Prayag Polytech Pvt Ltd vs Gem Batteries Pvt Ltd
- CitationCompany Appeal(AT) (Insolvency) No. 713 of 2019
Ratio decidendi
The rule this decision rests on
Under the Insolvency and Bankruptcy Code, 2016, the Code is a complete code in itself, and by virtue of its overriding provision (s. 238), its provisions prevail over inconsistent provisions of other enactments; accordingly, the general rule of the Indian Contract Act, 1872 that an agreement may be oral cannot be relied upon to establish a "financial debt" for the purposes of an application under s. 7 of the Code. A financial creditor seeking initiation of corporate insolvency resolution must establish the existence of a financial debt by records showing its terms, as contemplated by Rule 3(1)(d) of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016, which requires the terms of the financial debt, including tenure, to be set out; failure to produce any such record of financial debt justifies rejection of the s. 7 application. The deduction of tax at source on payments made by the corporate debtor is not, by itself, sufficient to establish that a financial debt exists, since tax may be deducted for various reasons unconnected with a debt. A penalty under s. 75 of the Code for furnishing false information cannot be imposed merely because the financial creditor has failed to make out its case on an application under s. 7; a failure to establish the claim does not by itself suffice to invoke s. 75.
Written by Miss Lucy from the judgment below, not taken from a headnote.
Judgment
As delivered
Prayag Polytech Pvt. Ltd. ...Appellant
Vs
Gem Batteries Pvt. Ltd. ....Respondent Present: For Appellant: Mr. Ayandeb Mitra and Ms. Aastha Trivedi, Advocates For Respondents:
ORDER
24.09.2019 Heard learned Counsel for the Appellant. The Appellant filed
Section 7 proceeding under Insolvency and Bankruptcy, 2016 (In short IBC)
before the Adjudicating Authority (National Company Law Tribunal, New Delhi,
Court-III) against Gem Batteries Pvt. Ltd. which has been rejected by the
Adjudicating Authority vide order dated 07.05.2019.
2. It was claimed before the Adjudicating Authority that an amount of Rs. 20
lakhs were disbursed by the Appellant, to the Corporate Debtor on 05.03.2016.
It was claimed that on 30.05.2016, the Corporate Debtor had returned Rs. 5
lakhs and another amount of Rs. 10 lakhs on 11.04.2017. According to the
learned Counsel for the Appellant, Respondent also paid certain amount towards
interest. Learned Counsel for the Respondent further states that the Appellant
on 02.01.2019 sent recall notice seeking repayment of the loan which had been
advanced. Learned Counsel for the Appellant further relied on TDS deducted by
Corporate Debtor to prove that there was financial debt.
Company Appeal (AT)(Insolvency) No. 713 of 2019 Page 1 of 4
3. The Adjudicating Authority heard the Appellant and in the impugned order
dated 7th May, 2019 observed in paragraph-9 and 11 as under:
.....
" 9. In the present case, no document has been
produced on the part of petitioner by way of any loan
agreement or demand promissory note or such other
document to establish that the money is payable on
demand and there has been default and that Corporate
Debtor is also bound to pay interest on the loan amount
made available by the Financial Creditor. It is also
noteworthy to mention that it is stated that there is only
an oral agreement between the parties regarding the
loaned amount.
11. .... It is stated in the recall notice filed as
"Annexure-5" of the petition and also in the "Page9" of the
typed set of the petition that till 25.12.2018 interest of Rs.
1,31,440/- was received by the Financial Creditor.
However, the payment of such interest is not reflected in
the document submitted by the Petitioner." ....
...
Adjudicating Authority also found that no Financial Contract was there.
4. Learned Counsel for the Appellant submits that the Corporate Debtor
deducted TDS on the interest paid by the Corporate Debtor while returning the
loan which is sufficient to show that there was financial debt. Regarding there
Company Appeal (AT)(Insolvency) No. 713 of 2019 Page 2 of 4 being no agreement or demand promissory note or such other document etc.,
learned Counsel for the Appellant submits that Section 10 of the Contract Act,
1872 shows that agreement could be even oral.
5. Learned Counsel for the Appellant further submits that "financial
contract" as defined in the Insolvency and Bankruptcy (Application to
Adjudicating Authority) Rules, 2016 does not debar oral contract and financial
contract can be oral in terms of Section 10 of the Contract Act. According to him
Section 7 application under IBC should not have been rejected.
6. We have gone through the records and the impugned order. Merely
pointing out that TDS was deducted would not be sufficient to conclude that
there was financial debt. TDS can be deducted for various reasons.
7. As regard relying on Section 10 of the Contract Act, 1872, in our view IBC
is a complete code in itself. Section 238 of IBC has overriding effect on provisions
inconsistent with IBC. The 'Financial contract' is defined in "Insolvency and
Bankruptcy (Application to Adjudicating Authority) Rules, 2016" Rule 3(1)(d)
requires setting out the terms of the financial debt including tenure etc. We find
that Appellant has failed to show any record showing financial debt to be there.
As such, we are unable to find any fault in the impugned order while rejecting
Section 7 application.
8. At this stage, learned Counsel for the Appellant submits that it was
improper on the part of the Adjudicating Authority to impose a fine of Rs. 1 lakh
relying on provision of Section 75 of IBC which relates to false information.
Company Appeal (AT)(Insolvency) No. 713 of 2019 Page 3 of 4 Looking to the facts even if Appellant failed to make out case, that by itself may
not be sufficient to invoke Section 75 of IBC.
9. We set aside the part of impugned order of the Adjudicating Authority as
regards the imposing of a fine of Rs. 1 lakh relying on Section 75 of IBC. Rest
part of the impugned order does not call for interference.
The appeal is disposed of accordingly at the stage of admission.
[Justice A.I.S. Cheema] Member (Judicial)
(Kanthi Narahari) Member(Technical) Akc/Sk
Company Appeal (AT)(Insolvency) No. 713 of 2019 Page 4 of 4
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