Steel Konnect (India) Private Limited vs M/S Hero Fincorp Limited

(arising out of Order dated 19th April, 2017 passed by the National Company Law Tribunal, Ahmedabad Bench in CP (IB) No. 5/7/NCLT/AHM/ 2017). IN THE MATTER OF:

Steel Konnect (India) Private Limited ....Appellant

Vs.

M/s Hero Fincorp Limited ...Respondent

Present: For Appellant: - Shri Vivek Sibal, Ms. Pooja M.Saizal, Advocates and Shri Ajoy Tola, C.A.

For Respondent: - Shri Venancio D'Costa and Ms. Astha

JUDGEMENT

SUDHANSU JYOTI MUKHOPADHAYA,J.

The respondent MI s Hero Fincorp Limited (hereinafter referred to as

'Financial Creditor) preferred an application under Section 7 of the

Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as 'I & B

Code'), for initiation of Corporate Insolvency Resolution Process against

Appellant- 'Corporate Debtor'. The Learned Adjudicating Authority

(National Company Law Tribunal), Ahmedabad Bench, by impugned order

dated 19th April 2017 in C.P.No. (IB) 05/NCLT/AHM/2017, admitted the

application, appointed an Interim Resolution Professional and passed 2

order of moratorium with certain observations and directions in terms of 'I

& B Code'.

2. Learned Counsel for the appellant submitted that the impugned

order was passed by the Adjudicating Authority in violation of Rules of

natural justice without giving any notice to the Appellant - 'Corporate

Debtor'.

3. It was also submitted that no post filing notice under Rule 4(3) of the

Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules,

2016 (hereinafter referred to as 'Adjudicating Authority Rules') was given

by the respondent - "Financial Creditor". A notice was served on appellant,

purported to be a notice under Rule 4(3), was pre filing notice with wrong

date of admission of the application mentioned therein.

4. It was further submitted that a record of default recorded with the

information utility or a record of default available with any Credit

Information Company (CIBIL) or copies of entries in Banker's book in

accordance with the Bankers Book Evidence Act, 1891 as required in terms

of Form - I read with Rule 4 of the Adjudicating Authority Rules was not

filed. Reliance was also placed on sub-section (3) of Section 7 to suggest

that record of default recorded with the information utility or such other

record or evidence of default as specified by Insolvency & Bankruptcy

Board of India (IBBI) has not been filed.

5. On the other hand, according to Learned Counsel for the

respondents, the appellant has no locus to file this appeal after 3

appointment of Interim Resolution Professional, who has already taken

over the management of the 'Corporate Debtor'. The powers of Board of

Directors, since then stands suspended in terms of Section 17(1)(a) & (b)

of the 'I & B Code.

6. In so far as notice under Rule 4(3) is concerned, according to Learned

Counsel for the respondent proper notice was issued to the 'Corporate

Debtor' who had appeared before Learned Adjudicating Authority on 17th

April 2017 and was given ample opportunity to present the case.

7. Relying on the decision of the Appellate Tribunal in "M/s. Innoventive

Industries Ltd. Vs ICICI Bank & Ann" (Company Appeal (AT)(Ins.) Nos. 1

and 2 of 2017 decided on 15th May 2017), it was contended that the

Adjudicating Authority is required to issue only a limited notice to the

'Corporate Debtor' before admitting a case for ascertainment of existence

of default. It was submitted that along with application under Section 7 of

'I & B Code' preferred before the Learned Adjudicating Authority, notice

was issued to appellant under Rule 4(3) of the Adjudicating Authority

Rules, intimating that the said application is likely to be listed. Therefore,

according to respondent there is no violation of Rule 4(3) of the Rules or

the principles of natural justice.

8. In so far as statement of account is concerned it was contended that

Learned Adjudicating Authority, before admitting the application under

Section 7 of the 'I & B Code', is only required to ascertain whether there

has been a default of debt on the part of the 'Corporate Debtor'. In the 4

present case, the 'Financial Creditor', apart from filing the statement of

accounts duly certified by the office of the 'Financial Creditor's Company,

filed records of default which is available with CIBIL. In so far as Banker's

Book of Evidence Act 1891 is concerned, it is submitted that the same is

not applicable to the non-banking financial companies.

9. We have heard learned counsel for the parties and perused the

record.

10. In "MIs Innoventive Industries Limited Vs. ICICI Bank & Ann" -

Company Appeal (AT) (Insol.) No. 1 & 2 of 2017, this Appellate Tribunal by

judgement dated 15th May 2017, noticed the exception of the principle of

rules of natural justice, as follows: -

"42. From the aforesaid decisions of Hon'ble

Supreme Court, the exception on the Principle of Rules of

natural justice can be summarised as follows: -

(i) Exclusion in case of emergency,

(ii) Express statutory exclusion

(iii) Where discloser would be prejudicial to public interests

(iv) Where prompt action is needed,

(v) Where it is impracticable to hold hearing or appeal,

(vi) Exclusion in case of purely administrative matters.

(vii) Where no right of person is infringed, 5

(viii) The procedural defect would have made no difference to the outcome.

(ix) Exclusion on the ground of 'no fault' decision maker etc."

11. In the said case this Appellate Tribunal, taking into

consideration the facts that though notice was not issued to "M/s

Innoventive Industries Limited" (Appellant), but the said appellant

having appeared and heard by Adjudicating Authority at the time of

admission of the application under Section 9 of the 'I & B Code', observe

and held as under: -

'65. In the present case though no notice was

given to the Appellant before admission of the case

but we find that the Appellant intervened before the

admission of the case and all the objections raised by

appellant has been noticed, discussed and

considered by the 'adjudicating authority' while

passing the impugned order dated 17th January

2017. Thereby, merely on the ground that the

Appellant was not given any notice before admission

of the case cannot render the impugned order illegal

as the Appellant has already been heard. If the

impugned order is set aside and the case is remitted

back to the adjudicating authority, it would be

'useless formality' and would be futile to order its

observance as the result would not be different. 6

Therefore, order to follow the principles of natural

justice in the present case does not arise."

12. In the present case we find that the respondent issued post filing

notice under Rule 4(3) along with application under Section 7 of 'I & B

Code'. In the said notice date of hearing was shown as 11th April 2017

but the matter was listed before the Adjudicating Authority, a day

earlier on 10th April 2017. In the aforesaid background, the

Adjudicating Authority adjourned the matter, and directed to issue

notice on respondent. When the application was taken up for

admission on 19th April 2017, the appellant appeared through their

lawyers, Mr. Ketan Parikh with Mr. Pavan Godiawala. Paragraph 6 of

the impugned order dated 19th April 2017 suggests that both the

counsel for the "Financial Creditor" (Respondent) and "Corporate

Debtor" (Appellant) were heard wherein after the impugned order was

passed.

In the aforesaid background, we hold that even if it is presumed

that no separate notice was issued by Adjudicating Authority to the

"Corporate Debtor", the appellant having heard before passing the

impugned order, the question of remitting the case for hearing on the

ground of non-compliance of principles of natural justice does not arise

as it will be futile. For the reason aforesaid we are not inclined to

interfere with the impugned order dated 19th April 2017 on the ground

that no notice was issued to appellant by the Adjudicating Authority. 7

13. For the same reason, we also reject the plea taken by the

appellant that the notice under Rule 4(3) of the Adjudicating Authority

Rules was a pre filing notice, wrong date of hearing having shown

therein.

14. Whether enclosures of record of default or copies of entries in

Banker's Book as required in terms of Form - 1, read with Rule 4 of the

Adjudicating Authority Rules and sub-section (3) of Section 7 of the 'I

& B Code', is mandatory or not fell for consideration before this

Appellate Tribunal in "Neelkanth Township and Construction Pvt.

Limited. Vs. Urban Infrastructure Trustees Limited" - Company

Appeal (AT) (Insolvency) No. 44 of 2017 by its judgement dated 11th

August 2017. In the said case, this Appellate Tribunal held:

"18. It is well settled that rules of procedure are

to be construed not to frustrate or obstruct the process

of adjudication under the substantive provisions of law.

A procedural provision cannot override or affect the

substantive obligation of the adjudicating authority to

deal with applications under Section 7 merely on the

ground that Board has not stipulated or framed

Regulations with regard to sub-section 3(a) of Section 7.

The language of Section 240, whereby Board have been

empowered to frame regulations is clear that the said

regulation should be consistent with the 'I & B' Code and the rules made thereunder by the Central

Government.

19. In exercise of power conferred by Section

239 read with Sections 7, 8, 9 and 10 of the 'I& B code,

the Central Government framed the rules known as

"Insolvency & Bankruptcy (Application to Adjudicating

Authority) Rules, 2016 (hereinafter referred to as

'Adjudicating Authority Rules, 2016). As per Rule 41,

a 'Financial Creditor' required to apply itself or jointly

in an application under Section 7 in terms of For-m-1

attached thereto. Part V of Form-1 deals with

particulars of 'Financial Debt' (documents, record and

evidence of default), as quoted below: -

"PART V PARTICULARS OF FINANCIAL DEBT [ DOCUMENTS, RECORDS AND EVIDENCE OF DEFAULT]

cc

1. PARTICULARS OF SECURITY HELD, IF ANY, THE DATE OF ITS CREATION, ITS ESTIMATED VALUE AS PER THE CREDITOR. ATTACH A COPY OF A CERTIFICATE OF REGISTRATION OF CHARGE ISSUED BY THE REGISTRAR OF COMPANIES (IF THE CORPORATE DEBTOR IS A COMPANY)

2. PARTICULARS OF AN ORDER OF A COURT, TRIBUNAL OR ARBITRAL PANEL ADJUDICATING ON THE DEFAULT, IF ANY (ATTACH A COPY OF THE ORDER) 9

3. RECORD OF DEFAULT WITH THE INFORMATION UTILITY, IF ANY (ATTACH A COPY OF SUCH RECORD)

4. DETAILS OF SUCCESSION CERTIFICATE, OR PROBATE OF A WILL, OR LETTER OF ADMINISTRATION, OR COURT DECREE (AS MAY BE APPLICABLE), UNDER THE INDIAN SUCCESSION ACT, 1925 (10 OF 1925) (ATTACHA COPY)

5. THE LATEST AND COMPLETE COPY OF THE FINANCIAL CONTRACT REFLECTING ALL AMENDMENTS AND WAIVERS TO DATE (ATTACH A COPY)

6. A RECORD OF DEFAULT AS AVAILABLE WITH ANY CREDIT INFORMATION COMPANY (ATTACH A COPY)

7. COPIES OF ENTIRES IN A BANKERS BOOK IN ACCORDANCE WiTH THE BANKERS BOOKS EVIDENCE ACT, 1891 (18OF1891)

8. LIST OF OTHER DOCUMENTS ATTACHED TO THIS • APPLICATION IN ORDER TO PROVE THE EXISTENCE OF OPERATIONAL DEBT AND THE AMOUNT IN DEFAULT"

,' 10

20. The rules framed by the Central

Government under Section 239 having prescribed the

documents, record and evidence of default as noticed

above, we hold that in absence of regulation framed by

the Board relating to record of default recorded with

the information utility or other record of evidence of

default specified, "the documents", 'record' and

'evidence of default' prescribed at Part V of Form-1, of

the Adjudicatory Rules 2016 will hold good to decide

the default of debt for the purpose of Section 7 of the 'I

&BCode'.

21. We further hold that the 'Regulations

framed by the Board' being subject to the provisions of

I & B Code' and rules framed by the Central

Government under Section 239, 'Part V of Form - 1' of

Adjudicating Authority Rules, 2016 framed by Central

Government relating to 'documents', 'record' and

'evidence of default', will override the regulations, if

framed by the Board and if inconsistent with the Rule.

However, it is always open to Board to prescribe

additional records in support of default of debt, such as

records of default recorded with the information utility

or such other record or evidence of default in addition to

the records as mentioned in Part V of Form-I. 11

22. At this stage, it is pertinent to note that the

Board has also framed Insolvency Resolution Process

for Corporate Persons, Regulations, 2016 ('Corporate

Persons Regulation' for short). It has come into force

since Notification dated 30th November 2016 was

issued. Regulation 8 of 'Corporate Persons Regulation',

2016 relate to claims by 'Financial Creditor'. Regulation

11 (2) relates to existence of debt due to 'Financial

Creditor', which is to be proved on the basis documents

mentioned therein and quoted below: -

"8. Claims by financial creditors.

(1) A person claiming to be a financial

creditor of the corporate debtor shall submit

proof of claim to the interim resolution

professional in electronic form fn Form C of

the Schedule:

Provided that such person may submit

supplementary documents or clarifications in

support of the claim before the constitution of

the committee.

(2) The existence of debt due to the financial

creditor may be proved on the basis of - 12

(a) the records available with an

information utility, if any; or

(b) other relevant documents, including -

(i) a financial contract supported by

financial statements as evidence of

the debt;

(ii) a record evidencing that the

amounts committed by the financial

creditor to the corporate debtor under

a facility has been drawn by the

corporate debtor;

(iii) financial statements showing that

the debt has not been repaid; or

(iv) an order of a court or tribunal that

has adjudicated upon the non-

payment of a debt, if any."

23. 'Form - C' attached to the Regulation

relates to proof of claim of 'Financial Creditor'

whereunder at Serial No. 10, the 'Financial Creditor' is

supposed to refer the list of documents in proof of claim

in order to prove the existence and non-payment of claim

dues to the 'Operational Creditor'.

13

Therefore, the stand of the appellant that the

Board has not framed any Regulations, relating to

clause (a) of sub-section (3) of Section 7, cannot be

accepted."

15. The case of the appellant is covered by the decision in

"Neelkañth Township and Construction Pvt. Ltd.". For the said

reason, the contention with regard to documents, records and evidence

of default as raised by appellant is also rejected.

17. For determination of the issue whether the "Corporate Debtor"

can prefer appeal under Section 61 of the 'I & B Code' through the

Board of Directors, which stand suspended after admission of an

application it is necessary to refer to Section 17, which reads as

follows: -

"17. Management of affairs of corporate

debtor by interim resolution professional. -

(1) From the date of appointment of the interim

resolution professional, -

(a) the management of the affairs of the

corporate debtor shall vest in the interim

resolution professional;

(b) the powers of the board of directors or the

partners of the corporate debtor, as the

case may be, shall stand suspended and 14

be exercised by the interim resolution

professional;

(c) the officers and managers of the corporate

debtor shall report to the interim resolution

professional and provide access to such

documents and records of the corporate

debtor as may be required by the interim

resolution professional;

(d) the financial institutions maintaining

accounts of the corporate debtor shall act

on the instructions of the interim resolution

professional in relation to such accounts

and furnish all information relating to the

corporate debtor available with them to the

interim resolution professional.

(2) The interim resolution professional vested

with the management of the corporate debtor

shall--

(a) act and execute in the name and on behalf

of the corporate debtor all deeds, receipts,

and other documents, if any;

(b) take such actions, in the manner and

subject to such restrictions, as may be

specified by the Board;

15

(c) have the authority to access the electronic

records of corporate debtor from

information utility having financial

information of the corporate debtor;

(d) have the authority to access the books of

account, records and other relevant

documents of corporate debtor available

with government authorities, statutory

auditors, accountants and such other

persons as may be specified."

16. From Clause (a) of sub-section (1) of Section 17 while it is clear

that the Management of affairs of the 'Corporate Debtor' stand vested

with the 'Interim Resolution Professional', such vesting is limited and

restricted to the extent of power vested under sub-section (2) of Section

17 which empowers the 'Interim Resolution Professional' to act and

execute in the name of 'Corporate Debtor' all deeds, receipts, and other

documents, if any, to take such action in the manner and subject to

such restrictions, as may be specified by the Board and have access of

authority to the electronic records of 'Corporate Debtor', books of

accounts, records etc.

From the aforesaid provision we find that "Interim Resolution

Professional' has not been vested with any specific power to sue any

person on behalf of the 'Corporate Debtor'. However, in case of such 16

difficulty, it is always open to the 'Interim Resolution Professional' to

bring to the notice of the Adjudicating Authority for appropriate order.

17. Admittedly, 'Corporate Debtor' was a party respondent to the

resolution process when application under Section 7 or 9 is preferred.

The 'Corporate Debtor' represented itself, at the initial stage before the

Adjudicating Authority through the Board of Directors or person

authorised by the Board of Directors. It is only after hearing the

'Corporate Debtor' the Adjudicating Authority can pass an order under

Section 7 or 9, admitting or rejecting the application.

18. Once the application under Section 7 or 9 is admitted, the

'Corporate Insolvency Resolution Process' starts in such case one of the

aggrieved party being the 'Corporate Debtor' has a right to prefer an

appeal under Section 61, apart from any other aggrieved person like

Director(s) of the company or members, who do not cease to be

Director(s) or member(s), as they are not suspended but their function

as 'Board of Director(s)' is suspend.

19. The 'Corporate Debtor' if represented before the Adjudicating

Authority through its Board of Directors or any person authorised by

Board of Director or its officers, for the purpose of preferring an appeal,

no objection can be raised that the 'Corporate Debtor' cannot appear

through its Board of Directors or authorised person or officer through

whom 'Corporate Debtor' represented before the Adjudicating

Authority.

17

Once a 'Corporate Debtor' appeared before the Adjudicating

Authority through its Board of Director(s) or its officers or through

authorised person and is heard before admission of an application

under '1 & B Code', being aggrieved such 'Corporate Debtor' cannot

prefer an appeal under Section 61 on the ground that the 'Corporate

Debtor' appeared through another person 'Interim Resolution

Professional', though he had not appeared before the Adjudicating

Authority.

20. Though the Board of Directors or partners of 'Corporate Debtor',

as the case may be is suspended and their power can be exercised by

the 'Interim Resolution Professional', but such exercise of power is

limited to the extent to sub-section (2) of Section 17 of the 'I & B Code'

and not for any other purpose. If the matter is looked from another

angle, it will be clear as to why 'Corporate Debtor' should not be

represented through 'Interim Resolution Professional' for preferring an

appeal under Section 61 of the 'I & B Code'. The Role of 'Interim

Resolution Professional' starts after initiation of 'Corporate Insolvency

Resolution Process' against the 'Corporate Debtor'. The 'Interim

Resolution Professional' once given consent to function directly or

indirectly he cannot challenge his own appointment, except in case

where he has not given consent. If the 'Corporate Debtor' is left in the

hands of 'Interim Resolution Professional' to raise his grievance by

filing an appeal under Section 61, it will be futile, as no 'Interim

Resolution Professional' will challenge the initiation of 'Insolvency 18

Resolution Process' which ultimately result into the challenge of his

appointment.

21. For example, if an application under Section 7 or 9 is admitted

and at the stage of admission, the 'Interim Resolution Professional' is

not appointed and such appointment is made later on within 14 days

of admission under Section 16, then in case of appointment of an

ineligible 'Interim Resolution Professional' against whom a

Departmental proceeding is pending, can the 'Corporate Debtor' prefer

appeal under Section 61 challenging the appointment of 'Interim

Resolution Professional', if the 'Corporate Debtor' is asked to be

represented through the same very 'Interim Resolution Professional'?

The answer will be in negative means a 'Corporate Debtor' in such case

cannot be represented to the 'Interim Resolution Professional', whose

appointment is under challenge and for all purpose to be represented

through the person who represented the 'Corporate Debtor' at the stage

of admission before the Adjudicating Authority.

22. At this stage, it is desirable to notice that though pursuant to

Section 17, the Board of Directors of a 'Corporate Debtor' stand

suspended (for a limited period of 'Corporate Resolution Process

maximum 180 days or extended period of 90 days i.e. 270 days), but

they continued to remain as Directors and members of the Board of

Directors for all purpose in the records of Registrar of Companies under

the Companies Act 2013.

19

23. For the reasons aforesaid, we also reject the plea taken by

Learned Counsel for the appellant that the "Corporate Debtor" has no

locus to prefer appeal under sub-section (1) of Section 61 through its

Board of Directors or authorise person or its officers except through

the "Interim Resolution Professional".

24. We find no merit in this appeal. It is accordingly dismissed.

However, in the facts and circumstances of the case, the parties shall

bear the respective costs.

(Balvinder Singh) (Justice S.J. Mukhopadhaya) Member (Technical). Chairperson

NEW DELHI 29th August 2017

SM