Idbi Bank Limited vs Resolution Professional Of Odisha ...

Company Appeal (AT) (Ins) No. 1528 of 2019 (Under Section 61 of Insolvency & Bankruptcy Code, 2016) (Against the Order dated 29.11.2019 in IA No. 98/CTB/2019 in TP No.41 of 2019 Arising out of CP (IB) No.352/KB/2018 passed by the 'Adjudicating Authority', National Company Law Tribunal, Cuttack Bench)

IN THE MATTER OF:

IDBI Bank Ltd. Having its Registered Office at IDBI Towers, World Trade Centre Appellant Cuff Parade, Colaba Mumbai - 400005 Vs.

1. Resolution Professional of ....Respondent No.1 M/s. Odisha Slurry Pipe Line Infrastructure Limited Having his office at House No.119, Ward No.11, Badahal Road, NH-6 behind Indian Bank, Keonjhar, Odisha - 758 001 2. Srei Infrastructure Finance Ltd. ... Respondent No.2 Having its Registered address at Vishwakarma, 86C Topsia Road (south), Kolkotta - 700 046. Present:

For Appellant: Mr. Arijit Mazumdar, Mr. Shambo Nandy and Akanksha Kaushik, Advocates

1 Comp App (AT) (INS) No. 1528 of 2019 For Respondents: Mr. Ramji Srinivasan, Sr. Advocate with Mr. Deep Roy and Mr. Rony O John, Mr. Piyush Swami, Mr. Dhaval Savla, Mr. Arshdeep Singh, Advocates for R-1.

Mr. Arun Kathpalia, Sr. Advocate with Mr. Suommo Biswas, Ms. Prabh Simran Kaur, Mr. Parth Gokhale, Mr. Siddhant Kant, Advocates for R-2 (CoC). Ms. Shrishti Agnihotri, RP

Mr. Neeraj K Kaul, Sr. Advocate with Mr. Vishal Gehrana, Mr. Naman Singh Bagga, Advocates for R-3.

JUDGMENT

(VIRTUAL MODE)

CA (AT) (INS) 1528 of 2019

Coram: Mr. Justice Jarat Kumar Jain Member (J) Mr. Kanthi Narahari Member (T)

Per: Kanthi Narahari Member (T) The present Appeal is filed against the order dated 29.11.2019 in IA/98/2019

in CP No.352 of 2018 passed by the Adjudicating Authority (NCLT, Cuttack Bench)

whereby the Adjudicating Authority dismissed the above IA filed by the Appellant.

Aggrieved by the same, the Appellant preferred the present Appeal.

Appellant's Submissions

1. Shri Arijit Mazumdar, Learned Counsel appeared for the Appellant

submitted the brief facts.

2. It is submitted that by the Impugned Order the Adjudicating Authority

upheld the decision of the Resolution Professional of the Corporate Debtor i.e.

2 Comp App (AT) (INS) No. 1528 of 2019 OSPIL to admit the 2nd Respondent herein as a Financial Creditor in the CIR Process

of Corporate Debtor.

3. It is submitted that in response to the public announcement the 2 nd

Respondent filed its claim purporting to be a Financial Creditor of the Corporate

Debtor on the basis of certain amounts allegedly advanced by the 2 nd Respondent to

the Corporate Debtor in terms of a Compulsory Convertible Loan Agreements dated

28.03.2015 and 20.06.2015 entered into between the 2 nd Respondent and the

Corporate Debtor. In terms of Clause 1.1 of the CCL Agreement, the term 'Investor'

is expressly defined to include the 2nd Respondent. As per the definition it is evident

that any amounts advanced by the identified investor under the CCL Agreements

would fall within the ambit of the term 'Equity Contributions'.

4. It is submitted that Schedule II (Estimated Project cost and financing

plan) of the CCL Agreement dated 28.03.2015 establishes that the amounts advanced

under the CCL Agreements in the form a Compulsorily Convertible Loan were

contemplated by the parties to be a part of the investor contribution by the investors

of the Corporate Debtor, which is treated to be separate from the debt to be extended

by the Lenders of Corporate Debtor in the form of term loans. Accordingly, the

moneys advanced by the 2nd Respondent to the Corporate Debtor shall be

compulsorily convertible into preference share capital of the Corporate Debtor on and

from the convertible due date as provided under the terms of CCL Agreement. The

said conversion period commences from the 5th year after the 1st drawdown of the

3 Comp App (AT) (INS) No. 1528 of 2019 compulsorily convertible facility by the Corporate Debtor and lasts till the end of its

tenure of 20 years.

5. The 2nd Respondent itself admitted that the arrangement under the CCL

Agreements to be in the nature of an equity investment in a firm Affidavit filed

before the Learned Senior Civil Judge, Senior Division Sealdah in title suit No.177 of

2016 filed by the 2nd Respondent in respect of the title of the Pipeline Asset.

6. It is submitted that in view of the above fact, three Lenders of the

Corporate Debtor namely the Appellant, State Bank of India and ICICI Bank Ltd.

addressed a letter dated 08.06.2019 to the Resolution Professional seeking to

highlight certain transactions entered into by the Corporate Debtor which would have

a bearing on the ongoing CIR Process including the transaction entered into between

the Corporate Debtor and the 2nd Respondent by way of the CCL Agreements.

7. The RP informed the COC Members that the 2nd Respondent filed a

claim for an amount of Rs.549,76,00,000/- and that the same was under review.

8. It is submitted that the members of the COC obtained 3 rd Party legal

opinion into the aspect whether the claim filed by the 2 nd Respondent can be

classified as a Financial Debt, according to the opinion the 2nd Respondent claim

cannot be classified as a Financial Debt and the said third party legal opinion was

shared with the Resolution Professional vide email dated 09.07.2019.

9. It is stated that the Resolution Professional admitted the claim of the 2nd

Respondent as a Financial Debt in terms of section 5(8) of the Code, on the basis of a

4 Comp App (AT) (INS) No. 1528 of 2019 review of documents made available to him and the legal advice procured by him

including a third-party legal opinion obtained by him. Further, the Resolution

Professional informed that he had classified the 2nd Respondent as a related party of

the Corporate Debtor. However, the members of COC expressed their severe

reservations with the decision taken by the Resolution Professional on admitting the

purported claim filed by the 2nd Respondent and requested the Resolution

Professional to provide with a copy of 3rd party legal opinion.

10. It is submitted that against the decision of the Resolution Professional

the Appellant was constrained to file the Company application before the Learned

Adjudicating authority and the Learned Adjudicating Authority was pleased to

dismiss the said Application vide the Impugned Judgment dated 29.11.2019.

11. The Learned Counsel further submitted that whether the amount

advanced by the 2nd Respondent to the Corporate Debtor under the CCL Constitute a

debt in terms of Section 3(11) of the Code. Further the amounts advanced by the 2 nd

Respondent to the Corporate Debtor under the CCL Agreements constitute a

Financial Debt in terms of Section 5(8) of the Code. In view of the aforesaid reasons,

the Learned Counsel prayed this bench to set side the Impugned Order of the Learned

Adjudicating Authority dated 29.11.2019 in CA 98 of 2019 in CP 352 of 2018 and

allow the Appeal as prayed for.

1ST RESPONDENT'S SUBMISSION:

12. The Learned Senior Counsel appearing for the 1st Respondent submitted

5 Comp App (AT) (INS) No. 1528 of 2019 that the 2nd Respondent's claim of Financial Debt owed to it by the Corporate Debtor

is premise on two loan Agreements i.e. Rs.136,50,00,000/- Loan Agreement-1 and

Rs.290,00,00,000/- Loan Agreement-2.

13. The Learned Counsel submitted that as per the Provisions of Section

5(7) 5(8) of the Code suggest that in case of any money advanced against payment of

interests or has the commercial effect of a borrowing, such moneys lent would

constitute a Financial Debt and the Creditor would be a Financial Creditor under the

Provisions of the Code. Accordingly, Loan-1 and Loan-2 are both interest bearing

and both have the commercial effect of a borrowing. The accounting treatment

provided by the borrower and lender are that of the borrowing transactions.

Therefore, the 2nd Respondent is a Financial Creditor of the Corporate Debtor. With

regard to the contention of the Appellant that the amount provided was intended to be

the equity contribution as an investor. In any event, as per the Loan Agreements the

loan extended by the 2nd Respondent were in the nature of a Financial Debt. As per

the Loan Agreement would be required to pay interest or the loans advanced as per

the Provisions of the Loan Agreement. Further, as per the clauses of the Loan

agreement the borrower shall pay interest to the lender i.e. the 2nd Respondent on the

loans outstanding from time to time and on all moneys due and payable under the

Agreement at the applicable rate of interest.

14. It is submitted that the loans also provided a right to 2 nd Respondent to

recall the same in case of an event of default. Accordingly, in accordance with the

6 Comp App (AT) (INS) No. 1528 of 2019 Loan Agreement the 2nd Respondent has recalled the loan.

15. It is submitted that the loans have all the facets of a Financial Debt. The

fact that there is interest payable by the Corporate Debtor to other Appellant clearly

indicates that there is a time value of money. Moreover, there are clauses which

clearly indicates that the amounts provided are payable and in fact, there are certain

mandatory requirements to repay the loan.

16. It is submitted that as per the Clauses of the Loan Agreement the

liability of the Corporate Debtor to make payment to the 2nd Respondent and that

repayment or conversion is at the action of the Borrower. It is also clarified that in

case a repayment notice is served the borrower has a right to repay the relevant

amount in quarterly instalments. It is a fact that the loans were disbursed to the

Corporate Debtor for interest and hence have time value for money. Further the loans

have also the commercial effect of borrowing accordingly the loans would be

categorized as financial debt under the Provisions of Section 5(8)(a) and 5(8)(f) of

the Code and the 2nd Respondent would be a Financial Creditor to the Corporate

Debtor.

17. In view of the reasons, the Appellant has not made out any case either on

facts or on law. Hence, the appeal may be dismissed.

2ND RESPONDENT'S SUBMISSIONS:

18. The Learned Senior Counsel appearing for the 2nd Respondent submitted

that it is an admitted fact that the 2nd Respondent entered into a Loan Agreement with

7 Comp App (AT) (INS) No. 1528 of 2019 the Corporate Debtor dated 28.03.2015 and a supplementary Loan Agreement dated

28.03.2015. Subsequently, a Right to Use agreement (RTU) dated 30.03.2015 was

entered into by and between the Corporate Debtor and Essar Steel. After execution of

the Agreements the 2nd Respondent disbursed an amount of Rs.136.50 Crore in

performance of the said Agreements in tranches as required by the Corporate Debtor.

Thereafter Corporate Debtor required further credit facilities and this Respondent

agreed to provide a further sum of Rs.290 crores on the basis of Loan Agreement

executed between this Respondent and the Corporate Debtor dated 20.06.2015.

Accordingly, this Respondent disbursed a sum of Rs.185.10 crores out of the

sanctioned sum of Rs.290 Crores. It is stated that under both the Agreements the

Corporate Debtor was required to serve the credit facilities and pay interest @ 12%

per annum. As a security to the loan availed by the Corporate Debtor, the Corporate

Debtor created several security/charges in favor of this Respondent.

19. It is evident from a mere perusal of the Loan Agreement dated

28.03.2015, it expressly stated to be a Loan agreement. In fact, the Corporate Debtor

was liable to pay interest on the loan availed by it which is evident from Clause 2.6 of

the loan agreement dated 28.03.2015. Further, as per clauses 2.6.1 and 2.6.2 of the

Loan Agreement dated 28.03.2015 it is evident that the borrower namely the CD was

to pay interest to this Respondent on the loan outstanding from time to time and all

moneys due and payable under the agreement at the applicable rate of interest. As per

clause 7.2 of the Loan Agreement upon occurrence of default this respondent entitled

8 Comp App (AT) (INS) No. 1528 of 2019 to recall the entire loan facilities.

20. It is submitted that this Respondent is a Financial Creditor of the

Corporate Debtor having extended the financial facilities/or loan to the Corporate

Debtor against payment of interest and for time value of money for which the debt in

question squarely falls under the definition of Financial Debt as per Section 5(8) of

the Code. Upon default being committed by the Corporate Debtor this Respondent

was constrained to issue notice on 09.01.2017. The Corporate Debtor has never

challenged the recall notice issued by this Respondent on any of the grounds

mentioned in the instant appeal.

21. It is submitted that this Respondent was a part of the Joint Lenders

Forum (JLF) so constituted in respect of Essar Steel India Ltd. where the loan to the

Corporate Debtor was discussed and the Appellant has never challenged the status of

this Respondent as lender Financial Creditor of the Corporate Debtor. Having not

challenged the status of this Respondent, the Appellant is estopped from contending

that this Respondent is not a Financial Creditor. Further the Appellant has always

admitted and acknowledged that this Respondent is a Financial Creditor. In fact, the

Appellant had voted in favor of the Resolution Plan which recognizes this respondent

as a Financial Creditor.

22. It is submitted that the Resolution Plan in respect of the Corporate

Debtor has been approved by the COC with 100% voting and in Resolution Plan this

Respondent is classified as a Financial Creditor and the Appellant has voted in favor

9 Comp App (AT) (INS) No. 1528 of 2019 of this Resolution Plan.

23. In view of the aforesaid reasons, the Appellant has not made out any

case and the appeal may be dismissed with exemplary costs.

ANALYSIS/APPRAISAL

24. Heard the Learned Counsel appeared for the respective parties, perused

the pleadings and documents filed in support of their case. After analyzing the

pleading the only issue need to be determined and addressed whether the 2nd

Respondent is a Financial Creditor or not.

25. Pursuant to the Corporate Insolvency Resolution Process of the OSPL,

the 2nd Respondent filed a claim before the IRP and the IRP admitted the claim and

treated the 2nd Respondent as Financial Creditor. The stand of the Appellant is that

the 2nd Respondent advanced the amounts to the Corporate Debtor (OSPIL) in terms

of Compulsorily Convertible Loan Agreements dated 28.03.2015 and 20.06.2015

entered between the 2nd Respondent and the Corporate Debtor (OSPIL). The

Appellant also contended that the IRP has not taken into account the fact that the

claim of the 2nd Respondent is not a Financial Debt and cannot be classified as a

Financial Debtor. It is an admitted fact that the appellant is one of the member of

COC. As stated supra the Resolution Professional of the Corporate Debtor admitted

the claim filed by the 2nd Respondent as a Financial Debt in terms of Section 5(8) of

the I&B Code 2016, on the basis of the documents made available to him.

10 Comp App (AT) (INS) No. 1528 of 2019

26. It is apt to mention that the IRP while classifying the 2nd Respondent as

Financial Creditor also treated the 2nd Respondent as related party. Aggrieved by the

same, the 2nd Respondent filed application before the Adjudicating Authority

challenging the said decision. However, the Learned Adjudicating Authority dealt the

issue with regard to the related party in the Application. The Plan has been approved

by the Learned Adjudicating Authority and the same was implemented.

27. While so, the Appellant filed an Application before the Adjudicating

Authority stating that the Resolution Professional has wrongly admitted the claim of

the 2nd Respondent as a Financial Debt and the Appellant sought to set aside the

claim admitted by the Resolution Professional. The Learned Adjudicating Authority

after due deliberation and considering the facts, dismissed the said Application.

28. Admittedly, the Corporate Debtor and the 2nd Respondent entered into a

Loan Agreement dated 28.03.2015 for purchase of 253 KMS of Operational Slurry

Pipeline developed by Essar Steel India Ltd. From the preamble of the Loan

Agreement it is evident that the OSPL is referred as Borrower and the 2nd Respondent

referred as Lender. Article 1 thereof defines definitions and interpretations. Article 2

refers to Agreement and Terms of Loans. As per Subclause 2.6 it refers to Interest

and 2.6.1 refers to Interest and Reset. Sub Clause 1 of 2.6.1 states as under:

"Interest with respect to Loan facility.

The Borrower shall pay interest to Srei, on the loans outstanding, from time to time, and on all monies due and payable under this Agreement, at the

11 Comp App (AT) (INS) No. 1528 of 2019 applicable interest rate (more particularly setout in Schedule III) for the interest period on each interest payment date, subject to tax deduction at source as per applicable laws. The first of such interest shall be paid on the first interest payment date falling after the initial drawdown. It is clarified that upon change of base rate, which is a floating rate, at any time, during the currency of the loan facility the applicable interest rate shall stand revised from the date of change of base rate"

29. Further Clause 2.7.2 of the Loan Agreement refers to voluntary

prepayment. It reads as under:

"Notwithstanding anything contained in the transaction documents, the borrower shall have the option to prepay the loan in full or in part, together with all interest, additional interests (if any), default interest (if any), other charges and moneys due and payable to SREI upto the date of such prepayment before final settlement date, by issuing a return notice of 7 business days. Such repayment may be made by any of the modes specified in this agreement. Further, Clause 2.7.3 also provides for mandatory prepayment."

30. We refer to Loan agreement dated 20.06.2015 entered between the

Corporate Debtor i.e. OSPIL and the 2nd Respondent. As per the loan agreement the

OSPIL referred to as the borrower and the 2nd Respondent refers to as the Lender.

From the perusal of classes of this Agreement the clauses of the Loan Agreement

dated 28.03.2015 is similar. However, we refer to the clauses of the Loan Agreement

dated 20.06.2015. Clause 2.6 refers to as interest. Clause 2.6.1 refers to Interest and

Reset.

12 Comp App (AT) (INS) No. 1528 of 2019 Sub Clause.1 Interest.

"The borrower shall pay interest to SREI on the loans at the applicable interest rate for the interest period on each interest payment date, subject to tax deduction at source as per applicable laws. The first of such interest shall be paid on the first interest payment date, falling after the initial Drawdown. It is clarified that upon change of base rate, which is a floating rate, at any time, during the currency of the Loan Facility, the applicable Interest Rate shall stand revised from the date of change of base rate."

31. Clause 2.6.2 provides for Additional Interest.

32. Further in both the Loan Agreement Clauses 2.7.2, it provides for

Voluntary Prepayment and Clauses 2.7.3 thereof provides for mandatory prepayment.

Clause 2.7.2 thereof states as under:

"Voluntary Prepayment.

'notwithstanding anything contained in the financing documents, the borrower shall have the option to prepay the loans, in full or in part, together with all interests, additional interests, Default Interests, other charges and moneys due and payable to SREI up to the date of such prepayment before the dates on which such payment/repayment falls due, by issuing a prior return notice of at least 7 business days to SREI specifying therein the proposed date of prepayment and the amount which the borrower proposes to prepay, without payment of any prepayment premium"

33. From the above Article/Clauses of the both the Loan Agreements it is

crystal clear that the Loan Agreements does have interest clause and voluntary

prepayment. Therefore, for all the purposes the debt advanced by the 2nd Respondent

13 Comp App (AT) (INS) No. 1528 of 2019 clearly attracts Financial Debt and the Creditor to be classified a Financial Creditor

under Section 5 (7) and 5(8) of the I&B Code, 2016.

34. Now we refer to the Provisions of Law. Section 5 sub section 7 defines

'Financial Creditor' means any person to whom a financial debt is owed and includes

a person to whom such debt has been legally assigned or transferred to.

Sub Section 8 of Section 5 defines

'Financial Debt' means a debt along with interest, if any, which is disbursed

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

(a) money borrowed against the payment of interest.

In terms of the Loan Agreements dated 28.03.2015 and 20.06.2015, the Corporate

Debtor (OSPIL) owed a Financial Debt to the 2nd Respondent. The said debt is a

Financial Debt in view of the above Provisions of Law for the reason that the money

borrowed by the Corporate Debtor from the 2 nd Respondent against the payment of

interest and both the Loan Agreements have interest bearing and commercial effect of

a borrowing. Admittedly, the payment of interest has been very well incorporated in

both the Loan Agreements and also provided for voluntary prepayment.

35. From a bare perusal of the Loan Agreements it is evident that the

arrangements made in the Loan Agreements does not restrict it to a mandatory

conversion but allows repayment at the option of borrower and prepayment and

mandatory payment after due notice, after issuing a return notice to the lender. In the

voluntary prepayment it is specifically stated that the option to prepay a loan in full

14 Comp App (AT) (INS) No. 1528 of 2019 or in part, together with all interests, additional interests if any, default interest if any,

other charges and moneys due and payable to the 2nd Respondent. Therefore, it is

aptly clear that the Loan Agreements have commercial effect of borrowing and the

classification of the 2nd Respondent as Financial Creditor and the Loan is a Financial

Debt absolutely in accordance with law and no interference is called for.

36. For the aforesaid reasons, there is no legal infirmity or illegality in the

order passed by the Adjudicating Authority. Viewed in that perspective, we are not

hesitant to hold that the Appeal is devoid of any merit and liable to be dismissed.

Accordingly, the Appeal is dismissed. However, no orders as to costs.

[Kanthi Narahari] [Justice Jarat Kumar Jain] Member (Technical) Member (Judicial)

18.01.2022 SE

15 Comp App (AT) (INS) No. 1528 of 2019