also on account of debt not being due and payable as on the date of issue of notice of recall.

(Emphasis Supplied)

➢ We would like to point out that the reasoning of Member (Technical) in

above paras are on perceived issues and presumed facts rather than on any

legal issues. We do not find any meaningful discussion regarding

applicability of Section 7 of the Code in the facts of the case and also do

no find any discussions on any judgment of the Hon'ble Supreme Court

of India's (out of catena of the judgments) on the subject where it has

been held again that the role of the Adjudicating Authority is limited to

find existence of debt for which default has taken place, meeting the

stipulated minimum threshold limit and take action to accept Section 7

application else reject the same. The Hon'ble Supreme Court of India

again and again held limited role of Adjudicating Authority in such case

except where non-compliance to provision of the Code is noted.

➢ The Adjudicating Authority is required to work as per the mandate of the

Code and regulations and in accordance with the ratio decided by the -70- Comp. App. (AT) (Ins.) No. 1287 & 1291 of 2022

Hon'ble Supreme Court of India and this Appellate Tribunal, rather than

presumption and assumptions in quoting few facts here and there out of

context, and therefore, we do not support the rational of the Member

(Technical) Ahmedabad Bench as contained in his order dated

08.10.2021.

➢ We find that all the parameters of Section 7 application has been met and

correctly pointed out in the Impugned Order by both the Judicial

Members of Ahmedabad and Kolkata in their judicial orders.

➢ We also further record that the case is squarely covered under the various

judgments of Hon'ble Supreme Court of India including Innoventive

Industries Ltd. v. ICICI Bank and Anr, (2018) 1 SCC 407], ES

Krishnamurthy v. M/s Bharath Hi Tech Builders [(2022) 3 SCC 161]

and Vistra ITCL (India) Limited & Ors. Vs. Dinkar

Venkatasubramanian and Anr. [(2023) 7 SCC 324], in addition to

catena of judgments of the Hon'ble Supreme Court of India and this

Appellate Tribunal.

➢ We note that there was no dispute on aspect of limitation between the

Member (Technical) and Member (Judicial) of NCLT Ahmedabad Bench

as seen from order dated 18.10.2021 passed by both the Members through

their different judgements and we also find that no question was framed

on this account by any of the Members.

-71-

Comp. App. (AT) (Ins.) No. 1287 & 1291 of 2022

➢ However, we find that the Member (Judicial), Ahmedabad Bench has

held that Section 7 application is not barred by limitation after recording

its detailed reasoning for the same.

➢ We find that the pleadings of the Respondent No. 2 that the issue of

limitation has attained finality on 08.10.2021 and the present appeal in so

far it challenged the said order on limitation itself is barred by limitation.

We also note that the Respondent No. 2 has taken this specific objection

in the Reply to appeal to which there was no rebuttal/ rejoinder.

➢ We have also noted the contention that disbursement of debt of

Rs. 384.59 Crores was made under additional loan agreement dated

27.04.2017, whereas for Section 7 application was filed on 16.02.2018

which is within the limitation period. As regard the previous loan

agreements, the same have been acknowledged from time to time in the

various documents and Balance Sheets. One Chart along with brief

compilation of relevant documents on record was presented before us and

handed over to us and the Appellant during the course of hearing in

present appeal on 19.09.2024. The same has also been filed in Written

Submissions by the Respondent No. 2. This also confirm the same.

➢ Based on above detailed discussions, we hold that there was a debt and

default on part of the Respondent No. 1 which entitled the Respondent -72- Comp. App. (AT) (Ins.) No. 1287 & 1291 of 2022

No. 2 to initiate Section 7 application of the Code and the same was not

barred by limitation.

120. Issue (II) (a) Whether, the Lenders especially the Respondent No. 2

who was the Financial Creditor and also allegedly in control of the

Respondent No. 1 since, 2005 to 2018, could have initiated present Section 7

application or should have initiated application under Section 10 of the

Code.

(b) Whether the invocation of pledge shares and partial conversion of debt

into equity by the Respondent No. 2 has adverse impact in the present

appeal.

(c) Whether, the Lenders especially the Respondent No. 2 assumed the role

of owners in addition to role of the Lenders after invocation of pledged

shares and partial conversion of debts into equity or the Lenders were

involved in management with limited roles to protect their loan advanced to

the Respondent No. 1.

➢ We have already noted the various facts regarding the failure of the

Corporate Debtor to complete the project and also their failure to make

the payment from time to time to the Lenders. We also note that even the

financial closure could not take place on account of non infusion of equity

and other funds by the promoters within the stipulated time period. -73-

Comp. App. (AT) (Ins.) No. 1287 & 1291 of 2022

➢ It is the case of the Appellant that this happened due to external factors

which were not under the control of the Promoters or the Respondent

No. 1 like Narmada Bachao Andolan and other legal issues. Be that as it

may, we have noted that the project cost which was 1565 Crores became

Rs. 1818 Crores in 1998 and further increased to Rs. 8121 Crores in

2016-17. The present day cost of project, if at all still viable, has not been

quantified by anyone and may be very steep at this stage.

➢ We observed from pleadings of both the parties that the project came to

grinding halt between the period 2001-2005 and only after the

government interventions, the Lenders and other stakeholders were

persuaded to infuse additional money into the project and in this

background the Respondent No. 2 revalidated his financial support of

Rs. 325 Crores and DPG for OFCDs and sanction letter was issued on

02.03.2005 by the Respondent No. 2 to Respondent No. 1. It is necessary

to understand that in this background, it was stipulated that the

Respondent No. 2 in consultation with other Lenders would be involved

in process of appointment of Chairman, MD, Director Finance on the

BoD of Respondent No. 1 and accordingly the AoA of Respondent No. 1

was amended.

➢ We need to take note of the fact that the Respondent No. 1 was

incorporated as a SPV on 11.05.1993 and since 1997 the money was -74- Comp. App. (AT) (Ins.) No. 1287 & 1291 of 2022

being sanctioned by Lenders including Respondent No. 2 to Respondent

No. 1 and despite of these financial facilities including additional loan

agreement, Default Payment Guarantee ('DPG') for Optionally Fully

Convertible Debentures ('OFCD'), the financial position of the

Respondent No. 1 could not improve.

➢ The project could not proceed further mainly due to lack of financial

arrangements on the part of the Promoters by way of equity and other

fund infusion. Even the managerial aspect of the Promoters could also

have been contributory factors leading to the crises in affairs of the

Respondent No. 1.

➢ The fact remains that the task force was constituted in September 2005 by

Ministry of power, GoI consisting of all the stakeholders including

Lenders and in pursuant to this task force, the DPG in favour of the

trustee of OFCD was issued which was secured by counter guarantee of

GoMP.

➢ It is the case of the Appellant that by the amendments in AoA especially

regarding process of approval of Chairman, MD, DF, the management

control of Respondent No. 1 effectively got transferred from the

Appellant to Lenders especially Respondent No. 2. Hence, the

Respondent No. 2 became the shareholder and could not have initiated

Section 7 application. In this connection, we note that these amendments -75- Comp. App. (AT) (Ins.) No. 1287 & 1291 of 2022

were done with the consent and approval of shareholders including the

Promoters. We note that GoMP fully consented to the said process.

➢ In this background, we note that the Respondent No. 1 requested the

Lenders to disburse further amount to complete the project and then

existing lender also agreed to convert default portion of interest by the

Respondent No. 1 in their respective books into ZCB, details of same, we

noted in our earlier discussions. We have already noted that Master

Restructuring and loan agreement was executed subsequently on

22.06.2020. We also note that the amendatory and restructuring

agreement (A&RA) was also signed amongst GoMP, Financial Creditors,

Respondent No. 1 and the Appellant and according to Part 3.3 of A&RA,

it was responsibility of the Promoters to achieve financial closure within

180 days of signing of A&RA dated 15.03.2016.

➢ However, the financial closure could not take place due to non infusion of

equity by the Promoters and therefore the Respondent No. 2 had to

sanction additional loan of Rs. 375 Crores and additional loan agreement

was signed on 29.09.2006 along with common loan agreement between

other lenders for Rs. 834 Crores.

➢ We note that as per terms of Subordinate Loan Agreement ('SLA'), it was

right of Respondent No. 2 to convert a part or full loan into equity shares

of the Corporate Debtor. At this stage, we would like to note that it was -76- Comp. App. (AT) (Ins.) No. 1287 & 1291 of 2022

right and not obligation on the part of the Respondent No. 2 to do so and

that too it could have been done in part or full.

➢ We observe that in terms of common loan agreement amongst the

Lenders, the Deed of pledge was also executed (pledge deed) on

30.11.2006 in favour of the Respondent No. 2 acting as security agent,

further addendum was done thereto in the year 2010-11, whereby the

Promoter's Rs. 29,17,20,330/- fully paid up shares were pledged for the

benefit of lenders including Respondent No. 2 with the secondary charge

in favour of the GoMP.

➢ We take note that the events of lack of financial closure due to non

infusion of equity and funds from the Promoters and due to persuasive

efforts of the Government, the Lenders especially the Respondent No. 2

was obligated to further sanction various financial facilities including

subordinate loan and additional loans to Respondent No. 1, detail of

which we have already noted earlier. Thus, it was not done as desire of

the Lenders for conversion of debts into equity or for that matter for

invocation of pledged shares, but was done as per then prevailing

financial condition of Respondent No. 1 and this was conscious decision

taken by all stakeholders.

➢ In any case, this was done, of course, only on the failure of the

Respondent No. 1 to make repayments to the Lenders. In the present -77- Comp. App. (AT) (Ins.) No. 1287 & 1291 of 2022

case, these rights were duly approved by the Stakeholders and the

Promoters to secure the huge amount of loans by the banks which is

normal commercial policy of Lenders.

➢ We do not subscribe to the pleadings of the Appellant that the Respondent

No. 2 wanted to take over the control of the Respondent No. 1 to service

his own interest and effectively took over the control of the management

of the Respondent No. 1 from the Appellant.

➢ It is required to be understood that if the Promoters would have kept his

promise to infuse the stipulated equity and funds, similarly if the

Respondent No. 1 would have paid back the amount due on the stipulated

time to the Lenders, there would not have been any occasion to make

such decision by the Lenders including changes under AoA or creating

pledged deed. Further, if the Appellant and the Respondent No. 1 would

have done their acts properly, there was no need for Respondent No. 2 to

invoke the pledged shares and partially convert the subordinate loan into

equity shares. In fact, there is no need for any banker to do so. After all

the bankers are involved in granting loans and getting interest, which is

their normal business and only to protect their financial interest, Lenders

make such provisions like partial conversion of debt into equity or

invocation of pledged shares in case of default by borrowers. Hence, in

this background, it need to be appreciated that the allegation that deemed -78- Comp. App. (AT) (Ins.) No. 1287 & 1291 of 2022

control of the Respondent No. 1 got transferred from the Appellant to

Respondent No. 2 with ulterior motives of Lenders is not correct.

➢ We also note that the Promoters Mr. Manoj Kasliwal continued to remain

on BoD of the Respondent No. 1. We further note that the MD, DF of the

Respondent No. 1 were approved by the following due process, with the

consent of the Lenders, and again on this aspect, we do not find any merit

in the allegation of the Appellant.

➢ At this stage, it would be important to understand the impact of

invocation of pledged shares by which the Lender became the

shareholders w.r.t. their rights in filing Section 7 application.

➢ We find that there is a direct judgment of this Appellate Tribunal which

support, prima-facie, the case of the Appellant i.e., case of PTC India

Financial Services Ltd. vs. Mr. Venkateswarlu Kari & Anr. passed in

Company Appeal (AT) (Ins.) No. 450 of 2018. The relevant paras of this

judgment are read as under :-

"2. The question arises for consideration is whether the Appellant can be held to be a 'Financial Creditor', who claimed to be a 'Financial Creditor' for accepting its claim.

3. The case of the Appellant is as follows.

The 'Bridge Loan Agreement' was reached on 10th March, 2014 between 'NSL Nagapatnam Power and Infratech Limited' (Corporate Debtor) and the Appellant - 'PTC India Financial Services Limited' pursuant to which a sum -79- Comp. App. (AT) (Ins.) No. 1287 & 1291 of 2022

of Rs. 125 Crores was disbursed to the 'Corporate Debtor' on the terms and conditions as set out in the agreement, for setting up a 1320 MW coal based thermal power project (super-critical) at Tentulei Village, Talcher Taluk, District Angul, Odisha.

4. The aforesaid 'debt' was secured by a 'Deed of Pledge' of shares dated 10th March, 2014 owned by 'Mandava Holdings Private Limited ('MHPL' for short) in 'NSL Energy Ventures Private Limited' ('NEVPL', for short).

13. The 'Interim Resolution Professional' (1st Respondent) issued email on 19th February, 2018 to the Appellant rejecting the financial claim of the Appellant on the purported ground that the claim had been satisfied as on the insolvency commencement date by invocation of pledge.

28. In view of the aforesaid position, as we held that the Appellant became the shareholder in terms of Clause 6 of the 'Pledge Deed' dated 10th March, 2014, the Appellant cannot take the advantage of Section 176 of the Contract Act. Section 176 of the Contract Act also cannot be taken into consideration for the purpose of collating the claim of any claimant (creditor) by the 'Resolution Professional' under Section 18 of the I&B Code."

(Emphasis Supplied)

➢ Thus, this Appellate Tribunal held that by invocation of pledged shares,

the Lenders became Shareholder and could not press for their claims

under Code.

-80-

Comp. App. (AT) (Ins.) No. 1287 & 1291 of 2022

➢ At this stage, we would like to refer to the Hon'ble Supreme Court of

India judgment dismissing this Appellate Tribunal's above quoted

judgment in the case of PTC India Financial Services Limited vs.

Venkateswarlu Kari and Anr. in Civil Appeal No. 5443 of 2019.

➢ We are conscious of facts that issue before the Hon'ble Supreme Court of

India was on few legal issues i.e., is whether the Depositories Act, 1996

read with the Regulation 58 of the Securities and Exchange Board of

India (Depositories and Participants) Regulations, 1996 has the legal

effect of overriding the provisions relating to the contracts of pledge

under the Indian Contract Act, 1872 and the common law as applicable in

India.

➢ We note that the aspect of invocation of pledged shares resulting Lenders

to became management shareholder v/s his right to file Section 7

application came up again to this Appellate Tribunal and it was decided

comprehensively, hence we will take benefit of this Appellate Tribunal

judgment. This Appellate Tribunal gave its judgment in the matter of

India Power Corporate Ltd. Vs. Meenakshi Energy Ltd. & Anr., passed

in Company Appeal (AT) (Ins.) No. 1220 of 2019 vide order dated

10.09.2020. The relevant paras of this judgment read as under :-

" 2.1 Brief facts of the case is that Meenakshi Energy Ltd. Respondent No. 1 (referred as Corporate Debtor) had availed term loan and working Capital facilities from time -81- Comp. App. (AT) (Ins.) No. 1287 & 1291 of 2022

to time from a consortium of lenders including State Bank of India, State Bank of Hyderabad, State Bank of Bikaner and Jaipur, State Bank of Mysore and State Bank of Travancore (SBI and the Associate Banks) Respondent No. 2 (referred as Financial Creditor) in two different phases to set up a 300 MW coal based power project (phase I) and 700 MW coal based thermal power project (phase II) respectively, in terms of Common Loan Agreement dated 10.07.2009 and 01.10.2010 respectively, at Thamminapatnam village, Nellore District (Andhra Pradesh).

2.4. The Corporate Debtor is unable to pay its debts. Therefore, Financial Creditor filed an Application under Section 7 of I&B Code, for initiating CIRP. The Application was filed by the SBI on behalf of the SBI and the Associate Banks as the Associate Banks have merged into SBI with effect from 01.04.2017.

3. The Corporate Debtor resisted the Application on various grounds. The amount claimed by the Financial Creditor was secured by pledge of valuable security in the form of shares of the Corporate Debtor. The Financial Creditor has suppressed material fact that the shares of the Corporate Debtor have already been invoked and transferred by the Financial Creditor to the Demat Account of SBI CAP Trustee. Thus, the Financial Creditor became owner of 95.2% shares of the Corporate Debtor and the entire debt of the Corporate Debtor stood discharged. The Financial Creditor being a majority Shareholder of the Corporate Debtor, cannot maintain this Application as a Financial -82- Comp. App. (AT) (Ins.) No. 1287 & 1291 of 2022

Creditor. The Financial Creditor has also mis-led the Ld. Adjudicating Authority by failing to disclose the pending legal proceedings before various forums. The Financial Creditor has filed this Application as a counter blast to the proceedings initiated by the Corporate Debtor and IPCL against the Financial Creditor in various forums. The Application is barred by Limitation. There does not exist any debt as on date, thus, there is no question of default in respect of the Financial Creditor....

5. Learned Senior Counsel for the Appellants submitted that the debt owed by Corporate Debtor was secured by pledge of shares of the Corporate Debtor held by the IPCL. The Financial Creditor after invocation of pledge and subsequent transfer of shares in the name of SBI CAP Trustee Company Ltd, now holds 95.2% of shares in the Corporate Debtor. The Financial Creditor admitted in form No. 1 the value of the pledged shares is Rs. 5,475 Crores and thus, the entire debt of the Financial Creditor stood discharged and there is no default. This Appellate Tribunal in the case of PTC India Financial Services Ltd. (in short PFS) Vs. Mr. Venkateshwaralu Kari and Mandava Holdings Pvt. Ltd. Company Appeal (AT) (Ins) No. 450 of 2018 held that once shares are transferred to the Financial Creditor, the Financial Creditor becomes the owner of the shares and in such a situation there is no debt due to the Financial Creditor as the dues stand satisfied by way of shares. Ld. Adjudicating Authority erroneously held that the Judgment of this Appellate Tribunal in PFS (Supra) has been stayed -83- Comp. App. (AT) (Ins.) No. 1287 & 1291 of 2022

by the Hon'ble Supreme Court, in fact further proceedings are stayed. Thus, as per the Judgment in PFS the entire debt of the Financial Creditor stood discharged

8. It is also submitted on behalf of the Appellants that after invocation of pledge and transfer of shares. The Financial Creditor in collusion and connivance with all the erstwhile lenders have been siphoning of the funds from the Corporate Debtor. Therefore, the Appellant (IPCL) had filed an Application under Section 241 & 242 of the Companies Act, against the Financial Creditor. However, Learned Adjudicating Authority has erroneously admitted the Application under Section 7 of I&B Code. Hence, the order deserves to be set aside.

9. On the other hand, Learned Counsel for the Financial Creditor (Respondent No. 2) submitted that the Appellants have wrongly contended that the invocation of pledge amounted to transfer of shares or discharge of debt. The Pawnee's rights are governed by the Section 176 of Indian Contract Act, 1872, when Pawnor makes default the Pawnee does not have a right to appropriate and transfer ownership to itself of the pledged goods. The Pawnee's remedies are limited to sue for debt and retain the pledged goods or sell the pledged goods on giving the Pawnor reasonable notice of the sale and appropriate the proceeds.

For this preposition, place reliance on the Judgment of Hon'ble Supreme Court in the case of Balkrishna Gupta Vs. Swadesi Polytex Ltd. (1985) 2 SCC 167. Wherein Hon'ble Supreme Court has held that even after the pledge is -84- Comp. App. (AT) (Ins.) No. 1287 & 1291 of 2022

enforced, the legal title in the shares pledged would not vest in the pledgee and the pledgee has only a special interest/property to retain the shares as a collateral or sell them in accordance with Section 176 of the Indian Contract Act. Hon'ble Bombay High Court in the case of United Breweries (Holdings) Ltd. & Ors. Vs. State Bank of India & Ors. (order dated 02.04.2013) in notice of Motion (L) No. 718 of 2013 in Suit (L) NO. 263 of 2013 held that invocation of pledge and transfer of pledged securities to the pledgee's Demat Account did not violate the Section 176 of the Indian Contract Act and did not result in the pledgor being divested of their rights to the pledged shares. The same view has been taken by this Appellate Tribunal in MAIF investments India Pvt. Ltd. Vs. M/s Ind. Bharath Energy (Utkal) Ltd., (Company Appeal (AT) (Ins) No. 597 of 2018). Thus, the invocation of pledge in itself does not amount to transfer of shares or discharge of debt. This Appellate Tribunal in the case of PFS held that invocation of pledged of shares amounts to discharge of debt. However, Hon'ble Supreme Court has stayed the proceedings. Therefore, this Judgment does not help the Appellants.

14. After hearing Learned Counsel for the parties, we have perused the record.

15. The following two issues are crop up in these Appeals.

(a) Whether the Application under Section 7 of I&B Code, filed pursuant to the RBI Circular dated 12.02.2018? -85-

Comp. App. (AT) (Ins.) No. 1287 & 1291 of 2022

(b) Whether the liability of the Corporate Debtor stood discharged in view of the invocation of the pledged shares by the Financial Creditor.

Issue No. 2

18. According to the Appellants after invocation of the pledged shares the Financial Creditor became 95.2% shareholder of the Corporate Debtor and the entire dues of Corporate Debtor stood discharged. In support of this submissions Learned Counsel for the Appellants cited two Judgments one of this Appellate Tribunal in the case of PTC India Financial Services Ltd. (Supra) in which it is held that once shares are transferred to the Financial Creditor, the Financial Creditor became the owner of the shares. The another Judgment of Hon'ble High Court of Delhi in the case of Tendril Financial Services Pvt. Ltd. (Supra) in this Judgment it is held that as per the Regulation 58 of Security Exchange Board of India (Depositors and Participants) Regulations, 1996, the moment the shares are transferred to the Demat Account of the beneficiary after invocation of pledge shares, such transfer amounts to sale and transferee became the beneficial owner of the shares.

19. Learned Counsel for the Respondent No. 2 (Financial Creditor) submits that Regulation 58(8) of the Debentures Regulations is subject to the terms of Share Pledge Agreement and the pledge is governed by the Indian Contract Act.

20 In the present case the whole controversy arises when SBI CAP Trustee Company Ltd. issued a notice of -86- Comp. App. (AT) (Ins.) No. 1287 & 1291 of 2022

invocation of pledge shares dated 20.12.2017. (Annexure 8 Page 240 of Reply of Respondent No. 2 (Financial Creditor)). In such a situation we are considering the effect of invocation of pledge shares.

26. In the light of the Judgement of Hon'ble High Court of Delhi in Tendril Financial Services Pvt. Ltd. (Supra). We are convinced with the arguments of Learned Counsel for the Appellants that the moment the shares transferred to the Demat Account of the SBI CAP Trustee Company Ltd. it became the beneficial owner of the shares as also held by this Appellate Tribunal in the case of PTC India Financial Services Ltd (Supra). Learned Counsel for the Appellants tried to impress that pursuant to invocation of pledged shares the Financial Creditor became the shareholder of the Corporate Debtor. We are unable to convince with this argument and held that after invocation of pledged shares the SBI CAP Trustee Company Ltd. became the shareholder of the Corporate Debtor, as per the Clause 2.6.2 of the Share Pledge Agreement dated 23.09.2016. The Financial Creditor is not party in the above referred agreement. In the notice dated 20.12.2017 it is mentioned that invocation of pledged shares shall not prejudice the rights and remedies available to the Financial Creditor under the Financing Documents. Therefore, it cannot be said that after invocation of the pledged shares by the SBI CAP Trustee Company Ltd., the Financial Creditor cannot maintain the Application under Section 7 of I&B Code, or the entire dues of the Corporate Debtor stood discharged.

-87-

Comp. App. (AT) (Ins.) No. 1287 & 1291 of 2022

27. It is argued on behalf of the Appellant that after invocation of pledge and subsequent transfer of shares the Financial Creditor held 95.2% shares of the Corporate Debtor. Thus, the entire debt of the Financial Creditor stood discharged. If this is the position, then why the Corporate Debtor after receiving the notice of invocation of pledged shares dated 20.12.2017 sent an acknowledgement of debt on 16.02.2017 (See Annexure 20 of Page 313 Reply of Financial Creditor Vol. II) and after transfer of shares sent letters dated 25.05.2018 and 11.06.2018 for settlement. It shows that even after transfer of shares in the Demat Account of SBI CAP Trustee Company Ltd., there exist a debt of more than Rs. 1 lakh and there is a default on the part of the Corporate Debtor.

29. Thus, we are unable to convince with the arguments of Learned Counsel for the Appellants that after invocation of the pledged shares by the SBI CAP Trustee Company Ltd. liability of the Corporate Debtor stood discharged.

30. It is true that after invocation of the pledge, Shares were transferred in dematerialised form in the DP Account of SBI CAP Trustee Company Ltd. and it became the beneficial owner of the shares it does not mean that the Financial Creditor became the beneficial owner of the shares and it losses the status of Financial Creditor.

31. With the aforesaid, we hold that the Financial Creditor has not filed the Application under Section 7 of I&B Code, in pursuant to the RBI Circular dated 12.02.2018 and even after invocation of the pledged shares by SBI CAP Trustee -88- Comp. App. (AT) (Ins.) No. 1287 & 1291 of 2022

Company Ltd., the financial Creditor can maintain the Application. Learned Adjudicating Authority has rightly admitted the Application under Section 7 of I&B Code. It is undisputed fact that the Corporate Debtor has committed default in repayment of debt and the amount of debt is more than 1 Lakh. Thus, we found no ground to interfere in these Appeals.

Thus, the Appeals are hereby dismissed. No order as to costs.

(Emphasis Supplied) ➢ We note that the present appeal before us is squarely covered in the

judgment of this Appellate Tribunal in the case of India Power (Supra)

and the same has not been challenged before the Hon'ble Supreme Court

of India, thus attained finality. We are duty bound to follow the same. ➢ We note that in the case of India Power (Supra), this Appellate Tribunal

has categorically held that the Lenders (like Respondent No. 2 herein)

have independent right to file Section 7 application, despite becoming

shareholder due to events like invocation of pledged shares.

➢ Thus, it becomes clear that Lender have independent rights under the

Code despite invocation of pledged shares which can make them

shareholder of the Corporate Debtor.

➢ In view of above detailed discussions, we find that the Lenders despite

might be in alleged control of Respondent No. 1 for intervening period

have independent rights to file Section 7 application under the Code and -89- Comp. App. (AT) (Ins.) No. 1287 & 1291 of 2022

as such there was no need or reason or occasion for the Respondent No. 2

to initiate application under Section 10 of the Code.

➢ Thus, we hold that based on above discussion including discussed

judgements above, that although the Respondent No. 2 might has become

the shareholder of Respondent No. 1 for intervening period due to partial

conversion of debt into equity and due to invocation of pledged shares,

(which were returned back to the Appellant based on judgement of

judicial fora as already discussed earlier), the Respondent No. 2 does not

lose his right to initiate Section 7 application.

➢ Similarly, we hold that invocation of pledge share and partial conversion

of debt into equity by Respondent No. 2 has no adverse impact in the

present appeal.

121. Issue No. (III) Whether, the additional loan agreement dated

27.04.2017 was fabricated or forced upon the Respondent No. 1 to initiate

Section 7 application by the Respondent No. 2 and whether the Recall

Notice dated 17.01.2018 was legal or not.

➢ It is the case of the Appellant that the additional loan agreement dated

27.04.2017 was fabricated and created by the Respondent No. 2 only with

dubious intentions of initiating Section 7 application against the

Respondent No. 1 and similarly additional loan agreement dated

27.04.2017 was also illegal and therefore, the present Section 7 -90- Comp. App. (AT) (Ins.) No. 1287 & 1291 of 2022

application of the Code could not have been initiated at all by the

Respondent No. 2. In this connection, we note that the additional loan

agreement was signed on 27.04.2017 between the Respondent No. 1 &

Respondent No. 2 and few important part of the agreement reads as

under:-

-91-

Comp. App. (AT) (Ins.) No. 1287 & 1291 of 2022 -92- Comp. App. (AT) (Ins.) No. 1287 & 1291 of 2022 -93- Comp. App. (AT) (Ins.) No. 1287 & 1291 of 2022 -94- Comp. App. (AT) (Ins.) No. 1287 & 1291 of 2022 -95- Comp. App. (AT) (Ins.) No. 1287 & 1291 of 2022

➢ Similarly, we take note of loan recall notice dated 17.01.2018 and we

would like to take note of some of important point of the same which

reads as under :-

-96- Comp. App. (AT) (Ins.) No. 1287 & 1291 of 2022 -97- Comp. App. (AT) (Ins.) No. 1287 & 1291 of 2022 -98- Comp. App. (AT) (Ins.) No. 1287 & 1291 of 2022 -99- Comp. App. (AT) (Ins.) No. 1287 & 1291 of 2022

➢ We note that Member (Technical) of Ahmedabad Bench has held that

Recall Notice dated 17.01.2018 was not valid as Respondent No. 2 was in

management control of the Respondent No. 1.

➢ We would like to take into all relevant para of Member (Technical)

judgement which reads as under :-

"22. ... Now, coming to the validity of recall notice dated 17.01.2018 given by the lender when they were in the management and control of the Corporate Debtor. It is noted that Rs.600 crores additional loan was sanctioned in April, 2017. However, only Rs. 384 crores were disbursed till 05.01.2018 and no further amount is disbursed thereafter....

23. Another important aspect which, at the very outset, may make the notice of recall dated 17.01.2018 premature as far as it concerns to the repayment of existing debts including the additional loan amount disbursed under loan agreement dated 27.04.2017. As per Clause 5.1.1.(B)(a) r.w. Schedule-

V, Schedule- X-A, Schedule-X-B (refer pages 709, 710, 741 and 750 of Volume-III of application), the repayment starts from 15.07.2020 and 15.01.2020. Further, there is reschedulement of all existing outstanding debts of the applicant-financial creditor in addition to fresh loans given in 2017. ...

-100-

Comp. App. (AT) (Ins.) No. 1287 & 1291 of 2022

Hence, on date of issue of recall notice, such debts are not payable at all and, therefore, the application filed for the so-called default is premature. Further, as far as interest during construction period is concerned, it has also been observed that it was to be paid out of loan amount disbursed by the applicant-financial creditor only and which was in the hands of the applicant-financial creditor and, therefore, the loan recall notice to this extent is illegal, malafide and impossible to perform as there is no source of funds available with the corporate debtor to repay the same other than the loan being disbursed or to be disbursed by the applicant-financial creditor for this purpose.

(Emphasis Supplied)

➢ We would like to take into all relevant para of judgment passed by

Member (Judicial) vide order dated 27.09.2022 in NCLT, Kolkata Bench

which reads as under :-

"Analysis and Findings:

II. Whether, notice dated 17.01.2018 recalling the loan is bad in law?

70. While adverting to answer the question/issue no. (II) as referred above, it is relevant to refer to the three reply affidavits filed by the Corporate Debtor:...

74. A clear picture that emerges from the above position on record is concluded as under.

-101- Comp. App. (AT) (Ins.) No. 1287 & 1291 of 2022

i. First reply by the Corporate Debtor dated 13.04.2018 was filed on 16.04.2018.

ii. Second reply affidavit was filed on 15.04.2019.

iii. Third reply affidavit by the Corporate Debtor was filed on 28.02.2020.

iv. The time gap between each of these reply affidavits is around between 8 to 12 months. Therefore, it was after a huge gap of 22 months from the date of filing the first affidavit, Corporate Debtor has come up with a completely new plea in the third reply that the first and second reply affidavits were filed in collusion and without any decision by the Board of Directors. It is stated in third reply affidavit that the Company Secretary who filed the 1st affidavit was acting at the behest of the applicant and the 2nd affidavit was filed by the managing director and the CEO and not the director as contended by the Corporate Debtor in 3rd affidavit. This is clear from minutes of 156 meeting placed on record along with the 2nd affidavit which has been reproduced above.

v. Corporate Debtor in its 3rd reply affidavit has wrongly described Mr. P.C Pankaj as the Director who was not only the managing director but also the CEO of the Corporate Debtor.

vi. On 27 September, 2018 the Corporate Debtor was merely asked to file a better affidavit by the Adjudicating Authority and in compliance of the said direction, the 2nd -102- Comp. App. (AT) (Ins.) No. 1287 & 1291 of 2022

affidavit was filed on 11th of April, 2019 on behalf of the Corporate Debtor, extract of contents has been reproduced above.

78. Besides the clear admission by Corporate Debtor of its debt and dues and also its inability to repay, as referred in preceding paragraphs/ record and documents furnished before this AA:

a. Plea raised by Financial Creditor vis-a-vis Additional loan agreement dated 27.04.2017 that;

i. In order to meet the immediate fund requirements as part of revival measure of the Project, the Financial Creditor in principle agreed to the increase in the Project cost from Rs. 2760,00,00,000/- to Rs. 8121,00,00,000/- and requirement of additional debt of Rs. 3022,00,00,000/- ('Additional Debt") for the Project. Subsequently, at the request of the Corporate Debtor, a Loan Agreement dated 27.04.2017 was executed between the Financial Creditor and the Corporate Debtor ('Additional Loan Agreement') for an additional term loan of Rs. 600 crores in order to meet the immediate fund requirements as a part of revival measure of the Project.

ii. Pursuant to the said Additional Loan Agreement, the Financial Creditor had disbursed an amount of Rs. 384,59,00,000. The said Additional Loan Agreement was entered into by the Financial Creditor in the capacity of Lender's Agent, Security Agent and Lender.

-103- Comp. App. (AT) (Ins.) No. 1287 & 1291 of 2022

iii. The aforesaid loan was supported by the Promoter Sh. Mukul Kasliwal in the board meeting dated 02.03.2017, as recorded in the minutes of meeting as under, wherein it is recorded that "Shri Mukul Kasliwal specifically requested the Board to record that, the sanctioning of additional loan to complete the project is a welcome step apart from all the issues and concerns going on between the Lenders and Promoters and Lenders will receive support from the promoters as well in view to complete the project.

iv. Entegra is thus estopped from questioning the said Loan Agreement and any argument to the contrary is hit by doctrine of approbate and reprobate.

v. Schedule II of the Additional Loan Agreement dated 27.04.2017 acknowledges the already existing debt of Rs.

1750.93 crore including the aforesaid amount due to the Financial Creditor (Pg. No. 736/758). Further, the Recitals to the Loan Agreement (Pg. Nos. 685/707) also acknowledge the previous liabilities of the Corporate Debtor; when seen and examined on the basis of record referred therein is found to be correct.

79. Debt was also acknowledged in the Annual Report/Balance Sheet of the Corporate Debtor for the FY 2013-14 signed by Sh. Mukul Kasliwal (Promoter) as one of Directors of the Corporate Debtor on 17.11.2014. The Annual Report was filed with the RoC & is part of public record. The Annual Report is also filed by Entegra Ltd. as Annexure-QQ with CP No. 175/2017.

-104-

Comp. App. (AT) (Ins.) No. 1287 & 1291 of 2022

80. Debt is again acknowledged in the Balance Sheet of the Corporate Debtor for FY 2016-17 signed on 28.08.2017.

81. The Corporate Debtor again acknowledged its liability/debt in the meeting of the Board of Directors of the Corporate Debtor held on 29.09.2015 duly attended by the Promoter Sh. Mukul Kasliwal.

82. Reliance has been placed on behalf of Corporate Debtor to the judgement in case of Vidarbha (supra.) but it is clear that the Corporate Debtor is not in a position to repay its debt and hence, the Corporate Debtor's reliance on Vidarbha (supra.) is totally misplaced.

83. Suffice it to say for the foregoing reasons, it is held in response to Point number (II), the Financial Creditor was well within its right to issue a recall notice dated 17.01.2018 demanding the Corporate Debtor to make payment of the total outstanding amount of Rs. 2139.20 crores including outstanding interest amounts payable as on 16.01.2018 within 15 (fifteen) days of the receipt of the said notice.

(Emphasis Supplied)

➢ From above, it is seen that the Member (Technical) of Ahmedabad Bench

has basically tried to analyse overall eco-system of the case and recorded

in his rational requiring of another chance was to be given to the

Respondent No. 1 and also holding that the Respondent No. 2 was in

control and management of the Respondent No. 1 and as such Recall -105- Comp. App. (AT) (Ins.) No. 1287 & 1291 of 2022

Notice was malicious and fabricated with only intent to take Respondent

No. 1 into insolvency.

➢ The Member (Technical) has not analysed as how recall notice dated

17.08.2018 was bad in law and how it was in violation of the Code or the

Regulations. On the other hand the Member (Judicial) of Kolkata vide

the Impugned Order dated 27.09.2022 has analysed in details the various

aspects of debt and default and has also gone into the various replies and

affidavits filed by the Respondent No. 1, various admission of debt, due

and inability to pay by the Respondent No. 1 recorded by the

Adjudicating Authority himself and finally the various acknowledgments

of debts in their Annual Report/ Balance Sheets which have also been

filed before ROC and are in public record especially for the year 2013-14

and 2016-17.

➢ The Member (Judicial) has also recorded Vidarbha Judgment is not

applicable in the present facts of the case.

➢ We note that the ingredients Section 7 of the Code does not prescribe any

formal demand notice to be issued by the financial creditors to the

Respondent No. 1 in contrast to Section 8, where it is mandatory on the

part of any operational creditor to issue demand notice to the Corporate

Debtor. However, the commercial practice and also for the principal of

natural justice, the financial creditors and the bankers issue loan recall -106- Comp. App. (AT) (Ins.) No. 1287 & 1291 of 2022

notice whereby they give all the details and also certain time line within

which the loan and interest along with other charges, if any, are recalled

by the bankers and the Corporate Debtor is called upon to repay. In the

present case, the Respondent No. 2 issued loan recall notice on

17.01.2018, which we have already noted earlier and highlighted the

significant portion.

➢ From this loan recall notice dated 17.01.2018, it becomes clear that the

Respondent No. 2 reminded Respondent No. 1 of his continuous failure to

service of financial facilities and based on which the account of the

Respondent No. 1 was declared as NPA as on 31.03.2012.

➢ This recall notice dated 17.01.2018 also mentioned about earlier recall

notice dated 05.01.2016 demanding payment of Rs. 1817 Crores as

outstanding amount as on 31.12.2015 along with additional payment of

Rs. 342.68 Crores towards ZCB.

➢ We also note that the recall notice has mentioned the event which

required Lenders to revoke pledged shares and convert partial subordinate

loan into equity and acquiring 51% stake in shareholding of Respondent

No. 1 by all Lenders collectively.

➢ The Recall notice dated 17.01.2018 categorically stipulated that the

project cost has seen abnormal increase to Rs. 8121 Crores and their

sanction of additional loan of Rs. 600 Crores and also mentioned facts -107- Comp. App. (AT) (Ins.) No. 1287 & 1291 of 2022

about their disbursement of 381.59 Crores till 02.01.2018 out of this

additional loan agreement of Rs. 600 Crores. We note that the Respondent

No. 2 specifically pointed out that despite partial disbursement of

Rs. 381.59 Crores, the Respondent No. 1 could not comply with

mandatory conditions precedent and failed to make quarterly interest on

additional loan from time to time being on 15.07.2017, failed further to

pay despite demand letter dated 06.07.2017, 01.10.2017, 05.01.2018

which has resulted in default in payment of interest and additional facility

as an event of default under Clause 17.1 (b) of additional loan agreement

and further defaulted under Clause 7.1 (c) by no repaying the credit

facilities granted under financing agreement. After summarising the

events, the Respondent No. 2 called upon Respondent No. 1 to make

payment of total outstanding of Rs. 2139.20 Crores within 15 days of

receipt of recall notice dated 17.01.2018 and on failure of which the

Respondent No. 2 would take necessary legal recourse.

➢ We do not find anything illegal or contrary to the law in issuing such

recall notice which is issued of details including of failures on the part of

Respondent No. 1 and contained details required proof of debt and default

along with various acknowledgements by the Promoters and the

Respondent No. 1.

➢ Thus, we hold that the Recall Notice dated 17.01.2018 was valid. -108-

Comp. App. (AT) (Ins.) No. 1287 & 1291 of 2022

➢ We have already noticed the details of additional loan agreement dated

27.04.2017 along with the reason for lenders to agree to such additional

loan and we do not wish to repeat the same. We hold that the additional

loan agreement dated 27.04.2017 was a genuine intent of Respondent No.

2 to help the Respondent No. 1 to survive and sustain and by no way it

can be treated as fabricated or forced upon the Respondent No. 1. We

note that this additional loan agreement was supported by Promoters of

the Respondent No. 1 Mukul Kasliwal in the board meeting dated

02.03.2017, as recorded in the minutes of meeting that "Shri Mukul

Kasliwal specifically requested the Board to record that, the sanctioning

of additional loan to complete the project is a welcome step apart from all

the issues and concerns going on between the Lenders and Promoters and

Lenders will receive support from the promoters as well in view to

complete the project".

➢ Thus, this issue goes in favour of the Respondent No. 2.

122. Issue (IV) Whether, Section 241 and 242 Companies Act, 2013

application filed by the Appellant who got reliefs from NCLT/ NCLAT and

the Hon'ble Supreme Court of India has any bearing on present Section 7

application.

➢ As regard, Section 241 & 242 of the Companies Act, 2013 and the

decision of the NCLT, this Appellate Tribunal and the Hon'ble Supreme -109- Comp. App. (AT) (Ins.) No. 1287 & 1291 of 2022

Court of India, which we have discussed earlier, we find that this was

done w.r.t. invocation of pledged shares and partial conversion of debt

into equity which was done in particular facts and circumstances of the

case. We also find that this Appellate Tribunal while dismissing the

appeal of the Respondent No. 2, held that the process was invalid due to

non following the procedure as laid down in the Companies Act, 2013.

➢ At this juncture, we would like to take into account the fact that this

Appellate Tribunal has categorically recorded about lack of enthusiasm

on the part of Promoters to take the project forward and even the

amendment back to AoA would have been restored, there was no

possibility on the part of the promoters to complete the project. We note

that this Appellate Tribunal has given direction to GoI and GoMP to find

way forward and HLC was constituted giving three scenarios noted

earlier.

➢ We have already noted that Scenario I failed due to non infusion of

Rs. 600 Crores as equity by the Promoters and non infusion of Rs. 1100

Cr as additional funds by Promoters. The Scenario II of HLC, happened

in the present case envisaged that government undertaking shall take over

the majority equity holding in the Respondent No. 1 and accordingly the

Lenders of Respondent No. 1, including the Respondent No. 2 had to

invoke the pledged shares and also convert the partial subordinate loan -110- Comp. App. (AT) (Ins.) No. 1287 & 1291 of 2022

into equity. These invocation were held not in accordance with law and

nowhere judicial fora held that the Respondent No. 2 do not have any

right to initiate Section 7 application under the Code. Incidentally, we

note that the GoMP has filed the affidavit before the Adjudicating

Authority that they do not find any hope for the project and only logical

course of action could be resolution of the Corporate Debtor i.e.

Respondent No. 1.

➢ In view of above, we do not find that Section 241 & 242 application

which came in favour of the Appellant has any adverse bearing under

Section 7 application filed by the Respondent No. 2 and consequently in

the present appeal.

123. In view of above detailed discussion, we find that the Adjudicating

Authority i.e., both Member (Judicial) of Ahmedabad and Kolkata Bench have

correctly passed the Impugned Order admitting Section 7 application of the

Respondent No. 2 and ordering initiation of the CIRP against the Respondent

No. 1. We are not satisfied with the rational contained in the judgment of

Member (Technical) of Ahmedabad Bench and do not agree to his finding in

rejecting Section 7 application of the Respondent No. 2. -111-

Comp. App. (AT) (Ins.) No. 1287 & 1291 of 2022

124. In fine the appeal devoid of any merit, fails and stands rejected. No cost.

IA, if any, are closed.

[Justice Rakesh Kumar Jain] Member (Judicial)

[Mr. Barun Mitra] Member (Technical)

[Mr. Naresh Salecha] Member (Technical) Sim