G. Sreevidhya vs Karismaa Foundations Pvt. Ltd

[Arising out of Order dated 23rd July, 2018 passed by the Adjudicating Authority (National Company Law Tribunal), Single Bench, Chennai in Company Petition No. CP/769/(IB)/2018]

IN THE MATTER OF:

G. Sreevidhya 26, Third Cross Street, R. A. Puram, Chennai - 600 028. ...Appellant Vs

M/s. Karismaa Foundations Pvt. Ltd. No. 340, First South Main Road, Kapaleeswarar Nagar, Neelangarai, Kancheepuram, Chennai - 600 115. ....Respondent

Present: For Appellant: Mr. A. Muraleedharan and Mr. Kamal Kishore, Advocates. For Respondent: Mr. Krishnendu Datta and Ms. Aakanksha Kaul, Advocates.

BANSI LAL BHAT, J.

The Appellant - 'G. Sreevidhya', claiming to be a 'financial creditor',

sought initiation of Corporate Insolvency Resolution Process qua the

Respondent - 'M/s Karismaa Foundations Pvt. Ltd.' (Corporate Debtor) for

default in discharging the financial debt by filing an application under -2-

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

to as 'I&B Code') before the Adjudicating Authority (National Company Law

Tribunal), Single Bench, Chennai. However, tables were turned on the

Appellant when in terms of the impugned order dated 23rd July, 2018 the

Adjudicating Authority rejected the prayer of Appellant after recording a

finding that the Appellant was an 'Operational Creditor' and there being an

existence of dispute on account of civil suits pending between the parties

initiation of Corporate Insolvency Resolution Process was not warranted.

Aggrieved thereof the Appellant has preferred the instant appeal assailing

the impugned order as being legally unsustainable.

2. The only question arising for consideration in this appeal relates to

the status of Appellant and initiation of Corporate Insolvency Resolution

Process at her instance.

3. A brief resume of the factual matrix for comprehending the real

controversy inter-se the parties is inevitable. The Appellant and the

Respondent entered into an agreement for construction of a residential

building on a turnkey basis at a cost of Rs.4 Crore. The Appellant

transferred a sum of Rs.1.5 Crore to the Respondent pursuant to the

aforesaid agreement executed on 10th November, 2014. This happened on

5th December, 2014. However, the Agreement could not be implemented.

The Respondent retained the money received from the Appellant as loan and

started paying interest thereon w.e.f. 5th December, 2014. Respondent is

stated to have issued balance confirmation on 1st April, 2015 in regard to

Company Appeal (AT) (Insolvency) No. 494 of 2018 -3-

Principal Amount together with interest accrued thereon for the financial

year 2014-15 after deducting tax at source though the same was not

remitted to Income Tax Department. According to Appellant, the

Respondent issued three cheques dated 13th March, 2015, 18th March, 2015

and 30th April, 2015 each valuing Rs.5 Lakhs, thereby repaying a sum of

Rs.15 Lakhs out of Rs.1.5 Crores and further issued a cheque dated 30th

June, 2015 for the balance loan amount of Rs.1.35 Crores. However, the

cheque bounced when presented on 22nd September, 2015 for encashment

at State Bank of Travancore, Taramani Branch, Chennai with endorsement

"exceeds arrangement" as reflected vide Memo dated 22nd September, 2015.

Subsequently, Respondent issued three cheques for Rs.25 Lakh each and

one cheque for Rs.50 Lakh favouring the Appellant, some of which were

antedated and others post dated. On presentation at the State Bank of

Travancore, Taramani Branch, Chennai these cheques were dishonored due

to "insufficient funds". According to Appellant, Respondent confirmed the

details of repayment of Principal Amount together with interest in

confirmation of accounts dated 6th July, 2016 covering the period ending

March, 2016. Respondent is stated to have paid interest on the outstanding

amount. However, subsequently Respondent committed default prompting

the Appellant to lodge a criminal complaint against Respondent for cheating

and breach of trust which led to registration of case under FIR No.

180/2016 with City Crime Branch, Chennai. However, the FIR was quashed

by the Hon'ble High Court of Madras on the petition of Respondent filed

under Section 482 of CrPC. This was followed by issuance of a demand

Company Appeal (AT) (Insolvency) No. 494 of 2018 -4-

notice by the Appellant to Respondent under wrong legal advice tendered by

her counsel wrongly treating the debt as 'operational debt'. Same was

replied to by the Respondent stating that it had filed a Civil Suit No. 3007 of

2018 pending adjudication before the Hon'ble High Court of Madras which

came to be returned to the Respondent for failure to pay court fee.

Subsequently, the Appellant filed Civil Suit No. 46 of 2018 against the

Respondent for recovery of money which is still pending before the Hon'ble

High Court of Madras. Since the Respondent had committed default in

discharge of financial debt in a sum of Rs.1.25 Crores, the Appellant was

within her rights to initiate Corporate Insolvency Resolution Process.

4. At the very outset, we may observe that the Adjudicating Authority

has given a short shrift to the matter and virtually failed to apply its mind to

determine that the nature of transaction inter-se the parties would embrace

the definition of 'Financial Debt'. The Adjudicating Authority, briefly referred

to the agreement dated 10th November, 2014 executed inter-se the parties

but without deliberating upon the facts and circumstances leading to

termination of the agreement and issuance of balance confirmation on 1st

April, 2015 by the Respondent as also the issuance of cheques to discharge

the liability, proceeded to hold that the claim of Appellant essentially falls

under the category of 'Operational Creditor' under Section 9 of I&B Code

with regard to which there was an existence of dispute. In arriving upon

such conclusion the Adjudicating Authority appears to have been influenced

by the observations of Hon'ble High Court of Madras which quashed the FIR

Company Appeal (AT) (Insolvency) No. 494 of 2018 -5-

filed by the Appellant alleging cheating and criminal breach of trust on the

part of Respondent, after holding that the dispute between the parties was

civil in nature and facts were required to be proved at the trial. The

Adjudicating Authority also appears to have been influenced by pendency of

cross civil suits between the parties before Hon'ble High Court of Madras.

This despite the fact that the Respondent had admitted the factum of

interest having been paid on the amount disbursed by Appellant to it to

implement the agreement.

5. We have heard the learned counsel for the parties and fathomed

through the depths of material on record.

6. Section 3(11) of I&B Code defines 'debt' as a liability or obligation in

respect of a claim which is due from any person and includes a 'financial

debt' and 'operational debt'. The term 'claim' defined under Section 3(6) of

the same Code means a right to payment in any of its manifestations

including right to remedy for breach of contract giving rise to a right to

payment. Section 5(7) of I&B Code defines the legal expression 'financial

creditor' as a person to whom a financial debt is owed which also includes

an assignee or a transferee. Section 5(8) of I&B Code defines the term

'financial debt' as a debt along with interest, if any, which is disbursed

against the consideration for the time value of money and includes the

money borrowed against the payment of interest, amounts raised under

credit facility, purchase facility, issue of bonds, notes, debentures, loan

stock or similar instrument, amount of liability in respect of any lease or

Company Appeal (AT) (Insolvency) No. 494 of 2018 -6-

hire purchase contract, receivables other than on non-recourse basis,

amount raised under any other transaction including forward sale or

purchase agreement having commercial effect of a borrowing, derivative

transactions in connection with protection against fluctuation in price,

counter indemnity obligations in respect of guarantee, indemnity, bond,

letter of credit or any instrument issued by a bank or financial institution

and the amount of any liability in respect of any guarantee or indemnity

with reference to the aforesaid transactions. This Appellate Tribunal, while

dealing with the interpretation of 'financial debt' in 'Shailesh Sangani Vs.

Joel Cardoso, Company Appeal (AT) (Insolvency) No. 616 of 2018

decided on 30th January, 2019' observed as under:-

6. A plain look at the definition of 'financial debt' brings it

to fore that the debt alongwith interest, if any, should have

been disbursed against the consideration for the time

value of money. Use of expression 'if any' as suffix to

'interest' leaves no room for doubt that the component of

interest is not a sine qua non for bringing the debt within

the fold of 'financial debt'. The amount disbursed as debt

against the consideration for time value of money may or

may not be interest bearing. What is material is that the

disbursement of debt should be against consideration for

the time value of money. Clauses (a) to (i) of Section 5(8)

embody the nature of transactions which are included in

Company Appeal (AT) (Insolvency) No. 494 of 2018 -7-

the definition of 'financial debt'. It includes money

borrowed against the payment of interest. Clause (f) of

Section 5(8) specifically deals with amount raised under

any other transaction having the commercial effect of a

borrowing which also includes a forward sale or purchase

agreement. It is manifestly clear that money advanced by

a Promoter, Director or a Shareholder of the Corporate

Debtor as a stakeholder to improve financial health of the

Company and boost its economic prospects, would have

the commercial effect of borrowing on the part of Corporate

Debtor notwithstanding the fact that no provision is made

for interest thereon. Due to fluctuations in market and the

risks to which it is exposed, a Company may at times feel

the heat of resource crunch and the stakeholders like

Promoter, Director or a Shareholder may, in order to protect

their legitimate interests be called upon to respond to the

crisis and in order to save the company they may infuse

funds without claiming interest. In such situation such

funds may be treated as long term borrowings. Once it is

so, it cannot be said that the debt has not been disbursed

against the consideration for the time value of the money.

The interests of such stakeholders cannot be said to be in

conflict with the interests of the Company. Enhancement

of assets, increase in production and the growth in profits,

Company Appeal (AT) (Insolvency) No. 494 of 2018 -8-

share value or equity enures to the benefit of such

stakeholders and that is the time value of the money

constituting the consideration for disbursement of such

amount raised as debt with obligation on the part of

Company to discharge the same. Viewed thus, it can be

said without any amount of contradiction that in such

cases the amount taken by the Company is in the nature

of a 'financial debt'.

7. Dwelling on the scope of provisions of Section 7 of I&B Code dealing

with triggering of Corporate Insolvency Resolution Process at the instance of

'Financial Creditors' and converging on the procedure regulating initiation of

such process, the Hon'ble Apex Court held in 'Swiss Ribbons Pvt. Ltd. &

Anr. Vs. Union of India & Ors.', Writ Petition (Civil) No. 99/2018 (2019

SCC OnLine SC 73) as follows:-

"36. A perusal of the definition of "financial creditor" and

"financial debt" makes it clear that a financial debt is a

debt together with interest, if any, which is disbursed

against the consideration for time value of money. It may

further be money that is borrowed or raised in any of the

manners prescribed in Section 5(8) or otherwise, as Section

5(8) is an inclusive definition. On the other hand, an

"operational debt" would include a claim in respect of the

provision of goods or services, including employment, or a

Company Appeal (AT) (Insolvency) No. 494 of 2018 -9-

debt in respect of payment of dues arising under any law

and payable to the Government or any local authority.

37. A financial creditor may trigger the Code either by

itself or jointly with other financial creditors or such

persons as may be notified by the Central Government

when a "default" occurs. The Explanation to Section 7(1)

also makes it clear that the Code may be triggered by such

persons in respect of a default made to any other financial

creditor of the corporate debtor, making it clear that once

triggered, the resolution process under the Code is a

collective proceeding in rem which seeks, in the first

instance, to rehabilitate the corporate debtor. Under

Section 7(4), the Adjudicating Authority shall, within the

prescribed period, ascertain the existence of a default on

the basis of evidence furnished by the financial creditor;

and under Section 7(5), the Adjudicating Authority has to

be satisfied that a default has occurred, when it may, by

order, admit the application, or dismiss the application if

such default has not occurred. On the other hand, under

Sections 8 and 9, an operational creditor may, on the

occurrence of a default, deliver a demand notice which

must then be replied to within the specified period. What is

important is that at this stage, if an application is filed

Company Appeal (AT) (Insolvency) No. 494 of 2018 -10-

before the Adjudicating Authority for initiating the

corporate insolvency resolution process, the corporate

debtor can prove that the debt is disputed. When the debt

is so disputed, such application would be rejected."

8. Adverting to the facts of the case in hand be it seen that initially

parties entered into an agreement of construction on 10th November, 2014 in

terms whereof the Respondent was to raise construction of a residential

building as per design provided by the Appellant for a turnkey price of

Rs.4 Crore. The Appellant was required to pay an advance of Rs.1.5 Crore

within a month with stipulation that the balance payment will be made in

equal instalments over the construction period, the agreed time frame for

completing the construction being 18 months from the date of approval.

What emerges from the stipulations in the agreement is that the

construction was to be raised at the site of Appellant at Koturpuram. The

factum of Appellant having paid the advance amount of Rs.1.5 Crore to the

account of Respondent on 4th December, 2014 has not been controverted by

the Respondent. It emerges from the material on record that the project had

been abandoned by the Appellant as the market conditions did not favour

going ahead with the proposed construction. She sought repayment in

regard to balance amount of Rs.1.35 Crores as according to her an amount

of Rs.15 Lakhs had been repaid in three instalments in March and April,

2015. It is further borne out from record that the Respondent initially

issued a cheque worth Rs.1.35 Crores dated 30th June, 2015 favouring the

Company Appeal (AT) (Insolvency) No. 494 of 2018 -11-

Appellant. Upon presentation of the Cheque at State Bank of Travancore the

same bounced due to lack of funds in the account of Respondent. This

happened twice. The Appellant felt cheated and served a legal notice dated

1st October, 2015 upon the Respondent before lodging an FIR alleging

cheating and criminal breach of trust, which ultimately came to be quashed

at the instance of Respondent by Hon'ble High Court of Madras in terms of

its order dated 20th November, 2017. It is further borne out by record that

the Respondent filed a Civil Suit before the Madras High Court wherein,

inter-alia the relief of declaration adjudging the bounced cheque as null and

void was sought by the Respondent. Appeal preferred by the Appellant

against order of Madras High Court came be dismissed by Hon'ble Supreme

Court in terms of order dated 22nd January, 2018. Admittedly, Appellant too

has filed a civil suit in regard to the same subject matter which is pending

adjudication before the Madras High Court. The nature of transaction and

debt has to be determined in the aforesaid context.

9. Agreement executed inter-se the parties on 10th November, 2014

envisaged construction of a residential building at the site of Appellant at

Koturpuram. The construction was to be raised by Respondent on the

design provided by the Appellant for a turnkey price of Rs.4 Crore. The

Appellant was under obligation to pay an advance of Rs.1.5 Crore within 30

days of the execution of the Agreement which admittedly she paid to

Respondent. Balance payment was to be made in equal instalments over the

construction period spread over 18 months from the date of approval.

Company Appeal (AT) (Insolvency) No. 494 of 2018 -12-

Admittedly, the project was abandoned by the Appellant due to market

considerations. This is clearly borne out from the statutory notice dated 1st

October, 2015 served by Appellant on the Respondent. The Appellant has

admitted receipt of Rs.15 Lakhs from Respondent while alleging that the

cheque issued by Respondent towards refund of the balance amount of

Rs.1.35 Crore was dishonoured when presented for encashment twice at the

State Bank of Travancore, Taramani Branch for lack of funds. Respondent,

while responding to the notice stated that an amount of Rs.25 Lakhs was

paid towards the interest @ 15% per annum while the debt was discharged

by issuing a cheque worth Rs.25 Lakhs and further three cheques totalling

to Rs.37,50,000/- in the name of one Mr. Ashok, styled as Appellant's

'stooge'. It further emanates from the reply of respondent to the notice of

Appellant that the Appellant was advised to hold back the cheque for

Rs.1.35 Crore being no longer valid on account of discharge of debt. It is

manifestly clear that the Respondent has not denied the transaction which

initially related to execution of a construction project for which the Appellant

had disbursed amount of Rs.1.5 Crores as advance money but on the project

becoming commercially unviable got transformed into a 'financial debt' and

was treated so. Payment of interest thereon, as admitted by the Respondent

is compatible with this proposition and speaks of no exception. The money

disbursed by the Appellant cannot be said to have been bestowed upon the

Respondent as largesse nor as alms. It was disbursed in pursuance of an

agreement in the nature of a financial transaction against consideration of

time value of money as the building raised in pursuance of such agreement

Company Appeal (AT) (Insolvency) No. 494 of 2018 -13-

would fetch fortunes for the Appellant. The project however fell through on

account of market considerations. If there were any doubt in the nature of

transaction, same got cleared as even according to Respondent interest was

paid on the advance money. Thus viewed, we find no impediment in holding

that the debt in question fell within the purview of 'financial debt' and the

Appellant's status was that of a 'financial creditor' and not an 'operational

creditor' as erroneously held by the Adjudicating Authority.

10. Once we hold that the Appellant was a 'financial creditor' qua the

Respondent - Corporate Debtor and the application under Section 7 being in

the prescribed format and not being defective was required to be admitted on

proof of default, we find that the Respondent has failed to discharge onus of

proof of discharge of debt. The plea raised that some cheques were delivered

to one Mr. Ashok, the so called 'stooge' of the Appellant in his name, when

she allegedly resorted to arm twisting using coercive methods for recovery of

outstanding dues is neither plausible nor has the same been substantiated

by record. That apart, the Respondent, subsequent to termination of

agreement, issued balance confirmation on 1st April, 2015 in regard to

Principal Amount and interest accrued thereon for the financial year, 2014-

15 after deducting tax at source which stares in its face. There is no

explanation for issuance of cheque worth Rs.1.35 Crore favouring the

Appellant which was dishonoured and led to lodging of FIR and filing of

cross suits. The dispute raised is neither relevant for triggering of Corporate

Insolvency Resolution Process under Section 7 of I&B Code nor does the

same relate to the issue of insolvency resolution. Given the mandate of

Company Appeal (AT) (Insolvency) No. 494 of 2018 -14- Section 238 of I&B Code, pendency of cross suits inter-se the parties

regarding the claim and the bounced cheque is no bar to initiation of

Corporate Insolvency Resolution Process at the instance of Appellant -

'Financial Creditor'.

11. In view of the foregoing discussion, the impugned order holding the

Appellant as 'operational creditor' and declining to initiate Insolvency

Resolution Process on account of pre-existence of dispute is unsustainable.

The findings recorded by the Adjudicating Authority are erroneous and

cannot be supported. We accordingly allow the appeal and set aside the

impugned order. The Adjudicating Authority is directed to admit the

application of Appellant - 'Financial Creditor' under Section 7 of I&B Code

after a limited notice to Respondent to enable it to settle the claim of the

Appellant, if it so chooses. There shall be no orders as to costs.

[Justice S. J. Mukhopadhaya] [Justice Bansi Lal Bhat] Chairperson Member (Judicial)

NEW DELHI

19th March, 2019

AM

Company Appeal (AT) (Insolvency) No. 494 of 2018