Mr. Jayesh Dani vs Srei Equipment Finance Limited & Anr

IN THE MATTER OF: Mr. Jayesh Dani (Ex-Director of HBC Auto and ANC SEZ Private Limited Having its address at 505, Ceejay House Dr. Annie Besant Road, Worli Mumbai - 400 018 Email: info@hbsrealtors.com ...Appellant Versus 1. SREI Equipment Finance Ltd. Having its address Vishwakarma, 86C Topsia Road, Kolkata - 700 046 West Bengal Email: corporate@srei.com ...Respondent No.1 2. Mr. Avinash Ambikaprasad Shukla (Interim Resolution Professional) Having its address at Level 3, Padma Palace Plot No. 79, Sector - 28, Vashi Navi Mumbai, Maharashtra - 400 703 Email: avinashshukla1708@gmail.com ...Respondent No.2 Present: For Appellant : Mr. Shivek Trehan, Mr. Ishaan Kumar, Advocates For Respondent : Mr. Krishnendu Datta, Sr. Advocate with Mr. Siddhant Buxy, Mr. Ativ Patel, Ms. Priyanka Vora and Mr. Rahul Gupta, Advocates JUDGMENT

(Hybrid Mode)

[Per: Arun Baroka, Member (Technical)] The present Appeal is filed under Section 61 of the Insolvency and

Bankruptcy Code, 2016 ("the Code") by the Appellant being the Ex-Director

of HBS Auto and ANC SEZ Private Limited ("Corporate Debtor"), being

aggrieved by the Impugned Order dated 02.01.2024 passed by the National Company Law Tribunal, Mumbai Bench ("Adjudicating Authority"), whereby

the Adjudicating Authority admitted the Company Petition (IB) No. 966 of

2020 filed by Respondent No.1 against the Corporate Debtor under Section 7

of the Code.

Appellant's case:

The Development of the SEZ Project

2. The Corporate Debtor, a private limited company established under the

Companies Act, 1956, specializes in the development of Special Economic

Zones (SEZs) and other infrastructure projects. In 2008, pursuant to a Lease

Deed dated 7th October 2008 with the Gujarat Industrial Development

Corporation (GIDC), the Corporate Debtor embarked on developing various

infrastructure facilities for a SEZ. This included industrial, business, and

social amenities such as land development, roads, buildings, sewerage, and

warehouses over approximately 309 acres at GIDC Panoli Industrial Estate in

Ankleshwar, Gujarat (hereinafter referred to as "the Project"). By 2011, the

Project was completed and began operations as a Pharma SEZ, though

substantial interest from prospective buyers was not forthcoming.

Sublease Agreements

3. In 2013, the Corporate Debtor entered into two Deeds of Sublease

(dated 18th March 2013 and 23rd August 2013) with M/s. HBS City Pvt. Ltd.,

subleasing portions of the Project land. In 2017-2018, Mahansaria Tyres Pvt.

Ltd. expressed interest in acquiring land for automobile operations.

Consequently, the Corporate Debtor sought and obtained approval for a

Company Appeal (AT) (Insolvency) No. 161 of 2024 2 of 15 change in manufacturing items and subleased approximately 127 acres to

Mahansaria Tyres Pvt. Ltd. on 6th December 2018.

Fundraising and Loan Agreements

4. Seeking funds for further development, the Corporate Debtor

approached Respondent No. 1 (the Financial Creditor) in 2017. The Financial

Creditor, through an Offer Letter dated 1st July 2017, provided a loan facility

of Rs. 60 Crores. This was formalized in the Rupee Loan Agreement dated 19th

July 2017, which included terms such as repayment in 54 instalments and

conditions for default and notice. It is noted that this agreement was

insufficiently stamped. A second loan of Rs. 6 Crores was secured via another

agreement dated 15th September 2019, which also contained specific terms

for repayment and default, and was likewise insufficiently stamped.

Challenges Leading to Default

5. The Corporate Debtor faced several insurmountable challenges:

o Lack of buyers for SEZ units.

o Illegal non-utilization charges by GIDC amounting to Rs. 43.6 Crores. o An economic slowdown that severely affected cash flow and fund availability.

These factors cumulatively led to the Corporate Debtor's inability to meet its

repayment obligations under the loan agreements.

Demand Notice and Company Petition

6. On 27th January 2020, the Financial Creditor issued a Demand Notice

demanding Rs. 6.74 Crores, alleging default without specifying the exact date.

Company Appeal (AT) (Insolvency) No. 161 of 2024 3 of 15 The entire credit facility was neither recalled nor accelerated as per the loan

terms.

7. Subsequently, on 14th September 2020, the Financial Creditor filed a

petition under Section 7 of the Insolvency and Bankruptcy Code, citing a

default amount of Rs. 58.38 Crores as of 15th December 2019. This claim was

grossly inflated and misleading, given the actual default was only Rs. 6.74

Crores.

OTS Agreement (December 1, 2021):

8. During the discussions and pendency of the Company Petition, the

Financial Creditor and the Corporate Debtor entered into an OTS Agreement

on December 1, 2021, where Respondent No. 1 agreed to accept an aggregate

OTS amount of Rs. 55.60 Crores towards the Corporate Debtor's dues.

According to the OTS Agreement and the terms of the Loan Agreement, the

payment terms were revised, and Respondent No. 1 postponed the repayment

of the Credit Facilities. The Corporate Debtor committed to making the

following payments to Respondent No. 1:

o Rs. 6 Crores upfront within 10 days from the date of the letter;

o Rs. 34 Crores on or before March 31, 2022;

o Rs. 15.60 Crores on or before March 31, 2025.

It was mutually agreed that a formal Settlement Agreement capturing the

terms of the Settlement would be filed before the NCLT, Mumbai Bench, at

the next hearing on January 7, 2022, to obtain an appropriate order.

Company Appeal (AT) (Insolvency) No. 161 of 2024 4 of 15 Initial Payment and Acceptance

9. On December 20, 2021, the Corporate Debtor, acting in good faith, paid

the upfront amount of Rs. 6 Crores to Respondent No. 1, which was accepted

without protest.

Covid-19

10. From December 2021 till February 2022, there was a sudden rise in

the Covid-19 cases, on account of which most of the offices, including that of

the Government, were either temporarily shut or were operating on a partial

basis. Due to which, the third party purchaser/financer could not comply

with the OTS letter dated 1st December, 2021 and also further could not get

the requisite permissions from the Competent Authorities, because of which

the Corporate Debtor and/or the purchaser/financer were not in position to

pay a sum of Rs. 34,00,00,000/- (Rupees Thirty Four Crores Only) on or

before 31.03.2022, as specified in the OTS letter dated 1st December, 2021.

11. Consequently, the Corporate Debtor on 24.05.2022 filed IA No. 1473 of

2022, placing the OTS Agreement on record and seeking dismissal of the

Company Petition. The Financial Creditor did not respond to this application.

12. Despite agreeing to execute a Settlement Agreement and file it with the

Adjudicating Authority, the Financial Creditor obstructed the process and

failed to record that the parties had settled the purported debt.

Other attempts at Settlement

13. The CD has given details of his efforts for settlement of the dues. These

efforts are being captured herein in next few paragraphs, as they have some

Company Appeal (AT) (Insolvency) No. 161 of 2024 5 of 15 bearing on the settlement of the dues of the CD, even though of not much

assistance.

Expression of Interest by MAK Living Realty Pvt. Ltd. (August 2021)

14. Around August 2021, MAK Living Realty Pvt. Ltd. expressed interest in

acquiring the remaining portion of the project, approximately 155 acres of

land, and sought it free of encumbrances. Consequently, the Corporate

Debtor proposed leasing or assigning the remaining SEZ land to MAK Living

Realty Pvt. Ltd. and entered into assignment agreements. Under these

agreements, MAK Living Realty Pvt. Ltd. committed to repay the pending dues

of Respondent No. 1 and discharging the non-utilisation dues levied by GIDC

on the Corporate Debtor. Subsequently, MAK Living Realty Pvt. Ltd. entered

into agreements with Bhakti Industrial Hub ("Bhakti"), granting leasehold

rights over 125 acres of land.

Payments to Statutory Authorities:

15. Acting on the aforementioned agreements, Bhakti paid approximately

Rs. 18.5 Crores to various statutory authorities on behalf of the Corporate

Debtor to secure the de-notification of the SEZ land for industrial activities.

GIDC Non-Utilisation Charges and High Court Order:

16. To challenge the illegal non-utilisation charges by GIDC, the Corporate

Debtor filed Special Civil Application No. 2560 of 2022 before the Hon'ble

Gujarat High Court. On February 14, 2022, the High Court ordered a status

quo regarding the SEZ land, stalling the de-notification proposal. This status

quo order affected the arrangements with MAK Living Realty Pvt. Ltd. and

Company Appeal (AT) (Insolvency) No. 161 of 2024 6 of 15 Bhakti, preventing the Corporate Debtor from making the March 31, 2022,

instalment payment. The Corporate Debtor kept Respondent No. 1 informed

of these developments.

Further Payments and Revised Proposals:

17. As noted earlier, the Corporate Debtor demonstrated good faith by

paying Rs. 6 Crores on December 20, 2021, and further amounts totalling

Rs.5 Crores by MAK Living Realty Pvt. Ltd. and Bhakti in September 2022.

18. In response to the inability to meet the March 2022 deadline due to

the pandemic and other delays, the Corporate Debtor requested extensions

and proposed revised payment schedules, including paying Rs. 5 Crores by

June 30, 2022, and Rs. 29 Crores by July 31, 2022. The Financial Creditor,

however, threatened to terminate the OTS Agreement without actually doing

so.

Revised OTS Proposal (March 14, 2023):

19. In light of the ongoing issues, the Corporate Debtor sent a revised OTS

proposal to Respondent No. 1 on March 14, 2023, which was in principle

accepted. Respondent No. 1 communicated its conditional approval of the

revised OTS on April 3, 2023, subject to incorporating certain terms and

conditions.

20. Subsequently, all the endeavours and efforts of the Corporate Debtor

and the purchaser/financer went futile and in vain, as the Financial Creditor

vide its letter dated 16.05.2022 purported to move ahead with the termination

of the said OTS Agreement dated 1st December, 2021.

Company Appeal (AT) (Insolvency) No. 161 of 2024 7 of 15

21. The Corporate Debtor vide its letter dated 23.05.2022 once again

requested the Financial Creditor to revisit the timelines of the OTS letter dated

1st December, 2021 and proposed payment of the remaining outstanding due

to the Financial Creditor in two tranches viz. Rs. 5 crores on or before 30th

June, 2022 and Rs. 29 Crores on or before 31st July, 2022.

Respondent's Defense:

22. The Corporate Debtor's appeal against the initiation of insolvency

proceedings appears misguided for the reasons in below mentioned

paragraphs.

23. A Clear Admission of Debt: Throughout this process, the Corporate

Debtor has repeatedly acknowledged their outstanding debt and inability to

pay:

o Their application to dismiss the insolvency petition (IA No.

1473/2022) explicitly mentions this.

o Several letters (dated 23.05.2022, 31.03.2022, etc.) reiterate their

financial situation.

These admissions solidify the existence of a valid debt exceeding the Rs. 1

crore threshold.

24. Omissions galore: The Corporate Debtor has consistently avoided its

financial obligations. They defaulted on both loans, totalling over Rs. 58

crores. This undeniable fact is supported by:

Company Appeal (AT) (Insolvency) No. 161 of 2024 8 of 15 o Their own admissions in multiple letters and proposals (First and

Second OTS).

o Undisputed loan statements and CIBIL reports.

25. Failed Promises and Broken Agreements: The Corporate Debtor

attempted to settle their debt through two One-Time Settlements (OTS) but

failed to fulfil their promises in both instances. This highlights their inability

to meet their financial commitments.

o The First OTS was terminated due to their non-payment.

o The Second OTS, while initially sanctioned, remains unpaid.

These attempts don't erase the original debt. Instead, they serve as additional

evidence of their financial struggle.

26. No Dispute, Just Delay: The insolvency process aims to resolve

financial distress. By proposing OTS during the proceedings, the Corporate

Debtor acknowledges the debt. This attempt to negotiate a settlement doesn't

negate the existing financial obligation.

27. A Default is a Default: Even if we consider only the initial default

amount of Rs. 6.74 crores, it still surpasses the threshold for initiating

insolvency proceedings.

28. Heard Learned Counsels for both the parties and perused all the

documents placed before us.

Appraisal:

Background and Factual Matrix

Company Appeal (AT) (Insolvency) No. 161 of 2024 9 of 15

29. The Corporate Debtor was engaged in the development of Special

Economic Zones (SEZ) and other infrastructure projects. The project, located

at GIDC Panoli Industrial Estate in Ankleshwar, Gujarat, faced numerous

challenges including a lack of buyers, economic slowdown, and substantial

non-utilization charges imposed by GIDC. To fund the SEZ project, the

Corporate Debtor secured a loan facility from the Financial Creditor totalling

Rs. 66 Crores under two agreements.

Financial Default and Demand Notice

30. The Corporate Debtor failed to service the loan as per the agreed

schedule due to various financial difficulties. Consequently, the Financial

Creditor issued a Demand Notice on January 27, 2020, seeking payment of

Rs. 6.74 Crores. This notice was followed by a Company Petition filed under

Section 7 of the Insolvency and Bankruptcy Code (IBC) on September 14,

2020, claiming a default amount of Rs. 58.38 Crores. The Appellant claims

that it is an inflated claim. However, it is belied by proper calculation sheets

on record, which provide for the details for distribution of Rs.58.38 crores.

One Time Settlement (OTS) Agreement

31. In an attempt to settle the outstanding dues, the parties entered into

negotiations resulting in an OTS agreement on December 1, 2021. According

to this agreement, the Financial Creditor agreed to accept Rs. 55.6 Crores as

a full and final settlement, structured in a phased payment schedule. The

Corporate Debtor made an initial payment of Rs. 6 Crores, which the

Financial Creditor accepted.

Company Appeal (AT) (Insolvency) No. 161 of 2024 10 of 15 Failure to Adhere to OTS Terms

32. The Corporate Debtor failed to pay Rs. 34 Crore in Tranche 1 of the

First OTS, which was supposed to be paid by 31.03.2022. Thus, Corporate

Debtor failed to adhere to the terms of the OTS. This has been accepted by

the Corporate Debtor in its I.A. No. 1473 of 2022 which he filed before the

Adjudicating Authority on 24 May 2022, in which it is claimed that the

Appellant on 12.04.2022 requested the Financial Creditor for further time to

pay the balance amount, which was due as on 31 March 2022 and also

indicated their readiness and willingness to pay the interest on the delayed

payment. The Appellant also sought the relief to dismiss / reject the

CP(IB)/66(MB)/2022 in view of the OTS dated 01 December 2021. Per contra

Respondent No.1 has clearly brought out that the proposals for OTS with the

Corporate Debtor for Rs. 55.60 crores were to be paid in two tranches.

33. Instead, on 12.04.2022 the Corporate Debtor filed an application

seeking dismissal of the insolvency petition on the ground of the OTS. The

Respondent No. 1 by letter dated 16.05.2022 terminated the First OTS on

account of default by the Corporate Debtor. All original terms of the loans

extended by the Respondent No. 1 to the Corporate Debtor were reinstated.

34. In response, the Corporate Debtor by letter dated 23.05.2022, once

again admitted its debts and offered to pay the balance amount by

31.07.2022. The Respondent No. 1 by letter dated 27.05.2022 rejected this

Company Appeal (AT) (Insolvency) No. 161 of 2024 11 of 15 request and re-iterated that the First OTS was terminated, and all original

terms of the loans were reinstated.

35. Second OTS Proposal: On 14.03.2023, the Corporate Debtor sent

another OTS proposal to the Respondent No. 1 for Rs. 48.60 crores along with

interest, with payment of Rs. 8.50 crores to be made upon sanction of the

Second OTS. The Respondent No. 1 by letter dated 03.04.2023 accorded an

in-principle sanction to the Second OTS proposal, subject to the terms and

conditions mentioned therein. In case of non-adherence to timelines, the

original loan liabilities were to revive and the OTS was to be treated as

acknowledgment of the debts under the entire loan. The Corporate Debtor did

not make any payment under the Second OTS till date. Therefore, the debt

and default have been admitted by the Corporate Debtor again and again.

36. We find that the CD has failed to settle their debt through OTS in both

instances. In the First OTS it was terminated due to their non-payment the

second OTS was sanctioned initially but remains unpaid.

37. The oral arguments of the Corporate Debtor that the OTS novates the

original loan agreements cannot be accepted for the reasons that the OTS

document clearly states that "any non-adherence to the time lines as

stipulated shall amount to revocation of the OTS". First OTS and Second OTS

in the present case did not novate the debt under the original loan

agreements. The First OTS was terminated by the Respondent No. 1 and the

original loan obligations stood revived. The revival of original loan obligations

Company Appeal (AT) (Insolvency) No. 161 of 2024 12 of 15 in case of default was further reiterated in the Second OTS, which also stood

terminated.

38. Despite several requests for extensions, the Financial Creditor found

the Corporate Debtor's performance unsatisfactory, leading to the

termination of the OTS agreement and the continuation of the insolvency

proceedings.

Analysis and Judgment

39. The appeal challenges the Adjudicating Authority's order on several

grounds, arguing bad faith by the Financial Creditor, misleading claims of

default amount, and obstruction in the settlement process. However, the

appeal does not hold upon a thorough examination of the facts and legal

principles.

Legality and Validity of the Demand Notice and Company Petition:

40. The Demand Notice and the subsequent Company Petition were issued

in accordance with the provisions of the IBC. The Financial Creditor's claim

of Rs. 58.38 Crores is backed by the loan agreements and the Corporate

Debtor's admitted inability to repay the loans as scheduled. Minor technical

objections raised by the Corporate Debtor with respect to the authorization,

notice in writing (Clause 8.6 of the loan agreement) and also declaration for

acceleration (Clause 8.3.1 of the loan agreement) do not stand the scrutiny

basis the material on record, including the rejoinder confirming the debt and

also the default. In any case, even if it is assumed that default was of only Rs.

6.74 crores and not of the entire loan amount, the default is still above the

Company Appeal (AT) (Insolvency) No. 161 of 2024 13 of 15 threshold amount of Rs. 1 crore. The debt and default are further established

by the following documents (a) CIBIL Report showing overdue amounts; (b)

Statement of Loan Accounts of both loans as proof of default (as on

16.06.2020); and (c) Balance sheet of the Corporate Debtor for FY 2017-18.

Further, it is not hit by Section 10A, as the date of default as per Part IV of

Section 7 petition is 15.12.2019.

Impact of the One Time Settlement Agreement:

41. While the OTS agreement shows the Corporate Debtor's intent to settle

the dues, the failure to adhere to its terms, even considering external factors

such as the High Court's order, cannot nullify the Financial Creditor's right

to pursue insolvency proceedings. The terms of the OTS required strict

compliance, and the Corporate Debtor's failure to meet these terms justified

the Financial Creditor's decision to terminate the agreement.

Assessment of Financial Creditor's Conduct:

42. The Financial Creditor acted within its rights by accepting the initial

OTS payment and subsequently seeking to recover the remaining dues

through insolvency proceedings when the Corporate Debtor defaulted. There

is no evidence of bad faith or unfair obstruction by the Financial Creditor.

The acceptance of partial payments does not negate the default or the

legitimacy of the insolvency proceedings.

Adjudicating Authority's Decision:

43. The Adjudicating Authority correctly applied the provisions of the IBC

in admitting the Company Petition and initiating CIRP. The Corporate

Company Appeal (AT) (Insolvency) No. 161 of 2024 14 of 15 Debtor's inability to service its debt, as per the loan agreements and the OTS,

substantiates the Financial Creditor's petition under Section 7 of the IBC.

Conclusion

44. In light of the above analysis, the appeal against the order of the

Adjudicating Authority lacks merit. There is a clear admission of debt and

default is clearly established. The default amount is more than Rs.1 crore.

The Financial Creditor acted within its legal rights throughout the process,

and the initiation of CIRP is justified by the Corporate Debtor's persistent

defaults and failure to comply with the OTS terms.

45. The order of the Adjudicating Authority is upheld, and this Appeal is

hereby dismissed. The Corporate Insolvency Resolution Proceedings against

HBS Auto and ANC SEZ Private Limited shall continue as per the provisions

of the Insolvency and Bankruptcy Code. No orders as to costs.

[Justice Ashok Bhushan] Chairperson

[Barun Mitra] Member (Technical)

[Arun Baroka] Member (Technical) New Delhi.

31st May, 2024 pks

Company Appeal (AT) (Insolvency) No. 161 of 2024 15 of 15