M/S Ravindra Construction Company vs Kalinga Sponge Iron Limited

IN THE MATTER OF: M/s Ravinder Construction Company Through its Sole-Proprietor Mr. Ravinder Singh Having its Registered Office at: A-201, Sunny Valley CGHS Plot No. 27 Sector - 12, Dwarka ...Appellant/ New Delhi - 110008 Financial Creditor

Versus

Kalinga Sponge Iron Limited Having its Registered Office at: Plot No. 82, Sector A Kalunga Industrial Estate, Rourkela ...Respondent/ Sundargarh, Orissa - 770001 Corporate Debtor

Present: For Appellant : Mr. Praveen Chauhan, Mr. Aakash Dubey, Mr. Sarthak Sawhney and Ms. Malvica Satija, Advocates

For Respondent : Mr. Abhijeet Sinha, Mr. Sanwal Tiberwal and Mr. Saikat Sarkar, Advocates

(08th December, 2022)

KANTHI NARAHARI, MEMBER (TECHNICAL)

Preamble:

The Present Appeal is filed against the Order dated 22nd November,

2021 passed by the Adjudicating Authority (National Company Law Tribunal,

Principal Bench, Cuttack Bench, Cuttack) in T.P. No. 28/CTB/2019 in C.P. Company Appeal (AT) (Ins.) No. 201 of 2022 1 of 17 (IB) No.1206/KB/2018, whereby the Adjudicating Authority has dismissed

the Application filed by the Appellant.

Brief Facts:

Appellant's Submissions:

2. Aggrieved by the aforesaid order, the Appellant preferred the present

Appeal.

3. The Learned Counsel appearing for the Appellant narrated the facts

which led to the filing of the Application before the Adjudicating Authority

under Section 7 of the I&B Code, 2016.

4. It is submitted that the Appellant is a Sole Proprietorship Company of

Sh. Ravinder Singh, who is an Ex-Director of the Corporate Debtor i.e.

Kalinga Sponge Iron Limited. The proprietor was inducted as Director of the

Corporate Debtor in the year 2003 and continued up till 28.07.2017. During

the said period the Appellant Company has advanced unsecured loans to the

Corporate Debtor with consent of other Directors and the said advance

amount was used by the Corporate Debtor in its usual course of business

for commercial purpose. The amounts were repaid from time to time as and

when demanded subject to availability of funds. The loans facilitated by the

Appellant were repayable on demand by the Corporate Debtor.

5. It is submitted that the Balance Sheet for the Financial Year 2015-16

of the Corporate Debtor reflects the amount of Rs.6,73,86,240/- as

outstanding and payable to the Appellant as on 31.03.2016. The said

amount has been carried forward to the Financial Year 2016-17, however,

Company Appeal (AT) (Ins.) No. 201 of 2022 2 of 17 due to the Balance Sheet being in XBRL format it does not reflect the

complete details. However, a sum of Rs.4,62,92,880/- shown in the ledger

maintained by the Appellant and the said amount is payable by the

Corporate Debtor to the Appellant.

6. It is submitted that the proprietor of the Appellant approached the

concerned directors of the Corporate Debtor and requested them to repay the

unsecured loans advanced by the Appellant at the earliest. The Corporate

Debtor assured to repay all the dues in full by 31.05.2018, however, only

Rs.32,00,000/- was paid and no further payment was made by the Corporate

Debtor. Having aggrieved by the aforesaid default the Appellant issued

demand letter dated 25.06.2018 to the Corporate Debtor demanding

repayment of unsecured loan of amount of Rs.4,62,92,880/-. Further, the

Appellant issued another demand letter dated 18.07.2018 to the Corporate

Debtor. The Corporate Debtor sent a reply dated 14.07.2018.

7. Having not paid the due amount by the Corporate Debtor, the

Appellant filed Application under Section 7 of the I&B Code, 2016 before the

NCLT, Kolkata Bench, clearly mentioning that the amount of debt granted

by the Appellant is Rs.4,62,92,880/- and relied upon the Balance Sheet for

the Financial Year 2015-16 of the Corporate Debtor which reflects the said

amount as outstanding. The Corporate Debtor filed its reply and contested

the matter stating that all the dues of the Appellant have been settled in

terms of MoU dated 27.06.2017.

Company Appeal (AT) (Ins.) No. 201 of 2022 3 of 17

8. It is submitted that the Learned Adjudicating Authority erred in

holding that by way of MoU dated 27.06.2017 the liability of the Corporate

Debtor towards both the Appellant and Sh. Ravindra Singh (Proprietor) was

over. However, the said finding is not correct since the Appellant was not

even a party to the MoU. Further, the Learned NCLT erred in observing that

the terms of the Balance Sheet for the Financial Year 2017-18, no amount

was payable to the Appellant is not correct. The Learned Adjudicating

Authority failed to observe the reply of the Corporate Debtor dated

14.07.2018, wherein a clear admission made that the Corporate Debtor owes

an amount to the Appellant.

9. In view of the reasons as stated above the Learned Counsel has prayed

this Bench to allow the Appeal.

Respondent's Submissions:

10. The Learned Counsel appearing for the Respondent filed its reply and

submitted the brief facts. It is submitted that; (1) M/s Hansraj Dhankar, (2)

Ravinder Singh (Proprietor) of Ravindra Construction, (3) Shish Pal Solanki,

and (4) Amit Kumar Agarwal were the promoters of the Corporate Debtor and

held shares of the Company within themselves. The Corporate Debtor was

considered as a partnership concern between the four persons. The

Corporate Debtor enjoyed credit limits from SBI and Corporation Bank and

the Directors had furnished personal guarantees for the limits sanctioned to

the Corporate Debtor. While so, the account of the Corporate Debtor with the

banks was classified as NPA on 13.02.2013 and the default amount stood at

Rs.8,55,05,409/- for which both the Corporate Debtor as well as the

Company Appeal (AT) (Ins.) No. 201 of 2022 4 of 17 Directors / Personal Guarantors were liable. Notice under Section 13(2) of

the SARFAESI Act, 2002 was issued on 14.03.2013, and the property was

put for sale on multiple times by the Bank. The said auction did not fetch

any buyers and last auction of the properties was published on 13.06.2017

for an amount of Rs.21.58 crores. The default amount as on the date of notice

stood at Rs.35.88 crores. The Directors / Personal Guarantors were also

liable to make good the balance amount in case of shortfall of recovery. The

bank also filed O.A. under the provisions of Recovery of Debt due to bank

Act, 1993 before the DRT against the Company and the Personal Guarantors.

11. Under the above circumstances, the present Directors of the Corporate

Director entered into negotiations with the above four erstwhile Directors to

take over the Corporate Debtor as a going concern by settling the dues of the

bank and release of erstwhile Directors from the guarantee and closer of the

other dues against the banks. Accordingly, the parties entered into an MoU

dated 22.06.2017 for valuable consideration of Rs. 26.00 crores well above

the auction price of Rs.21.58 crores. The main reason for higher

consideration was that the negotiations also contemplated release of

personal guarantees of the Directors.

12. It is submitted that out of Rs. 26 crores the banks would be paid of

under OTS and the balance consideration would then be paid to the outgoing

parties towards full and final settlement of all the liabilities whatsoever and

howsoever of the outgoing parties. The same was agreed to be paid through

purchase of their shares and the balance would be payable in the ratio of

shareholding / profit sharing of the outgoing parties.

Company Appeal (AT) (Ins.) No. 201 of 2022 5 of 17

13. The outgoing Directors confirmed vide their letter dated 24.07.2017

that the amount of Rs.26 crores payable as consideration including

withdrawal of the guarantees of the outgoing parties as per terms of the MoU

and the same was for the full and final settlement of all the liabilities.

14. It is submitted that the Corporate Debtor vide its letter dated

12.04.2018 confirmed that the net liability of Mr. Ravinder Singh stood at

Rs.32 lacs after the adjustment in terms of MoU. The said letter was

acknowledged by Mr. Ravinder Singh and on the basis of said

acknowledgement the balance dues of Rs.32 lacs was paid vide RTGS on

16.04.2018.

15. It is submitted that after having received entire settlement amount

ensuring his personal guarantee stood released on 13.04.2018 and

25.04.2018, the Appellant raised frivolous claim of Rs. 4,62,92,888/- by

issuing demand letter dated 25.06.2018 and 18.07.2018. It is submitted that

no such demand was ever made till the personal guarantees of Mr. Ravinder

Singh was released on 13.04.2018 and 25.04.2018. The MoU was entered on

22.06.2017 and the Appellant issued demand letter dated 25.06.2018 and

18.07.2018 i.e. after release of personal guarantees.

16. It is submitted that the audited balanced sheet of the Appellant as on

31.03.2018, the dues payable stood at Rs.31,57,596/- after adjustment in

terms of MoU. However, the Appellant was paid an amount of Rs.32 lacs and

an excess of amount of Rs.42,404/- was paid which is receivable. The

Appellant failed to disclose the MoU and other documents before the

Company Appeal (AT) (Ins.) No. 201 of 2022 6 of 17 Adjudicating Authority which would establish that the alleged amount has

been paid / adjusted in lines with the Agreement / MoU.

17. The Learned Counsel further submitted that the Appellant has chosen

to ignore the letter dated 12.04.2018 addressed to the Appellant and the

Proprietor confirming settlement of account. The ledger balance relied upon

by the Appellant does not show the alleged dues claimed by it. Further, the

Balance Sheet of the Respondent for the year ending 31st March 2018 clearly

show the unsecured loan of the Appellant stood as Rs.31,57,596/- and the

same was squared off by payment of Rs.32 lacs to the Appellant, which

cannot be disputed by the appellant after having received the money and

being discharged of his personal guarantees from State Bank of India and

Corporation Bank.

18. The Learned Counsel submitted that the Learned Adjudicating

Authority rightly dismissed the application filed by the Appellant as it was

devoid of merits. Further, the Appellant failed to establish that there is a debt

and default on the part of the Corporate Debtor. The Learned Counsel prayed

this Bench to dismiss the Appeal with exemplary costs.

Analysis / Appraisal:

19. Heard the Learned Counsel appeared for the respective parties

perused the pleadings and documents. After analysing the pleadings, the

moot point for consideration is whether the Appellant has made out any case

to allow the Appeal as prayed for.

Company Appeal (AT) (Ins.) No. 201 of 2022 7 of 17

20. The Appellant filed an Application under Section 7 of the I&B Code,

2016 before the Adjudicating Authority (NCLT), Kolkata Bench, against the

Corporate Debtor seeking initiation of CIRP on the ground that the Corporate

Debtor committed default in paying the financial debt of a sum of

Rs.4,62,92,880/- as per Part-IV of Form-1. After Constitution of Cuttack

Bench, the Application was transferred to the Cuttack Bench and

renumbered as T.P. No. 28/CTB/2019. The Corporate Debtor filed its reply

and contended that the erstwhile directors entered into an MoU dated

22.06.2017 and the net consideration was fixed as Rs.26 crores to be paid

to the outgoing parties / directors. It is further contended that on 12.04.2018

a letter was issued to Mr. Ravinder Singh confirming that his net liability

after adjustments in terms of the MoU and clarifications stands at Rs.32

lacs. It is stated that the letter was duly acknowledged by Mr. Ravinder Singh

and on the basis of the said acknowledgement, the balance due of Rs.32 lacs

was paid through RTGS on 16.04.2018.

21. The Adjudicating Authority recorded the submissions of the parties

and dismissed the application of the Applicant by observing as under:

"13. The four outgoing Directors, who were present at the meeting wherein it was resolved that there shall be "no claim of money from the parties except to the extent as specified in the Memorandum of Understanding signed between the parties".

This resolution of the Corporate Debtor at the Board of Director's Meeting held on 22.06.2017, was also signed by the present applicant in his capacity as the Director of the Corporate Debtor. By Letter dated 22.06.2017, as per the terms and conditions of the Memorandum of Understanding, the physical possession of the company, plant, building was handed over to the present Company Appeal (AT) (Ins.) No. 201 of 2022 8 of 17 Directors. All the four Directors of the Corporate Debtor by Letter dated 28.07.2017 resigned from the Board of Directors of the Corporate Debtor. Thereafter, by Declaration dated 13.04.2018, the applicant along with other three erstwhile Directors has categorically stated that no claims from Mr. Prem Chand Agarwal and his family's members in relation to any matters to Kalinga Sponge Iron Ltd. and that they shall not make any dispute with them in relation to any matter henceforth. Hence, there is a categorical admission that no amount is due and payable. By Letter dated 12.04.2018, the Corporate Debtor has issued a Letter to the applicant, wherein it is stated that based on the Memorandum of Understanding (MOU) dated 22.06.2017 that a sum of Rs.32 Lakh is due and payable by the Corporate Debtor to the applicant towards full and final settlement of all dues. This Letter has been acknowledged by the applicant. However, in course of the earlier, the Counsel for the applicant stated that he denies the authenticity of this Letter. Hence, this cannot be relied upon. In the Balance-Sheet audited for the year 2017-18, it is clear that as on 31.03.2018, no amount is due and payable by the Corporate Debtor to the applicant. At this juncture, it is pertinent to mention that applicant relies upon the Balance-Sheet for the year 2015-16 and 2016-17 as only proof of debt due and payable by the Corporate Debtor. It is important to remember that during this period, the applicant was in the realm of affairs of the Corporate Debtor, the same Auditor has given the Financial Statements for the year 2017-18, stating clearly therein that no amount is due and payable to the applicant.

14. There is no agreement regarding terms and conditions or regarding repayment etc. There is no bank statement or any other supporting evidence produced in support of his claim by the applicant that what is the mode of transaction for providing

Company Appeal (AT) (Ins.) No. 201 of 2022 9 of 17 such stated loans to the Corporate Debtor. There are discrepancies noted in the ledger sheet of the applicant. We cannot take into consideration one or two Balance-Sheets of the company and conclude the case. Furthermore, there is no documents to show the loan transacted in to the account of the corporate debtor. From the arguments and documents, it is clear that the entire payment is towards the business transfer agreements between the parties for takeover of the Corporate Debtor, various loans were settled by the new Directors. There is also a Memorandum of Understanding (MOU) for the transfer of the shares from the erstwhile Directors to the present Directors. The agreements between the parties were entered on 22.06.2017. However, till 25.06.2018, the applicant has not issued any E-mail or Letter claiming the amount. The claim was after receipt of the full and final settlement of the bank's dues wherein the applicant is one of the personal guarantors. The Memorandum of Understanding (MOU) for transfer of the Corporate Debtor by the present applicant in his capacity as Managing Director was dated 22.06.2017. Relevant dates in this regard have been summarized in the table below:

1. MOU dated 22.06.2017

2. Handing of the Corporate Debtor 25.06.2017 over dated

3. No Due Certificate in respect of 13.04.2018 loan account of Corporate Debtor from Corporation Bank

4. No Due Certificate in respect of 25.04.2018 loan account of Corporate Debtor from State Bank of India

Company Appeal (AT) (Ins.) No. 201 of 2022 10 of 17

5. The Letter of Demand of "debt" 25.06.2018, 18.07.2018 from applicant to respondent

6. The application was filed on 24.08.2018

15. The applicant has failed to prove that he is entitled to interest on the alleged loan and that it was agreed that corporate debtor shall pay 24% interest P A. No document is filed to support that the alleged amount due is financial loan.

Further the date of default is crucial point. The applicant failed to satisfy this tribunal regarding the exact date of default. Hence, the applicant has failed to prove existence of financial loan, interest due, and default.

16. In view of the above discussions, documents on record and after hearing the learned senior Counsel/Counsel at length we are of firm opinion that this petition ought to be dismissed."

22. The Adjudicating Authority categorically held that by letter dated

12.04.2018, the Corporate Debtor has issued a letter to the Appellant,

wherein it is stated that based on the Memorandum of Understanding dated

26.02.2017, a sum of Rs.32 lacs is due and payable by the Corporate Debtor

to the Appellant towards full and final settlement of all dues. The

Adjudicating Authority also observed that the said letter has been

acknowledged by the Appellant. However, the Counsel for the Appellant

denied the authenticity of the letter. The Adjudicating Authority also

observed that the audited Balance Sheet for the year 2017-18, it is clear that

as on 31.03.2018, no amount is due and payable by the Corporate Debtor to

the Appellant / Applicant.

Company Appeal (AT) (Ins.) No. 201 of 2022 11 of 17

23. Further, the Adjudicating Authority observed that there is no

agreement regarding terms and conditions of repayment and there is no bank

statement or any other supporting evidence produced in support of the claim

of the Appellant that what is the mode of transaction for providing such

stated loans to the Corporate Debtor.

24. The Respondent filed a detailed counter to this Appeal and narrated

the facts with regard to the history of the Corporate Debtor. There is no denial

that the Corporate Debtor was promoted by the directors (as stated supra)

including the proprietor of the Appellant. However, the Corporate Debtor was

classified as NPA on 13.02.2013 and the default amount as on the date of

NPA/stood at Rs. 8,55,05,409/- for which the Directors who are the personal

guarantors were liable. The bank issued notice under Section 13(2) of the

SARFAESI Act, 2002 and initiated recovery proceedings against the

Corporate Debtor and personal guarantors of the Corporate Debtor. While

so, the property was put for sale on multiple times by the bank, however, the

auction did not fetch any buyers. The present Directors i.e. Mr. Prem Chand

Agarwal and Akhil Kumar Agarwal entered an MoU dated 22.06.2017 with

the Directors. From the preamble, it is evident that all the 4 Directors

(outgoing and the two incoming Directors / present Directors or parties to

the MoU. The purpose entering the MoU thus read as under:

"Both the parties have decided to enter into an arrangement whereby the outgoing parties intend to transfer the ownership rights of M/s Kalinga Sponge Iron Ltd., having its registered office at Plot No. 82A, IDC, Kalunga District, Sundergarh (Odissa) to the incoming parties by way of transfer of shares.

Company Appeal (AT) (Ins.) No. 201 of 2022 12 of 17 As the plant was closed since last 5 years there was huge loss. Due to continuing pressure from the bankers for due repayment of the debt and further to this, the failure on the part of the bankers to identify a successful bidder in the public auction called for on previous occasions, this deal was done on mutual agreement."

25. Further the MoU contains the terms of payment, change of

management, transfer of shares, clearances of book balances, change of

signatories, cases and dues, plant operation and dispute resolution etc. Both

the parties have affixed their signatures on the MoU and there is no dispute

with regard to the terms and conditions of the MoU. From the MoU, it is

apparent that under Clause (3) which refers to consideration of the amount

fixed as Rs.26 crores for transfer of ownership. It is mentioned that the

amount required for OTS is Rs.21 crore and the balance amount of Rs.5 crore

to be paid to the outgoing parties in the ratio of 35:30:20:15. As per the MoU,

the proprietor of the Appellant stands at Sl. No. 2 in the preamble of MoU

and he holds 30% shares in the company and accordingly it was agreed to

pay 30% of the balance payment as stated above.

26. The Learned Counsel for the Appellant contend that the Corporate

Debtor defaulted in payment of the amount and relied upon the Balance

Sheet for the year 2015-16 of the Corporate Debtor. The photo copy of the

Balance Sheet annexed at page 144 of Vol. I, it is seen under the category of

long-term borrowings the name of the Appellant reflects and the amount

shown as Rs. 6,61,16,240/- (subject to corrections since the photo copy is

unclear).

Company Appeal (AT) (Ins.) No. 201 of 2022 13 of 17

27. It is to be noted that the Balance Sheet of the Corporate Debtor is for

the Financial Year 2015-16, however the MoU entered on 27.06.2017 which

is subsequent to the Balance Sheet. The Appellant failed to produce any

document subsequent to entering into as MoU to establish that the

Corporate Debtor owed the amount to the Appellant.

28. For filing an Application under Section 7 of the I&B Code, 2016 seeking

for Initiation of Corporate Insolvency Resolution Process against a Corporate

Debtor before the Adjudicating Authority, the Applicant has to establish that

a default has occurred. Sub-section (3) of Section 7 thus read as under:

"The Financial Creditor shall along with the Application furnish

(a) record of the default recorded with the information utility or such other record or evidence of default as may be specified, (b) the name of Resolution Professional proposed to act as an Interim Resolution Professional; and (c) any other information as may be specified by the Board."

29. As per the provisions of law the Financial Creditor has to furnish the

details of the default. As stated (supra) the Appellant / Applicant has failed

to establish that the Corporate Debtor owed an amount to the Appellant and

it defaulted. Further, the Appellant failed to establish the debt and default

except in Part-IV of Form-I stating the total amount of debt granted

Rs.4,62,92,880/- and there is no evidence with regard to disbursal of

amount from the account of the Appellant against the consideration for the

time value of money.

Company Appeal (AT) (Ins.) No. 201 of 2022 14 of 17

30. After entering the MoU dated 27.06.2017, the Corporate Debtor

through the erstwhile Directors addressed a letter dated 24.07.2017 to the

present Directors wherein it is stated as under:

"Kalinga Sponge Iron Ltd.

Date: 24.07.2017 To

Prem Chand Agarwal & Akhil Kumar Agarwal Lal Building, Kachery Road, Rourkela-769012 (Odisha)

Sub: Our MOU dated 22.06.2017 As discussed with you we would like to clarify/confirm the terms of MOU dated 22.06.2017 as follows:

The consideration of Rs.26.00 Crores is the final settled amount with the outgoing parties towards their shareholdings and other liabilities whatsoever and in lieu of release of the Guarantees of the Outgoing parties. As stated in the MOU the amount paid to the Bank towards OTS will be deducted and the balance will be paid to the outgoing parties in form of purchase of their shareholdings and balance towards other liabilities whatsoever and howsoever.

We also ensure to cordially settle with the banks under One time Settlement Scheme.

Yours faithfully,

For Kalinga Sponge Iron Ltd. For Kalinga Sponge Iron Ltd.

Sd/- Sd/- Director Director"

Company Appeal (AT) (Ins.) No. 201 of 2022 15 of 17

31. As per the above letter, the outgoing parties confirmed the terms of

MoU dated 22.06.2017 and also confirmed the consideration as final settled

amounts towards their shareholding and other liabilities.

32. However, the Appellant contend that it issued a demand letter dated

25.06.2018 and 18.07.2018 addressed to the present Directors claiming

balance of amount Rs.4,62,92,880/-. In the very same letter, the Proprietor

of the Appellant admitted the receipt of amount Rs.32 lacs on 16.04.2018.

In response to the letter dated 25.06.2018, the Corporate Debtor vide its

reply dated 14.07.2018 addressed to the Proprietor of the Appellant stating

that the balance amount claimed by it do not contain any account ledger

substantiating the balance outstanding and requested to provide the year

wise ledger of last 5 years of both the accounts i.e. the Appellant and the

Proprietor (Mr. Ravinder Singh). The Appellant has not produced any reply

or response to the letter dated 14.07.2018 nor produced any documentary

evidence to establish the debt owed by the Corporate Debtor.

Conclusion:

33. The Appellant failed to establish with documentary evidence that there

is a debt and default. The Adjudicating Authority passed a reasoned order

and no interference is called for.

34. This Tribunal comes to an irresistible and inescapable conclusion that

the Appeal is devoid of merits and liable to be dismissed. Accordingly, the

Appeal is dismissed.

Company Appeal (AT) (Ins.) No. 201 of 2022 16 of 17

35. Before parting with the judgment this Tribunal is of the view that the

Appeal is frivolous and vexatious wasting the precious time of this Tribunal

and deserved to be imposed exemplary costs. Accordingly, a cost of

Rs.1,00,000/- (Rupees One Lac only) is imposed, which is payable to the

Prime Minister Relief fund within a period of one month from the receipt of

copy of this order and report compliance before the Registrar of this Tribunal.

[Justice Rakesh Kumar Jain] Member (Judicial)

[Kanthi Narahari] Member (Technical)

pks

Company Appeal (AT) (Ins.) No. 201 of 2022 17 of 17