Shaila Clubs & Resorts Pvt Ltd vs Mrs.Meghna Rajeev Kore & Ors

ASHOK BALASAHEB GAJBAR Erstwhile Director of Shaila Clubs & Resorts Pvt. Ltd. 72/3, Prabhat, Shivaji Partk, Cross Road No. 1, Dadar, Mumbai - 400028 ...Appellant

Versus

1.MRS. MEGHNA RAJEEV KORE Residing at Kore Lawn, 383/3, Sahyog Nagar, MSEB Road, Govt. Colony, Vishrambaug, Sangli - 416 416

2. MS. SAKSHI RAJEEV KORE Residing at Kore Lawn, 383/3, Sahyog Nagar, MSEB Road, Govt. Colony, Vishrambaug, Sangli - 416 416

3. MASTER DEV RAJEEV KORE Through his mother and natural guardian Mrs. Meghna Rajeev Kore, Residing at Kore Lawn, 383/3, Sahyog Nagar, MSEB Road, Govt. Colony, Vishrambaug, Sangli - 416 416

4. SHAILA CLUBS AND RESORTS PRIVATE LIMITED Registered Office Address: Kore Plaza, Behind Hotel Pai-Prakash, Vishrambag, Sangli - 416 415

Through Its Resolution Professional, Mr. Milind Kasodekar, Regn. No. IBBI/IPA-002/ IPN00116/2017-18/10285, 3rd, Floor Satyagiri Apartment, 77 Vijay Nagar Colony, 2147 Sadashiv Peth, Pune - 411 030 Email: Milind.kasodekar@kmdscs.com ...Respondents 2

Present: For Appellant : Ms. Ruby Singh Ahuja, Mr. Lakshya Khanna, Ms. Honey Maini, Advocates For Respondent : Mr. Raghunath S. Mr. Rajesh C. Ms. Meenakshi Rawat, Adv. for R1, 2 and 3. Mr. Avinash R. Khanolkar, Mr. G. Kaushal, Mr. Arun Pal, Advocates for R-4/RP

JUDGMENT

Per: Justice Rakesh Kumar Jain:

This appeal is preferred by an erstwhile Director of the Corporate

Debtor (Shaila Clubs & Resorts Private Limited), being aggrieved against the

order dated 29.10.2021, passed by the Adjudicating Authority (National

Company Law Tribunal, Mumbai Bench, Court-II) in CP (IB) 170/MB/C-

II/2018, by which an application filed by Respondents No. 1 to 3 (Financial

Creditors), under Section 7 of the Insolvency and Bankruptcy Code, 2016 (in

short 'Code') to initiate Corporate Insolvency Resolution Process (in short

'CIRP') against the Corporate Debtor has been admitted.

2. In short, the Respondents No. 1 to 3 are the legal heirs of Rajeev

Ramling Kore, a founding member, promoter and Director of Respondent No.

4, who passed away on 08.07.2013. The Respondents No. 1 to 3 filed an

application under Section 7 of the Code r/w Rule 4 of the Insolvency and

Bankruptcy (Application to Adjudicating Authority) Rules, 2016 (in short

'Rules') alleging that Respondent No. 4 had borrowed an amount of Rs.

3,59,00,000/- from late Rajeev Ramling Kore. It is alleged that Respondents

No. 1 to 3 addressed a letter dated 03.10.2017 asking Respondent No. 4 to

repay a sum of Rs. 3,59,00,000/- together with interest @ 18% p.a. within

Company Appeal (AT) (Ins) No. 1042 of 2021 3

seven days of the receipt of the notice and thereafter filed the application

under Section 7 of the Code claiming an amount of Rs. 3,76,70,410/-

(including interest) assigning the date of default as 14.10.2017.

3. The Corporate Debtor contested the application, inter alia, on the

ground that the application filed under Section 7 of the Code could be

maintained only if it is proved that there is a debt and default in non-

payment of the amount of debt which are conspicuously absent from the

pleadings as well as evidence led by the Financial Creditors as they have

failed to prove that the principal loan amount had become due and payable.

It was also stated that nothing has been brought on record to prove that

there was any agreement between the parties to pay interest on the amount

stated to have been advanced by late Rajeev Ramling Kore, therefore, neither

the said amount falls in the definition of financial debt nor discloses the

default as prescribed under Section 2(12) of the Code. Rather it is submitted

that the principal amount was to be repaid from the sale proceeds of the

principal assets (Club Premises) which is the subject matter of the

arbitration and litigation, therefore, the principal loan amount has not

become due and payable and as such there was no default on the part of the

Corporate Debtor (Respondent No. 4) which may trigger the cause of action

for the filing of application under Section 7 of the Code.

4. Counsel for the Appellant has submitted that the Adjudicating

Authority has passed the impugned order without applying its mind to the

facts and circumstances much less the evidence brought on record as

according to the Appellant the amount of Rs. 3,59,00,000/- is shown in the

Company Appeal (AT) (Ins) No. 1042 of 2021 4

balance sheet of the year 2013 -14 only and in this regard, he has drawn

our attention to the auditor's report pertaining to the assessment year 2013-

14 in which clause 3(b) provides as under:-

"(b) The Company has taken unsecured loans from other parties listed in the register maintained under Section 301 of the Act and the maximum outstanding balance and also the closing balance of the said parties were given as per the table below:

Name of the Person Maximum Balance Closing Balance Outstanding during the year Rajeev R. Kore 35,913,539 35,913,539 Sanjay Pratap 495,000 495,000 Vilasrao Patil 5,100,000 5,100,000 Rajesh V. Patil 3,000,000 3,000,000

5. Thereafter, he has referred to the annual report for the assessment

year 2014-15, in which clause 3(b) provides as under:

"(b) The Company has taken unsecured loans from other parties listed in the register maintained under Section 301 of the Act and the maximum outstanding balance and also the closing balance of the said parties were given as per the table below:

Name of the Person Maximum Balance Closing Balance Outstanding during the year Rajesh V. Patil 3,000,000 3,000,000 Amit Kore 72,85,000 72,85,000

Company Appeal (AT) (Ins) No. 1042 of 2021 5

6. It is further submitted that the date of default is mentioned as

14.10.2017 in part-iv of the application which is filed under Section 7 of the

Code in Form-1 without explaining as to how the date of default has been

ascertained in the absence of any agreement between the parties about the

manner in which the amount was to be repaid except that it shall be after

the sale of the assets of the club premises. In this regard, Counsel for the

Appellant has referred to the definition of financial debt which is provided in

Section 5(8) of the Code and submitted that it does not come within the

purview of the financial debt which means a debt alongwith interest and the

debt is defined under Section 3(11) of the Code as a liability or obligation in

respect of a claim which is due from any person. Similarly, Counsel for the

Appellant has referred to the definition of default provided in Section 3(12)

which means non-payment of debt when whole or any part or installment of

the amount of debt has become due and payable and is not paid by the

debtor or the corporate debtor, as the case may be. It is further submitted

that the debt and default are the two main components of Section 7 which

provides that an application may be filed for initiating corporate insolvency

resolution process against a corporate debtor before the Adjudicating

Authority when a default has occurred. The sum and substance of the

arguments of Counsel for the Appellant is that not only the Respondents No.

1 to 3 had to plead and prove that there was a debt but also it had become

payable and in the event of non-payment a default has occurred to attract

the provision of Section 7 of the Code for seeking initiation of CIRP against

the Corporate Debtor. It is further submitted that in the latest decision of

Company Appeal (AT) (Ins) No. 1042 of 2021 6

the Hon'ble Supreme Court in the case of Vidarbha Industries Power Limited

Vs. Axis Bank Limited, 2022 SCC Online SC 841, it has been held that the

Adjudicating Authority is not to pass an order of admission mechanically

even if the discretionary powers have been conferred upon it. It is argued

that the impugned order has been passed mechanically, without application

of mind and also without giving any reasons. In this regard, it is submitted

that the Adjudicating Authority has observed in Para 11 of the impugned

order that "we have heard the arguments of Financial Creditor and

Corporate Debtor and perused the records" whereas the order was ex-parte

because no one had appeared on behalf of the Respondent (Corporate

Debtor) which is also evident from the first page of the impugned order

where the appearance of counsel for the parties has been marked. In the

end, it is submitted that since none of the contentions, though noticed from

Paragraph 8 to 10 in the impugned order have been discussed while

recording its satisfaction in Para 12 and 13 of the impugned order for the

purpose of initiation of CIRP against the Corporate Debtor, therefore, the

impugned order may be set aside and the matter may be remanded back to

the Adjudicating Authority to decide it again after taking into consideration

the facts and circumstances of the case much less the primary issue as to

how the provision of Section 7 of the Code are attracted when the amount of

debt has neither become due nor payable and as such does not fall within

the definition of default.

7. On the other hand, Counsel appearing on behalf of the Respondents

No. 1 to 3 has submitted that the Adjudicating Authority has taken into

Company Appeal (AT) (Ins) No. 1042 of 2021 7

consideration all the aspects of the matter at the time of passing of the

impugned order. In this regard, it is submitted that the Adjudicating

Authority has referred to the audited statement of accounts from the year

2011 -12, 2013-14, 2014-15 and 2015-16 in para 4 of the impugned order.

Counsel for the Respondent, in reply to the contention of the Appellant that

there is no reference of the amount of Rajeev Ramling Kore in the column of

outstanding in the audited report of assessment year 2014-15 stated that

the balance sheet as on 31.03.2014 reflects the amount of the long term

borrowings which includes the component of the amount advanced by Amit

Kore. It is further submitted that before filing the application under Section

7 of the Code a notice was served upon the Corporate Debtor on 03.10.2017

and after waiting for sufficient time the application under Section 7 of the

Code was filed assigning the date of default as 14.10.2017. It is further

argued that the component of interest has been applied to the principal

amount which was not paid despite notice and that the amount in question

had become due and payable with the service of the notice of demand.

8. We have heard Counsel for the parties and perused the record with

their able assistance.

9. In the matter of judicial review in appeal, the Appellate Court is more

concerned about the manner in which the findings are ultimately recorded,

while admitting or rejecting the application filed either under Section 7, 9 or

10 of the Code as the case may be because a reasoned and speaking order is

the soul of principle of natural justice which has to be observed by the

Adjudicating Authority being a quasi judicial authority. It has been found

Company Appeal (AT) (Ins) No. 1042 of 2021 8

from the impugned order that the Adjudicating Authority has divided its

order in three parts. The first part deals with the submissions of Financial

Creditor, second part deals with the submissions of Corporate Debtor and

the third is about its satisfaction for admitting the application filed under

Section 7 of the Code. We have carefully gone through the impugned order

and are surprised to note that none of the contentions of the Corporate

Debtor have been discussed except for noticing in the fact that a demand

notice was issued by the Financial Creditor, there was an acknowledgement

by the Corporate Debtor in various financial statements and that the

understanding that money shall be paid after sale of assets is of no

substance. In this regard, Paragraph 12 and 13 of the impugned order

deserves to be mentioned which contains the findings of the Adjudicating,

Authority for the purpose of admitting the application.

"12. In the present case in hand it is noted that the legal heirs of the FC also successor to the Original FC now on record. Petitioners vide a notice of demand called upon the CD dated 03.10.2017 to pay to Petitioners. Further it is also noted that money/loan acknowledged by the CD in various financial statements. The contention of the CD that there was understanding that money will be paid after sale of asset only has no substance in it.

13. We also consider the facts of the case in the lights of the Hon'ble Supreme Court in Swiss Ribbons Pvt. Ltd. & Ors. Vs. Union of India & Ors. (writ Petition (c) No. 99 of 2018) upholding the constitutional validity of IBC, the position is very clear that unlike Section 9, there is no scope of raising a dispute as far as

Company Appeal (AT) (Ins) No. 1042 of 2021 9

Section 7 petition is concerned. As soon as a debt and default is proved, the adjudicating authority is bound to admit the petition"

10. The Adjudicating Authority, has apparently committed an error in not

deciding the issue as to whether there was actually a default on the part of

the Appellant. It should have given the reason as to why the contention of

the Corporate Debtor that there was an understanding that money shall be

paid after the sale of assets only has no substance in it and how it has come

to the conclusion that various financial statements shows acknowledgement

of the money/loan by the Corporate Debtor. There is no discussion at all by

the Adjudicating Authority about these material facts. Not only that, it

appears that the Adjudicating Authority has not looked into the fact that no

one had appeared on behalf of the Corporate Debtor before it when the

matter was argued and reserved and still it is recorded in its order that it

had heard the arguments of the Corporate Debtor. All these facts

cumulatively shows that there was no application of mind much less

judicious in passing of the impugned order which has been apparently

passed in a most mechanical manner. The Adjudicating Authority has to

take into consideration the fact that the proceedings of CIRP, initiated after

the admission of the application, has an immense adverse effect upon the

Corporate Debtor, therefore, such application should not be admitted as a

matter of routine and that too in a mechanical manner.

11. Thus, in view of the aforesaid facts and circumstances, we are of the

considered opinion that the impugned order suffers from non-application of

mind and is not a reasoned/speaking order, therefore, the same is hereby

Company Appeal (AT) (Ins) No. 1042 of 2021 10

set aside and the matter is remanded back to the concerned Adjudicating

Authority to decide the lis again by passing a speaking order. The parties are

directed to appear before the Adjudicating Authority on 20th December,

2022. The registry is directed to send the copy of this order to the concerned

Adjudicating Authority for compliance.

[Justice Rakesh Kumar Jain] Member (Judicial)

[Mr. Kanthi Narahari] Member (Technical)

New Delhi

01st December, 2022

Sheetal

Company Appeal (AT) (Ins) No. 1042 of 2021