Pec Ltd vs Sri Gangadhara Steels Limited

(Arising out of Order dated 29.08.2017 passed by the Adjudicating Authority (National Company Law Tribunal), Hyderabad Bench, Hyderabad in Company Petition No. (IB)-39/7/HDB/2017)

IN THE MATTER OF:

PEC Ltd. ... Appellant

Versus

M/s. Sree Ramakrishna Alloys Ltd. ... Respondent

Company Appeal (AT) (Insolvency) No. 236 of 2017

(Arising out of Order dated 29.08.2017 passed by the Adjudicating Authority (National Company Law Tribunal), Hyderabad Bench, Hyderabad in Company Petition No. (IB)-40/7/HDB/2017)

IN THE MATTER OF:

PEC Ltd. ... Appellant

Versus

M/s. SriGangadhara Steels Limited ... Respondent

Present: For Appellant: Mrs. Sangeeta Sondhi, Shri Sanjeev Narula, Ms. Kaanan Gupta and Shri Vikas, Advocates.

For Respondent: Shri Rajesh Bohra, Shri Aditya Naryan and Shri Tanmay Jain, Advocates.

Company Appeals (AT) Nos. 225 & 236 of 2017 2

JUDGEMENT

SUDHANSU JYOTI MUKHOPADHAYA, J.

In both the appeals as common question of law is involved,

Appellant is common, the terms of agreement are similar, they were heard

together and are being disposed of by this common judgment.

2. The Appellant- 'M/s. PEC Ltd.' is a Government of India Enterprise,

and is a 'Financial Creditor' of Respondent(s)- 'Corporate Debtor(s)' of

both the appeals.

3. The case of the Appellant is that the Respondent- 'M/s. Sree

Ramakrishna Alloys Limited' defaulted of Rs.15,16,26,907/- as on 6th

March, 2017. Initially, on demand, the Respondent- 'M/s. Sree

Ramakrishna Alloys Limited' issued three cheques which have been

bounced, three Criminal Complaints under Section 138 of the Negotiable

Instrument Act, 1881 has been instituted against the said Respondent

being Criminal Complaint No. 40156/2016, Criminal Complaint No.

18535/2016 and Criminal Complaint No. 18399/2017 pending in Patiala

House Courts, New Delhi.

4. According to Appellant, the Respondent(s)- 'M/s. Sree

Ramakrishna Alloys Limited' has also sold the goods pledged by the

Appellant and has misappropriated the sale proceeds of the stock of

pledged goods for which Criminal Complaints have also lodged by filing

Company Appeals (AT) Nos. 225 & 236 of 2017 3

FIR before Station House Officer (SHO), Parawada Police Station,

Visakhapatnam-CII.

5. The Appellant- 'M/s. PEC Ltd' filed an application under Section 7

of the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as

"I&B Code") for initiation of 'Corporate Insolvency Resolution Process'

against 'M/s. Sree Ramakrishna Alloys Limited'. The said application on

notice has been admitted by impugned order dated 29th August, 2017,

order of moratorium has been passed and 'Interim Resolution

Professional' has been appointed. The grievance of the Appellant is that

though the application was preferred by the Appellant under Section 7 of

the 'I&B Code', at the request of the Respondent- 'M/s. Sree Ramakrishna

Alloys Limited' ('Corporate Debtor'), the application has been treated to

be an application under Section 9 of the 'I&B Code', and order of

admission has been passed.

6. Learned counsel appearing on behalf of the Appellant submits that

in view of the fact that the application under Section 7 of the 'I&B Code'

has been treated to be an application under Section 9 of the 'I&B Code',

the Appellant is now deprived of its right as 'Financial Creditor' and

cannot take part as a member of 'Committee of Creditors' which has a

vital role to play. It was further submitted that the application having

filed under Form-1 of the Insolvency and Bankruptcy (Application to

Adjudicating Authority) Rules, 2016, (hereinafter referred to as

"Adjudicating Authority Rules") the same cannot be treated to be an

Company Appeals (AT) Nos. 225 & 236 of 2017 4

application under Form-5 of the Adjudicating Authority Rules, as per

which different informations and records are to be provided and enclosed.

7. Similar is the plea taken in the case of 'M/s. SriGangadhara Steels

Limited' the other ('Corporate Creditor') Respondent in the other appeal.

According to Appellant, 'M/s. SriGangadhara Steels Limited', also

defaulted to pay the amount of Rs. 7,43,89,467/- as on 6th March, 2017.

The said 'M/s. SriGangadhara Steels Limited' also issued three cheques

which were bounced giving rise to three Criminal Complaints under

Section 138 of the Negotiable Instrument Act against the Respondent(s)

being Criminal Complaints No. 40154/2016, Criminal Complaint

No.18534/2016 and Criminal Complaint No. 18400/2017, all pending in

the Patiala House Court at New Delhi.

8. In the said appeal similar plea has been taken that the Respondent-

'M/s. SriGangadhara Steels Limited' had also sold the goods pledged by

the Appellant and have misappropriated the proceeds of the stock of

pledged goods and for which, the Appellant has filed Criminal

Complaints. Against 'M/s. SriGangadhara Steels Limited'-('Corporate

Debtor') also an application under Section 7 of the 'I&B Code' was filed

but the Adjudicating Authority at the instance of the 'Corporate Debtor',

treated the application as an application under Section 9 and by

impugned order dated 29th August, 2017, admitted the application,

passed order of moratorium and appointed 'Interim Resolution

Professional'.

Company Appeals (AT) Nos. 225 & 236 of 2017 5

9. We have heard learned counsel for the Appellant(s) and learned

counsel appearing on behalf of the Respondent(s).

10. From the record of both the appeals, we find that the agreement

reached between the Appellant-'M/s. PEC Ltd.' and respective

Respondent(s) are verbatim similar. For the said reason, we are referring

one of the agreement, language of both the agreements being same,

except the name of one of the party.

11. From relevant fact as pleaded we find that 'M/s. Sree Ramakrishna

Alloys Limited' ('Corporate Debtor') by their letter dated 19th February,

2014 intimated the Appellant- 'M/s. PEC Ltd.' that the said Respondent

has proposed to procure 'M.S. Billets' as per the policies of the Appellant.

So, the Appellant was requested to approve and grant clearance for the

purchase of 'M.S. Billets' through ILC for Rs. 4,99,97,493/- (Rupees Four

Crores Ninety-Nine Lakhs Ninety-Seven Thousand Four Hundred and

Ninety-Three Only) and enclosed the offer and proforma invoice with

request to the Appellant- 'M/s. PEC Ltd.' to arrange an amount of

Rs.63,75,000/- (Sixty-Three Lakh Seventy-Five Thousand Only) towards

the 12.5% margin money with conditions as mentioned therein, which

reads as follows:

"SREE RAMAKRISHNA ALLOYS LIMITED INNOVATIVE GROWTH To M/s PEC Limited A Govt. of India Enterprise (Under Ministry of Commerce) Jagannadh Nilayam, 10-27-17A, Waltalr Uplands, VISAKHAPATNAM-530 003 Tel. No. 0891-2710311, Fax No. 0891-6642008 Company Appeals (AT) Nos. 225 & 236 of 2017 6

Kind Attn: Shri G.Y. Dupate, Branch Manager

Dear Sir,

Sub: Proposal for procurement M.S. Billets as per your policies

We are very thankful to you for your continued support. We now wish to procure 1292 MT of MS Billets from M/s. HARI HARA TRADERS MIG-81, D. No. 24-33-26, Vinayaka Nagar, Vuda Colony, Peda Gantyada, Visakhapatnam (AP) 530044 for which we request you for your approval and clearance for the purchase through ILC for Rs. 4,99,97,493/- (Rupees Four Crores Ninety Nine Lakhs Ninety Seven Thousand Four Hundred and Ninety Three Only). We are enclosing herewith a firm offer and proforma Invoice from the supplier of MS Billets M/s. HARI HARA TRADERS Visakhapatnam at Rs. 36,855/- (Basic price Inlusive of duty) + VAT 5% extra. This price is inclusive of freight i.e., delivery to our yard.

We hereby inform your good selves that we will arrange an amount of Rs.63,75,000/- (Sixty Three lakh Seventy Five Thousand Only) towards the 12.5% margin money for the above LC by way of RTGS.

We request your good selves to open ILC with following conditions:

1.Advising bank: State Bank of India Overseas branch, Visakhapatnam

2.Time for lifting of material: One month

3.Time for documentation: 10 days

4.Partial Negotiations should be allowed

We look forward for your confirmation of our proposal for domestic purchase.

With Best Regards

Thanking you,

Yours faithfully, For SREE RAMAKRISHNA ALLOYS LIMITED

Sd/-

(S. RAMAKRISHNA) Managing Director"

12. It was followed by an agreement reached between the Appellant-

M/s. PEC Ltd. and Respondent- 'M/s. Sree Ramakrishna Alloys Limited'

on 24th February, 2014. Relevant portion of the said agreement reads as

follows: -

"NOW IT IS AGREED BY AND BETWEEN THE PARTIES AS UNDER:-

Company Appeals (AT) Nos. 225 & 236 of 2017 7

SRAL is desirous of purchase approx. LC1292.000 MTS (+/-2%) MS Billets @ Rs. 36,855/- PMT + 5% Taxes. (Total value to Rs. 4,99,97,493/- (+/-2%).

The material shall be delivered and stored in open space earmarked for PEC and duly fenced at SRAL's Yard Paravada, Visakhapatnam.

In order to procure raw material and to fulfill their obligations under their supply contracts with different buyers of the finished goods, SRAL has requested PEC for financial assistance to purchase the raw material. And at the request of SRAL, PEC has agreed to provide ILC of Rs. 4,99,97,493/- (+/-2%) (Rupees Four Crore Ninety Nine Lakhs Ninety Seven Thousand Four Hundred and Ninety Three Only) towards cost of said material (inclusive of applicable taxes).

1. SRAL shall provide to PEC Margin Money as advance equal to 12.5% on 100% of the value of the material to be procured through PEC.

2. SRAL has to pay 1% Trade Margin to PEC on invoice value of the material procured through PEC.

3. PEC shall raise Tax invoice by loading 1% Trade margin on purchase value immediately and differential VAT would be remitted to the state govt. and same shall be recovered from SRAL.

4. SRAL shall pledge the stock to PEC by way of entering into deed of pledge.

5. SRAL shall lift the entire stock with in the usance period of ILC i.e. 90 by making payment at the Release Order rate fixed by the PEC.

6. SRAL agrees to pay usance interest at the applicable rate. All bank charges, incidental expenses, taxes, levies & duties involved in the said supply transactions shall be on SRAL's account.

7. In case PEC remains out of pocket beyond the recovery period of 90 days as stated above and PEC's fund remain blocked, SRAL will pay interest at the rate of 14.5% per annum for the delayed period beyond 90 days.

8. SRAL will also pay to PEC all bank charges including DD/Pay Order/Fax charges etc. and any other incidental charges that may be incurred by PEC. These charges will be settled at actuals. Any excess/refund will be settled within a week's time after getting such advice from PEC.

9. SRAL will ensure the delivery of material from M/s HARI HARA TRADERS immediately on opening of ILC by PEC. PEC shall not be responsible for the quantity and quality of material at the point of loading as well as at the point of unloading. Immediately after delivery of material by supplier, SRAL will intimate PEC and it's surveyor with a copy of the invoices/DC and will immediately pledge the Material in favour of PEC and will store the Material in PEC's warehouse/Plant Premises of SRAL to the satisfaction of PEC.

10. SRAL has agreed to pledge the Material in favour of PEC and store them in Warehouse/plant premises to the satisfaction of PEC at the cost and risk of SRAL. It will be a first charge and SRAL will not put any further charge with any other person/party. For this, SRAL shall sign an Agreement of Pledge, which shall form an integral and inseparable part of this Agreement.

11. SRAL shall earmark area in their plant premises for PEC to store the pledged material/goods. The area so earmarked shall be properly

Company Appeals (AT) Nos. 225 & 236 of 2017 8

fenced and shall have the facility of electricity/water and sitting arrangement for PEC's security at the cost of SRAL. Shall also reimburse to PEC electricity, water and/or any other charges for the services available at PEC's warehouse and/or provide these services free of cost."

13. Sub-Section (7) of Section 5 of the 'I&B Code' defines 'Financial

Creditor' means:

"5(7) "financial creditor" means any person to

whom a financial debt is owed and includes a

person to whom such debt has been legally assigned

or transferred to"

'Financial Debt' is defined in sub-section (8) of Section 5 of the 'I&B

Code' as follows:

"5(8) "financial debt" means a debt alongwith

interest, if any, 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 acceptance under

any acceptance credit facility or its de-

materialised equivalent;

(c) any amount raised pursuant to any note

purchase facility or the issue of bonds, notes,

debentures, loan stock or any similar

instrument;

Company Appeals (AT) Nos. 225 & 236 of 2017 9

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

lease or hire purchase contract which is

deemed as a finance or capital lease under

the Indian Accounting Standards or 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

transaction, including any forward sale or

purchase agreement, having the commercial

effect of 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 of a 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 Company Appeals (AT) Nos. 225 & 236 of 2017 10

items referred to in sub-clauses (a) to (h) of

this clause"

14. From the letter referred to above and the agreement, we find that

the Appellant-M/s. PEC Ltd. has disbursed the amount to 'M/s. Sree

Ramakrishna Alloys Limited' against the consideration for the time value

of money. It is also clear that M/s. Sree Ramakrishna Alloys Limited by

the agreement dated 24th February, 2014 has borrowed money from the

Appellant-M/s. PEC Limited against the payment of interest. Thus, the

Appellant-M/s. PEC Ltd. come within the meaning of 'Financial Creditor'

and is eligible to file an application under Section 7 of the 'I&B Code'

there being a debt and default on the part of the Respondent.

15. In so far as the other Respondent-'M/s. SriGangadhara Steels

Limited' is concerned, similar proposal for procurement M.S.Billets as per

the policies of the Appellant-'M/s. PEC Ltd.' was made by letter dated

3rd May, 2014. The language of letter dated 3rd May, 2014 is same and

similar to the language used by 'M/s. Sree Ramakrishna Alloys Limited'

dated 19th February, 2014.

16. It is stated that both the Respondents belong to same group of

Directors, and have same business.

17. In the agreement reached between the Appellant-M/s. PEC Ltd.

and Respondent-'M/s. SriGangadhara Steels Limited' dated

19th May, 2014 similar terms and conditions have been mentioned, as in

the agreement of 'M/s. Sree Ramakrishna Alloys Limited' and quoted Company Appeals (AT) Nos. 225 & 236 of 2017 11

above, except the difference of amount. In the agreement with 'M/s.

SriGangadhara Steels Limited' also terms and conditions is similar. It has

been agreed that beyond the period of ninety days, if the amount is not

paid, 'M/s. SriGangadhara Steels Limited' will have to pay interest

@ 14.5% per annum for the delayed period beyond ninety days, as the

terms and conditions in the case of 'M/s. Sree Ramakrishna Alloys

Limited'.

18. From the letter dated 3rd May, 2014, written by 'M/s.

SriGangadhara Steels Limited' and the agreement reached with M/s. PEC

Ltd. with the said Respondent(s) dated 19th May, 2014, it is clear that the

Appellant-M/s. PEC Limited is a 'Financial Creditor' of 'M/s.

SriGangadhara Steels Limited' ('Corporate Debtor').

19. For the reasons aforesaid, we hold that the Adjudicating Authority

failed to appreciate that the application(s) preferred by Appellant under

Section 7 of the 'I&B Code' cannot be treated as an application under

Section 9 of the 'I&B Code' and the Appellant who is a 'Financial Creditor'

cannot be treated as 'Operational Creditor'.

20. Further, we hold that if an application is filed by a person under

Section 7 of the 'I&B Code' and in case the Adjudicating Authority comes

to the conclusion that the Applicant is not a 'Financial Creditor' in such

case the Adjudicating Authority has jurisdiction to reject the application

under Section 7 of the 'I&B Code', but the said Authority cannot treat the

format of the application under Section 7 of the 'I&B Code' (Form-1) as

an application under Section 9 of the 'I&B Code' (Form-5), nor can treat Company Appeals (AT) Nos. 225 & 236 of 2017 12

such person an 'Operational creditor', in absence of any claim made

under Section 9 of the 'I&B Code'. Further, as the informations required

to be given in Form-1 varies from the informations as required to be given

in Form-5 (As per Section 9), including instructions made below the

requisite form(s), no application filed under Section 7 can be treated as

an application under Section 9 of the 'I&B Code.

21. Further, for filing an application under Section 9 of the 'I&B Code'

it is mandatory to issue a demand notice/invoice of payment under sub-

section (1) of Section 8, but no such requirement is there for filing an

application under Section 7 of the 'I&B Code'. Therefore, in absence of a

notice under sub-section (1) of Section 8 of the 'I&B Code', an application

under Section 7 cannot be treated to be an application under Section 9.

22. In the present case, as the application preferred by the Appellant

under Section 7 in both the appeals are maintainable and have been

admitted, order of moratorium has been passed and 'Interim Resolution

Professionals' have been appointed, no interference is called for against

the impugned order dated 29th August,2017 challenged in Company

Petition No. (IB)-39/7/HDB/2017 and the impugned order dated 29th

August, 2017 challenged in Company Petition No. (IB)-40/7/HDB/2017,

except to modify the part of the order whereby the Appellant is treated to

be an 'Operational Creditor'. Both the applications for all purpose should

be treated to be an application under Section 7 of the 'I&B Code' and the

Appellant-'M/s. PEC Ltd.' in both the cases should be treated as

'Financial Creditor'. The 'Interim Resolution Professionals' are directed to Company Appeals (AT) Nos. 225 & 236 of 2017 13

treat the Appellant accordingly, and include the Appellant as a Member

of 'Committee of Creditors' in both the cases for taking decisions in

accordance with law.

23. Both the appeals are allowed with aforesaid observations and

directions. However, in the facts and circumstances of the case, there

shall be no order as to cost.

(Justice Bansi Lal Bhat) (Justice S.J. Mukhopadhaya) Member (Judicial) Chairperson

NEW DELHI

13th December, 2017

AR

Company Appeals (AT) Nos. 225 & 236 of 2017