Shailesh Sangani vs Joel Cardoso & Anr

[Arising out of order dated 31st August, 2018 passed by the Adjudicating Authority (National Company Law Tribunal), Mumbai Bench in Company Petition No. (1732/I&BP/2018]

IN THE MATTER OF:

Shailesh Sangani D/10, Ananta Building, Dr. Rajjabali Ali Pater Road, Breach Candy, Mumbai - 400 026. ...Appellant

Vs

1. Joel Cardoso 601, 6th Floor, Colden Ferns, Opp. Supari Talao Rebello Road, Bandra (West), Mumbai - 400 050.

2. Priority Marketing Private Limited Having its registered office at Gala No. 423-B, 4th Floor, Shah & Nahar Industrial Premises, Dhanraj Mills Compound, S. J. Marg, Lower Parel (W), Mumbai - 400 013. Represented through its Resolution Professional Mr. Pranav Damania. ....Respondents

Present:

For Appellant: Dr. U. K. Chaudhary, Senior Advocate assisted by Mr. Srisabri, Mr. Mahesh Agarwal, Mr. Rajeev Kumar and Ms. Swati Sinha, Advocates.

For Respondents: Mr. Gaurav Mitra and Mr. Rohan Ganpathy, Advocates. -2-

BANSI LAL BHAT, J.

Appellant is Promoter/Shareholder/Director of Respondent No.2

Company 'Priority Marketing Private Limited' (Corporate Debtor). Being

aggrieved of the impugned order dated 31st August, 2018 passed by the

Adjudicating Authority (National Company Law Tribunal) Mumbai Bench in

Company Petition No. 1732/I&BP/2018 by virtue whereof petition filed by

Respondent No. 1 - 'Mr. Joel Cardoso' as a 'Financial Creditor' under

Section 7 of the Insolvency and Bankruptcy Code, 2016 (hereinafter referred

to as 'I&B Code') has been admitted, moratorium slapped and Interim

Resolution Professional appointed with certain directions, has assailed the

impugned order primarily on the ground that the amount claimed by

Respondent No. 1 is not a 'Financial Debt' within the meaning of Section

5(8) and Respondent No. 1 cannot be treated as a 'Financial Creditor' for the

purposes of I&B Code.

2. For better understanding of the controversy involved in this appeal it

would be apposite to refer to the factual matrix of the case. Respondent

No.1, claiming to be a Shareholder of Respondent No. 2 (hereinafter referred

to as Corporate Debtor), filed an application under Section 7 of I&B Code

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before the Adjudicating Authority (National Company Law Tribunal) Mumbai

Bench, seeking initiation of Corporate Insolvency Resolution Process against

the Corporate Debtor on the ground that the Respondent No. 1 had granted

unsecured loan repayable on demand from time to time to the Corporate

Debtor which stood at Rs.3,23,46,475/- as on 31st March, 2008, major

portion whereof was repaid by the Corporate Debtor from year 2008 to 2010

leaving an amount of Rs.1,45,36,475/- as outstanding which was duly

reflected in the financial statements of Corporate Debtor and in respect

whereof the Corporate Debtor issued balance confirmation as on 1st April,

2016 which was confirmed by the statutory auditor in terms of email dated

5th October, 2017 and since the Corporate Debtor did not repay the

aforesaid loan amount, Respondent No. 1 served a notice of demand upon

the Corporate Debtor, which was not complied. Corporate Debtor raised the

plea before the learned Adjudicating Authority that there were cross

holdings inter-se the respondents in various companies and the amounts so

arrived at was a settlement amount which had not ended in compliance of

mutual obligations between the parties. The Corporate Debtor further

stated that the unsecured loan of Rs.1,45,36,475/- was a part of overall

settlement and it was ready to settle the cross holding of shares and loans

inter-se the Respondents. Respondent further contended that none of the

loans under the quasi partnership arrangement inter-se the Respondents

had any term for repayment or interest. The learned Adjudicating Authority

found that the contention raised on behalf of Corporate Debtor was not

plausible as the factum of amount advanced as loan by Respondent no.1 to

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Corporate Debtor was admitted and reflected in the accounts and confirmed

by the Corporate Debtor. Learned Adjudicating Authority was of the view

that the said amount was arrived at after the parties mutually agreed and

the same was reflected in the books of the Corporate Debtor under the head

'long term borrowings', the amount of debt fell within the purview of

'financial debt' notwithstanding the fact that no interest was payable. The

contention raised by the Corporate Debtor was accordingly repelled.

3. Learned counsel for the Appellant submits that the learned

Adjudicating Authority landed in error in holding that the amount claimed

by Respondent No.1 for triggering Corporate Insolvency Resolution Process,

in respect whereof default on the part of Corporate Debtor was alleged, was

not a 'Financial Debt' as defined under Section 5(8) of the I&B Code despite

the admitted position that there was no consideration for the time value of

money in the transaction. It is further submitted that learned Adjudicating

Authority failed to notice that no interest was ever claimed by the

Respondent No.1 or paid by the Corporate Debtor to Respondent No.1, that

no TDS amount was ever deducted in respect of the part payments made,

that there was no tenure for the repayment of amounts granted by

Respondent No.1 to Corporate Debtor and that there was no time value of

money in the transaction and no consideration for the time value of the

money was agreed between the parties at the time of disbursement of

moneys by Respondent No.1.

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4. Per contra it has been argued on behalf of Respondent No.1 that he

had provided moneys to the Corporate Debtor by way of interest free

unsecured loans between the period starting on 1st April, 2002 and ending

on 29th November, 2007, totalling to Rs.3,23,46,475/-, portion whereof to

the tune of Rs.1,78,10,100/- stands repaid by the Corporate Debtor leaving

a balance amount of Rs.1,45,36,475/- as outstanding, which is reflected in

the balance sheet of the Corporate Debtor as unsecured loan. It is further

submitted that by way of confirmation of accounts dated 1st April, 2016, the

Corporate Debtor has admitted the outstanding loan amount being due to

Respondent No. 1 which is further clarified by the statutory auditor of the

Corporate Debtor vide its email dated 5th December, 2017. It is further

submitted that there was no partnership or quasi-partnership between the

Appellant and Respondent No. 1 and moneys advanced by the Appellant

himself to the Corporate Debtor by way of unsecured loans in similar

fashion have been repaid by the Corporate Debtor. It is further submitted

that the ledger account maintained by the Corporate Debtor clearly reflects

the loan amounts provided by Respondent No.1 at different intervals and

repayments made to him by the Corporate Debtor. It is further submitted

that interest is not the mandatory factor to determine the nature of debt and

in the instant case loan provided by Respondent No. 1 to Corporate Debtor

being against the consideration for time value of money falls within the

purview of 'Financial Debt'. It is submitted that the Corporate Debtor owes

a 'financial debt' since the borrowing by the Corporate Debtor from

Respondent No.1 is 'an amount raised under any other transaction....xxx...

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having the commercial effect of a borrowing, covered under Section 5(8)(f) of

the I&B Code.'

5. We have gone through the record and given our anxious consideration

to the submissions made at the Bar. For determination of the issue whether

the amount claimed by Respondent No. 1 from the Corporate Debtor, default

in payment whereof culminated in initiation of Corporate Insolvency

Resolution Process, falls within the purview of 'financial debt' as defined

under Section 5(8) of the I&B Code, be it seen that the legal expression

'debt', defined under Section 3 (11) means a liability or obligation in respect

of a claim which is due from any person and includes a financial debt and

operational debt. It is manifestly clear that the liability or obligation to pay

must arise out of a claim due from a debtor/ borrower. The nature of

obligation and from where it springs is immaterial. The obligation may be

contractual or otherwise. Since, the legal expression 'debt' includes a

'financial debt' across the ambit of I&B Code, it would be appropriate to refer

to the definition of legal expression 'financial debt' as engrafted in Section

5(8) of I&B Code, which is reproduced hereinbelow:

"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;

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(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;

(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 non-recourse 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

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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;"

6. A plain look at the definition of 'financial debt' brings it to fore that the

debt alongwith interest, if any, should have been disbursed against the

consideration for the time value of money. Use of expression 'if any' as

suffix to 'interest' leaves no room for doubt that the component of interest is

not a sine qua non for bringing the debt within the fold of 'financial debt'.

The amount disbursed as debt against the consideration for time value of

money may or may not be interest bearing. What is material is that the

disbursement of debt should be against consideration for the time value of

money. Clauses (a) to (i) of Section 5(8) embody the nature of transactions

which are included in the definition of 'financial debt'. It includes money

borrowed against the payment of interest. Clause (f) of Section 5(8)

specifically deals with amount raised under any other transaction having

the commercial effect of a borrowing which also includes a forward sale or

purchase agreement. It is manifestly clear that money advanced by a

Promoter, Director or a Shareholder of the Corporate Debtor as a

stakeholder to improve financial health of the Company and boost its

economic prospects, would have the commercial effect of borrowing on the

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part of Corporate Debtor notwithstanding the fact that no provision is made

for interest thereon. Due to fluctuations in market and the risks to which it

is exposed, a Company may at times feel the heat of resource crunch and

the stakeholders like Promoter, Director or a Shareholder may, in order to

protect their legitimate interests be called upon to respond to the crisis and

in order to save the company they may infuse funds without claiming

interest. In such situation such funds may be treated as long term

borrowings. Once it is so, it cannot be said that the debt has not been

disbursed against the consideration for the time value of the money. The

interests of such stakeholders cannot be said to be in conflict with the

interests of the Company. Enhancement of assets, increase in production

and the growth in profits, share value or equity enures to the benefit of such

stakeholders and that is the time value of the money constituting the

consideration for disbursement of such amount raised as debt with

obligation on the part of Company to discharge the same. Viewed thus, it

can be said without any amount of contradiction that in such cases the

amount taken by the Company is in the nature of a 'financial debt'.

7. Adverting to the facts of the instant case be it seen that in the balance

sheet of 2009 forming Annexure B of the reply affidavit filed by Respondent

No. 1 under the heading 'unsecured loans' name of Respondent no. 1 figures

with particulars of loan. Same is extracted as under:-

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Company Appeal (AT) (Insolvency) No. 616 of 2018 -11-

8. The confirmation of accounts for the period between 1st April, 2015 to

31st March, 2016 forming 'Annexure C' to the reply affidavit reflects an

amount of Rs.1,45,36,475/- as balance in the book of accounts in the name

of Respondent No. 1. Same is extracted hereinbelow:-

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9. The balance sheet as on 31st March, 2017 at page 83 of the reply

affidavit filed by Respondent No.1, inter alia, reflects a non-current liability

of Rs.4,72,76,182/- treated as 'long term borrowings' and not treated as

shareholder's funds. Same factual position is reflected in the communication

made by the Company Auditor 'Ganesh Mehta', Partner 'Ganesh and

Rajendra Associates' addressed to Respondent No.1 in his communication

dated 5th December, 2017 forming Annexure D to the reply affidavit of

Respondent no.1 which is reproduced hereinbelow:-

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This communication reflects total unsecured loan of Rs.4,72,76,182/-

against the Corporate Debtor in the books of the Company as on 31st March,

2017, the breakup showing the loan amount of Rs.1,45,36,475/- in the

name of Respondent No.1.

In the face of this documentary evidence it is abundantly clear that

the amount disbursed by Respondent No.1 to the Corporate Debtor was in

the nature of debt treated as long term loan and not as an investment in the

nature of share capital or equity. Such disbursement cannot either be

treated as largesse. We are convinced that the aforesaid amount outstanding

as against Corporate Debtor, default whereof is not in issue, has all the

trappings of a 'financial debt' and falls within the purview of Section 5(8)(f) of

the I&B Code and Respondent No.1 is covered by the definition of 'Financial

Creditor'.

10. Learned counsel for the Appellant relied upon judgments of this

Appellate Tribunal rendered in 'Dr. B. V. S. Laxmi Vs. Geometrics Laser

Solutions Pvt. Ltd.', Company Appeal (AT) (Insolvency) No. 38 of 2017

decided on 22nd December, 2017 and 'Macksoft Tech Pvt. Ltd. & Ors. Vs.

Quinn Logistics India Ltd.', Company Appeal (AT) (Insolvency) No. 143,175 &

176 of 2017 decided on 21st May, 2018 to buttress his point that the

Respondent No.1 is not a 'Financial Creditor'. We have carefully gone

through the aforesaid judgments in 'Dr. B. V. S. Laxmi (Supra)', wherein this

Appellate Tribunal noticed that there was nothing on record to suggest that

Company Appeal (AT) (Insolvency) No. 616 of 2018 -14-

the Corporate Debtor borrowed the money and the creditor failed to

establish that the Corporate Debtor had raised the amount under any other

transaction having commercial effect of borrowing. The judgment relied

upon, on facts, is distinguishable and is not attracted to the facts of instant

case. In 'Macksoft Tech Pvt. Ltd. & Ors. (Supra)', this Appellate Tribunal held

as under:-

"37. Grant of loan and to get benefit of development is

object of the Respondent - ('Financial Creditor'), as

apparent from their 'Memorandum of Association'. Thus,

we find that there is a 'disbursement' made by the

Respondent - ('Financial Creditor') against the

'consideration for the value of money'. The investment

was made to derive benefit of development of 'Q-City',

which is the consideration for time value of money. Thus,

we find that the Respondent - ('Financial Creditor') come

within the meaning of 'Financial Creditor' and is eligible to

file an application under Section 7, there being a 'debt' and

'default' on the part of the 'Corporate Debtor'."

This judgment also does not support the Appellant's case in as much

as it holds that the amount disbursed as loan by a shareholder to derive

benefit of development of assets of the Corporate Debtor would be in the

nature of a loan disbursed against the consideration for time value of

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money. Appellant, therefore, does not gain anything by placing reliance on

this judgment.

11. For the foregoing reasons we find no merit in this appeal. There being

no infirmity in the impugned order, this appeal is dismissed. There shall be

no orders as to costs.

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

NEW DELHI

30th January, 2019

AM

Company Appeal (AT) (Insolvency) No. 616 of 2018