S.A.R.E Public Company Limited Through ... vs Sare Gurugram Pvt. Ltd

NATIONAL COMPANY LAW APPELLATE TRIBUNAL, PRINCIPAL BENCH, NEW DELHI Company Appeal (AT) (Insolvency) No. 359 of 2021 (Arising out of Order dated 01/09.03.2021 passed by the Adjudicating Authority (National Company Law Tribunal), New Delhi, Principal Bench in Company Petition No. (IB)-300(PB/2020)

IN THE MATTER OF:

S.A.R.E Public Company Limited through its Receiver Mr. Augoustions Papathomas, Vyronos, 36, Nicosia Tower Centre, 8th Floor, Flat/ Office 801, PC 1506, Nicosia Cyprus.

Rep. by its Power of Attorney Holder Mr. Rajesh Panayathatta, Flat No.503, Tower No.22, Paras Tierea, Sector - 137, Noida UP .... Appellant

Vs

1. SARE Gurugram Pvt. Ltd. E-7/12, LGF, Malviya Nagar, Delhi - 110017. Rep. by the Interim Resolution Professional Mr. Ajit Gyanchand Jain, 204, Wall Street - 1 Near Gujrat College, Ellis Bridge, Ahmedabad - 380 006.

2. Asset Care and Reconstruction Enterprises Ltd. 2nd Floor, Mohan Dev Building, 13, Tolstoy Marg, New Delhi - 110001. ... Respondents

Present: For Appellant: Ms. Pooja M. Saigal, Ms. Anshul Bajaj, Simrat Singh Pasay, Mr. Chaitanya Pandey, Advocates

For Respondent: Mr. Bhargav K.Hemmige, Advocate for R1

Mr. Arun Kathpalia, Sr. Advocate, Mr. Rajat Joneja, Mr. Ananya Kumar, Mr. Kartikeya Gupta, Advocates for R2

Company Appeal (AT) (Insolvency) No. 359 of 2021 1 Mr. Ritin Rai, Sr. Advocate, Mr. Siddharth Dutta, Advocate for Interveners

JUDGMENT

ASHOK BHUSHAN, J.

This Appeal has been filed against order dated 09.03.2021 passed by

National Company Law Tribunal, New Delhi, Principal bench admitting the

Company Petition No. (IB)-300(PB)/2020 filed by Respondent No.2-Asset

Care and Reconstruction Enterprises Ltd. under Section 7 of the Insolvency

and Bankruptcy Code, 2016 (hereinafter referred to as the 'Code'). The

Appellant had filed an IA No. 3783 of 2020 for intervention, which

Application was dismissed by admitting the Company Petition filed by

Respondent No.2.

2. We need to notice certain background facts and sequence of the

events giving rise to this Appeal for deciding the issues raised in this Appeal

are:

(i) The Appellant S.A.R.E Public Company Limited is a Company

existing under the laws of Cyprus. One Wafra Capital Partners

L.P (Wafra) a Cayman Islands Limited Partnership having its

office at New York, United States of America. In the year 2011

Wafra had invested US$ 50 million in convertible bonds issued

by S.A.R.E Public and a Purchase Agreement dated

28.04.2011 was entered between Wafra and Appellant.

Several other supporting/ ancillary agreements forming part

Company Appeal (AT) (Insolvency) No. 359 of 2021 2 of the composite transaction were also entered. A Share Pledge

and Assignment Agreement dated 28.04.2011 was executed

between Wafra and S.A.R.E Public and SARE Cyprus (a wholly

owned subsidiary of S.A.R.E. Public). In terms of Clause 12 of

the Purchase Agreement, S.A.R.E. Public has inter-alia

undertaken that so long as any Bond remains outstanding the

S.A.R.E. Public shall not itself shall cause each of its

Subsidiaries not to, directly or indirectly create Liens upon

any of their properties, assets or revenues, whether now owned

or thereafter acquired.

(ii) SARE Gurugram Pvt. Ltd., the Corporate Debtor in order to

obtain funds entered into Debenture Trust Deed dated

04.12.2015 (DTD1), whereby non-convertible debentures

worth INR 95 crores was issued by Corporate Debtor and

purchased by Altico Capital India Ltd. (Altico) (A private limited

Company incorporated under the provisions of Companies Act,

1956, having its registered office at Bandra (East), Mumbai,

Maharashtra). Another Debenture Trust Deed (DTD2) dated

24.11.2016 was entered, whereby non-convertible debentures

worth INR 220 crores were issued by the Corporate Debtor and

purchased by Altico.

(iii) A Facility Agreement dated 14.05.2018 had been executed

amongst SARE Gurugram (Corporate Debtor), KKR India Asset

Finance Private Limited (KKR) and Altico, in pursuant to which

Company Appeal (AT) (Insolvency) No. 359 of 2021 3 loan facility for an amount of INR 100 crores was being

advanced by KKR and Altico to SARE Gurugram. Altico was

to advance INR 60 crores and KKR to INR 40 crores. Securities

were created by the Company forming part of SARE Group.

(iv) On 30.06.2018 an amount of US $ 60,162,463 was due and

payable by SARE Public to Wafra on account of outstanding

Bonds. Due to repeated defaults of SARE Public, Wafra had

exercised its right to appoint a Receiver as per the terms of the

Debenture Deed dated 28.04.2011 and had appointed Mr.

Augoustinos Papathomas as Receiver and Manager on all

secured assets of SARE Public on 10.08.2018. Receiver issued

letters to SARE Public and subsidiaries of SARE Public

informing about his appointment as Receiver / Manager of

SARE Public.

(v) Wafra had initiated proceedings against SARE Public before

the Hon'ble Supreme Court of the State of New York, claiming

a sum of USD 64,064,696 and seeking restraint order from

transferring, converting, encumbering, selling, assigning,

withdrawing, perfecting etc. the assets of SARE Public.

Hon'ble Supreme Court of the State of New York, County of

New York passed order dated 13.08.2018 granting temporary

injunction as prayed for.

(vi) The SARE Public through its Receiver had filed Civil Suit in the

High Court of Delhi CS (COMM) No.1179 of 2018 through its

Company Appeal (AT) (Insolvency) No. 359 of 2021 4 Receiver Mr. Augoustinos Papathomas seeking inter alia

declaration that all securities such as power of attorney, Non-

Disposable Undertaking, charge on assets/ encumbrances/

lien/ pledge of shares etc., already created or sought to be

created by the companies forming part of the SARE Group in

favour of KKR and Altico in furtherance of a Facility Agreement

dated 14.05.2018 are non-est, null and void. In the suit,

Corporate Debtor SARE Gurugram was Defendant No.3 and

Altico was Defendant No.17.

(vii) The Delhi High Court passed an interim order dated

12.10.2018 restraining Altico from giving effect to the Facility

Agreement dated 14.05.2018 to the extent of taking lien,

charge, security, mortgage or pledge of any of the assets of the

companies forming part of SARE Group.

(viii) On 23.03.2019, the Altico has assigned entire financial

assistance aggregating to INR 370 Crores to Asset Care and

Reconstruction Enterprises Ltd. - Respondent No.2

(hereinafter referred to as 'ACRE'). As per the Assignment

Agreement all the facilities advanced by Altico to SARE

Gurugram have been assigned in favour of ACRE.

(ix) On 07.01.2020, ACRE filed an Application under Section 7 of

the Code against SARE Gurugram.

(x) On 08.01.2020, the Delhi High Court modified the interim

order dated 12.10.2018 to the extent that it permitted SARE

Company Appeal (AT) (Insolvency) No. 359 of 2021 5 Gurugram and other Group Companies to raise further

funding to complete the pending projects. Against the order of

Delhi High Court dated 08.01.2020 of learned Single Judge,

KKR filed an FAO(OS) (COMM) No.69 of 2020, where Division

bench vide order dated 17.07.2020 has directed the

Companies forming part of the SARE Group (including SARE

Gurugram) not to mortgage, charge or create a lien on their

movable/ immovable assets till the next date of hearing.

(xi) Hon'ble Supreme Court of the State of New York vide judgment

dated 25.08.2020 awarded an amount of US$ 82,388,841.

(xii) The Appellant herein filed an Intervention Application being

I.A. No.3783 of 2020 in the Company Petition (IB)-

300(PB)/2020 seeking intervention as well as dismissal of

Section 7 petition. Reply to the intervention was filed by

Respondent No.2.

(xiii) The Adjudicating Authority vide its order dated 09.03.2021

admitted Section 7 petition filed by Respondent No.2 and

rejected the Intervention Application filed by the Appellant.

Aggrieved against the order dated 09.03.2021, this Appeal has

been filed by SARE Public.

3. We have heard Ms. Pooja M. Saigal, learned Counsel for the

Appellant, Shri Arun Kathpalia, learned Senior Counsel appearing for

Respondent No.2 (ACRE), both of them have placed their submissions with

ability and clarity. Mr. Ritin Rai, learned Senior Counsel appearing for

Company Appeal (AT) (Insolvency) No. 359 of 2021 6 Intervener and Mr. Bhargav K. Memmige, learned Counsel for Respondent

No.1 SARE Gurugram.

4. Learned Counsel for the Appellant challenging the impugned order

stated that Adjudicating Authority committed error in entertaining the

Application of Respondent No.2 under Section 7 of the Code, which was

filed on the strength of Assignment Agreement 23.03.2019. The

Assignment dated 23.03.2019 in favour of Respondent No.2 was in

violation of interim order passed by the Delhi High Court dated 12.10.2018,

hence was void and unsustainable. The Assignment, which was very basis

of the Application filed by Respondent No.2 being invalid, the Application

ought not to have been entertained by the Adjudicating Authority and same

deserves to be rejected. The Delhi High Court by interim order dated

12.10.2018 has specifically restrained the Altico (Defendant No.17) in suit.

not to give effect to the Facility Agreement dated 14.05.2018 to the extent

of taking lien, charge, security, mortgage or pledge of any of the assets of

the Company forming part of SARE Group. The Assignment by Altico in

favour of Respondent No.2 dated 23.03.2019 being in teeth of interim order

dated 12.10.2018, the Application ought to have been rejected. In filing

the Application, Respondent No.2 had colluded with Respondent No.1,

which is apparent from the fact that Respondent No.1 neither filed the reply

in Section 7 application nor contested the Application. Specific plea of

intervening raised by the Appellant before the Adjudicating Authority,

which was not even considered by the Adjudicating Authority. Respondent

No.2 had no locus to file and maintain Section 7 Application before the

Company Appeal (AT) (Insolvency) No. 359 of 2021 7 Adjudicating Authority, in view of the restraint order passed of the Delhi

High Court of 12.10.2018. The Adjudicating Authority failed to consider

the fact that Assignment Agreement does not permit severance/ bifurcation

of the Facility. The Adjudicating Authority committed an error in taking

the view that even if Facility Agreement dated 14.05.2018 is ignored, there

was debt under DTD1 and DTD2, hence, default being admitted, Section 7

Application was maintainable. The Assignment Agreement dated

23.03.2019 being not severable. The above view taken by the Adjudicating

Authority is erroneous and deserves to be set aside by this Tribunal. The

impugned order is non-speaking order, since the issues raised by the

Appellant in the Intervention Application has not been appropriately

considered. The Corporate Debtor, a second step subsidiary of SARE

Public is the recipients of funds availed from Wafra Capital Partners, hence

it was bound by Clause 12 of the Purchase Agreement dated 28.04.2021.

5. Shri Arun Kathpalia, learned Senior Counsel for Respondent No.2

refuting the submissions of the learned Counsel for the Appellant submits

that the Appellant has no locus to challenge the order dated 09.03.2021.

There is no dispute raised by the Corporate Debtor or the Appellant with

respect to the debt owed by the Corporate Debtor. At the stage of

proceeding under Section 7 of the Code, Adjudicating Authority is only

required to examine the existence of debt and whether there has been a

default by the Corporate Debtor in repayment of the debt. The Corporate

Debtor or other subsidiaries of SARE Public were not party to Purchase

Agreement dated 28.04.2011. There were three financial debts owned by

Company Appeal (AT) (Insolvency) No. 359 of 2021 8 the Corporate Debtor namely - (i) Debenture Trust Deed dated 04.12.2015

worth Rs.95 crores; (2) Debenture Trust Deed dated 24.11.2016 worth

Rs.220 crores; and (3) Facility Agreement dated 14.05.2018 for a facility of

Rs.100 crores. The Delhi High Court in its order dated 08.01.2020 has

also clearly held that the Purchase Agreement between Plaintiff (SARE

Public) and Defendant No.20-Wafra was executed by Defendant Nos. 1 to

15 and there is no commitment or promise by Defendant Nos.1 to 15 of the

suit. In the suit, which was filed in Delhi High Court, only document

sought to be challenged by the Intervener was the Facility Agreement and

no relief was claimed in relation to DTD1 and DTD2. The interim order

dated 12.10.2018 was restricted with regard to only Facility Agreement

dated 14.05.2018. In any way, the order dated 12.10.2018, does not in

any manner restrain the Altico from assigning its right under the Facility

Agreement. There being no restraint with regard to DTD1 and DTD2,

Assignment of the said loan did not suffer from any error or invalidity and

admitted default being there with regard to DTD1 and DTD2, Adjudicating

Authority did not commit any error in admitting Section 7 Application. For

argument sake, even if it is assumed that there was any restraint with

regard to Facility Agreement dated 14.05.2018, other two loans remained

untouched, hence, default at the part of Corporate Debtor was an admitted

fact, which could have been very well taken note on the basis of Section 7

Application. In the present case, debt and default having not been disputed

either by the Corporate Debtor or by the Intervener herein, the Intervention

Company Appeal (AT) (Insolvency) No. 359 of 2021 9 Application was not maintainable and has rightly been rejected by the

Adjudicating Authority.

6. Shri Ritin Rai, learned Senior Counsel for Interveners submits that

homebuyers are already part of the CoC and there is a Resolution Plan

which is pending consideration.

7. We have considered the submissions of learned Counsel for the

parties and have perused the record.

8. We need to first notice the Section 7 Application filed by Respondent

No.2 and the basis given in the Application for initiating insolvency

proceedings. Section 7 Application has been brought on the record by

Appellant as Annexure A-22 (Volume-V). The Application has been filed in

Form-1 and Part-IV of the Application deals with 'Particulars of financial

Debt'. It is useful to notice the particulars of 'Financial Debt' as mentioned

in Part-IV of Section 7 Application:

"Part-IV

PARTICULARS OF FINANCIAL DEBT

1. Total amount of Debt Total amount of debt disbursed to the granted date(s) of Corporate Debtor is INR 375,00,00,000/-. disbursement The debt was disbursed by Altico Capital India Ltd. under Debenture Trust Deed dated 4 December, 2015, Debenture Trust Deed dated 24 November 2016 and Facility Agreement dated 14th May, 2018.

The schedule of disbursement of Rs.95 crs NCDs is as follows: -

Date of Amount of Disbursals/ Disbursals/ Adjustments Adjustments (in INR) 23 November 95,00,00,000/- 2016 TOTAL 95,00,00,000/-

Company Appeal (AT) (Insolvency) No. 359 of 2021 10 The schedule of disbursement of Rs.220 crs NCDs is as follows: -

Date of Amount of Disbursals/ Disbursals/ Adjustments Adjustments (in INR) 23 November 188,00,00,000/- 2016 23 November 23,47,50,000 2016 8 June 2018 3,66,50,000/- 20th March 2019 4,86,00,000/- TOTAL 220,00,00,000/-

The schedule of disbursement of Rs.60 crores Term Loan is as follows: -

Date of Amount of Disbursals/ Disbursals/ Adjustments Adjustments (in INR) 25 May 2018 12,22,20,000 12 June 2018 2,71,30,000 25 June 2018 2,11,00,000 30 July 2018 12,40,00,000 14 September 8,77,34,444 2018 31 October 2018 3,75,00,000 6 November 2018 4,02,61,258 7 December 2018 3,80,00,000 29 January 2019 10,20,54,298 TOTAL 60,00,00,000/-

The entire debt has thereafter been assigned to the Applicant by way of Assignment Agreement dated 23 March 2019.

A copy of the Assignment Agreement dated 23 March 2019 is enclosed and marked as Annexure F.

Copy of the Amended and Restated Declaration of Trust dated 22 March 2019 appointing the Financial Creditor as the trustee of ACRE-81-TRUST is enclosed and marked as Annexure G."

Company Appeal (AT) (Insolvency) No. 359 of 2021 11

9. The above indicates that there are three independent and separate

transactions by which Altico has extended financial facility/ loan to

Corporate Debtor, they are - (i) Non-convertible debenture of face value of

INR 95 crores issued by the Corporate Debtor and purchased by Altico on

04.12.2015; (ii) Non-convertible debenture aggregating to INR 220 crores

executed by Corporate Debtor and purchased by Altico dated 24.11.2016;

and (iii) Facility Agreement dated 14.05. 2018 executed between Corporate

Debtor in its capacity as borrower and Altico Capital India Ltd. and KKR

India Asset Finance Limited for extending a Term Loan Facility for

aggregating INR 100 crores, out of which Rs.60 crores was to be financed

by Altico. The total defaulted amount claimed in Section 7 Application is

INR 462,34,02,742. The learned Counsel for the Appellant's argument is

based on the interim order dated 12.10.2018 passed by the Delhi High

Court in CS (COMM) No.1179 of 2018. It is useful to extract the entire

order dated 12.10.2019 passed in the above suit and in I.A. No.14239 of

2018 filed by the Plaintiff under Order 39 Rule 1 and 2 CPC to the following

effect:

"IA No.14239/2018 Issue notice to the defendants by ordinary process

and speed post, returnable for the date fixed above.

This application is filed under Order 39 Rule 1 and

2 CPC seeking ex parte ad interim injunction restraining

the defendants No.1 to 15 from pledging, mortgaging,

encumbering, disposing of, selling or alienating any of

their assets, shares, properties (movable and immovable)

Company Appeal (AT) (Insolvency) No. 359 of 2021 12 in any manner whatsoever without obtaining the prior

written permission of the Receiver of the plaintiff. Other

connected reliefs are also sought. The suit is filed seeking

a decree of declaration that all the securities and

documents, power of attorneys, non-disposable

undertakings, charge on assets etc. sought to be created

by the defendants No.1 to 15 in favour of defendants

No.16 to 19 or any other person or entity pursuant to

and/or in furtherance of the Facility Agreement dated or

any other agreement are nonest, null and void. Other

connected reliefs are also sought.

The case of the plaintiff and the defendants No.1

to 15 form part of S.A.R.E.Group of companies which are

all inter related to each other. SARE Public is the

parent/holding company of the entire SARE Group and

the entire group is controlled by it through its controlled

subsidiaries. It is stated that in the year 2011 Wafra had

invested US $50 Million in convertible bonds issued by

SARE Public. The said funds were to be utilised by SARE

Public through its controlled subsidiaries to acquire

develop and sell middle-income residential projects

across India. Wafra and SARE Public had also executed

a secured convertible bond purchase agreement dated

28.4.2011, pursuant to which Wafra had purchased

Company Appeal (AT) (Insolvency) No. 359 of 2021 13 SARE Public's Series A Secured Convertible Bonds

subject to terms and conditions of the purchase

agreement. It is further pleaded that by virtue of

Purchase Agreement SARE Group i.e. SARE Public and

its subsidiaries were categorically barred from creating

any lien/pledge/encumbrance/charge and any third

party right whatsoever on their respective properties until

the time the bonds are outstanding. It is further pleaded

that the investments were made by SARE Public in India

through its controlled subsidiaries and the entire SARE

Group including the Indian Subsidiaries were a part of

the agreement and were governed by the terms and

conditions thereof.

Learned senior counsel appearing for the plaintiff

has relied upon the Purchase Agreement dated

28.4.2011 Sub Clause 3 which stipulates that the Issuer

(SARE Group) shall use the net proceeds of the sale of the

Bonds to the Purchaser to acquire, develop, sell, middle-

income residential projects across India with supporting

infrastructure by Controlled Subsidiaries. Reliance is

also placed on clause 12 which states that so long as the

Bond remains outstanding the issuer shall cause each of

its Subsidiaries not to directly or indirectly create, incur,

assume or suffer to exist any Lien upon any of its

Company Appeal (AT) (Insolvency) No. 359 of 2021 14 property, assets or revenues etc. It is also pointed out

that this agreement is signed on behalf of the

subsidiaries.

It is pleaded that a Facility Agreement has now

been executed on 14.5.2018 by defendant No.3/ SARE

Gurugram Private Limited with defendants No.16 and 17

pursuant to which the loan facility vide an aggregate

amount of INR 100 Crores is proposed to be advanced to

defendant No.3 on security of the assets of defendant

No.3 and other subsidiaries of SARE Group. It is pleaded

that this arrangement which has yet not been completed

is wholly contrary to the Agreement between the parties

and will cause irreparable loss and injury to the WAFRA

Group if the securities are allowed to be further pledged

or given as lien.

Plaintiff has made out a prima facie case in its

favour. Defendants No.1 to 10 are restrained from

creating any encumbrance/charge or lien or mortgage of

any of their assets, shares, properties (movable or

immovable) to any third party till the next date of hearing.

Defendants 16 and 17 are also restrained from giving

effect to the Facility Agreement dated 14.5.2018 to the

extent of their taking lien charge, security, mortgage or

Company Appeal (AT) (Insolvency) No. 359 of 2021 15 pledge of any of the assets of defendants No.1 to 15 till

the next date of hearing.

Plaintiff to comply with provisions of Order 39 Rule 3 CPC within three days.

A copy of the order be given dasti under signatures of the Court Master to learned counsel for the plaintiff"

10. In the suit, Defendant No.16 was the KKR India Asset Finance Pvt.

Ltd. and Defendant No.17 was Altico Capital India Ltd. The interim

injunction passed by the Delhi High Court against Defendant No.16 and

17 is to the following effect:

"Defendants 16 and 17 are also restrained from giving effect to the Facility Agreement dated 14.5.2018 to the extent of their taking lien charge, security, mortgage or pledge of any of the assets of defendants No.1 to 15 till the next date of hearing."

11. One of the submission advanced by learned Counsel for Respondent

No.2 was that the above interim injunction order dated 12.10.2018 does

not restrain Defendant No.17 to assign its debt. It is submitted that

injunction was to restrain from giving effect to the Facility Agreement dated

14.05.2018, but there was no restraint of assignment. The tenor of the

order dated 12.10.2018 is restraint to give effect to the Facility Agreement

dated 14.05.2018. Any action taken in pursuance of Facility Agreement

dated 14.05.2018 may be in teeth of the said injunction. The Assignment

dated 23.03.2019 by Defendant No.17 in favour of ACER - Respondent

No.2 was also for the loan which was advanced by Facility Agreement dated

Company Appeal (AT) (Insolvency) No. 359 of 2021 16 14.05.2018. Thus, taking a broad view of the matter, we are inclined to

agree with the learned Counsel for the Appellant that assignment of Facility

Agreement dated 14.05.2018, ought not to have been done by Defendant

No.17 as per the spirit of the order dated 12.10.2018. Now the question to

be answered is as to whether when loan extended by Facility Agreement

dated 14.05.2018, could not have been assigned to Respondent No.2.

Whether assignment of non-convertible debentures (Debenture Trust Deed)

of INR 95 crores dated 04.12.2015 and INR 220 crores by non-convertible

debentures also could not have been assigned by Altico to Respondent No.2

and when default in pursuance of Facility Agreement dated 14.05.2018

could not have been looked into when the assignment of Facility Agreement

dated 14.05.2018 was prohibited, what is the consequence on the

Application filed by Respondent No.2 under Section 7 of the Code?

12. As noted above, the Application under Section 7 in Part-IV contains

three separate transactions, on the basis of which default was claimed.

Copies of Debentures Trust Dees dated 04.12.2015 as well as 24.11.2016

were part of the Section 7 Application. The Facility Agreement dated

14.05.2018 was also filed along with Section 7 Application. Total default

on the basis of the aforesaid three financial transactions were amounting

to INR 462,34,02,742. On 01.10.2019, Respondent No.2 issued an

acceleration cum enforcement notice to the Corporate Debtor recalling all

financial assistance and declaring outstanding amount as on 16.09.2019

as due and payable. As per Section 7, sub-section 4, the Adjudicating

Authority has to ascertain the existence of a default from the records of the

Company Appeal (AT) (Insolvency) No. 359 of 2021 17 information utility or on the basis of other evidence furnished by the

Financial Creditor. Under Section 7, sub-section (5) it is mentioned when

the Adjudicating Authority is satisfied that "a default has occurred and

the application under sub-section (2) is complete .... it may, by order,

admit such application". The Hon'ble Supreme Court in (2018) 1 SCC

407 in Innoventive Industries Limited vs. ICICI Bank and Another

while considering statutory scheme under Section 7 of the Code, laid down

following in paragraph 29 and 30:

"29. The scheme of Section 7 stands in contrast with the scheme under Section 8 where an operational creditor is, on the occurrence of a default, to first deliver a demand notice of the unpaid debt to the operational debtor in the manner provided in Section 8(1) of the Code. Under Section 8(2), the corporate debtor can, within a period of 10 days of receipt of the demand notice or copy of the invoice mentioned in sub-section (1), bring to the notice of the operational creditor the existence of a dispute or the record of the pendency of a suit or arbitration proceedings, which is pre-existing--i.e. before such notice or invoice was received by the corporate debtor. The moment there is existence of such a dispute, the operational creditor gets out of the clutches of the Code.

30. On the other hand, as we have seen, in the case of a corporate debtor who commits a default of a financial debt, the adjudicating authority has merely to see the records of the information utility or other evidence produced by the financial creditor to satisfy itself that a default has occurred. It is of no matter that the debt is disputed so long as the debt is "due" i.e. payable unless

Company Appeal (AT) (Insolvency) No. 359 of 2021 18 interdicted by some law or has not yet become due in the sense that it is payable at some future date. It is only when this is proved to the satisfaction of the adjudicating authority that the adjudicating authority may reject an application and not otherwise.

13. The Adjudicating Authority has merely to see the records of

information utility and other evidence produced by the Financial Creditor

to satisfy itself that a default has occurred.

14. We may also now look into the Assignment Agreement dated

23.03.2019. The Assignment Agreement dated 23.03.2019 executed

between Altico Capital India Ltd. and Asset Care and Reconstruction

Enterprises Ltd. - Respondent No.2. In Schedule 1 of the Assignment

Agreement details of the 'Financing Documents' has been mentioned and

'Facility wise Principal Outstanding as on March 22, 2019 has been

mentioned in Schedule 1, Item 3 to the following effect:

"3 Facility wise Nature of facility Principal outstanding as Principal on 22nd Mar-2019 Outstanding NCD - 220 Crores 2,20,00,00,000 as on March NCD - 95 Crores 90,00,00,000 22nd, 2019 Term Loan - 60 Crores 60,00,00,000 (Date of SMA TOTAL 3,70,00,00,000"

II: March 2nd, 2019)

15. We may also notice that interim order dated 12.10.2018 came to be

modified by the Delhi High Court by subsequent order dated 08.01.2020.

The modification as directed by the Delhi High Court on 08.01.2020 did

not modify or vacate the interim direction and modification was to the

limited extent that Defendant No.1 to 10 were permitted to mortgage,

Company Appeal (AT) (Insolvency) No. 359 of 2021 19 charge or create a lien on their movable/ immovable assets. In paragraph

49 of the judgment, following has been held:

"49. I accordingly modify the interim order dated 12.10.2018 read with order dated 01.11.2018. Subject to further orders of the court, defendants No.1 to 10 are permitted to mortgage, charge or create a lien on their movable/ immovable assets subject to filing an undertaking in the court by way of an affidavit that the same is being done bonafidely for the purpose of completion of the pending real estate projects of defendants No.1 to 10 or for its day to day operations. Any such lien, mortgage or charge would be created only to complete the pending projects or for carrying out normal day to day running of the companies. Full amounts of the funds so generated by creation of such lien, mortgage or charge including how the amounts are expanded shall be filed in court on an affidavit of a director every quarterly. Subject to above modification, the interim order dated 12.10.2018 read with clarification dated 01.11.2018 shall continue to operate."

16. The interim order dated 12.10.2018 as extracted above was confined

to injunction against Defendant No.17 regarding Facility Agreement dated

14.05.2018. The interim injunction was not with regard to non-convertible

Debenture Trust Deed dated 04.12.2015 and Debenture Trust Deed dated

14.11.2016 and the debt due under the aforesaid Debenture Trust Deed as

was detailed in Section 7 Application were unaffected by the interim order

dated 12.10.2018. Hence, the debt under the aforesaid financial

Company Appeal (AT) (Insolvency) No. 359 of 2021 20 transaction was due and default was there with regard to the said financial

transactions.

17. It is not the case of the Appellant that there was no default on the

part of the Corporate Debtor with regard to Debenture Trust Deed dated

04.12.2015 and 24.11.2016. It is not even the case that there is no default

with regard to Facility Agreement dated 14.05.2018, but the submission is

that there being interim injunction on 12.10.2018, assignment of debt

under the Facility Agreement dated 14.05. 2018 could not have been made

in favour of defendant No.3.

18. At this juncture, we may notice one of the Clauses of the Assignment

Agreement dated 23.03.2019, which is Clause 10.5 dealing with

'Severability' to the following effect:

"10.5 Severability If any provision of this Agreement is held to be illegal, invalid, or unenforceable under Applicable Law, and if the rights or obligations under this Agreement of the Parties will not be materially and adversely affected thereby (a) such provision will be fully severable; (b) this Agreement will be construed and enforced as if such illegal, invalid, or unenforceable provisions had never comprised a part hereof; and (c) the remaining provisions of the Agreement will remain in full force and effect and will not be affected by the illegal, invalid, or unenforceable provision or by its severance here from."

Company Appeal (AT) (Insolvency) No. 359 of 2021 21

19. The Assignment Agreement, thus, does contain a 'Severability' clause

specifically providing that if any provision in the Agreement is

unenforceable under applicable law, such provision will be fully severable.

Provision of the Agreement insofar as it assigns the debts arising out of the

Facility Agreement dated 14.05.2018 being under the injunction of the

Delhi High Court vide order dated 12.10.2018, this could not have been

given effect to and the Facility Agreement, thus, can be held to be

unenforceable under the applicable law. There being three financial

transactions dated 04.12.2015, 24.11.2016 and 14.05.2018, even if,

18.05.2018 was unenforceable, there was no cloud on the enforceability of

other two transactions i.e. 04.12.2015 and 24.11.2016 and they were

clearly severable by virtue of Clause 10.5 as noted above. The Adjudicating

Authority, thus, has not committed any error in taking the view that even

if, the Facility Agreement dated 14.05.2018 is ignored, there was still

default on the part of the Corporate Debtor on the basis of which IBC

proceedings under Section 7 can be proceeded. The findings in the above

context recorded by the Adjudicating Authority in paragraph 22 of the

judgment.

20. The learned Counsel for the Appellant submits that Clause 10.5 did

not permit any severability into three facilities. In support of her

submission, learned Counsel Ms. Pooja M. Saigal relied on judgment of

Hon'ble Supreme Court in (1972) 3 SCC 799, Mattapalli Chelamayya

and Another vs. Mattapalli Venkataratnam and Another. Hon'ble

Apex Court in the above case had occasion to consider the severability with

Company Appeal (AT) (Insolvency) No. 359 of 2021 22 regard to an Award, which was unregistered and which embodied partition

of the immovable property. On the same Award, the Hon'ble Apex Court

held that it contains two distinct transactions. In paragraph 11 and 12,

following has been laid down:

"11. The direction to pay a sum of money which has been held due and payable by the appellants to the respondents is a direction giving effect to a liability which already existed. It does not create the liability for the first time but merely works out the liability. But the same thing cannot be said about the charge. The charge is created for the first time. The case, therefore, involves two distinct matters -- one is a personal liability to pay a certain amount, and the second is an additional relief to recover that amount from the immovable property of the appellants, should they fail to pay as ordered. It is, therefore, clear that the two do not form one transaction but two severable transactions. As pointed out long ago by Muttusami Ayyar, J., in Sambaya v. Gangayya [13 Mad 308, 311] : "The test, therefore, is whether the transaction evidenced by the particular instrument is single and indivisible or whether it really evidences two transactions which can be severed from each other, the one as creating an independent personal obligation and the other as merely strengthening it by adding a right to proceed against immovable property. But it should be remembered that it is not enough that there is an obligation to pay a sum of money, but that it is also necessary that the obligation should have an independent existence, and be in no way contingent or conditional on the breach of some obligation relating to immovable property created by the same instrument, for

Company Appeal (AT) (Insolvency) No. 359 of 2021 23 the contingency or the condition and the obligation would then be parts of one indivisible transaction". In the present case the document evidences two transactions which can be severed from each other. One transaction creates an independent personal obligation to pay a certain sum of money and the other transaction, namely, the charge merely strengthens the first transaction by adding a right to proceed against the charged property. In our opinion the High Court was right in directing that the second transaction with regard to the charge being a severable transaction can be validly ignored and to the extent that it declares the personal obligation to pay the transaction, not being required to be compulsorily registered, the award was admissible in evidence.

12. It was further contended for the appellants that an award is one and indivisible and to direct that effect be given to a part of the award and not to the whole of the award would amount to modifying the award and that was impermissible. We do not think that there is any substance in this contention also. Where a severable part of an award cannot be given effect to for a lawful reason, there is no bar to enforce the part to which effect could be justly given. See Mst Amir Begam v. Badr-ud-din Hussain [AIR 1914 PC 105 : 12 ALJ 537 : 16 Bom LR 413] where as a general principle it is laid down that when a separable portion of an award is bad, the remainder of the award, if good, can be maintained. By giving effect to a part of the award in this case no prejudice is caused to the appellants. In fact they stand to benefit. As the award stands, the appellants would have been responsible not only to pay the amounts personally, but also from the property which was

Company Appeal (AT) (Insolvency) No. 359 of 2021 24 charged. Since the charge part is eliminated for want of registration, they are freed from the additional liability. It is true that judgment should be pronounced according to the award, but that does not bar giving effect to the severable part of the award if it could be justly done. Departure from the award or a part of the award is barred only in those cases where the award or a severable part of it is lawful and capable of being given effect to."

21. The Hon'ble Supreme Court had approved the judgment of the High

Court, which directed that second transaction with regard to the charge

being a severable transaction can be validly ignored and the personal

obligation to pay the transaction, not being required to be compulsorily

registered can be enforced, the Award was admissible in the above respect.

22. In the present case, we have noticed that there were three financial

transactions, which were assigned by Agreement dated 23.03.2019. Even

if, one transaction that is Facility Agreement dated 14.05.2018 was under

cloud due to interim order passed by the Delhi High Court dated

12.10.2018, there was no cloud on other financial transactions, which were

much before of passing of the interim order. There can be no illegality with

regard to assignment of debt in favour of Respondent No.2 with regard to

above two transactions and there being default with regard to above two

transactions, which is an admitted fact, no exception can be taken to the

admission of Application under Section 7 of the Code.

23. The judgment of Kerala High Court in (1985) KLT 87, Varkey vs.

Subromonia Iyer has also been relied by the learned Counsel for the

Company Appeal (AT) (Insolvency) No. 359 of 2021 25 Appellant, where the High Court itself has relied on judgment of Hon'ble

Supreme Court, reiterated the same principle and laid down following in

paragraphs 14, 15, 16, 17 and 18:

"14. Counsel for the respondent relying on the decision reported in M. Chelamayya v. M. Venkataratnam (1972) 3 SCC 799 : AIR. 1972 SC. 1121) submits that even if the agreement contains certain provisions which require registration, without affecting the body and main purpose of the agreement, the part that is required to be registered can be severed and the document could be used. In (1972) 3 SCC 799 : AIR. 1972 SC. 1121, it was observed:-

"Thus where one transaction creates an independent personal obligation to pay a certain sum of money and the other transaction merely strengthens the first transaction by adding the right to proceed against the charged property, the second transaction with regard to the charge being a severable transaction can be validly ignored and the award to the extent it declares the personal obligation to pay is admissible in evidence the transaction not being required to be compulsorily registered."

15. The counsel submits that part which provides for interest can be severed and the document can be used even without registration. Here also, the plaintiff has got another difficulty that there is a charge by the document Ext. A2.

16. If applying the principle of separability, this part also is severed, the plaintiff has to fall back on the charge in the original mortgage. If he wants to enforce

Company Appeal (AT) (Insolvency) No. 359 of 2021 26 the charge created on the property by the original mortgage as stated earlier, it is not enforceable in this suit since it is barred by limitation.....

17. We also agree that if a transaction is distinct and divisible and one part of the transaction can be validly effected by an unregistered instrument and the other part requires registration, the instrument may be used as evidence of the part which does not require registration. We are of opinion that the part which is not required to be registered must be collateral and not dependent upon the part which requires registration. In a Madras case (Sambayya v. Gangayya (1890) 13 Mad.

308) Muttusami Ayyar, J. said: -

"The test therefore is whether the transaction evidenced by the particular instrument is single and indivisible, or whether it really evidences two transactions which can be severed from each other, the one as creating an independent personal obligation and the other as merely strengthening it by adding a right to proceed against immovable property. But it should be remembered that it is not enough that there is an obligation to pay a sum of money, but that it is also necessary that the obligation should have an independent existence, and be in no way contingent or conditional on the breach of some obligation relating to immovable property created by the same instrument, for the contingency of the condition and the obligation would then be parts of one indivisible transaction."

18. Normally an agreement has to be considered as a whole. Of course, severance can be effected without affecting or damaging the core of the transaction.

Company Appeal (AT) (Insolvency) No. 359 of 2021 27 Severability which takes in the rule of separability is a principle which can be applied only if it does not affect the main aim and intention of the transaction and only if the objectionable part can be severed without affecting the validity of the remaining part."

24. We, thus, are of the view that the three loans which were assigned

by Altico in favour of Respondent No.2 were severable and even if the

Facility Agreement dated 14th May, 2018, which was sought to be given

effect to be excluded from consideration, the assignment cannot be held to

be illegal with regard to other two transactions that is Debenture Trust

Deeds dated 04.12.2015 and 24.11.2016. There being default under the

above two transactions being INR 111,55,88,511 + INR 2,73,76,59,666 as

mentioned in Column 2 of Part-IV of the Section 7 Application and default

being more than Rs.1 crore, the Application has rightly been admitted by

the Adjudicating Authority. We, thus, are of the view that no error has

been committed by the Adjudicating Authority in admitting the Section 7

Application. There is no merit in the Appeal, the Appeal is dismissed. No

order as to costs.

[Justice Ashok Bhushan] Chairperson

[Dr. Ashok Kumar Mishra] Member (Technical) NEW DELHI

24th January, 2022

Ash/NN

Company Appeal (AT) (Insolvency) No. 359 of 2021 28