Jaiprakash Agarwal vs Alka Prakash Agarwal & Anr

[Arising out of order dated 03.02.2023 passed by the Adjudicating Authority, National Company Law Tribunal, Mumbai Bench-V, Mumbai in C.P. (IB) No. 196/MB/2021]

In the matter of:

Jaiprakash Agarwal Managing Director, (Powers of Board of Directors suspended) Bazargaon Paper & Pulp Mills Pvt. Ltd., Flat No. 702, Rachna Galaxy, Apartment, Opposite North Ambazari Road Shivaji Nagar, Nagpur- 440010. ...Appellant Versus

1. Alka Prakash Agarwal A-6, Ganga Sagar, 83 Canal Road, Ramdaspeth, Nagpur - 440010, Maharashtra ....Respondent No. 1

2. Bazargaon Paper & Pulp Mills Pvt. Ltd. Through the Interim Resolution Professional. Having registered office at : A-404, Twin Towers CHS Ltd., 2nd Cross Lane, Lokhandwala, Andheri (W), Mumbai - 400053, Maharashtra ....Respondent No. 2

Present :

For Appellant : Mr. Sameer Jain and Mr. Syed Fazl Askari, Advocates. For Respondents : Mr. Adarsh Rai, Advocate. Mr. Shivam Singh and Mr. Bharat Gupta, Advocates for R-2

Company Appeal (AT) (Insolvency) No. 292 of 2023 Page 1 of 16 JUDGMENT

(Hybrid Mode)

[Per: Barun Mitra, Member (Technical)]

The present appeal filed under Section 61 of Insolvency and Bankruptcy

Code 2016 ('IBC' in short) by the Appellant arises out of the Order dated

03.02.2023 (hereinafter referred to as 'Impugned Order') passed by the

Adjudicating Authority (National Company Law Tribunal, Mumbai Bench-V)

in C.P. (IB) No. 196/MB/2021. By the impugned order, the Adjudicating

Authority allowed the Section 7 application filed by M/s Alka Prakash Agarwal

and admitted the Bazargaon Paper & Pulp Mills Pvt. Ltd.-Corporate Debtor

into the rigours of Corporate Insolvency Resolution Process ('CIRP' in short).

Aggrieved by this impugned order, the suspended director of the Corporate

Debtor has preferred this appeal.

2. Making his submissions, the Learned Counsel for the Appellant

submitted that Bazargaon Paper & Pulp Mills Pvt. Ltd.-Corporate Debtor had

taken an unsecured loan from Ms. Alka Prakash Agarwal-Respondent No.1 of

Rs.70 lakhs based on an oral agreement which loan was repayable on

demand. The entire amount of Rs.70 lakhs was disbursed to the Corporate

Debtor in four tranches based on an oral understanding on varying rates of

interest from 15% to 18% p.a. of simple interest. It is further submitted that

during F.Y. 2010 to 2017, the Corporate Debtor had repaid a total amount of

Rs.1.16 cr to the Respondent No.1 which included Rs. 70 lakhs towards

principal amount and Rs.46 lakhs towards interest. In support of their

contention, it is submitted that the financial statements of Respondent No.1

Company Appeal (AT) (Insolvency) No. 292 of 2023 Page 2 of 16 as well as their Form-26AS shows that payment of Rs.46,04,548/- was

already made towards interest on which TDS was also duly deducted.

However, though the total amount was repaid, this has deliberately not been

disclosed before the Adjudicating Authority and hence the ex parte order of

the Adjudicating Authority admitting the Section 7 application of the

Respondent No. 1 suffers from grave infirmities.

3. On the quantum of interest which was chargeable on the unsecured

loan, it was contended that there was no written contract between the parties

regarding any agreed rate of interest. It has also been submitted that with a

view to cross the threshold of Rs.1 cr as provided under Section 4 of the IBC,

the claim has therefore been inflated by the Respondent No. 1 by applying

compounded interest of 24% p.a. by relying on fabricated and self-serving

ledgers and other documents. There is no written contract or any written

document between the two parties to establish that the interest was to be paid

compounded @ 24% p.a. The books of accounts of the Corporate Debtor which

has been relied upon by Respondent No.1 also shows that the loan amount

carried simple rate of interest and not compounded interest.

4. It was further asserted that the loan had been given by Respondent

No.1 on the basis of an oral agreement and that the said the loan was

repayable on demand. It was pointed out that following repayment of the

outstanding amount in June, 2017 by the Corporate Debtor, no demand was

thereafter raised by Respondent No.1 nor any notice for payment of any

Company Appeal (AT) (Insolvency) No. 292 of 2023 Page 3 of 16 outstanding amount was served upon the Corporate Debtor which clearly

shows that the loan and interest thereupon had already been paid.

5. Assailing the impugned order, it has been contended that the impugned

order has been wrongly premised on doctored claims put forth by the

Respondent No.1. Besides adding compounded interest to the principal

amount to cross the threshold limit of Rs.1 cr, it is also contended that

Respondent No.1 had filed the Section 7 application before the Adjudicating

Authority on the basis of forged documents. The balance confirmation

document contained the forged signature of the Appellant. Hence, a police

complaint had also been filed in this regard. However, since the Adjudicating

Authority did not take cognizance of the fact that the Section 7 application

was based on fabricated documents, the impugned order was therefore liable

to be set aside.

6. The Learned Counsel for the Appellant further submitted that the

Respondent No.1 placed a forged statement of reconciliation before the

Adjudicating Authority and obtained an ex-parte order from the Adjudicating

Authority bringing Corporate Debtor into the folds of CIRP. Reiterating that

the Respondent No.1 had never made any demand or sent any notice to the

Corporate Debtor seeking the outstanding amount before the passing of the

ex-parte order by the Adjudicating Authority, it was vehemently contended

that impugned order has been passed ex parte violating the principles of

natural justice in a summary manner without the essential element of the

proof of debt and default having been established. Despite there being a

genuine reason for non-appearance on behalf of the Appellant before the Company Appeal (AT) (Insolvency) No. 292 of 2023 Page 4 of 16 Adjudicating Authority due to demise of an immediate family member leading

to the closure of the office of the Corporate Debtor, this factum was overlooked

by the Adjudicating Authority while passing the impugned order.

7. Rebutting the contentions raised by the Appellant, it was submitted by

the Learned Counsel for the Respondent No.1 that the ground of violation of

natural justice raised by the Appellant is a farce. The Appellant was pretty

much aware of the ongoing Section 7 proceedings as these proceedings find

mention in the two Criminal Applications filed by them. Having wilfully

abstained from attending the proceedings before the Adjudicating Authority

while pursuing their related contemporaneous Criminal Applications, it does

not stand to reason that demise of one of their relative constituted sufficient

and rational basis for them not being able to effectively participate in the

proceedings before the Adjudicating Authority.

8. On the claim made by the Appellant that the Corporate Debtor had paid

a sum of Rs.1.16 cr, it is contended by the Respondent No.1 that this figure

does not tally with the bank statement placed by the Appellant. It has also

been contended that the very fact that the Appellant did not produce their

own ledger statement raises serious question marks on their transparency

and fairness. It was stoutly contended that the Corporate Debtor at no stage

denied that they had to make payments to the Respondent No.1 as is borne

out from the contents of the criminal applications as well as their statement

given by them to the Economic Crime Branch on 12.06.2021. Even the police

complaint lodged by the Appellant with regard to the balance confirmation

Company Appeal (AT) (Insolvency) No. 292 of 2023 Page 5 of 16 being forged and fabricated was only an eyewash as it was filed on 28.02.2023

being only one day prior to the filing of Section 7 application by the

Respondent No.1. It was further denied that 24% interest was not agreed

between the parties. Admitting that there was no written contract between the

two parties with regard to the quantum of interest payable, it was submitted

that Form-26AS of F.Y. 2015-16 clearly shows that the interest component

calculated was at 24% compound interest and this calculation was reported

to the Income-Tax Department by the Appellant himself. Hence the denial on

the part of the Appellant of debt and default is only to escape the liability to

repay the outstanding principal and interest amount which meets the

pecuniary limits set under the IBC.

9. The Learned Counsel for the Respondent No. 2-Resolution Professional

submitted that an I.A. No.5717 of 2023 has been filed by them to take on

record two agreements entered into by the Appellant. It was submitted that

one agreement was entered into by the Corporate Debtor with a sister-concern

to sell of its assets including sale of non-agricultural land and sale of plant

and machinery of the Corporate Debtor. It has also been submitted that by

another agreement, the Appellant has transferred to its sister-concern

Rs.98.34 lakhs which amounts to siphoning of the said amount. The RP has

submitted that this illegal transfer has been noticed and recorded in the first

meeting of the CoC.

10. We have duly considered the arguments advanced by the Learned

Counsel for both the parties and perused the records carefully. The short

Company Appeal (AT) (Insolvency) No. 292 of 2023 Page 6 of 16 point for our consideration was whether there was a debt and default by the

Corporate Debtor qua the Respondent No.1 and whether the default amount

crossed the prescribed threshold limit of Rs. 1 cr under Section 4 of IBC.

11. At the outset, it may be useful to examine the tenability of the

contention of the Appellant that the impugned order was set ex-parte against

them in violation of the principles of natural justice thereby causing great

prejudice to their interests. It goes without saying that real and effective

opportunity to hear is one of the critical quotients of the tenets of natural

justice. When we see the material on record, we find that the Appellant did

not appear before the Adjudicating Authority on multiple occasions, following

which the Adjudicating Authority had directed paper publication of the notice

so that the contesting party is put on notice. The notice was duly published

in two newspapers on 01.04.2022 but in spite of that, the Appellant failed to

remain present before the Adjudicating Authority until the matter was set ex-

parte and reserved for orders. In the given facts of the case, we are satisfied

that adequate notice was given to the Appellant to appear before the

Adjudicating Authority to present their case. The impugned order also took

notice of the non-participation of the Appellant in the proceedings before it,

which is as extracted hereunder:

"2. The Corporate Debtor has never appeared before this Bench. It is seen that no one appeared on behalf of the Corporate Debtor on 11.03.2022, 21.04.2022, 12.07.2022 and 14.12.2022. No reply has been filed to the Present Company Petition, although notice was validly served by the Petitioner on the Corporate Debtor on 24th August 2021 and 18th April 2022. Therefore, the Corporate Debtor was set ex-parte on 29.07.2022. Affidavits supporting the service of notice was placed before this Bench. The counsel for the

Company Appeal (AT) (Insolvency) No. 292 of 2023 Page 7 of 16 Petitioner brought the attention of this Bench to the paper publication carried out by the Petitioner in two local newspaper i.e. Free Press Journal (English newspaper) and Navshakti in (Marathi newspaper). Due to repeated non-appearance by the Corporate Debtor, the Corporate Debtor was set ex-parte."

12. The justification proffered now by the Appellant to explain their absence

is that there was a demise in the family. Even if we give the benefit of this

explanation to the Appellant, this ground cannot hold good for having been

absent on 18 occasions each time when the matter was fixed for appearance

and hearing. Furthermore, there is force in the contention of the Respondent

no. 1 that when the Corporate Debtor also had other Directors on the

Company, it is left unexplained why the others could not have pursued the

matter before the Adjudicating Authority. Thus, this story of demise of a close

relative to explain their absence from appearing before the Adjudicating

Authority at a time when the matter was listed for hearing on 18 occasions

lacks merit and is an eyewash which deserves scant regard. Moreover, it is

noteworthy that during the same period the Appellant was aggressively

pursuing the Criminal Applications nos. 585 of 2022 and 181 of 2023, in

which applications, the Appellant had contemporaneously acknowledged that

Section 7 application is pending before the Adjudicating Authority. In spite of

having full knowledge of the Section 7 application and yet not appearing

before the Adjudicating Authority cannot be lost sight of casually. This

recurrent absence clearly demonstrates that the Appellant was intentionally

not participating in the proceedings before the Adjudicating Authority. Under

such circumstances, it is difficult to grant any indulgence to the Appellant in

entertaining their complaint that there has been miscarriage of natural

Company Appeal (AT) (Insolvency) No. 292 of 2023 Page 8 of 16 justice. When the Appellant failed to participate in the proceedings before the

Adjudicating Authority despite reasonable opportunity having been afforded

to the Appellant, the impugned order cannot be said to have been vitiated on

grounds of violation of the principles of natural justice.

13. This brings us to the basic question of debt and default and at the

outset we would like to refer to the guiding principles propounded by the

Hon'ble Apex Court in the case of Innoventive Industries Limited v. ICICI

Bank (2018) 1 SCC 407 on admission or rejection of an application filed

under Section 7 of the IBC. It is well settled that under the ambit of Section 7

of the IBC, the Adjudicating Authority is to only determine whether a default

has occurred and whether the debt, which may still be disputed, was due and

remained unpaid. The moment the Adjudicating Authority is satisfied that a

default has occurred and the amount of default is more than the prescribed

amount under Section 4 of the IBC, the application is to be admitted unless

it is incomplete.

14. When we look at the impugned order, we find that the Adjudicating

Authority has admitted the Section 7 application after satisfying itself of the

presence of debt and default. The relevant excerpts of the impugned order are

as placed below:

"11. We have heard the Learned Counsel appearing for the Petitioner and perused the record. The Present Petition is filed under Section 7 of the Code, wherein the Petitioner contends that the Corporate Debtor had failed to repay the total debt amount of Rs. 1,17,76,398/-. On the basis of an Oral Agreement, the Petitioner had disbursed the loan amount of Rs. 70,00,000/- to the Corporate Debtor, in tranches, starting from 2010 to 2012, to be repayable on demand, at the interest rate varying from 15% to 24% per annum. Company Appeal (AT) (Insolvency) No. 292 of 2023 Page 9 of 16

12. The Petitioner further contended that the Corporate Debtor had admitted its liability by the last payment made by the Corporate Debtor on 13th June 2017 and also had acknowledged its debt vide the document annexed as "Confirmation of Accounts" dated 31st March 2018 which is duly signed by both the parties. Further, the Corporate debtor had also paid a part payment of principal amount, along with the interest, which is evident from the document annexed as "Working Of Default" to the Company Petition.

13. After hearing the submissions of the Learned Counsel appearing for the Financial Creditor and upon perusing the above documents relied by the Financial Creditor, this Bench is of the considered opinion that the "debt and default" in this case are proved beyond doubt. Since the Corporate Debtor remained ex-parte, the claim of the Financial Creditor remained unchallenged."

15. In arriving at its findings, we also notice that Adjudicating Authority

has taken note of the material on record/documents to satisfy itself about the

debt and default. The relevant para is extracted below as under :-

"3. The Petitioner has attached the following documents to demonstrate the existence of Debt:

i. The Ledger Statement of the Corporate Debtor for the period beginning from 1st April 2010 to 30th November 2020.

ii. Form 26AS which is Tax Statement under Section 203AA of the Income Tax Act, 1961 for the Financial Years 2008- 09 to 2019- 20 reflecting payments made by the Corporate Debtor towards the payment of the TDS amount on interest payment under section 194A of the Income Tax Act, 1961.

iii. Form 26AS for the Financial Year 2015-16 reflecting payments made by the Corporate Debtor towards the TDS amount deducted on interest payment.

iv. Copy of Bank Statement of the Petitioner for the period of 01st April 2011 to 30th November 2020.

v. Copy of Audited Financial Statement of Corporate Debtor for the Financial Year 2010-11, 2011-12, 2012-13, 2013- 14, 2014-15 and 2015-16.

Company Appeal (AT) (Insolvency) No. 292 of 2023 Page 10 of 16 vi. Copy of the Working for Debt Default.

vii. Copy of Ledger for loan, Unpaid TDS Ledger & the ledger account reflecting Interest Payment."

16. It is the case of the Appellant that in the absence of any financial

contract between the parties, it is not clear as to on which date the debt and

interest thereon had become due and payable. In support of their contention

that in the absence of a financial contract there is no proof of debt or default,

the Appellant has relied on the judgement of this Tribunal in Pawan Kumar

vs Utsav Securities Pvt. Ltd in CA(AT)(Ins)No. 251 of 2020. Further

reliance has been placed on the judgement of this Tribunal in Kalpesh

Dineshbhai Patel vs Krishna Paper Trading Co & Ors in CA(AT)(Ins)No.

410 of 2021 to assert that as there is no demand letter or notice,

consequently, it is not established by the Respondent No. 1 that any loan was

due and payable by the Appellant.

17. When we look at the facts of the present case, we notice that in para

7.5 at page 13 of Appeal Paper Book ('APB' in short) filed by the Appellant, it

has been unequivocally admitted by the Appellant-Corporate Debtor that in

the year 2010-11, on an oral agreement, a "friendly loan" of Rs.50 lakhs was

given by Respondent No.1 to the Corporate Debtor bearing an interest of 15%

p.a. It has also been admitted in the same paragraph that a further sum of

Rs.10 lakhs was borrowed in F.Y. 2011-12 and 2012-13 at the rate of 18%

simple interest. Thus, it is clear that admittedly a friendly loan had been taken

by the Corporate Debtor, which was repayable on demand, for which there

Company Appeal (AT) (Insolvency) No. 292 of 2023 Page 11 of 16 was no written contract between the parties and that the rate of interest was

varying.

18. We also notice that the Respondent No.1 has relied on the financial

statements of the Corporate Debtor till F.Y. 2015-16; Form 26AS Tax

Statements reflecting payments made by the Corporate Debtor towards TDS

amount on interest payment and a statement of reconciliation from F.Y. 2018

to evidence debt and default. It is also the case of the Respondent No.1 that

the Corporate Debtor on several occasions admitted its liability by reflecting

the name of the Respondent No.1- Financial Creditor under the head

"unsecured loan" from other parties in its audited financial statements till

31.03.2014 and in the balance confirmation statement for the financial year

ending 31.03.2018. These documents were also placed by the Respondent

No.1 before the Adjudicating Authority to establish debt and default.

19. On the Appellant's claim that the outstanding payments were cleared

in June 2017, it has been contested by the Respondent No.1 on the basis of

the ledger statement as on 31.03.2017, as emailed to the Appellant by the

Respondent No.1 on 16.08.2017, which showed that the closing balance was

Rs.51.81 lakhs as placed at page 449 of APB. There is no material placed on

record by the Appellant which shows that this ledger statement was

controverted at any stage. That the Appellant was required to make payments

to the Respondent No.1 has also not been denied as is clearly borne out from

the contents of the criminal applications as well as the statement given by

them to the Economic Crime Branch on 12.06.2021.

Company Appeal (AT) (Insolvency) No. 292 of 2023 Page 12 of 16

20. It has been disputed by the Appellant that there was no reconciliation

of an accounts between the two parties post 2017 and that the document

dated 31.03.2018 put forth by the Respondent no.1 is a forged document on

which a police complaint was lodged and therefore cannot be relied upon. Be

that as it may, we cannot side-step the plea raised by the Appellant that the

police complaint was lodged by the Appellant with regard to forged and

fabricated balance confirmation as late as on 28.02.2023 which was one day

prior to the filing of Section 7 application by the Respondent No.1. This gives

a semblance of credence to the allegation of the Respondent No.1 that the

police complaint was more in the nature of an after-thought. Further, there is

no material placed on record by the Appellant which shows that the police

investigation has reached any finality and keeping in view the summary

jurisdiction bestowed upon the Adjudicating Authority and this Tribunal, we

do not wish to delve any further on the forgery aspect of the balance

confirmation.

21. The bone of contention between the parties seem to also arise from the

fact that the levy of 24% compounded interest by the Respondent No.1 was

contested by the Appellant. When it is an admitted fact that the loan was

premised on an oral agreement and the rate of interest was varying, in the

absence of any contrary material being brought on record by the Appellant,

the contention of the Respondent No.1 that Form-26AS of F.Y. 2015-16 as

placed at page 168 of APB clearly shows that the interest component

mentioned therein is calculated at 24% compound interest and that this has

been reported to the Income Tax Department by the Appellant himself cannot

Company Appeal (AT) (Insolvency) No. 292 of 2023 Page 13 of 16 be discounted. Further it has been claimed that this interest rate tallies with

the interest rate of 24% p.a. as mentioned in the ledger at page 101 of APB

and page 38 of APB. Furthermore, once payment of interest had been shown

from the Corporate Debtor in Form 26AS and Form No. 26AS entries

correspond to the claim of financial debt, the said document becomes another

piece of evidence to prove that it was a financial debt.

22. At this stage it may be useful to note that the judgement of this Tribunal

in Pawan Kumar supra does not come to the aid of the Appellant in view of

the clear findings of this Tribunal in the case of Agarwal Polysacks Ltd. vs

K. K. Agro Foods & Storage in CA(AT)(Ins)No.1126 of 2022 wherein the

facts of the two cases have been distinguished and held that the judgement

of this Tribunal in Pawan Kumar supra was applicable only in the context

of a Non-Banking Financial Corporation. After going into Regulation 8(2) of

Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for

Corporate Persons) Regulations, 2016, and Rule 3(1)(d) and Rule 4(1)

of Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules,

2016 which regulates filing of application by the Financial Creditors, it has

been held in Agarwal Polysacks supra that written financial contract is not

a pre-condition or an exclusive requirement for proving existence of debt. It

has been further amplified that the Insolvency and Bankruptcy (Application

to Adjudicating Authority) Rules, 2016 and CIRP Regulations makes it is clear

that financial debt can be proved from other relevant documents and it is not

mandatory that written financial contract can be the only basis for proving

the financial debt. If disbursement of loan was with interest and repayment

Company Appeal (AT) (Insolvency) No. 292 of 2023 Page 14 of 16 was on demand, the two essential conditions of financial debt stand

established with regard to the time value of money. Since the loan had been

given on the basis of an oral agreement and was admittedly repayable on

demand, there was no need to issue any written notice on the Corporate

Debtor seeking repayment.

23. It is trite law that under the IBC once a debt which becomes due or

payable, in law and in fact, and if there is incidence of non-payment of the

said debt in full or even part thereof, CIRP may be triggered by the financial

creditor as long as the amount in default is above the threshold limit. Once

the Adjudicating Authority is subjectively satisfied that there is a debt and a

default has been committed by the Corporate Debtor and the Section 7

application is complete in all respects, the Adjudicating Authority in the

exercise of summary jurisdiction has to admit the Section 7 application.

24. In our considered view, on the question as to whether debt and default

was adequately demonstrated before the Adjudicating Authority, basis the

records made available before it, the Adjudicating Authority has rightly

concluded that it was satisfied with the evidence and material produced before

it by the Respondent no.1 to prove that a debt had arisen; that a default has

occurred and the default is above the threshold limit of Rs. 1 crore. This is a

case where all the pre-requisites for filing a Section 7 stood fulfilled and the

Adjudicating Authority cannot be held to have committed an error in

admitting the Corporate Debtor into CIRP for having defaulted in repaying a

financial debt which was above the threshold limit.

Company Appeal (AT) (Insolvency) No. 292 of 2023 Page 15 of 16

25. In result, we are of the view that the Adjudicating Authority did not

commit any error in admitting the Section 7 application and bringing

the Corporate Debtor into the fold of CIRP. The impugned order does not

warrant any interference. There is no merit in the Appeal. Appeal is dismissed.

The interim stay stands vacated and Resolution Professional may now

continue to proceed with the CIRP process in accordance with law. All I.A.s

are disposed of in the above terms. No order as to costs.

[Justice Ashok Bhushan] Chairperson

[Mr. Barun Mitra] Member (Technical)

Place: New Delhi Date: 02.07.2024 Harleen Kaur

Company Appeal (AT) (Insolvency) No. 292 of 2023 Page 16 of 16