Kalpesh Ramniklal Shah vs Mundara Estate Developers Limited & Anr

NATIONAL COMPANY LAW APPELLATE TRIBUNAL, PRINCIPAL BENCH, NEW DELHI Company Appeal (AT) (Insolvency) No. 71 of 2023 (Arising out of Order dated 12.01.2023 passed by the Adjudicating Authority (National Company Law Tribunal), Court No.V, Mumbai Bench, in Company Petition No.699/(IB)-MB-V/2021)

IN THE MATTER OF: Kalpesh Ramniklal Shah R/o 7B,Ami Ramkrishna Building, Happy Home Society, Nehru Road, Vile Parle (East), Mumbai - 400057. ... Appellant

Vs

1. Mundara Estate Developers Limited 7B 11 Ami Ramkrishna Building, Happy Home Society, Nehru Road, Ville Parle (East), Mumbai - 400057. Through Pinakin Surendra Shah Interim Resolution Professional

2. Metroglobal Ltd., Through its Authorised Officer, 101, 1st Floor, Mangal Disha, Near Guru Gangeshwar Temple, 6th Road, Khar (West), Mumbai - 400052. ... Respondents

Present:

For Appellant: Mr. Abhijeet Sinha, Mr. Malak Bhatt, Ms. Neeha Nagpal, Mr. Saikat Sarkar & Ms. Samridhi, Advocates.

For Respondents: Mr. Salil Thakore & Mr. Yugantar Singh Chauhan, Advocates.

JUDGMENT

ASHOK BHUSHAN, J.

This Appeal by a Suspended Director of the Corporate Debtor has

been filed against the order dated 12.01.2023, admitting Section 7

Application filed by the Respondent - Financial Creditor.

Company Appeal (AT) (Insolvency) No. 71 of 2023 1

2. The Corporate Debtor entered into an Agreement dated 27.01.2011

with Metrochem Industries Ltd. (now Metroglobal Ltd.). For repayment of

principal amount of Rs.24 crores, 11 post-dated cheques were given, while

the interest amount of Rs.13.50 crores was to be paid through issuance

of 05 post-dated cheques under the Agreement. The Agreement further

stipulated that in case of failure to pay, penal interest should be levied on

the outstanding amount. Shares of Corporate Debtor and one M/s Parag

Kunj Finvest Private Ltd. were also pledged to the Financial Creditor as

security.

3. A further Agreement dated 28.12.2012 was entered between

Financial Creditor and the Corporate Debtor for a payment of Rs.46

crores. As per the terms of the Settlement Agreement, two properties in

Vadodara and Gujarat., amounting to Rs.21.35 crores were assigned

through Sale Deed in favour of Mr. Gautam M. Jain and the remaining

Rs.24.65 crores were to be settled through the Loan Agreement security

at Mumbai for the two properties as security. Financial Creditor issued

legal notice to the Corporate Debtor for payment of outstanding amount

on 27.05.2016. Section 7 Application was filed by the Financial Creditor

in June 2021 seeking initiation of Corporate Insolvency Resolution

Process ("CIRP") against the Corporate Debtor for default of an amount of

Rs.89,76,41,443/- with outstanding principal amount being

Rs.19,63,71,657/- and interest of Rs.70,12,69,786/-. Reply was filed by

the Corporate Debtor. In the reply, it was pleaded that petition has been

filed without disclosing material information and true nature of relations

Company Appeal (AT) (Insolvency) No. 71 of 2023 2 between Corporate Debtor and the Financial Creditor. The Loan

Agreement is in direct contravention of Section 295 of Companies Act,

1956. Various other pleas were taken in the reply, opposing the Section

7 Application. The Adjudicating Authority by order dated 12.01.2023

admitted Section 7 Application. Aggrieved by the said order, this Appeal

has been filed.

4. When Appeal was taken up on 24.01.2023, the Appellant prayed for

time to make one more effort to negotiate with the Financial Creditor to

make the payment of the dues. The Appeal was adjourned, directing that

Committee of Creditors ("CoC") in pursuance of the impugned order shall

not be constituted in the meantime. The Appellant on 22.02.2023 further

prayed that last opportunity of four weeks be allowed to take steps

towards settlement. Since, no settlement could be arrived between the

parties, the Appeal was heard on 05.07.2023.

5. The learned Counsel for the Appellant in support of the Appeal

submits that key managerial personnel of Financial Creditor, holds

majority shareholding in the Corporate Debtor and is a 'related party'.

The Financial Creditor exercises substantial control in the Corporate

Debtor, hence, the Financial Creditor could not have filed Section 7

Application. The Adjudicating Authority ignored the settlement, which

was entered between the parties and by payment of Rs.46 crores the

matter stood settled in the year 2012 itself. The alleged loan transaction

was in contravention of Section 295 of the Companies Act. As per

Settlement Agreement two properties of Rs.21.35 crores at Vadodara were

Company Appeal (AT) (Insolvency) No. 71 of 2023 3 assigned via Sale Deed in favour of Gautam Jain, Director of Financial

Creditor by Girish Shah, Director of Corporate Debtor. The remaining

amount of Rs.24.65 crores was secured through the two properties at

Mumbai.

6. The learned Counsel for the Respondent refuting the submission of

learned Counsel for the Appellant submits that the Corporate Debtor has

admitted the liability in all Balance Sheets signed by the Corporate Debtor

under the Companies Act from Financial Year 2010-11 till Financial Year

2019-20. The Balance Sheets acknowledges the debt owed to the

Financial Creditor. The Balance Sheets have been signed by the Directors

of the Corporate Debtor and few of them have been signed by Kalpesh

Shah, who has filed the present Appeal. In each of the Balance Sheets,

the Financial Creditor's name is mentioned under the heading "Loans and

Advances" and in each Balance Sheets, an amount in excess of Rs.25

crores is shown as a liability of the Corporate Debtor. The Balance Sheets

further indicate that there are no revenues from operations/sales and the

Corporate Debtor is not a going concern, but is only incurring liabilities.

The total amount of Rs.24 cores was transferred by the Financial Creditor

in favour of the Corporate Debtor. The debt towards the Financial

Creditor having been acknowledged by the Corporate Debtor, Section 7

Application has rightly been admitted by the Adjudicating Authority. The

contention that against the outstanding amount payable by the Corporate

Debtor to the Financial Creditor, Mr. Girish Shah has transferred two

parcels of land to Mr. Gautam Jain is completely false. The transactions

Company Appeal (AT) (Insolvency) No. 71 of 2023 4 between Mr. Gautam Jain and Mr. Girish Shah for purchase of lands is

completely different transactions and has nothing to do with the Loan

Agreement between the Respondent and the Financial Creditor. The lands

were purchased by Gautam Jain in his individual capacity and he had

paid consideration to Mr. Girish Shah and others. The settlement as

claimed by the Appellant is not admitted and even if for the sake of

argument, the settlement is admitted, then also as per the settlement the

dues of Rs.25 crores was to be paid by sale of secured properties, which

sale never took place. In the audited Balance Sheet of the Financial

Creditor 2019-20, the Corporate Debtor has shown an amount in excess

of Rs.24 crores as payable to the Financial Creditor. The provisions of

Section 295 of the Companies Act, 1956 are not applicable, even,

otherwise, it does not lie in the mouth of the Corporate Debtor or the

Appellant to contend after having taken the loan, that the transaction

violates the law. The Financial Creditor is not a 'related party' of the

Corporate Debtor. The Financial Creditor does not exercise substantial

control over the Corporate Debtor. Moreover, the Code does not prohibit

Application for admission of petition even in cases where Financial

Creditor is a 'related party'.

7. We have considered the submissions of the learned Counsel for the

parties and have perused the record.

8. The Loan Agreement dated 27.01.2011 entered by Corporate

Debtor, with Metrochem Industries Ltd. & GESC Ltd. is an admitted

document. The Metrochem Industries Ltd. (Latter have been renamed as

Company Appeal (AT) (Insolvency) No. 71 of 2023 5 Metroglobal Ltd.), in pursuance of the Loan Agreement, Rs.24 crores were

disbursed and the same was to be repaid by the Corporate Debtor in the

manner as described in the Loan Agreement. The Balance Sheets of the

Corporate Debtor have been brought on record from the year 2010-11 to

2019-20, which Balance Sheets contain clear acknowledgement of the

debt. In the Balance Sheet as on 31.03.2012, under the head "Short Term

Borrowing" an amount of Rs.29,98,71,657/- has been mentioned. This

Balance Sheet of the Corporate Debtor clearly acknowledges the debt

owed to the Financial Creditor. In the Balance Sheet of Financial Year

2012-13 under the heading "Short Term Borrowing" against Metroglobal

Ltd., Ahmedabad an amount of Rs.23,55,72,087/- has been mentioned

as on 31.03.2013. The Balance Sheets thereafter continuously

acknowledges the debt and Balance Sheet for the year 2018-19, which is

stated to be signed by the Appellant as Director, also contains

acknowledgment against the Metroglobal Ltd., Ahmedabad under the

heading "Long Term Borrowings" an amount of Rs.27,34,34,765/-, which

is again acknowledgment. The Balance Sheet for the Financial Year 2019-

20 again contains acknowledgement of the debt by the Appellant, which

clearly proves that the debt continued to be due and the same remained

unpaid. The Balance Sheets further indicate that there are no revenues

generated. The Corporate Debtor, which is not generating any revenue

for the last 10 years and the acknowledgement of debt against the

Financial Creditor is continuously recorded in the Balance Sheets, we are

Company Appeal (AT) (Insolvency) No. 71 of 2023 6 of the view that no error has been committed by the Adjudicating

Authority in admitting Section 7 Application.

9. Coming to the settlement, which was claimed to be entered by the

Appellant in the year 2012, which according to the Appellant was also

recorded on 28.12.2015, suffice it to say that as per the Agreement

claimed by the Appellant, a sum of Rs.24.65 crores was still to be

recovered by sale of two properties provided as security. The learned

Counsel for the Financial Creditor denies the signature on the Settlement

Agreement. He, however, submits that even if the Settlement Agreement

is accepted for the sake of argument, according to the Settlement

Agreement, an amount of Rs.24.64 crores still due to be paid by the

Corporate Debtor, which was never paid. Hence, debt and default is

proved, which enables the Adjudicating Authority to admit Section 7

Application. The continuous acknowledgment of the debt in the Balance

Sheets also runs against the submission of the Appellant that there was

any Settlement Agreement and the dues between the party were finally

settled. The continuous acknowledgment in the Balance Sheets indicate

that debt continued to be due and payable by the Corporate Debtor.

10. The submission of the Appellant regarding key managerial

personnel of Financial Creditor, holding majority shareholding in the

Corporate Debtor and is a 'related party' and exercises substantial control

in the Corporate Debtor is vehemently denied by the Respondent

submitting that no transaction was entered between the Corporate Debtor

and the related party. The control by the Financial Creditor is also denied

Company Appeal (AT) (Insolvency) No. 71 of 2023 7 by the Respondent. It is submitted that had Financial Creditor really been

in control of the Corporate Debtor, situation of non-payment of loan would

not have arisen. The Corporate Debtor is under control of Girish Shah,

who has 25% shareholding in the Corporate Debtor and who is a

Guarantor as well as Pledgor under the Loan Agreement. With regard to

control through M/s. Kava Impex Pvt. Ltd., it has been submitted that

more than Rs.15 crores out of Rs.24 crores has been transferred to M/s.

Mundara Estate Developers Ltd. even before M/s. Kava Impex Pvt. Ltd.

became a partner therein. Further the submission of learned Counsel for

the Appellant that loan transaction was in violation of Section 295 of the

Companies Act, 1956, does not help the Appellant to deny the loan

transaction and the disbursement of the amount. Even if, the allegation

of violation of Section 295 of the Companies Act, 1956 may be there, that

does not in any manner inhibit filing of Section 7 Application and take

appropriate proceedings under the IBC. The purpose and object of the

IBC is entirely different. The violation of provisions of Companies Act,

1956, for example Section 295 has different consequences, which

consequences in law can take effect and remedial measures can be taken

under Section 295, when the ingredients of Section 295 are proved, but

that itself cannot be a ground to reject Section 7 Application filed by the

Financial Creditor, where debt and default is proved.

11. We may refer to the judgment of the Hon'ble Supreme Court in

Innoventive Industries Ltd. vs. ICICI Bank and Anr. - (2018) 1 SCC

407. The Hon'ble Supreme Court in the above judgment while dealing

Company Appeal (AT) (Insolvency) No. 71 of 2023 8 with the Scheme under Section 7 of the Code has held that when a default

of financial debt is committed, the Adjudicating Authority has merely to

see the records of the information utility and other evidence produced by

the Financial Creditor to satisfy itself that a default has occurred.

Following has been laid down by the Hon'ble Supreme Court in paragraph

30 of the judgment:

"30. On the other hand, as we have seen, in the case of a corporate debtor who commits a default of a financial debt, the adjudicating authority has merely to see the records of the information utility or other evidence produced by the financial creditor to satisfy itself that a default has occurred. It is of no matter that the debt is disputed so long as the debt is "due" i.e. payable unless interdicted by some law or has not yet become due in the sense that it is payable at some future date. It is only when this is proved to the satisfaction of the adjudicating authority that the adjudicating authority may reject an application and not otherwise."

12. The law laid down in Innoventive Industries Ltd. by the Hon'ble

Supreme Court has been reiterated by the Hon'ble Supreme Court in M.

Suresh Reddy vs. Canara Bank & Ors. - Civil Appeal Nos.7121 of

2022 decided on 11.05.2023.

13. We have noticed above that in the present Appeal also the Appellant

took several opportunities to settle the dues with the Financial Creditor,

which settlement never took place. Taking into consideration overall facts

Company Appeal (AT) (Insolvency) No. 71 of 2023 9 of the present case and pleadings on record, we are satisfied that there is

no ground to interfere with the impugned order passed by the

Adjudicating Authority, admitting Section 7 Application.

14. There is no merit in the Appeal. The Appeal is dismissed. No order

as to costs.

[Justice Ashok Bhushan] Chairperson

[Barun Mitra] Member (Technical)

NEW DELHI

14th July, 2023

Ashwani

Company Appeal (AT) (Insolvency) No. 71 of 2023 10