Neelkanth Township And Construction ... vs Urban Infrastructure Trustees Ltd

11. THE NATIONAL COMPANY LAW APPELLATE TRIBUNAL. COMPANY APPELLATE JURISDICTION ••.0. Company Appeal (AT) (Insolvency) No. 44 of 2 (arising out of Order.dated 21st April2017 passed by NCLT, Mumbai Bench, Mumbai In C.P.No. 69/I&BP/NCLT/MAH/2017

•:Ne.elnth Township and Construction. Pvt. Ltd. .Appellant Vs.. Uban Infrastructure Trustees Limited Respondent

Present: For Appellants: Dr. UK.Chaudhaty, Senior Advocate with Mr. Kush Chaturveda, Ms Anshula Grover, Ms Chaitrika Pathi, Mr. Aman Uarma, Mr. Saket Mone and Mr. Bimanshu Vij, Advocates. For Respondents: Mr. Jaideep Gupta, Sr. Advocate with Mr. Arif Doctor, Ms. Surekhararnan: and Anuj .Sharma, Advocates. .

JUDGEMENT

SUDHANS.0 JYOTI. MUKHOPADRAYA,J.

This appeal has been preferred by Appellant/ Corporate Debtor against

order dated 2 1t April 2017 passed by Learned Adjudicating Authority,

(National Company Law Tribunal), Mumbai Bench, Mumbai, in C P No

69/l&BP/NCLT/MAH/2017. By the impugned order Learned Adjudicating

Authority entertainedthe application preferred by the Respondent Financial

Creditor .uiider Section 7 of the Insolvency & Bankruptcy Code, 2016

(hereinafter referred to as 'I & B Code'), admitted the application and ordered

moratorium with further order appoint an Insolvency Resolution

Professional and passed consequential directions.

Learned Counsel, for the Appellant-Corporate Debtor assailed the

impugned order mainly, on the:.following grounds: -

The application filed by Respondent under Section 7 is. 4efectie.

and not complete. as it was not accompanying the documents, as

mandàthd by sub-section (3) of. Section 7 of the 'I & B Code'.

(ii) The application under section .7 is tinie barred, as the debt..

.

claimed related to the years 2011, 2.012 and 2018.

(iii) That the 'default of debt' as claimed by Respondent. .has not been

admitted by the Corporate Debtor. and

(iv That the Respondent is. not a 'Financial Creditor', but an .Itivestor.

Learned counsel for the appellant . submitted that an application by a

'Financial. Creditor' under Section 7 can only be filed when it is.furnished with

the documents..provided under Sub-section (3).. of SectiOn 7 and none other,

namely (a) a record of the default as recorded with the information utility (b

Such other record or evidence OI..default as may be specified.

.4. The expression "such other record .01 evidence of default" as may be, specified can only be such record or evidence as is specified by the insolvency

and Bankruptcy Board of India (hereinafter referred to as "the Board") under Cf sub-section 2(f) of Section 240 of & B Code'. Reliance was also placed. on

definition of the word "specified" as defined under Section 3(32) of the 'J&B

Code'

Learned .counsel for the appellant placed reliance on decision of this

Appellate Tribna1 in 'Smart Timing Steel Limited Vs. National Steel & Agro

Industries Ltd."": Company Appeal (AT)(Iris) No. 28 of 2017 to suggest that the

provision of sub-section .3(a) of SectiOn 7 is mandatory.

was also. submitted that it was .th• Of the inso1venc and

Bankruptcy Board of India (In short "Doard") to specify Regulations and in

absence of the same the proceeding under Section 7 of 18& B Code' cannot be

initiated.

7. In support of the second contention it was submitted that the time barred

debt cannot be enforced by filing an application for Corporate Insolvency

Resolution Process The claim of the 'Financial Creditor', is completely time.

barred as the debenture certificates were due for redemption as far back as in

the years 2011, 2012 and. 2013 respectively. Consequently, the application

filed by the Financial Creditor' in the.year 2017 is hopelessly time barred.

It was next submitted that the respondent does not come within the

Irneaning of "Financial Creditor" as defined in sub-section (7) read with sub-

section(8) of Section 5. of the 'I & B code'. No 'financial debt' is owed to the

Respondent.

9. .:Counsel for the Appellant further submitted that 'Debenture Certificates'

forming basis of claim of the Respondent do not fall within the definition of

'financial debt' as provided under sub-section (8) of Section 5 of the 'I & B

Code' A plain reading of the definition of 'financial debt' makes it apparent

that it is the debt which is only if disbursed against the consideration for time

value of money. Therefore, there has to be a consideration flowing from the

advance of money which is at par with the time value of money. Since the

'debenture certificates' issued to the Respondent were carrying zero interest

and another was carrying only one percent interest, the same were not issued

against consideration for time value of money, as envisaged under sub-section

(a) of Section 5. The debenture certificates were purchased bylRespondent only by way of an investment, and do not come within the meaning of 'financial

debt'..

10 Learned Counsel for the appellant also placed reliance on definition of

"debt" as defined under sub-section (1.1.) of Section 3 of the '1 & B Code' It was

further contended that there is pendency of proceedings. between the parties

as the 'Financial Creditor' has already invoked arbitration against the

'Corporate Debtor' for the same cause of action which is an admitted fact

11. In reply Learned Counsel appearing on behalf of the respondent

submitted that in absence of the Regulations framed by the Board, the statutes

(I & B Code) cannot be made ineffective, having come into force since 15th

December 2016 Reliance, was also placed on Insolvency and Bankruptcy

(Adjudicatmg Authority Rules, 2016) (hereinafter referred to as Adjudicatoiy

Rules) framed by the Central Government, under section 239 of the 'I & B

Code!

12 Learned Counsel for the respondent submitted that the Balance Sheet of

'Corporate Debtor' was noticed by Learned Adjudicating Authority, before

admitting the case Reliance was also placed on Regulation 8(2) and To C"

of Insolvency andBankruptcy Board of India (Insolvency Resolution Process

for Corporate Persons) ReguIatioiis 2016 (hereinafter referred to 'Corporate

Person'), Regulation 20.1:6.

13. The question to be determined is whether in absence of record of default

as recorded with the information utility or any other "record or evidence of

default" specified by the Board, an application under Section 7 is maintainable

or not?

14. Process of initiation of Insolvency .Resclu•tiOh process by a financial

creditor is provided in Section 7 (if the I & B Code As per sub-section (1) of

Section 7 of the..1 & B Code, the trigger for filing of an application by a financial

creditor before the Adjudicating Authority is when a default in respect of any

financial debt has occurred Sub-section (2) of Section 7 provides that the

financial creditor shall make an application in prescribed form and manner

and with prescribed documents, including "record of the default" recorded with

the information utility of such other record or evidence of default as may be

specified"

15. 'Once the application is flied by the 'Fi4;cia1 Creditor' with the

Adjudicating Authority, the Adjudicating Authority, within 14 days of the

receipt of the application under sub-section (2) of Section 8 required to

ascertain the existence of default from the records of an information utility or

on. the basis of Other evidence furnished by the 'fiiancial creditO? under sub-

section (3)(a) of Section 7

.16 'Financial Creditor' along with, the ap.plicati:n. required to be furnished

information and other facts as prescribed under sub-section (3) of Section 7

Where the Adjudicating Authority is satisfied that a default has occurred and;

the application under sub-section (2) is complete, and there are no disciplinary

proceedings pending against the proposed resolution professional, it can admit

such application and in case the application is incomplete, required to provide

7 days' time to complete the record and on failuie is to dismiss the application

17 The aforesaid facts are to be considered from the procedure for initiation:

of corporate insolvency resolution process by 'financial creditor' as mandated

under Section 7 of 'I & B Code', and quoted below--

A financial creditor either by itself orjointly with other".

financial creditors may file an application for initiating corporate

insolvency resolution process against a corporate debtor before

the Adjudicating Authority when a default has occurred.

Explanation. --For the purposes of this. sub-section, adefault

includes a default in respect of afinancial debt owed not only to

::the applicant financial creditor but to any other financial creditor

of the corporate debtor..

(2) The financial creditor shall make an application under sub-

section (1) in such form and manner and accompanied with such

fee as may be prescribed.

(3). The financial creditor shall, along with the appljOation,

frrnish-

(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 the resolution professional proposed to act as

an interim resolution professional, and

(c) any other information as may be specified by the Board.

(4) The Adjudicating Authority shall, within fourteen days of the

receipt of the application under sub-section (2), ascertain the

existence of a default from the.records of an information utility or

on the basis of other evidence furnished by the financial creditor

under sub-sectiOn (3).

(5) Where the Adjudicating Authority is satisfied that--

(a) a default has occurred and the application under sub-

section (2) is complete, and there is .:no . disciplinary proceedings pending against the proposed nsb1Ütio,t

professional, it may, by order, admit such application, or

(I,) default has not occurred or the application under sub-

section (2) is incomplete or any disciplinary proceeding is

pending against the proposed resolution professional, it may,

by order, reject such application

Provided that the Adjudicating Authority shall, before rejecting

the application under clause (b) of sub-section (5), give a notice

to the applicant to rectify the defect in his application within

seven days of receipt of such notice from the Adjudicating

Authority

(6) The corporate insolvency resolution process shall commence

from the date of admission of the application under sub-section

(5)

(7) The Adjudicating Authority shall communicate--

(a) the order under clause (a) of sub-section (5) to the financial

creditor and the corporate debtor;

(b) the order under clause (b) of sub-section (5) to the financial

creditor, within seven days of admission or rejection of such

application, as the case MAY be"

I It is well settled that rules of procedure are to be construed not to

frustrate or obstruct the process of adjudication under the substantive

provisions of law A procedural provision cannot override or affect the

substantive obligation of the adjudicating authority to deal with applications

under Section 7 merely on the ground that Board has not stipulated or framed

Regulations with regard to sub-section 3(a) of Section T. The language of Section 240, whereby Board havebeemempow6te&to. frame reguiátionSis; clear

at the said regulation should be consistent with the 1 & B' Code and the

es made thereunder by the Central Government..

In exercise of power conferred by Section 239 read with Sections 7, 8, 9

and 10 of the 'I & B code, the Central Government framed the rules known as

"Insolvency & Bankruptcy (Application to Adjudicating Authority) Rules, 2016

(hereinafter referred to as 'Adjudicating Authority Rules, 2016). As per Rule

41, a Financiai Creditor' required to apply itself O.r jointly in an application

:Under Section 7 in terms of Formj .attac:hed thereto. Part V of Form-? deals

with particulars of 'Financial Debt' (documents, record and evidence: of defaült,

as quoted below..-

PART V

PARTICULARS OF FINANCIAL DEBT( DOCUMENTS, RECORDS AND EVIDENCE OF DEr'AUL27•

PARTICULARS OF SECURITY HELD,: IF ANY, THE.DATE OF ITS CREATION, ITS ESTIMATED VALUE AS PER THE CREDITOR. ATTACH A COPY OF A CERTIFICATE OF REGISTRATION OF CHARGE ISSUED BY THE REGISTRAR OF COMPANIES (IF THE CORPORATE DEBTOR IS COMPANY)

2, PARTICULARS OF AN ORDER OF .A COURT, TRUNAL OR ARB1TRAL PANEL ADJUDICATING ON THE DEFAULT, IF ANY (ATTAcHA COPY OF THE ORDER)

RECORD OF DEFAULT WITH THE INFORMATION UTILITY, ANY (ATTACH A COPY OF SUCH RECORD)

4. DETAILS OF SUCCESSION CERTIFICATE, OR PROBATE OF A WILL OR LETTER OF ADMINISTRATION, OR COURT DECREE (AS MAYBE APPLICABLE), UNDER THE I1VfjL1W SUCCESSION ACT, 1925 (10 OF 1925) (ATTAcHA COPY)

5. THE LATEST AND COMPLETE COPY OF THE FINANCIAL CONTRACT REFLECTING ALL AMENDMENTS AND WAIVERS TO DATE (ATTACH A COPY) .6. A RECORD OF DEFAULT AS AVAILABLE WITH ANY CREbi1:; INFORMATION COMPANY (ATTACH A COPY)

Z. COPIES OF ENTIRES IN A BANKERS BOOK LW ACCORDANCE WITH THE BANKERS BOOKS. EVIDENCE ACT, 1891 (18 OF 1891)

8. LIST OF OTHER DOCUMENTS ATTACHED TO THIS APPLICATION IN ORDER TO PROVE THE EXISTENCE OF OPERATIONAL DEBT AND THE AMOUNT IN DEFAULT"

20.. The rules framed by the Central Government Section 2 having

prescribed the aocuments, i ecord and evidence of default as noticed above, we

hold that in absence of regulation framed by the Board relating to record of

default recorded with the information utility or other record of evidence of

default specified, "the documents", 'record' and 'evidence of default'prescribed

at Part V of Form- 1, of the Adjudicatory Rules 2016 will hold good to decide

the default of debt for the purpose of Section 7 of the 'I &.B Code'

21, We further hold that .the"Reguiatiøns framed bythe Board'..bêing: subject,

to the provisions of 'I & B Code' and rules framed by the Central Government

under Section 239, 'Part V of Form - 1' of Adjudicating Authority Rules, 2016

framed by Central Government relating to 'documents', 'record' and 'evidence

of defailt', will override the regulations, if framed by the Board and if

inconsistent with the Ride Howeer, it is always open to Board to prescribe

additional records in support of default of debt, such as records of default

recorded with the information utility or such other record or evidence of default

in addition to the records as mentioned in Part V of Form-1. 10

22 At this stage, it: is pertinent to note that the Board has also framed

Insolvency Resolution Process for Corporate Persons, Regulations, 2016

('Corporate Persons Regulation' for short). It has come into force since

Notification dated 30th November 2016 was issued Regulation 8 of 'Corporate

Persons Regulation', 2016 relate to claims by 'Financial Creditor' Regulation

11(2) relates to existence of debt due to 'Financial Creditor', which is to be

proved on the basis documents mentioned therein and quoted below -

"8 Claims by financial creditors

(1) A person claiming to be afinancial creditor of the corporate

debtor shall submit proof of claim to the interim resolution

professional in electronic form in Form C of the Schedule

Provided that such person may submit supplementary

documents or clarifications in support of the claimbefore the

constitution of the committee.

(2) The existence of debt due to the financial creditor may be

proved, on the basis of-

(a) the records available with an information utility, if any;

or

lb) other relevant documents, including -

(i) a financial contract supported by financial statements

as evidence of the debt;

(ii) a record evidencing that the amounts committed by the

financial creditor to the corporate debtor under a facility

has been drawn by the corporate debtor, ii.

(iii) financial statements àhoivihg that the debt has not

been repaid; or

(iv) an order of a court or tribunal that has adjudicated

upon the non-payment of a debt, if any."

23. .. o 'Form - C' attached to the Regulation relates to proof of Claim

'Financial Creditor' whereunder at Serial No. 10, the Financial Creditor' is

supposed to refer the list of documents in proof of claim in order to prove the

existence and non-payment of claim dues to the 'Operational Creditor'

erefore, the stand of the appellant that the Board has not framed any

Regulations, relating to clause (a) of sub-section (3) of Section 7, cannot be

accepted.

24.. The next ground taken on behalf of the appellant is that the claim of the

respondent is barred by limitation, as the Debentures were matured between

the year 2011 - 2013 is not based on Law There is nothing on the record that

Limitation Act, 2013 is applicable to I & B Code Learned Counsel for th

appellant also failed to lay hand on any of the provision of I & B Code to suggest

that the Law of Limitation Act, 1963 is applicable The I & B Code, 2016 is not

An Act for recovery of money claim, it relates to initiation of Corporate

Insolvency Resolution Process. If there is a debt which includes interest and

there is default of debt and having continuous course of action, the argument

that the claim of money by Respondent is barred by Limitation cannot be

accepted.

25 Next question arises is whether the respondent come within the meaning

of 'Financial Creditor' or not,.

• 6. For determination of the.aforesaid is$ue, it is desirable to notice meaning

Of "Financial Creditor', as defined in sub-section (7) of Section 5 of 'I & B Code',

and quoted hereunder:

"(7 'financial creditor" means any person to whom a financial

debt is. owed and includes aperson to whom such debt has been

legally, assigned or transferred to

27. 'Financial Debt' means a debt, along with interest, if any, which is.

;disbursed against the consideration of time value and money as defined in sub-

sectiOn (8) of Section 5, as quoted below: -

"Sec.5. Definitions in this Part, unless the context

otherwise requires,

(8) 'financial debt" means a debt alongwith interest, if

:which is disbursed against the consideration for the time

value of money and includes--

(a) money borrowed against the payment of interest,

(b) any amount raised by acceptaru:.

'; under . ..y

acceptance credit facility or its, de-materialised

equivalent;

(c) any amount raised pursuant to.: any iwte purchase

facility or the issue of bonds, notes; debentures, loan

stock or any similar instrument;

fd, the amount of any liability in . respect of any lease or

hire purchase contract which is deemed as. a finance or-

r

capital. lease under the Indian Accounting Standards or capital

such other accounting standards as may be prescribed;

(e) receivables sold or discounted other than any

receivables sold :on nonrecourse basis;

(f) any amount raised under any other transactiort,

including any forward . sale or purchase agreement,,

having the commercial effect f a:borrowing;

(g) any derivative transaction entered into in connection,

with protection against or benefit from fluctuation, in any

rate or price and for calculating the value of any

derivative transaction, only the market value of such.

transaction shall be taken into account;

h) any counter-indemnity obligation, in respect •o

guarantee, indemnity, bond, documentary letter of credit

or any other instrument issued . by a. bank Or financial

institution;

(i) the amount of any liability in respect of any of the

guarantee or indemnity for any of the items referred to in

sub-clauses (a) to(h) of this clause,b

28. Clause (c) of sub-section (8) of Section '5 deals with any amount raised.

pursuant to any note purchase facility or the issue of bonds, notes:

debentures, loan stock or any similar instrument.,

29. From the aforesaid provision, we find that the debentures come within

meaning of 'Financial Debt' as defined in Clause ( I sub-section (8)

Section. S.

.3 Debt' is defined in :.ijb-sectjon (11) of Section 3 means:

"(11) "debt" me a liability or obligation in respect of

a claim which is due from any person and includes a

financial debt and operational debt"

31. It is admitted that the appellant is debenture holder. The Respondent-

'Corporate Debtor' also pleaded that the appellant is Investor From the

relevant facts as we noticed above, we find that the Respondent- 'Corporate

Debtor has a liability and obligation in respect of amount which is due to the

debenture holder from the 'Corporate Debtor', including 'Financial Debt' 1 e the

amount due on maturity of debentures

3 The 'default' means non-payment of debt as defined in sub-section 12 of

Section 3, as below: -.

"(12) "default" means non-payment of debt when whole

or any part or instalment of the amount of debt has

become due and payable and is not repaid by the debtor

or the corporate debtor, as the case may be"

33 The fact as pleaded 'and not disputed by Respondent - 'Corporate Debtor'

that the 'debenture holder' (Appellant) and amount matured in the year 2011,

2012 and 2013 has not been paid Thus, we find there is a default as defined

under section 3(12) of the I & B Code The. 'CorporateDebtor' had a liability and.obli'gatiori in: respect of claim

of respondent which includes the 'Financial Debt', including those come within.

clause (c) of sub-section (8) of Section 5 As per the agreement, the same was

liable to be paid from the date of maturity along with interest, if any and the

same having not paid, the default of debt is apparent.

This apart we find that the amount Of debt and. interest, as shown: b

appellant was to be disbursed: against consideration: for time value of the.

money. Therefore, it cannot be stated that debentures on maturity do not come

Within the purview i9f amount payable against the consideration for the time

vain..of the money.

35 In, the albresaid background, the Learned Adjudicating Authority having

admitted the application under Section 7, the application being complete, no

interference is called for

36. In .absence of any merit the appeal is dismissed. However, in the facts

and circumstances, there shall, be no order as to cost.

Balvinder Singh) Justice S.J. Mukhopadhaya Member (Technical)1. Chairperson.

NEW DELHI August, 2017