Surinder Kumar Singal vs Aarkay Innovations Limited

[Arising out of order dated 12.01.2021 in CP (IB) No. 120/Chd/CHD/2019 passed by the Adjudicating Authority (National Company Law Tribunal), Chandigarh Bench, Chandigarh.]

IN THE MATTER OF:

Surinder Kumar Singal SCO 15, 2nd Floor, Sector 26, Madhya Marg, Chandigarh-160019 EMAIL ID: info@woolcloth.com ...... Appellant.

Versus

M/s Aarkay Innovations Limited Having its registered office at SCO 15, 2nd Floor, Sector 26, Madhya Marg, Chandigarh-160019 EMAIL ID: ajaybansal12K@rediffmail.com Aarkaychd1@gmail.com Also at: Corporate Office: SCO 35-36, First Floor, Opposite Ramada Plaza Hotel, Chandigarh- Ambala Highway, Zirakpur (Punjab)- 140603 ....... Respondent.

Present: For Appellant: Mr. P. Nagesh, Sr. Advocate with Mr. Anish Gupta, Advocate. For Respondent: Mr. Subhash Saini and Mr. Mast Ram, PCS. 2

JUDGMENT

(01st February, 2022)

Justice Anant Bijay Singh;

This Appeal has been preferred by the Appellant - Surinder Kumar Singal

being aggrieved and dissatisfied by the order dated 12.01.2021 passed by the

Ld. Adjudicating Authority (National Company Law Tribunal), Chandigarh

Bench, Chandigarh in CP (PB) No. 120/Chd/CHD/2019 whereby and where

under the Application filed by the Appellant herein (Financial Creditor) under

Section 7 of the Insolvency and Bankruptcy Code, 2016 (for short IBC) was

rejected.

2. The facts giving rise to this Appeal are as follows:

i) The Appellant (Financial Creditor) has given unsecured loan facility to

the Respondent (Corporate Debtor) from the year 2007 till 2017. The

Respondent has been paying interest on the unsecured loan. The Respondent

has been deducting and depositing Tax Deducted on Source (TDS) on the

interest paid to the Appellant.

ii) Further case is that on 20.04.2017, the amount of Rs. 1.95 Crores was

outstanding as unsecured loan from the Respondent and the Respondent has

been paying interest on Rs. 1.75 Crores till 30.09.2018. Thereafter,

30.09.2018, neither payment of the principal amount of Rs. 1.95 Crores was

made not any amount of interest was paid by the Respondent to the Appellant

herein.

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iii) Further case is that on 21.01.2019, the Appellant issued a demand

notice to the Respondent seeking repayment of the unpaid financial debt by the

Respondent. That neither any payment was made nor any reply was sent by

the Respondent to the notice of the Appellant.

iv) Thereafter, on 22.02.2019, the Appellant had filed an Application before

the Ld. Adjudicating Authority for initiation of Corporate Insolvency Resolution

Process, in its capacity as a Financial Creditor under Section 7 of the IBC filed

by the Appellant dated 22.02.2019 seeking initiation of Corporate Insolvency

Resolution Process against the Corporate Debtor (Annexure-2 Colly at page 37

to 147 of the Appeal Paper Book).

v) After hearing the parties the Ld. Adjudicating Authority had passed the

following order:

" 25. The Respondent -Corporate Debtor in relation to the above assertion has placed reliance on the decision of NCLAT in the case titled Prayag Polytech Pvt. Ltd. Vs. Gem Batteries Pvt. Ltd. in (Company Appeal (AT) (Insolvency) No. 713 of 2019) wherein the Appellate Authority while confirming the decision of NCLT, New Delhi Bench has held that in the absence of the Financial Creditor between the parties, the Financial debt as described under Section 5 (8) of the code cannot be ascertained and merely pointing out that TDS was deducted by the Corporate Debtor would not be sufficient to conclude that there was any financial debt.

Company Appeal (AT) (Insolvency) No. 119 of 2021 4

26. In view of the above discussion, we are of the view that the petitioner has failed to establish that the Unsecured Loan he has granted falls within the scope of "Financial Debt" in the absence of any Loan Agreement/board Resolution setting out the terms & conditions of the agreement. Also, we shall not go into the question of whether any amount is due from the Corporate Debtor to the Petitioner or not here and shall only limit us to the issue that whether the petitioner has fulfilled the characteristics of a "Financial Creditor" as defined under Section 7 of the Code or not. Thus, we are of the considered view that due to the insufficient evidence/documents provided by the petitioner in the present case, this application is hereby rejected."

Hence this Appeal.

Submissions on behalf of the Appellant

3. The Learned Sr. Counsel for the Appellant during the course of argument

and in his memo of Appeal along with Written Submissions submitted that the

Appellant has given unsecured loan facility to the Respondent from time to

time and the Respondent has been repaying part of unsecured loan to the

Appellant. On 31.03.2018, the amount of Rs. 1,95,00,000/- was outstanding

as unsecured loan of the Appellant from the Respondent. The same can be

seen from the audited balance sheet for the Financial Year 2017-2018 of the

Respondent which is at page 61 of the Appeal Paper Book.

Company Appeal (AT) (Insolvency) No. 119 of 2021 5

4. It is further submitted that the Respondent has been paying interest on

the unsecured loan till 30.09.2018 and has also been deducting and depositing

TDS on the interest paid to the Appellant and the same can be seen from the

TDS certificate which is at page 137 to 141 of the Appeal Paper Book as well as

the Ledger Accounts for the Financial Year 01.04.2014 to 31.03.2018 of the

Respondent at page 172 to 178 of the Appeal Paper Book.

5. It is further submitted that the cheques issued by the Respondent to the

Appellant (at page 130, 133 and 135 of the Appeal Paper Book) clearly reflects

the amount disbursed by the Appellant to the Corporate Debtor was in the

nature of debt treated as an unsecured loan.

6. The Learned Sr. Counsel for the Appellant while relying on the judgment

of this Appellate Tribunal in the case of "Shailesh Sangani Vs. Joel Cardoso

& Anr. Company Appeal (AT) (Insolvency) No. 616 of 2018" at paragraphs 5

and 6, wherein this Appellate Tribunal held as hereunder:

" 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

Company Appeal (AT) (Insolvency) No. 119 of 2021 6

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;

(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;

Company Appeal (AT) (Insolvency) No. 119 of 2021 7

(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 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

Company Appeal (AT) (Insolvency) No. 119 of 2021 8

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 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. It is further submitted that the Ld. Adjudicating Authority has not

considered these aspects of the matter and rejected the Application filed by the

Appellant herein under Section 7 of the IBC. Based on these submissions the

impugned order is fit to be set aside and the Appeal be allowed.

Company Appeal (AT) (Insolvency) No. 119 of 2021 9

Submissions on behalf of the Respondent

8. The Learned Counsel for the Respondent during the course of argument

and in his Reply Affidavit along with the Written Submissions submitted that

the Appellant being one of the promoters/directors and guarantors misused

the provisions of Section 7 of the IBC and made an un-successful attempt to

initiate CIRP process against the Respondent a solvent company. The Appellant

has adopted the present mode only to enforce the recovery of an amount

deposited by him towards the promoter's contribution.

9. Concealment of material Facts: The Appellant has concealed following

material facts:

i) Civil Suit (Para 7 at page 3 of the Reply) wherein the Appellant himself has

inter-alia claimed 40% shares in the Respondent Company and IA No. 391 of

2020 filed by the Appellant before the Ld. NCLT.

ii) Personal Identification (Column 3 at page 41 of the Appeal Paper Book).

iii) Being Promoter, Director and Guarantor to the Credit Facilities.

iv) Amount deposited towards promoter's contribution in terms of a stipulation

of HDFC Bank.

v) Availing of Loan from the Respondent Company (para 8 at page 4 of the

Reply).

Company Appeal (AT) (Insolvency) No. 119 of 2021 10

vi) Ledger accounts from 01.04.2010 onwards (para 9 at page 183 of the Appeal

Paper Book).

vii) Bank Account Statements proving the amount drawn by the Company (at

page 48 of the Appeal Paper Book).

viii) Amount deposited from 10.01.2007 to 07.09.2016 (at page 59 & 60 of the

Appeal Paper Book).

ix) Working for computation of amount and days of default in tabular form (at

page 59 & 60 of the Appeal Paper Book).

x) Evidence of disbursement of loan (at page 59 & 60 of the Appeal Paper

Book).

xi) Bank Statement of IDBI Bank Account of the Appellant (at page 59 of the

Appeal Paper Book).

xii) Dates of disbursements (Clause 1 of part IV at page 43 of the Appeal Paper

Book).

xiii) Conversion of Unsecured Lone into Equity as and when required to

maintain a positive tangible net worth (Sl. No. 8 of declaration/ Undertaking/

specific Conditions at page 165 & 168 of the Appeal Paper Book).

10. Misleading/ contradictory information: The Appellant before the Ld.

Adjudicating Authority (para 1 at page 38 of the Appeal Paper Book) has stated

that he has been giving loans from time to time w.e.f. 07.09.2016. Whereas,

Company Appeal (AT) (Insolvency) No. 119 of 2021 11

para 7(i) at page 7 of the Appeal Paper Book, the Appellant has stated that he

has been giving un-secured facility to the Respondent from the year 2007. The

amount outstanding is stated before the Ld. Adjudicating Authority is Rs. 20

Lacs as on 20.04.2017. Whereas, at page 4 of the Appeal, he has stated that as

on 20.04.2017, the amount of Rs. 1.95 Crores was outstanding. In fact, the

Appellant has not placed any document neither before the Ld. Adjudicating

Authority not before this Appellate Tribunal to show that the debt was due and

payable over a period of time.

11. Incomplete Application:

i) No information provided under Clause 3, 5 and 6 of Part I and Clause 5, 6

and 7 of Part V. Further information under Clause 1 of Part IV is wrong as no

amount of debt has been granted. Even otherwise as per statement at page No.

59 & 60 of the Appeal, the total amount deposited is stated to be Rs. 3.85

Crores and not Rs. 1.95 Crore which is mentioned at page 43 of the Appeal.

ii) No information about workings for computation of amount and days of

default in tabular form in Clause 2 of Part IV.

iii) No document specified under rule 3(1)(d) of IBC (Application to Adjudicating

Authority) Rules, 2016 and Regulation 2A and 8(2) of IBBI Regulations 2016 to

prove the existence of financial debt, the amount and date of default Column 5

& 8 at page 45 of the Appeal).

Company Appeal (AT) (Insolvency) No. 119 of 2021 12

12. No evidence/ records have been placed to satisfy three essential

ingredients:

i) Disbursal of loan amount.

ii) Such disbursal was for a consideration of time value of money.

iii) A default has arisen either in repayment of whole or in part. No mandatory

information/ documents/ evidence required under Clause 3 to 8 of Part-V of

Form-1 (at page 45 of the Appeal) have been placed. No documents/evidence

was placed to prove that the Respondent Company borrowed the alleged un-

secured loan from the Appellant. The Appellant further failed to recognize that

the judgment passed by this Appellate Tribunal in similar case "Company

Appeal (AT) (Insolvency) No. 38 of 2017 Dr. BVS Lakshmi Vs. Geometrix

Laser Solutions Pvt. Ltd." held that the Appellant has failed to bring on

record any evidence to suggest that the disbursed money has been made

against consideration for the time value of money. There is nothing on the

record to suggest that the Respondents borrowed the money.

13. It is further submitted that there are no documents/records to prove that

the Appellant is a Financial Creditor. The Appellant vide paras 33, 35, 36, 39 &

40 at page 189 to 190 of the Appeal stated that the Audited Balance Sheets

and other documents mentioned in para 8 of Part-V of the Application prove

beyond doubt that two ingredients of IBC Application i.e. Debt and Default are

fully stratified. Meaning thereby there was no Financial Debt defined under

Section 5(8) of IBC. Further the audited Balance Sheets also do not prove the

Company Appeal (AT) (Insolvency) No. 119 of 2021 13

existence of financial debt and default defined under Section 3(12) of IBC.

These Balance Sheets do not prove that the whole loan or its instalment when

became due and payable and the same is/are not repaid. The Hon'ble Supreme

Court in the matter of "M/s Innoventive Industries Ltd. Vs. ICICI Bank &

Anr." at para 28 of the Judgment held that a 'Debt may not be due if it is not

payable in law or in fact' and also held that the speed within which the

'adjudicating authority is to ascertain the existence of a default from

the records of the information utility or on the basis of evidence

furnished by the financial creditor, is important'.

14. It is further submitted that the deduction of TDS is not sufficient to

conclude the outstanding amount as Financial Debt. In this regard this

Appellate Tribunal in the case of "Company Appeal (AT) (Insolvency) No. 713

of 2019 Prayag Polytech Pvt. Ltd. Vs. Gem Batteries Pvtl Ltd." held that

merely pointing out that TDS was deducted would not be sufficient to conclude

that there was Financial Debt. TDS can be deducted for various reasons.

15. It is further submitted that the payment of surplus was interest as there

was no over due to the Bank. No interest to be paid on unsecured loans in case

of any over dues with the Bank. This Appellate Tribunal in the case of

"Company Appeal (AT) (Insolvency) No. 57 of 2018 Sanjay Kewalramani Vs.

Sunil Parmanand Kewalramani & Ors." held that the mere fact that the

company paid interest @ 12% per annum, during certain period cannot be the

ground to hold that the 'debt' comes with the meaning of 'Financial Debt'.

Company Appeal (AT) (Insolvency) No. 119 of 2021 14

Based on these submissions the Ld. Adjudicating Authority has rightly rejected

the Application under Section 7 of the IBC filed by the Appellant, therefore, the

instant Appeal is not maintainable and is liable to be dismissed with exemplary

cost.

FINDINGS

16. After hearing the parties and having gone through the pleadings made on

behalf of the parties, we are of the considered view that the following facts are

admitted in the instant Appeal.

 The Appellant has given unsecured loan facility to the Respondent from

time to time and the Respondent has been repaying part of the unsecured

loan to the Appellant. On 31.03.2018, the amount of Rs. 1,95,00,000/-

was outstanding as unsecured loan of the Appellant from the Respondent.

 The Respondent has been paying interest on the unsecured loan till

30.09.2018 and has also been deducting and depositing TDS on the

interest paid to the Appellant and the same can be seen from the TDS

certificate which is at page 137 to 141 of the Appeal as well as the Ledger

Accounts for the Financial Year 01.04.2014 to 31.03.2018 of the

Respondent at page 172 to 178 of the Appeal Paper Book.

 The Appellant has concealed the facts namely a) Civil Suit (Para 7 at page

3 of the Reply) wherein the Appellant himself has inter-alia claimed 40%

shares in the Respondent Company and IA No. 391 of 2020 filed by the

Appellant before the Ld. NCLT. b) Personal Identification. c) Being

Company Appeal (AT) (Insolvency) No. 119 of 2021 15

Promoter, Director and Guarantor to the Credit Facilities. d) Amount

deposited towards promoter's contribution in terms of a stipulation of

HDFC Bank. e) Availing of Loan from the Respondent Company. f) Ledger

accounts from 01.04.2010 onwards (para 9 at page 183 of the Appeal

Paper Book). g) Bank Account Statements proving the amount drawn by

the Company. h) Amount deposited from 10.01.2007 to 07.09.2016 (at

page 59 & 60 of the Appeal Paper Book). i) Working for computation of

amount and days of default in tabular form (at page 59 & 60 of the Appeal

Paper Book). j) Evidence of disbursement of loan. k) Bank Statement of

IDBI Bank Account of the Appellant. l) Dates of disbursements (Clause 1

of part IV at page 43 of the Appeal Paper Book). m) Conversion of

Unsecured Lone into Equity as and when required to maintain a positive

tangible net worth (Sl. No. 8 of declaration/ Undertaking/ specific

Conditions at page 165 & 168 of the Appeal Paper Book).

 The Appellant has given contradictory information before the Ld.

Adjudicating Authority (para 1 at page 38 of the Appeal) has stated that he

has been giving loans from time to time w.e.f. 07.09.2016 and para 7(i) at

page 7 of the Appeal Paper Book, the Appellant has stated that he has

been giving unsecured facility to the Respondent from the year 2007. The

amount outstanding is stated before the Ld. Adjudicating Authority is Rs.

20 Lacs as on 20.04.2017. Whereas, at page 4 of the Appeal, he has stated

that as on 20.04.2017, the amount of Rs. 1.95 Crores was outstanding.

The Appellant has not placed any document neither before the Ld.

Company Appeal (AT) (Insolvency) No. 119 of 2021 16

Adjudicating Authority not before this Appellate Tribunal to show that the

debt was due and payable over a period of time.

 It is also an admitted fact that the Appellant has filed incomplete

Application without information provided under Clause 3, 5 and 6 of Part I

and Clause 5, 6 and 7 of Part V. Further information under Clause 1 of

Part IV is wrong as no amount of debt has been granted. Even otherwise

as per statement at page No. 59 & 60 of the Appeal, the total amount

deposited is stated to be Rs. 3.85 Crores and not Rs. 1.95 Crore which is

mentioned at page 43 of the Appeal. No information about workings for

computation of amount and days of default in tabular form in Clause 2 of

Part IV. No document specified under rule 3(1)(d) of IBC (Application to

Adjudicating Authority) Rules, 2016 and Regulation 2A and 8(2) of IBBI

Regulations 2016 to prove the existence of financial debt, the amount and

date of default Column 5 & 8 at page 45 of the Appeal).

 It is also an admitted fact that no evidence/records have been placed to

satisfy the three essential ingredients namely a) Disbursal of loan amount.

b) Such disbursal was for a consideration for time value of money. c) A

default has arisen either in repayment of whole or in part. No mandatory

information/ documents/ evidence required under Clause 3 to 8 of Part-V

of Form-1 (at page 45 of the Appeal) have been placed. No

documents/evidence were placed to prove that the Respondent Company

borrowed the alleged unsecured loan from the Appellant.

Company Appeal (AT) (Insolvency) No. 119 of 2021 17

 The Appellant further failed to recognize that the judgment passed by this

Appellate Tribunal in the case of "Company Appeal (AT) (Insolvency) No.

38 of 2017 Dr. BVS Lakshmi Vs. Geometrix Laser Solutions Pvt. Ltd."

held that the Appellant has failed to bring on record any evidence to

suggest that the disbursed money has been made against consideration

for the time value of money. There is nothing on the record to suggest that

the Respondents borrowed the money.

 It is also an admitted fact that there are no documents/records to prove

that the Appellant is a Financial Creditor. The Appellant vide paras 33, 35,

36, 39 & 40 at page 189 to 190 of the Appeal stated that the Audited

Balance Sheets and other documents mentioned in para 8 of Part-V of the

Application prove beyond doubt that two ingredients of IBC Application i.e.

Debt and Default are fully stratified. Meaning thereby, there was no

Financial Debt defined under Section 5(8) of IBC. Further the audited

Balance Sheets also do not prove the existence of financial debt and

default defined under Section 3(12) of IBC. These Balance Sheets do not

prove that the whole loan or its instalment when became due and payable

and the same is/are not repaid.

 The Hon'ble Supreme Court had held in the matter of "M/s Innoventive

Industries Ltd. Vs. ICICI Bank & Anr." at para 28 of the Judgment that

a 'Debt may not be due if it is not payable in law or in fact' and also

held that the speed within which the 'adjudicating authority is to

ascertain the existence of a default from the records of the

Company Appeal (AT) (Insolvency) No. 119 of 2021 18

information utility or on the basis of evidence furnished by the

financial creditor, is important'.

ORDER

17. Taking all these facts and circumstances of the case, we come to the

conclusion that there is no 'debt' and 'default' proved by the Appellant in the

instant Appeal. Thus, there is no illegality committed by the Ld. Adjudicating

Authority while passing the impugned order, therefore, we do not need to

interfere in the impugned order. The impugned order dated 12.01.2021 passed

by the Ld. Adjudicating Authority (National Company Law Tribunal),

Chandigarh Bench, Chandigarh in CP (PB) No. 120/Chd/CHD/2019 is hereby

affirmed. There is no merit in the Appeal. The Appeal is hereby dismissed. No

order as to costs.

18. Registry to upload the Judgment on the website of this Appellate

Tribunal and send the copy of this Judgment to the Ld. Adjudicating Authority

(National Company Law Tribunal), Chandigarh Bench, Chandigarh, forthwith.

[Justice Anant Bijay Singh] Member (Judicial)

[Ms. Shreesha Merla] Member (Technical) New Delhi 01st February, 2022 R. Nath.

Company Appeal (AT) (Insolvency) No. 119 of 2021