Fortune Land Holdings Llp vs Spg Macrocosm Limited

NATIONAL COMPANY LAW APPELLATE TRIBUNAL PRINCIPAL BENCH: NEW DELHI Company Appeal (AT) (Insolvency) No. 621 of 2024 (Arising out of the Impugned Order dated 29 February, 2024 passed by the 'Adjudicating Authority' (National Company Law Tribunal, Indore Bench in C.P.(IB)/23/MP/2023]

IN THE MATTER OF: Fortune Land Holdings LLP Registered Address: No. 383, 9th Cross, 2nd Block R.T. Nagar, Bangalore Karnataka 560032 ...Appellant

Versus

SPG Macrocosm Limited Registered Address: 408, Anish Heritage, Flat No. 203, Indrapuri Colony Bhwarkuan, Indore Madhya Pradesh - 452001 ...Respondent

Present: For Appellant : Mr. Abhishek Naik, Ms. Gulafsha Kureshi, Advocates

For Respondent : Mr. Abhishek Arora, Mr. Abhishek Anand, Advocates for IRP.

JUDGMENT

(Hybrid Mode)

[Per: Arun Baroka, Member (Technical)] The present appeal is being filed under Section 61 of the Insolvency and

Bankruptcy Code (hereinafter referred to as 'IBC') against the order dated

29.02.2024 (hereinafter referred to as 'Impugned Order') passed by the Ld.

Adjudicating Authority, National Company Law Tribunal, Indore Bench

(hereinafter referred to as 'Ld. Adjudicating Authority') in C.P.

(IB)/23/MP/2023 whereby the Ld. Adjudicating Authority dismissed the

application filed on behalf of the Appellant/Financial Creditor under Section 7 of the IBC seeking initiation of Corporate Insolvency Resolution Process

(hereinafter referred to as 'CIRP') against the Respondent/Corporate Debtor.

Facts of the Case:

2. The present appeal is being filed under Section 61 of the IBC against

the Impugned Order passed by the Ld. Adjudicating Authority in C.P. (IB) No.

23 of 2023 whereby the Ld. Adjudicating Authority dismissed the application

filed on behalf of the Appellant under Section 7 of the IBC seeking initiation

of CIRP against the Corporate Debtor. The facts necessitating the filing of the

present appeal before this Hon'ble Tribunal are as follows:

Appellant's case:

3. In 2018, the respondent, SPG Macrocosm Limited, approached the

appellant, Fortune Land Holdings LLP, seeking a loan of Rs. 70,00,000/-

(Rupees Seventy Lakhs only).

4. On 01.10.2018, a Loan Agreement was executed between the parties

for the disbursal of the loan amount, repayable within 36 months with an

interest rate of 15% per annum. An Unsecured Demand Promissory Note was

also executed as security for the loan.

5. The loan amount was disbursed as follows:

Date Amount (in Rupees) Mode of Payment 09.10.2018 15,00,000/- R.T.G.S 09.10.2018 20,00,000/- R.T.G.S 10.01.2018 35,00,000/- R.T.G.S

6. An audit conducted by N.R. Panchal & Co. reflected the loan in the

respondent's balance sheet under 'Non-Current Liabilities', which remains

undisputed.

Company Appeal (AT) (Insolvency) No. 621 of 2024 2 of 13

7. Despite repeated demands starting from October 2021, the respondent

failed to repay the loan. Demand Notices were issued on 05.10.2021,

05.01.2022, 02.04.2022, 01.07.2022, and a legal demand notice on

31.12.2022, all of which were ignored by the respondent.

8. Consequently, the appellant filed an application under Section 7 of the

IBC (C.P. 23 of 2023) before the Adjudicating Authority for the initiation of

CIRP against the respondent.

9. Despite multiple hearings and submission of additional documents,

including the 'Record of Default' authenticated by NeSL, the Adjudicating

Authority dismissed the appellant's application on 29.02.2024.

10. The Adjudicating Authority Erred in dismissing the Application under

Section 7 of the IBC on following grounds:

10.1. Existence of Debt and Default:

The appellant provided substantial evidence demonstrating the existence of a

debt and the respondent's default. The loan was reflected in the respondent's

balance sheet, and the 'Record of Default' from NeSL was undisputed. Under

Section 7 of the IBC, the only requirement for admission of an application is

the existence of a debt and default, both of which were clearly established.

10.2. Compliance with Procedural Requirements:

The appellant complied with all procedural requirements, including filing the

information of default with the information utility, as directed by the Ld.

Adjudicating Authority. The authenticated records were submitted and

should have been duly considered.

Company Appeal (AT) (Insolvency) No. 621 of 2024 3 of 13 10.3. Misinterpretation of the Indian Stamp Act, 1899 - Sufficient Stamping

of Promissory Note:

The Adjudicating Authority incorrectly ruled that the Promissory Note was

insufficiently stamped under Schedule 1 Article 49 (b) of the Indian Stamp

Act, 1899. The appellant clarified in the additional affidavit that the

Promissory Note, being payable on demand, was sufficiently stamped as per

Clause 49 (iii) of the Stamp Act.

11. Irrelevance to the Determination of Debt and Default:

The primary focus under Section 7 of the IBC should be the establishment of

debt and default. Even if the stamping of the Promissory Note was in question,

it should not have overshadowed the clear evidence of debt and default

presented by the appellant.

12. Procedural Errors and Due Process Violations:

12.1. Failure to Consider Additional Evidence:

The Adjudicating Authority failed to adequately consider the additional

affidavit and the 'Record of Default' from NeSL. This oversight constitutes a

significant procedural error and a violation of the appellant's due process

rights.

12.2. Unjust Rejection of the Application:

The dismissal of the appellant's application without proper consideration of

all evidence and compliance with procedural requirements resulted in a

miscarriage of justice, adversely affecting the appellant's right to seek redress

under the IBC.

Company Appeal (AT) (Insolvency) No. 621 of 2024 4 of 13

13. For the foregoing reasons, the appellant respectfully requests that this

Appellate Tribunal set aside the Impugned Order dated 29.02.2024 passed

by the Adjudicating Authority and admit the application

Respondent's Brief

14. The respondent, SPG Macrocosm Limited submits in defense of the

Impugned Order dated 29.02.2024 passed by the National Company Law

Tribunal, Indore Bench, which correctly dismissed the appellant's application

under Section 7 of the Insolvency and Bankruptcy Code, 2016 seeking

initiation of the corporate insolvency resolution process against the

respondent.

15. The loan amount disbursed in the Loan Agreement dated 01.10.2018

is Rs. 70,00,000/- (Rupees Seventy Lakhs only). The principal loan amount

is not disputed; however, the interest levied at 15% per annum, amounting

to Rs. 44,62,500/- (Rupees Forty-Four Lakhs Sixty-Two Thousand Five

Hundred only), is questionable and denied in totality.

16. The petition is not maintainable as the interest component has been

added to the principal amount with mala fide intent to initiate CIRP. The

claimed amount of Rs. 1,14,62,500/- is misleading, and the actual disputed

loan amount remains Rs. 70,00,000/-.

17. The loan was intended for general corporate purposes and should be

treated as a business loan rather than a financial loan under Section 5(8) of

the IBC. This distinction is crucial in determining the applicability of CIRP

Company Appeal (AT) (Insolvency) No. 621 of 2024 5 of 13 under the IBC, as the nature of the loan affects the legal rights and obligations

of the parties involved. Therefore, the provisions of the IBC are not applicable.

18. The Appellant's inclusion of the interest amount of Rs. 44,62,500/- in

the total claim is unwarranted and intended to unjustly increase the amount

claimed under the CIRP. The principal loan amount of Rs. 70,00,000/- is

acknowledged, but the inflated claim due to the disputed interest lacks basis

and should be disregarded by this Appellate Tribunal. The interest of 15% per

annum is denied as it does not form part of the present purpose under the

application filed under Section 7 of IBC.

19. The Adjudicating Authority correctly observed that the Promissory Note

dated 01.10.2018 was insufficiently stamped under Schedule 1 Article 49(b)

of the Indian Stamp Act, 1899. This deficiency was highlighted in the

clarification sought on 12.10.2023.

20. The appellant failed to produce the original Promissory Note during

the proceedings, providing only a photocopy, which cannot be validated by

impounding. This is in accordance with the precedent set by the Hon'ble

Supreme Court in Hariom Agarwal vs. Prakash Chand Malviya (2008)

3 CTC 457, which states that an insufficiently stamped instrument cannot

be admitted as secondary evidence.

21. The Adjudicating Authority rightly concluded that if the original

instrument was produced, it could be impounded under Section 33 of the

Indian Stamp Act, 1899, with the necessary stamp duty and penalty to be

Company Appeal (AT) (Insolvency) No. 621 of 2024 6 of 13 collected under Section 35 and sent to the Collector as required under Section

38 of the Act. The appellant's failure to address this issue further undermines

their claim.

22. The Adjudicating Authority correctly applied the judgment in

Thenappa Chettiar vs. Andiyappa Chettiar (AIR 1971 MAD 290), which

clarifies that the duty paid on a Promissory Note "payable on demand" under

Schedule I Article 49(a)(iii) of the Indian Stamp Act, 1899, was insufficient in

this case. The issue was correctly identified as related to the Stamp Act, not

the IBC.

23. The Adjudicating Authority appropriately focused on the insufficiency

of the stamping on the Promissory Note rather than solely on the existence

of debt and default. This legal nuance is critical, as procedural and

evidentiary compliance is fundamental to the adjudication process.

24. For the foregoing reasons, the respondent respectfully requests that

this Appellate Tribunal uphold the Impugned Order dated 29.02.2024 passed

by the Ld. Adjudicating Authority, thereby dismissing the appellant's

application under Section 7 of the IBC.

Appraisal:

25. Heard both parties and perused all documents on record.

26. The main issue for Consideration is whether there exists a debt and

default as defined under Section 7 of the IBC in the instant case.

Company Appeal (AT) (Insolvency) No. 621 of 2024 7 of 13

27. Existence of Debt and Default: The primary requirement for admitting

an application under Section 7 of the IBC is the existence of a debt and

default. The Appellant has presented several documentary evidence like Loan

Agreement dated 01.10.2018, Unsecured Demand Promissory Note dated

01.10.2018, Independent Audit report by N.R. Panchal & Co and also record

of information utility authenticated by NeSL on 22.08.2023.

28. Loan Agreement dated 01.10.2018, which is a registered document, has

clear mention of the principal amount of Rs 70 Lakhs and also the interest

@15%. The relevant clauses are extracted herein:

29. This document also has a clause for a promissory note which is not

registered. The relevant clause is as follows:

Company Appeal (AT) (Insolvency) No. 621 of 2024 8 of 13 And the unsecured promissory note is as follows:

30. From the above material on record, it is evident that in October 2018,

a Loan Agreement dated 01.10.2018 was executed between the Appellant and

the Respondent for disbursal of loan of Rs. 70,00,000/- which was to be

repaid by the Respondent within a period of 36 months along with the

accumulated interest calculated at 15% per annum. Also, document reveals

that an Unsecured Demand Promissory Note dated 01.10.2018 was also

executed by the Respondent in favour of the Appellant as a security and the

same has been recorded in Clause 4 of the Loan Agreement.

31. The argument of the Respondent-CD that the loan amount of

Rs.70,00,000/- was for general Corporate purposes and was in nature of

Company Appeal (AT) (Insolvency) No. 621 of 2024 9 of 13 business loan and not a financial loan as explained under Section 5(8) of the

Code is not borne out from the facts and the loan agreement itself and cannot

be accepted.

32. Further we look into other evidence of the Independent Audit report by

N.R. Panchal & Co. in 2019. An independent audit of the

Respondent/Corporate Debtor was conducted by N.R. Panchal & Co.

(Chartered Accountants) and an Annual Report dated 28.06.2019 was

generated by N.R. Panchal & Co. The loan granted by the Appellant is reflected

in the balance sheet attached to the said report wherein a loan amount of Rs.

70,00,000/- granted by the Appellant is clearly mentioned under the heading

of 'Non-Current Liabilities'.

33. Now we further look into the other evidence of the information utility.

On enquiry by the Adjudicating Authority, the Appellant during the

proceedings submitted the record of financial information i.e., 'Form C', on

the portal of the information utility namely National E-Governance Services

Limited (NeSL) which was subsequently authenticated by NeSL on

22.08.2023 pursuant to which 'Form D' i.e., 'Record of Default' was issued to

the Appellant in respect of the default of debt owed by the

Respondent/Corporate Debtor.

34. The above-mentioned evidence presented by the Appellant, including

the balance sheet and the 'Record of Default', unequivocally establishes the

debt and default.

Company Appeal (AT) (Insolvency) No. 621 of 2024 10 of 13 Stamping of Promissory Note:

35. The Adjudicating Authority's focus on the stamping issue of the

unsecured promissory note, while relevant, should not overshadow the clear

evidence of debt and default. Its legal validity has been well settled by the

Hon'ble Apex court in its Judgement in Curative Petition (C) No. 44 of 2023

in Review Petition (C) No. 704 of 2021 in Civil Appeal No. 1599 of 2020 in

which seven judge bench acknowledges and adopts the revised legal stance

on the enforceability of unstamped arbitration agreements in the case "IN RE

INTERPLAY BETWEEN ARBITRATION AGREEMENTS UNDER THE

ARBITRATION AND CONCILIATION ACT 1996 AND THE INDIAN STAMP ACT

1899", the relevant portion is as follows:

"...

M. Conclusions

224. The conclusions reached in this judgment are summarised below:

a. Agreements which are not stamped or are inadequately stamped are inadmissible in evidence under Section 35 of the Stamp Act. Such agreements are not rendered void or void ab initio or unenforceable;

b. Non-stamping or inadequate stamping is a curable defect;

c. An objection as to stamping does not fall for determination under Sections 8 or 11 of the Arbitration Act. The concerned court must examine whether the arbitration agreement prima facie exists;

d. Any objections in relation to the stamping of the agreement fall within the ambit of the arbitral tribunal; and e. The decision in NN Global 2 (supra) and SMS Tea Estates (supra) are overruled. Paragraphs 22 and 29 of Garware Wall Ropes (supra) are overruled to that extent......"

Company Appeal (AT) (Insolvency) No. 621 of 2024 11 of 13

36. It has been clearly brought out in the above judgement of the Apex

Court that Agreements which are not stamped or are inadequately stamped

are inadmissible in evidence under Section 35 of the Stamp Act and such

agreements are not rendered void or void ab initio or unenforceable and

further Non-stamping or inadequate stamping is a curable defect and

therefore as claimed by the Appellant unstamped "confirmation and

undertaking" doesn't make the whole process illegal if this document is not

even relied upon as an evidence. In this backdrop we need not look into the

claim of the Appellant that the Promissory Note was sufficiently stamped

under Clause 49(iii) of the Indian Stamp Act, 1899. Even if there was an issue

with the stamping, it should not detract from the established debt and

default. The precedence set by the Hon'ble Apex Court suggests that minor

procedural lapses should not impede the substantive justice under IBC.

37. In this backdrop reliance by the Adjudicating Authority and also the

Respondent on the ratio laid down by the Hon'ble Supreme Court of India

in the case Hariom Agarwal vs Prakash Chand Malviya 2008(3) CTC 457

wherein it was held that a photocopy of an instrument that is not duly

stamped cannot be validated by impounding and cannot be admitted as

secondary evidence, instrument under Section 2(14) means only original and

does not include a copy thereof, loses its relevance, particularly when other

compelling material is on record to establish debt and default.

38. It is evident that, the debt and default are clearly established by the

material on record in the form of the Loan Agreement, the Audit Report and

Company Appeal (AT) (Insolvency) No. 621 of 2024 12 of 13 also Record of Default (Form D) from the Information Utility (NeSL) taken

together, as was examined in earlier part of the Appraisal.

Conclusion

39. For the reasons stated above, this Appellate Tribunal finds that the

Adjudicating Authority erred in dismissing the application under Section 7 of

the IBC. The existence of debt and default has been clearly established, and

the procedural requirements have been met by the Appellant. The issue of

stamping does not outweigh the substantive evidence of debt and default.

40. Order

o The appeal is allowed.

o The Impugned Order dated 29.02.2024 passed by the Adjudicating

Authority is set aside.

o The application filed by the Appellant under Section 7 of the IBC

deserves to be admitted.

o The matter be taken up within 10 days by the Adjudicating Authority

for initiating the CIRP as per the IBC provisions and to pass

consequential orders. Each party shall bear its own costs.

[Justice Ashok Bhushan] Chairperson

[Arun Baroka] Member (Technical) New Delhi 3rd July, 2024 pks

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