Shantilal Javerchand Jain Suspended ... vs Varsha Corporation Limited Through ...

For Respondent: Mr. Subir Kumar, Mr. Vardhman Kaushik, Ms. Disha Shah, Mr. Nishant Gautam, Mr. Prafful Saini, Mr. Syed, Ms. Eesha, Advocates for R-1 Mr. Vishesh Kalra, Mr. Kunal Kanungo, Advocates for R-2.

JUDGMENT

(Date: 02.11.2022)

Company Appeal (AT) (Insolvency) No. 719 of 2021

Page 1 of 13 [Per.: Dr. Alok Srivastava, Member (Technical)]

1. The present appeal has been filed under section 61 of the

Insolvency and Bankruptcy Code, 2016 (in short 'IBC') by the

Appellant against the order dated 10.6.2022 in CP No.

3863/IBC/MB/2019 (hereinafter called 'Impugned Order') passed

by the Adjudicating Authority (National Company Law Tribunal,

Mumbai)/

2. The Appellant is aggrieved by the Impugned Order in that

the section 7 application filed by respondent No. 1 has been

admitted and Corporate Insolvency Resolution Process (in short

'CIRP') has been initiated against the corporate debtor Varsha

Corporation Limited.

3. In brief, the Appellant's case is that a promissory note was

executed between the corporate debtor and Respondent No. 2 Mr.

Rajendra Shah on 23.2.2012 for a loan of Rs.50,00,000/- (Rupees

Fifty Lakhs Only) payable by the corporate debtor, and the

requisite amount was given by Respondent No. 2 vide cheque no.

468828 dated 21.2.2012 drawn on Central Bank of India. The

Appellant has stated that during the life of the promissory note i.e.

Company Appeal (AT) (Insolvency) No. 719 of 2021

Page 2 of 13 up to 23.2.2015, there was no demand for repayment by

Respondent No.2 and therefore, no default can be determined

during this period. He has further stated that in accordance with

Article 35 of the Schedule which includes periods of limitation in

the Limitation Act, 1963, a period of limitation of three years is

stipulated for a promissory note, which is payable on demand, and

thus the section 7 application filed by Respondent No. 2 on

25.10.2019 was clearly barred by limitation, as it was filed after

more than 7 years from the date of issue of promissory note.

Lastly, he has stated that since the section 7 application has been

filed beyond the limitation period, it has been incorrectly admitted

by the Adjudicating Authority.

4. We heard the Learned Counsels for both the parties in the

matter and perused the record.

5. The Learned Counsel for the Appellant has argued that the

Impugned Order has been obtained by Respondent No. 2/Financial

Creditor by claiming himself to be a financial creditor without

attaching any financial contract to prove that the alleged debt is a

financial debt as required under IBC. He has further argued that

the section 7 application does not show how the alleged loan was

Company Appeal (AT) (Insolvency) No. 719 of 2021

Page 3 of 13 disbursed and the date of default has been taken as 16.12.2016,

even though the limitation of the promissory note was over on

23.2.2015, and in view of the fact that there is no acknowledgment

of the debt by the corporate debt from 23.2.2015 up to the date of

default, namely, 16.12.2016, the application under section 7 is

clearly barred by limitation.

6. The Learned Counsel for Appellant has referred to letters

dated 7.6.2017 and 16.1.2017 which have been submitted by the

financial creditor, to claim that these letters are of dates that are

clearly beyond the period of limitation, and, therefore, they cannot

be shown as acknowledgement of debt to take benefit of section 18

of the Limitation Act, 2013. He has also claimed that reliance

placed on the proceedings in the application under section 138 of

the Negotiable Instruments Act with respect to dishonouring of

three cheques, all dated 22.10.2016, cannot be considered as

acknowledgment for extension of limitation under section 19 of the

Limitation Act, 1963, since the tendering of three cheques in

question was done after the period of limitation had lapsed on

23.2.2015. Moreover, he has claimed, the deposit of TDS amount

cannot be taken as acknowledgment of debt by the Appellant. The

Learned Counsel for Appellant has lastly argued that there was no

Company Appeal (AT) (Insolvency) No. 719 of 2021

Page 4 of 13 demand made within the validity period of the promissory note i.e.

between 23.2.2012 and 23.2.2015 and hence the debt of Rs. 50

lakhs lent through the promissory note became time barred on

12.3.2015, and with no acknowledgment of the debt produced by

Respondent No. 2 pertaining to any date before 23.2.2015 to claim

extension of limitation, the section 7 application, which is clearly

barred by limitation, should be rejected.

7. The Learned Counsel for Appellant has cited the following

judgments of NCLAT in support of his contention that lack of

record to show disbursal of loan is a serious short-coming in

section 7 application on which basis the insolvency application

cannot be admitted:-

(i) Prayag Polytech Pvt. Ltd. v/s Gem Batteries Pvt.

Ltd. (Company Appeal (AT) (Ins) No. 713 of 2019).

(ii) Pawan Kumar v/s. Utsav Securities Pvt. Ltd. and Anr. (Company Appeal (AT) (Ins) No. 251 of 2020).

8. The Learned Counsel for Appellant has also cited the

judgment of NCLAT in Anita Jindal Vs. M/s. Jindal Buildtech

Pvt. Ltd., [CA (AT) (Insolvency) No. 512 of 2021], whereby the

Hon'ble Tribunal has held that for seeking initiation of CIRP, the

Company Appeal (AT) (Insolvency) No. 719 of 2021

Page 5 of 13 factual matrix of the case should be seen whether it is only with an

intention for recovery of dues and not for the purpose of

insolvency resolution, and if it is meant for recovery of dues, the

application for CIRP initiation ought not to have been admitted.

9. In reply, the Learned Counsel for Respondent has argued

that the promissory note was executed between him and the

corporate debtor for providing a loan of Rs. 50 lakhs, which was

disbursed by cheque no.468828 dated 21.2.2012 drawn on the

Central Bank of India. He has further argued that since the

corporate debtor was paying interest @ of 15% p.a. on the amount

given on loan, he had no reason to demand repayment of the

amount as per the promissory note till the year 2016, when on

non-receipt of timely interest payment he approached the

corporate debtor for repayment of the loan amount alongwith

interest. He has referred to letter dated 7.6.2016, sent to him by

the corporate debtor, wherein the corporate debtor has admitted

receiving a sum of Rs. 50 lakhs by cheque no. 468828 drawn on

Central Bank of India with interest @ 15% p.a, and whereby the

corporate debtor gave cheque no. 964293 dated 22.10.2016 for

Rs.50,00,000/- drawn on the corporate debtor's bank 'Greater

Bombay Co-operative Bank, Malad Branch, Mumbai' towards

Company Appeal (AT) (Insolvency) No. 719 of 2021

Page 6 of 13 repayment of the principal loan amount. He has also referred to

two other cheques, viz. cheque no. 958801 dated 22.10.2016 for

an amount of Rs.3,41,250/- and cheque no. 964332 dated

22.10.2016 for an amount of Rs.1,72,500/-, both issued by the

corporate debtor for payment of interest due on the loan amount.

He has further submitted that on presentation of these cheques,

the Central Bank of India issued three advice notes dated

16.12.2016 dishonouring the three cheques with the statement

"Account Closed".

10. The Learned Counsel for Respondent has urged, on the basis

of the dishonour of the above-mentioned cheques, that since the

corporate debtor was paying interest on the unsecured loan, which

is clear from the ledger showing 'Confirmation of Account' for the

period 1.4.2014 to 31.3.2015, and also Form 16A showing TDS

deduction, that there was no default till then i.e. 16.12.2010. He

has submitted that the date of default is the date of the bouncing

of the cheque viz. 16.12.2016, and since the section 7 application

has been filed on 25.10.2019, it is clearly within limitation of three

years. He has strongly argued that even if he did not take any

action for repayment of the amount in accordance with the

promissory note, the fact that the disbursed amount was a loan

Company Appeal (AT) (Insolvency) No. 719 of 2021

Page 7 of 13 cannot be denied, as is coming out from the letter dated 7.8.2016

of the corporate debtor. Further, he has referred to the judgment

of the Metropolitan Magistrate, 20th Court, Mazgaon, Mumbai in

Summary Criminal Case No. 2000868/SS/2017, in which the

existence of the three cheques bearing no. 964293 for Rs. 50

lakhs, no. 958801 for Rs. 3,41,250/- and no. 964332 for Rs.

1,72,500/-, all issued on 22.10.2016 drawn on the Greater

Bombay Co-operative Bank, Mumbai has been found to be correct

and so affirmed by the Metropolitan Magistrate, Mumbai.

11. The issue, therefore, that falls for consideration in this

appeal is whether the loan advanced by Respondent No. 2 to the

corporate debtor regarding which the promissory note has been

executed is a financial debt and further whether the letter dated

7.6.2016 constitutes admission of such debt and whether the date

of dishonouring of cheques i.e. 16.12.2016 is the date of default.

12. We note that the ledger statement regarding confirmation on

account of the corporate debtor for the period 1.4.2014 to 2015,

which was sent by the corporate debtor to Respondent No. 2

(attached at page 97 of the appeal paperbook) clearly shows that

Company Appeal (AT) (Insolvency) No. 719 of 2021

Page 8 of 13 interest on unsecured loan amount of Rs.170625/- was paid on

9.4.2014, further an amount of Rs.172500/- was paid on

20.11.2014 and an amount of Rs.341250 was paid on 20.06.2015.

Therefore, it is clear, as claimed by Respondent No. 2, that the

corporate debtor was paying interest in the years 2014 and 2015

on the loan amount of Rs. 50 lakhs and hence, and so it is logical

that the corporate debtor did not demand repayment of the

amount of the promissory note. Further, the TDS details updated

on 16.7.2014 (attached at pp.99-100 of appeal paperbook) also

corroborate the payment of interests by the corporate debtor to

Respondent No. 2. Thus, we find the argument of Respondent No.

2 that the question of demanding payment on account of the

promissory note during the existence did not arise till June, 2016

when he approached the corporate debtor for repayment of the

loan amount convincing.

13. Further, we note that within a period of three years from the

date of issue of ledger confirmation of account dated 1.4.2015, the

corporate debtor issued a letter dated 7.6.2016 (attached at pg. 80

of the appeal paperbook) wherein the corporate debtor has

admitted that Rs. 50 lakhs given by cheque no. 468828 drawn on

Central Bank of India was by way of business loan with interest @

Company Appeal (AT) (Insolvency) No. 719 of 2021

Page 9 of 13 15% p.a. This letter also notes that cheque no. 964293 for

Rs.50,00,000 has been given by Respondent No. 2 towards

repayment with an assurance as follows:-

"We have assured you that, when you will deposit your cheque with your bank the same will definitely be honoured and we will neither stop the payment thereof by requesting our bank nor dishonour the same for any reason whatsoever. In case we dishonour the same you will be at liberty to take legal action against us under the provision of the Negotiable Instrument Act. However, we assure you that such a stage will never come. The account of the interest will be settled subsequently."

14. We also note that three-cheques bearing no. 964293 dated

22.10.2016 for an amount of Rs. 50,00,000/-, cheque no. 958801

dated 22.10.2016 for an amount of Rs.3,41,250/- and cheque no.

964332 dated 27.10.2016 for an amount Rs.1,72,500/- (copies at

page 81 of appeal paperbook) relating to the principal loan amount

and the interest thereon were presented in the bank for realisation,

when they were dishonoured and the advice notes have been sent

by the Central Bank of India regarding dishonouring of the three

cheques with the comments "Account Closed".

15. While no date of default is mentioned in the promissory note

or any other document such loan agreement has been produced,

we are of the view that corporate debtor's letter dated 7.6.2016

states very clearly the existence of the loan and also the fact that

Company Appeal (AT) (Insolvency) No. 719 of 2021

Page 10 of 13 on depositing the cheque with the bank of Respondent No. 2, the

same will definitely be honoured and the dishonouring of cheques

will be taken as default for which the financial creditor can take

legal action. Thus the date 16.12.2016 has been correctly

considered as the date of default by the Adjudicating Authority,

which the said cheques were dishonoured.

16. The corporate debtor has admitted the fact that a loan was

taken by the corporate debtor from Respondent No. 2 (para 5 of

reply dated 16.1.2017 to the notice of Respondent No. 2, attached

at pp. 92-96 of the appeal paperbook). Further in the same reply,

the corporate debtor has accepted that such cheques were given by

the corporate debtor, but with an understanding that the same

shall be deposited in the month of March, 2017. We are not

inclined to accept this claim of the corporate debtor and are of the

view that Respondent No. 2 deposited the cheques in accordance

with date of the cheques, i.e. 22.10.2016. Therefore, it also

supports the contention of the Financial Creditor that the date of

16.12.2016, when these cheques were dishonoured, has been

correctly considered as the date of default.

Company Appeal (AT) (Insolvency) No. 719 of 2021

Page 11 of 13

17. We peruse the judgment of this tribunal in the matter of

Anita Jindal vs. M/s. Jindal Buildtech Pvt. Ltd. & Anr.(supra)

cited by the Learned Counsel for the Appellant, to note the facts in

this case, the section 7 application was dismissed since the matter

related to recovery of past dues, whereas in the present case, it is a

clear case of loan amount disbursed to the corporate debtor for

running his enterprise, and the loan repayment is in default and

therefore the section 7 route for insolvency resolution in the

present case is possible.

18. The Learned Counsel for Appellant has also referred to the

order of this tribunal in the matter of Prayag Polytech Pvt. Ltd.

Vs. Gem Batteries Pvt. Ltd. [Company appeal (AT) (Insolvency)

No. 713 of 2019), wherein it is observed by this tribunal that

Appellant has failed to show any record showing financial debt to

be there, whereas in the present case the existence of a financial

debt has been established without any ambiguity. Also, in the

judgment in the matter of Pawan Kumar vs. Utsav Securities

Pvt. Ltd. [Company Appeal (AT)(Ins) No. 251 of 2020) cited by

the Learned Counsel for Respondent holds that the Adjudicating

Authority is obliged to investigate the nature of the transaction

and should be very cautious in admitting the Application. We

Company Appeal (AT) (Insolvency) No. 719 of 2021

Page 12 of 13 note that in the present case, the Adjudicating Authority has

looked at all the documents and events presented by both the

parties to arrive at the conclusion that the said debt is 'financial

debt'.

19. In view of the discussion in the aforementioned paragraphs,

we are of the clear view that the Adjudicating Authority has not

committed any error in admitting the section 7 application. The

appeal being devoid of merit is, consequently, dismissed.

20. No order as to costs.

(Justice Ashok Bhushan) Chairperson

(Dr. Alok Srivastava) Member (Technical)

(Mr. Barun Mitra) Member (Technical)

New Delhi 2nd November, 2022

/aks

Company Appeal (AT) (Insolvency) No. 719 of 2021

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