Kalpana Morakhia vs Edelweiss Asset Reconstruction ...

NATIONAL COMPANY LAW APPELLATE TRIBUNAL PRINCIPAL BENCH, NEW DELHI Company Appeal (AT) (Ins.) No. 531 of 2022 IN THE MATTER OF: KALPANA MORAKHIA SUSPENDED DIRECTOR OF SMAAASH ENTERTAINMENT PRIVATE LIMITED 6a2, PRITHVI APARTMENTS ALTAMOUNT ROAD, MUMBAI 400026 ...Appellant

Versus

EDELWEISS ASSET RECONSTRUCTION COMPANY LTD. HAVING OFFICE AT: - EDELWEISS HOUSE, OFF CST ROAD KALINA, MUMBAI- 400098 ... Respondent No. 1

BHRUGESH AMIN INTERIM RESOLUTION PROFESSIONAL OF SMAAASH ENTERTAINMENT PRIVATE LIMITED BDO RESTRUCTURING ADVISORY LLP BDO INDIA LLP LEVEL 9, THE RUBY NW WING, SENAPATI BHAPAT MARG DADAR (W), MUMBAI - 400028 ... Respondent No. 2

Present: For Appellant: Mr. Abhijeet Sinha, Mr. Abhirup Dasgupta, Mr. Ishaan Duggal, Ms. Bhawana Sharma, Mr. Kunal Godhwani, Ms. Jayshree Shukla Dasgupta, Advocates For Respondent: Mr. Krishnan Venugopal, Sr. Adv. with Mr. Rahul Dev, Ms. Ekta Bhasin, Ms. Aastha Trivedi, Advocates

JUDGMENT

Per: Justice Rakesh Kumar Jain:

This appeal is filed by a member of the suspended board of directors of

Smaaash Entertainment Pvt. Ltd. (Corporate Debtor) against the order dated

06.05.2022, passed by the Adjudicating Authority (National Company Law

Tribunal, Mumbai Bench III) in C.P. (IB) No. 935(MB)/2020 by which an

application filed under Section 7 of the Insolvency and Bankruptcy Code,

Company Appeal (AT) (Ins.) No. 531 of 2022 2

2016 (in short 'Code') read with Rule 4 of the Insolvency and Bankruptcy

(Application to Adjudicating Authority) Rules, 2016 (in short 'Rules') for

resolution of unresolved financial debt of Rs. 2,924,730,442/- by Edelweiss

Asset Reconstruction Company Ltd. (Respondent No. 1) as Financial Creditor,

in its capacity as trustee of EARC Trust SC 384 (Assignee of the rights of the

assignor ECL Finance Ltd.) vide assignment deed dated 28.06.2019, has been

admitted.

2. The facts in brief, extracted from the memorandum of appeal, are that

the Corporate Debtor i.e. Smaaash Entertainment Pvt. Ltd., engaged in

providing gaming arcade services and sporting entertainment services, issued

14.75% secured redeemable non-convertible debentures in September, 2017

to ECL Finance Ltd. at par with face value of Rs. 10 lakhs per debenture for

an aggregating amount of Rs. 280 Crores at a private placement basis in two

tranches. The first tranche was up to Rs. 258 Crores and the second tranche

was up to Rs. 22 Crores.

3. The debenture trust deed was executed between the Corporate Debtor

and Catalyst Trusteeship Limited on 17.08.2017 (amended by first

supplemental dated 15.01.2018).

4. Sam Family Trust and AHA Holdings Pvt. Ltd. executed security

documents in favour of Catalyst Trusteeship Limited and created mortgage

over certain properties in favour of Catalyst Trusteeship Ltd. The Appellant

also created a mortgage over its certain properties in favour of Catalyst

Trusteeship Ltd.

Company Appeal (AT) (Ins.) No. 531 of 2022 3

5. Catalyst Trusteeship Limited issued a recall notice dated 24.07.2019 to

the Corporate Debtor, mortgagors and guarantors, claiming that the

Corporate Debtor was required to serve interest on 30.05.2019 and

30.06.2019, which it failed and is thus in default.

6. ECL Finance Ltd. also executed an assignment agreement with EARC

Trust SC 384 on 28.06.2019 and the application, under Section 7 of the Code,

was filed before the Adjudicating Authority by Edelweiss Asset Reconstruction

Company Ltd. (Respondent No. 1), acting as a trustee of EARC Trust SC 384.

7. On the other hand, Catalyst Trusteeship Ltd. issued notice to Sam

Family Trust, AHA Holdings Pvt. Ltd. and other guarantors of the Corporate

Debtor and invoked the guarantees. Catalyst Trusteeship Ltd. took measures

under the Securitisation And Reconstruction Of Financial Assets And

Enforcement Of Security Interest Act, 2002 (in short 'SARFAESI Act') which

was challenged by the Sam Family Trust and AHA Holdings Pvt. Ltd. before

the DRT, Pune by way of SA No. 207 of 2021 and 208 of 2021.

8. It is alleged that in this interregnum, the Respondent No. 1 filed an

application i.e. I.A. No. 1930 of 2020 before the Adjudicating Authority to

restrain the Corporate Debtor from alienating or transferring the assets. The

Respondent No. 1 also filed an application i.e. I.A. No. 2034 of 2020 for urgent

listing of I.A. No. 1930 of 2020. Both I.As with CP (IB) 935/2020 were listed

on 19.01.2021 and the Adjudicating Authority directed the Corporate Debtor

to maintain status quo. I.A. No. 2034 of 2020 and 1930 of 2020 were disposed

of.

Company Appeal (AT) (Ins.) No. 531 of 2022 4

9. It is pertinent to mention that the Financial Creditor/Respondent No. 1

has given the date of default as 28.05.2019 in the petition filed under Section

7 of the code.

10. The applications filed by Sam Family Trust and AHA Holdings Pvt. Ltd.

before the DRT, Pune was allowed on 28.02.2022 holding that the account

had not become NPA:

"51. In the facts and circumstances, I hold that the demand notice under section 13(2) was issued when neither principal amount was due nor the interest payable was overdue. Different dates of NPA shows that the Respondents were themselves not sure in respect of date of NPA. NPA is the main crux in issuing 13(2) notice which is found missing in the circumstances as on date of notice under section 13(2) of Act. On this count the Securitisation Application deserves to be allowed."

11. It is the grievance of the Appellant that when the matter was listed

before the Adjudicating Authority on 15.03.2022, request of the Appellant

(Corporate Debtor) to file additional document on account of subsequent

development was not allowed rather the order was reserved. The order passed

on that date is "C.P. 935 of 2020 & 1930 of 2020. Heard both sides and orders

are reserved. Both parties are directed to file written submissions within two

days".

12. This order was challenged by the Appellant by way of i.e. CA(AT) (Ins)

No. 322 of 2022 which was dismissed on 28.03.2022 with the following order:

"This Appeal has been filed against the following order dated 15.03.2022 passed by the Adjudicating Authority (National Company Law Tribunal), Mumbai Bench, Court III:

"Counsel for both sides present. Parties directed to file WS within 2 days. Reserved for Orders."

2. We are of the view that above is no such order against which an Appeal can be entertained. This Appeal is premature. It shall be

Company Appeal (AT) (Ins.) No. 531 of 2022 5

open for the Appellant to take all pleas and submissions after judgment is delivered if they are so aggrieved. The Appeal is dismissed."

13. It is alleged that the assignment of debt by EARC Trust SC 384 was

challenged by the Appellant by way of Writ Petition (C) No. 10663 of 2020

before the Hon'ble Delhi High Court but it was withdrawn vide order dated

23.07.2021 to approach the court of appropriate jurisdiction.

14. It is further alleged that thereafter the Appellant filed a suit before the

Hon'ble High Court of Bombay that the assignment agreement dated

28.06.2019 be declared as null and void. The said suit was registered as

commercial suit (L) no. 1292 of 2022 in which the Ld. Single Judge passed

the order:

"Accordingly, the deed of assignment dated 28.06.2019, prima facie appears to have been executed on the misconceived premise that the loan accounts of Applicants/Plaintiffs were NPA/SMA-2 accounts. Accordingly, they cannot be acted upon. In view thereof, the Defendant Nos. 1 to 3, their servants, agents and officers are required to be restrained by an order and injunction of this court from in any manner acting in pursuance of the Assignment Agreement dated 28.06.2019 on substance or otherwise in any other from or in any other manner whatsoever.

15.....

(i) Till the hearing of the interim applications, ad-interim relief is granted in terms of prayer clause (a) in both the interim applications i.e. interim application (L) No. 994 of 2022 and interim application (L) 1294 of 2020."

15. It is pertinent to mention that the order dated 19.04.2022 was

challenged in appeal before the Bombay High Court and was stayed vide order

dated 05.05.2022 which is as under:

"6. Therefore, in short debts are admitted by Respondent No. 1 and admittedly amounts have not been paid since August, 2018 in the case of AHA Holdings Pvt. Ltd. and 28.02.2019 in the case of

Company Appeal (AT) (Ins.) No. 531 of 2022 6

Smaaash Entertainment Pvt. Ltd. Hence, we do not agree with the impugned order which is hereby stayed."

16. However, the commercial suit (L) No. 987 of 2022, challenging the

assignment agreement is still pending. The order dated 05.05.2022 was

challenged by the Appellant herein by way of SLP(C) D. No. 26154/2022

before the Apex Court in which the following order was passed on 19.09.2022

which is reproduced as under:-

"1.Permission to file the Special Leave Petition is granted. 2 Delay condoned.

3 The ad-interim order of the learned Single Judge dated 19 April 2022 has been stayed by the Division of the High Court of Judicature at Bombay on 5 May 2022 while admitting the appeal. The Division Bench has specifically clarified that the pendency of the appeal shall not come in the way of the hearing of the interim application and that "learned Single Judge may dispose the interim application in accordance with law". The reasons contained in the impugned order of the Division Bench shall not be regarded as a final or conclusive expression of opinion since they are only confined to the admission of the appeal and an ad-interim stay. The appellants would be at liberty to move the Single Judge for early hearing.

4 The Special Leave Petition is accordingly disposed of. 5 Pending applications, if any, stand disposed of."

17. It is further pertinent to mention that the order dated 28.02.2022

passed by the DRT, Pune was stayed by the DRAT, Mumbai in appeal no. 31

of 2022 vide its order dated 03.06.2022 which is reproduced as under:-

"Reply which was directed by Tribunal within three weeks is being filed today with copy to other side.

Appellant had already sought stay of the entire operation in impugned order. That impugned order for stay was restricted to restoration of the possession on the understanding that both sides would be ready for hearing alongwith Appeal No. 30 of 2022.

Company Appeal (AT) (Ins.) No. 531 of 2022 7

It is submitted by Ld. Counsel representing for Respondent that arguing counsel is not present today due to personal reasons, therefore, he seeks adjournment.

In view of the fact that the reply has been filed today and since the Respondents have sought time, I find that the Appellants are entitled to stay the impugned order until further order. Compilation submitted by Ld. Counsel for the Appellant be taken on record.

Rejoinder, if any, shall be filed with copy to the other side. Post on 04.07.2022 for hearing."

18. Besides aforesaid facts which are borne out from the record, it would

be relevant to refer to certain orders passed by this Tribunal during the

pendency of this appeal, which are reproduced as under:

"23.05.2022: Heard Shri Abhijeet Sinha, Learned Counsel for the Appellant and Shri Ramji Srinivasan, Learned Senior Counsel for the Respondent No.1.

2. This Appeal has been filed against the order dated 06.05.2022 passed by the Adjudicating Authority (National Company Law Tribunal), Mumbai Bench, Court-III admitting Section 7 Application filed by the Respondent. Several submissions have been raised on behalf of the Appellant including violation of principle of natural justice, the Respondent being only Debenture Holder not entitled to initiate proceeding.

3. Shri Ramji Srinivasan, Learned Senior Counsel for Respondent No.1 opposing the submission of the Learned Counsel for the Appellant submits that in view of the fact that there are several materials which indicate that debt and default is proved, admission of the Application cannot be faulted. He submits that insofar as the principle of natural justice is concerned, the document which is sought to be relied and claimed by the Appellant not been able to produce before the Adjudicating Authority was order dated 28.02.2022 of the Debt Recovery Tribunal which may not be relevant for admitting Section 7 Application.

4. Shri Abhijeet Sinha, Learned Counsel for the Appellant submits that the Appellant has approached the Respondent for making an offer of some settlement.

5. Shri Ramji Srinivasan, Learned Senior Counsel for Respondent No.1 submits that although Appellant submits that Appellant is ready to make upfront payment of Rs.30 Crores but in the e-mail, they said that the said payment can be made only after approval of

Company Appeal (AT) (Ins.) No. 531 of 2022 8

one-time settlement within one month from signing of the settlement.

6. Be that as it may. Issue notice. Shri Ramji Srinivasan, Learned Senior Counsel accepts notice on behalf of Respondent No.1. Shri Bhrugesh Amin, Learned Counsel accepts notice on behalf of Respondent No.2. No further notice need be issued. Let reply be filed within one week. Rejoinder, if any, may be filed by the next date.

7. List the Appeal on 02.06.2022. Subject to Appellant depositing Demand Draft of Rs.30 Crores in favour of "The Pay and Accounts Officer, Ministry of Corporate Affairs, New Delhi" within one week from today, the Interim Resolution Professional shall collate the claims but shall not constitute the Committee of Creditors. We further observe that in event the amount is not deposited within one week from today, this interim order shall stand automatically vacated.

31.05.2022: Mr. Abhijeet Sinha, Ld. Counsel appearing for the Applicant in I.A. No. 1705 of 2022 submits that in pursuance of the order passed by this Appellate Tribunal on 23rd May, 2022, an amount of Rs. 11 Crores have been deposited and he seeks liberty to deposit rest of Rs. 19 Crores by 2nd June, 2022 when the matter is already fixed. The prayer is allowed.

Subject to above, the interim order already granted shall continue till 2nd June, 2022.

02.06.2022: Learned Counsel for the Appellant submits that an amount of only Rs.11Crores/- have been paid but balance of Rs.19Crores/- has not yet been paid.

2. In view of the matter, we are of the view that the Interim Order dated 23/05/2022 staying the constitution of CoC is withdrawn. However, it shall be open for the Appellant after making payment of Rs.19Crores/- to make an appropriate Application for any Interim Relief as may be advised.

3. Learned Counsel for the Appellant may file the 'Rejoinder Affidavit' within three weeks.

List this Appeal on 26th July, 2022."

19. Counsel for the Appellant has argued that the Adjudicating Authority

has not followed the principle of natural justice because due opportunity was

not granted to argue the matter before it in as much as when the matter was

taken up for hearing on 15.03.2022, Advocate Sujit Lohaty had appeared on

Company Appeal (AT) (Ins.) No. 531 of 2022 9

behalf of the Appellant and requested for an adjournment to place on record

subsequent events but no time was given and was not permitted to argue

orally as well. In this regard, affidavit dated 21.03.2022 of Sujit Lohaty, Adv.

of High Court of Bombay has been attached.

20. On the other hand, Counsel for Respondent, in this regard, has

submitted that the Adjudicating Authority had given opportunity to both sides

for arguments and thereafter reserved the order. It is further submitted that

even in the order dated 15.03.2022 the said Adv. Sujit Lohaty is not recorded

as present rather another Adv. Ankit Worlikar was present on behalf of the

CD/Appellant. In this regard, Counsel for the Respondent has relied upon a

decision of the Hon'ble Supreme Court in the case of State of Maharashtra

Vs. Ramdas Shrinivas Nayak and Anr. (1982) 2 SCC 463, to contend that the

statement of fact regarding proceedings in the court are conclusive and not

open to be contradicted in appeal. It is further submitted that any such

affidavit should have been filed before the same court instead of making a

part of the Appeal. It is further submitted that in the case of Dharampal

Satyapal Limited Vs. Deputy Commissioner of Central Excise, Gauhati & Ors.

(2015) 8 SCC 519, it has been held that if a hearing would not change the

ultimate conclusion reached by the decision maker then it is not necessary to

grant a hearing and therefore, until and unless prejudice is shown, every

violation of a natural justice may not lead to the conclusion that the order

passed is always null and void. Moreover, the Respondent has also filed an

affidavit of Rahul Dev, Adv. to counter the assertion made by the Appellant

through affidavit of Sujit Lohaty.

Company Appeal (AT) (Ins.) No. 531 of 2022 10

21. Thus, from the aforesaid facts and circumstances much less the order

recorded by the Adjudicating Authority on 15.03.2022 of hearing the parties

before reserving the order and in view of the decisions of Hon'ble Supreme

Court in the case of State of Maharastra (Supra) and Dharampal Satyapal

Limited (Supra), it cannot be said that the principle of natural justice has

been violated for not granting an opportunity of hearing. However, in the

interest of justice the subsequent events which the Appellant wanted to show

i.e. the order passed by the DRT, Pune on 28.02.2022 holding that the

account had not become NPA, can be taken into consideration even now.

22. As a matter of fact, the Appellant has challenged the locus of

Respondent No. 1 to file the application under Section 7 of the Code on the

ground that it is not a financial creditor to the Corporate Debtor. In this

regard, it has been argued that a suit has been filed in the High Court of

Bombay seeking declaration that the assignment deed dated 28.06.2019 is

null and void in which ad-interim injunction was issued on 19.04.2022 before

the impugned order could have been passed on 06.05.2022. Meaning thereby,

the locus standi of the Appellant was not established. However, Counsel for

the Respondent has submitted that the order dated 19.04.2022 was stayed

by the Division Bench of High Court of Bombay in appeal on 05.05.2022

whereas the impugned order was passed on 06.05.2022. It is also submitted

that mere pendency of the suit for declaration is thus not suffice to stall the

proceedings for the initiation of CIRP when the debt and default has been

proved.

Company Appeal (AT) (Ins.) No. 531 of 2022 11

23. Counsel for the Appellant has then argued that the issue regarding the

debt was decided in favour of the Appellant by the DRT, Pune on 28.02.2022

and once there was no NPA, the question of filing of the application under

Section 7 of the Code on account of a default was neither here nor there. In

this regard, Counsel for Respondent has submitted that since the subsequent

events have been seen by this Tribunal, it would be apt to mention that the

order of 28.02.2022 purported to have been passed by the DRT, Pune was

stayed by the DRAT, Mumbai in appeal No. 31 of 2022 on 03.06.2022.

24. It is further submitted that even the order dated 05.05.2022 of the

Division Bench of High Court of Bombay passed in appeal was tested by the

Appellant by way of SLP filed before the Hon'ble Supreme Court which was

disposed of on 19.09.2022. Therefore, it is submitted that the effect of the

order dated 19.04.2022 has been wiped out as also the order dated

28.02.2022 of the DRT, Pune by the order dated 03.06.2022 by the DRAT,

Mumbai.

25. There is force in the submissions made by Counsel for Respondent in

respect of the issue regarding the locus of the Respondent in filing the petition

under Section 7 of the Code because the order dated 19.04.2022 of the Single

bench was stayed by the Division Bench of the High Court of Bombay on

05.05.2022 and was further upheld by the Hon'ble Supreme Court vide order

dated 19.09.2022.

26. Similarly, the issue regarding the NPA, decided in favour of the

Appellant by the DRT, Pune on 28.02.2022 has been put to rest by way of

stay by the DRAT, Mumbai on 03.06.2022, therefore, the Adjudicating

Company Appeal (AT) (Ins.) No. 531 of 2022 12

Authority has not committed any error in passing the order of admission as

there is a debt and default which is required to be looked into for the purpose

of initiation of proceedings under Section 7 of the Code.

27. Consequently, we do not find any merit in the present appeal and the

same is hereby dismissed. No costs.

28. However, before parting with this order, we may hasten to add that

since we have dismissed the appeal, therefore, the amount of Rs. 11 Crores

deposited by the Appellant in pursuance of the order dated 23.05.2022 passed

by this Tribunal be returned to the Appellant within one month.

[Justice Rakesh Kumar Jain] Member (Judicial)

[Dr. Alok Srivastava] Member (Technical)

New Delhi 04th January, 2023

Sheetal

Company Appeal (AT) (Ins.) No. 531 of 2022