Vejas Power Projects Limited vs Vaayu Infrastructure Llp

[Arising out of Order dated 03.06.2022 passed by the Adjudicating Authority (National Company Law Tribunal), Mumbai Bench, Court-II in C.P. (IB) - 1951(MB)/2019]

IN THE MATTER OF:

Vejas Power Projects Pvt. Ltd. IL&FS Financial Centre, Plot No. C-22, G-Block, Bandra Kurla Complex, Bandra East, Mumbai, Maharashtra - 400051. ...Appellant

Versus

Vaayu Infrastructure LLP 1102(2), 11th Floor, Fortunate Terrace, New Link Road, Andheri (West), Mumbai, Maharashtra - 400053. ...Respondent

Present:

For Appellant: Mr. Gopal Jain, Sr. Advocate with Mr. Raunak Dhillon, Ms. Isha Malik, Mr. Nihaad Dewan, Advocates.

For Respondents: Mr. Dhruba Mukherjee, Sr. Advocate with Mr. Kumar Anurag Singh, Mr. Zain A. Khan, Mr. Karan Grover, Ms. Varsha Banerjee, Advocates.

JUDGMENT

ASHOK BHUSHAN, J.

This Appeal has been filed against the order dated 03.06.2022

passed by the Adjudicating Authority (National Company Law Tribunal),

Mumbai Bench, Court-II by which the application under Section 7 of the

Cont'd.../ -2-

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

Code') filed by the Appellant has been rejected by the Adjudicating

Authority. The Appellant aggrieved by rejection of Section 7 application

has come up in this appeal. The background facts have been noted in

detail by the Adjudicating Authority and it is useful to notice the relevant

facts to the following effect:

(i) IL&FS Energy Development Corporation Limited (IEDCL)

signed a MoU dated 27.07.2010 with Wind World India Limited

(WWIL) for WWIL to set up Wind Energy Projects for a total

capacity of 1004 MW for IEDCL in a phased manner. Later

100% subsidiaries of IEDCL were incorporated as SPV (IEDCL

SPVs) for the purpose of investing in Wind projects.

(ii) Orders were placed by the IEDCL SPV for the supply, erection

and commissioning of wind power projects with wind world

(India) limited and purchase orders for transfer of development

rights were placed on Wind World Wind Resources

Development Private Limited (WWRDPL), a 100% subsidiary of

WWIL, in a phased manner spanning over five phases between

2010 and 2014.

Commercial aspects of the agreement shows the

payment by IEDCL SPVs was to be made as per milestones

under the purchase orders placed by the IEDCL SPVs on

WWIL.

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(iii) WWIL was entitled to receive full payment from the IEDCL

SPVs as and when the project milestones were achieved.

(iv) However, the IEDCL SPVs faced challenges in raising long term

loans to make the payment to WWIL under the purchase order

placed by them on WWIL. Consequently, by way of

arrangement, WWIL was asked to and provided with advance

in terms of agreement but in the form of loans from IL&FS

Financial Service Limited (IFIN) the financial lending arm of

IL&FS group. IFIN and WWIL entered into loan agreements

termed as loan agreement from time to time to enable WWIL to

receive advance payment in the form of loans in lieu of project

related payments to be made to WWIL by the IEDCL SPVs. A

clear understanding was that whenever WWIL complete its

project/obligations under various contract become entitled to

payments.

Thus, when the IEDCL SPVs realised that they are not

able to organise the project finances with their lenders in time,

the arrangement of funding project related advance and other

payments in the form of loans from IFIN to WWIL was put into

place.

(v) Post disbursement of the first four advance payments by way

of loans, IFIN decided that it would not give further advance

payment by way of loans to WWIL but to WWILs subsidiaries

who would be given advance payment by way of loans from

Company Appeal (AT) (Insolvency) No. 815 of 2022 -4-

loan no. 5 onwards although the arrangement was with WWIL

to square the advance payment by way of loans against

supplies that it would make to IEDCL SPVs.

WWIL along with its subsidiaries squared advance

payment received by way of loans amounting to Rs. 348 cr

which were disbursed by IFIN to WWIL and its subsidiaries in

lieu of project payments under the purchase orders placed by

the IEDCL SPVs on WWIL via issuance of letters of

adjustments to the IEDCL SPVs who in turn paid IFIN in line

with the understanding between WWIL and IEDCL. From the

record, we found that in total 7 advance payment for

completion of the project by way of loan amounting to Rs. 348

cr were pre-dominantly squared between March 2014 to

September 2014 by WWIL and its subsidiary due to the

increased pace of project activities. Documentations brought

on record for all other IEDCL SPVs whereby part of the project

proceed were used to clear the advance payment loans paid to

WWIL and its subsidiaries.

(vi) On 30.12.2015, IFIN assigned the facilities to the Appellant

(formerly known as IL&FS Wind Project Development

Company) vide an Assignment Agreement.

(vii) On 10.01.2018, demand notice was issued to WWFMPPL as

well as the Respondent - Vaayu Infrastructure LLP to pay an

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amount of Rs.26,63,62,453/- as on 21.12.2012 together with

further interest in respect of the facilities.

(viii) On 29.01.2018, a recall notice was issued to WWFMPPL

declaring the amount of Rs.254,72,62,584/- as due and

payable.

(ix) By letter dated 07.02.2018, guarantee given by the

Respondent was also invoked for payment of

Rs.254,72,62,584/-.

(x) The Appellant after taking the aforesaid steps filed an

application under Section 7 against the Respondent -

Corporate Guarantor.

2. The Adjudicating Authority issued notice in the Section 7 application

to which a detailed reply dated 21.03.2022 was filed by the Corporate

Debtor. The Corporate Debtor in its reply pleaded that the applicant is not

a financial creditor of the Corporate Debtor. It was pleaded that nine

coloured Loan Agreements were executed between IFIN (Assignor of the

applicant) on one side and WWIL and its subsidiaries on the other side.

The execution of the nine transactions coloured as Loan Agreement were

at the request and insistence of IL&FS Group, which were facing various

internal issues within themselves. The underlying transactions were mere

book entries at the behest of IL&FS Group. The Balance Confirmation

letter given by the Corporate Debtor as well as audited financials of the

Appellant for the FY 2017-18 establishes the nature of underlying nine

transactions, including the last two transactions of Rs.100 Crores and

Company Appeal (AT) (Insolvency) No. 815 of 2022 -6-

Rs.110 Crores as only capital advances. In the reply, the details of

transactions were pleaded. To the reply filed by the Corporate Debtor no

rejoinder was filed by the Appellant.

3. The Adjudicating Authority after hearing the parties by order dated

03.06.2022 rejected the Section 7 application holding that the real nature

of the transactions between the parties is not of loan transaction. In the

financial statements of the applicant the amount was shown as capital

advance. The main transactions between the Appellant and the Principal

Borrower was not in reality loan transaction rather it was an advance

payment by way of loan. It is useful to notice the findings recorded by the

Adjudicating Authority in Paras 15, 16 and 17:

"15. It is very clear from the document placed by the Respondent that the essence of transaction as entered between the parties herein is advance payment/final payment towards supply of materials, commissioning of wind turbines/ completion of wind energy project for subsidiaries of IEDCL. The advance/progressive payments for such work is clearly authored by IL&FS group and the loan amount were adjusted at the time of final payment for the work performed by WWIL and its subsidiary company WWWRDPL. The aforesaid facts clearly suggest that the payment has been made by IFIN to WWIL and its subsidiary towards supply of material and for rendering services. The correspondence, email and documents specially two emails namely email dated 22.01.2015 which

Company Appeal (AT) (Insolvency) No. 815 of 2022 -7-

shows that the IL&FS considered and confirmed that the payments by IFIN and IL&FS are the obligation of IL&FS and same is advanced towards the supply and by incremental supply of WEG and the second email dated 08.07.2015 shows that the amount disbursed by IFIN to WWIL and WWWMPPL (subsidiary of WWIL) is by way of advance payment/payment against supply of materials commissioning of the wind turbines and on completion of hand over of the wind energy project, though shown as loan. The Corporate Debtor herein is merely the corporate guarantor along with another Vishwind Infrastructure LLP as co-guarantor.

16. The amounts assigned by IFIN to the Financial Creditor have been accounted for by Vejas Power Project Limited, as 'capital advance' in the audited balance sheet as filed by the Registrar of Companies for F.Y. 18 &F.Y. 19. This clearly shows that the Vejas Power Project Limited has knowledge that the amount due does not come within the meaning of 'financial debt', therefore, accounted the amount as a 'Capital Advance' and not as a "Financial Loan".

It is settled law that under Section 129 of the Companies Act, 2013 financial statements shall give true and fair view of the state of affairs of company and shall comply with the Accounting Standard. Therefore, no contrary stand can be taken by Vejas Power Project Limited;

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17. In this case, both sides have clearly functioned as collective through their group companies in order to fulfil the terms of MoU and the transactions as stated by the Petitioner needs to be looked as a part of the transaction under the initial MoU dated 27.07.2010 entered between IL & FS Energy Development Company Limited (IEDCL) and Wind World India Limited (WWIL).

Thus, the amount that has been disbursed by IFIN do not come within meaning of 'Financial Debt' as defined under Section 5(8) of the IBC as was held in the matter of Anuj Jain IRP of Jaype Infratech Limited Vs. Axis bank Limited & Ors. 2020 SSC Online SC 237. Though, the IFIN or Vejas Power Limited may claim to be a creditor of Wind World India Limited; towards the advance as paid by them, but such a claim is clearly not a claim in the nature of a 'Financial Debt' under Section 5(8) of IBC. In the light of above, the applicant cannot be considered as a Financial Creditor and therefore under Section 7 petition is dismissed as not maintainable, and it is filed only for recovery not for Resolution Process as per the objective of the Code."

4. We have heard Shri Gopal Jain, learned senior advocate and Shri

Dhruba Mukherjee, learned senior advocate appearing for the Respondent.

5. Shri Gopal Jain, learned senior counsel for the Appellant challenging

the impugned order submits that Section 7 petition filed by the Appellant

fulfills both ingredients for admission of the petition and the present debt

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falls within the ambit of financial debt within the meaning of Section 5

Sub-section (8) of the I&B Code. A sum of Rs.210 Crores was advanced by

the IL&FS Financial Services Ltd (IFIN) to the Corporate Debtor. The

Respondent being the Corporate Guarantor of the Corporate Debtor has a

coextensive liability with the Corporate Debtor and also owes a financial

debt to the Appellant. The Adjudicating Authority had only to verify

whether the default has been committed in payment of the debt. The

Adjudicating Authority could not have been embarked on any other

enquiry. The Corporate Guarantee was given by the Respondent on

24.09.2014 alongwith Vishwind Infrastructure LLP. The Principal

Borrower and the Respondent have defaulted in their obligation to repay

the debt. The Loan Agreement and the obligation of the Principal Borrower

and the Respondent were also distinct and separate from any transaction

which Wind World India Ltd. (WWIL) may have with IEDCL or its SPVS.

The debt in question is a financial debt and not an advance for supply and

services. Mention of capital advance in the Balance Sheet for FY 2017-18

was an inadvertent error which was corrected in subsequent financial

statements of 2019-20 and 2020-21.

6. Shri Dhruba Mukherjee, learned senior counsel for the Respondent

refuting the submissions of the Appellant contended that there was no

disbursement of financial debt in the present case. The modus operandi

of IL&FS of entering into colourable transaction is a well-known fact. The

Appellant is a group company of IL&FS and assignee of the financial wing

of IL&FS (IFIN). IL&FS Group Companies being IEDCL and IL&FS SPVS

Company Appeal (AT) (Insolvency) No. 815 of 2022 -10-

alongwith IFIN worked in a collusive manner to deprive the manufacturer

and supplier of the wind turbine generator i.e. WWIL of its project

receivables. The present is the case wherein the advance payments/

project related payments were shown as loans and were required to be

squared off at the stage of completion of the project milestone by WWIL.

The Adjudicating Authority after looking to the contemporaneous

documents has correctly came to conclusion that the transactions did not

involve any financial debt. The Appellant's Balance Sheet having shown

the amount as capital advance, it is not open to the Appellant to contend

that the real nature of the transaction is loan amount. The Adjudicating

Authority in detail examined all submissions of the Appellant and has come

to the correct conclusion that there is no financial debt, which may warrant

any interference by this Tribunal. It is submitted that email dated

08.07.2015 of IL&FS SPVS to WWIL clearly indicates the nature of

transactions. Internal documents of IL&FS dated 17.09.2014 clearly

described and corroborated the fact of transactions being book entry only.

Seven out of Nine loans were squared off by way of apportionment letters

as was envisaged. The Respondent does not deny the entitlement of the

Appellant for the amount received but filing of the application under

Section 7 is not in accordance with the I&B Code. It was open for the

Appellant to seek such remedy as available in law for recovery of its capital

advance. It is submitted that proceeding under Section 7 is not a recovery

proceeding and the application under Section 7 was liable to the rejected

on this ground also.

Company Appeal (AT) (Insolvency) No. 815 of 2022 -11-

7. We have considered the submissions of learned counsel for the

parties and perused the record.

8. A Memorandum of Understanding (MOU) dated 28.06.2010 was

entered between IL&FS Energy Development Company Ltd. (IEDCL) and

the Wind World India Ltd. (WWIL) for WWIL to set up wind energy projects

for a total capacity of 1004 MW for IEDCL in a phased manner. The

Appellant has brought on record the said MOU dated 28.06.2010 at page

85 as Annexure A-2. Para 2.4 of the Agreement contains the payment

terms which are to the following effect:

"2.4 Payment Terms

The Contract Price payable by the Owner to the Contractor, in respect of the each Project for which an Order has been received by the Contractor in terms of this MoU, shall be contingent upon achievement of milestones described in the column no. 2 as per the schedule of payments described below in table 1:

Milestone Milestone % of Payment Contract No. Price First An advance payment 25% against the submission of advance payment bank guarantee ("Advance Payment Guarantee") from the Contractor simultaneously with the execution of the Definitive Agreements.

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Second On dispatch of the WTGs 65% to the site on a pro-rate basis within 15 days of dispatch of the relevant WTG.

Third On receipt of 5% commissioning certificate of the WTG on a pro-rate basis, within 15 days of receipt of commissioning certificate for each WTG. Fourth On completion (as defined 5% hereinafter) of the respective Phase (as defined hereinafter) of the relevant Project, on a pro rata basis, and in case of the last Phase of the relevant Project after adjusting there from any adjustment required towards the Delay LD.

The payment shall be made within 15 days of the submission of copy of invoices in triplicate to the Owner along with the necessary documentary evidences by the Contractor. Further the Owner shall also deduct the taxes at source as per the applicable law before making any payment to the Contractor. Further, the Parties agree that for any delay in payment after 30 days from the submission of coy of invoices in triplicate to the Owner, the Owner shall pay the interest @ 1.5% per month on the amount due from the date on which the amount became due till the date of actual payment."

9. From the materials brought on the record it is clear that there was

difficulty in the IL&FS SPVS for making advance payment. An email was

Company Appeal (AT) (Insolvency) No. 815 of 2022 -13-

sent on behalf of the WWIL for delay in payments for completed Phase-II of

project was causing stress on WWIL. The facilitative transactions towards

advance payment was entered by IL&FS entities with the WWIL and

subsidiaries of WWIL since IL&FS SPVS were not able to raise funds from

its lenders. The IL&FS SPVS could not have received loan from IL&FS,

hence, it was devised by the IL&FS Group to ensure payment of advance

payment towards supplies and services by way of entering into Loan

Agreement with WWIL and its subsidiaries, which loan amounts were to be

squared out by receivables towards the advance payment. The

Adjudicating Authority in the impugned order has noticed several

contemporaneous materials to indicated that the true nature of amount

which was disbursed to the Principal Borrower in which the Corporate

Guarantee was given by the Corporate Debtor - Respondent was not a

disbursal for time value of money rather it was devised as a mechanism to

make payment of services and supply to WWIL and its subsidiaries. It is

relevant to notice that there was nine such transactions which were entered

between IFIN and the WWIL and its subsidiaries, which had been noticed

by the Adjudicating Authority in Para 1.7. Out of nine such transactions,

transactions 1 to 7 were squared off and it was only the transactions at Sl.

No. 8 and 9 of Rs.100 Crores and Rs.110 Crores which could not be

squared off. The Respondent has also given reasons due to which the said

amount could not be squared off. The reason given is that IEDCL SPVS

abruptly cancelled the order for capacity of 124.8 MW for which materials

had already been partially supplied by WWIL. There was unilateral

Company Appeal (AT) (Insolvency) No. 815 of 2022 -14-

invoking of bank guarantees by the IEDCL SPVS which has also been

stated.

10. Shri Gopal Jain, learned senior counsel for the Appellant has read

various clauses of the Facility Agreement dated 27.06.2014 and

24.09.2014 between the IFIN and the Principal Borrower. When we read

the Facility Agreement and the Guarantee given by the Respondent

separately and independently, there is no doubt that documents indicate

that loan was advanced by IFIN to the Principal Borrower but when we look

into the transactions alongwith the contemporaneous materials, emails

exchanged between the parties, the reflection in the financial documents,

it is clear that the real intent was to arrange for payment by the IL&FS

subsidiaries towards payment of services and supplies for which contract

was entered between IL&FS Energy Development Corporation Limited

(IEDCL) and Wind World India Limited (WWIL) dated 20.06.2010.

11. Now we look into the financial statement of Appellant for the FY

2016-17 and 2017-18. Respondents have relied on Note 41 of FY 2016-17

and Note 40 and 41 of FY 2017-18, which is to the following effect:

"Note No 41 in FY 2016-17 is reproduced herein below:-

Textual information (41)

Description of other non-current assets, others Capital advances Note: The Board of directors of the Company in the meeting held on 18 July, 2017

Company Appeal (AT) (Insolvency) No. 815 of 2022 -15-

have approved procurement / acquisition of 56 MW of Wind Power assets, being the underlying security, against the settlement of the said advance. Accordingly, the said advance have been classified as Capital advance and presented as "Non-Current Assets".

Note No 40 and 41 in FY 2017-18 is reproduced herein below:-

Textual information (40)

Description of other non-current assets, others Capital advances Note: The Board of directors of the Company in the meeting held on 18 July, 2017 have approved procurement / acquisition of 56 MW of Wind Power assets, being the underlying security, against the settlement of the said advance. Accordingly, the said advance have been classified as Capital advance and presented as "Non-Current Assets"

Textual information (41)

Description of other non-current assets, others Capital advances Note: The Board of directors of the Company in the meeting held on 18 July, 2017 have approved procurement / acquisition of 56 MW of Wind Power assets, being the underlying security, against the settlement of the said advance. Accordingly, the said advance have been classified as Capital advance and presented as "Non-Current Assets"."

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12. The submission of learned counsel for the Appellant that the

aforesaid mention of Capital Advance was only an inadvertent error which

was corrected in 2019-20 and 2020-21, cannot be accepted. The Section

7 application itself was filed by the Appellant in the year 2019 and

Appellant has contemporaneous records which have their own relevance

and value. The Appellant who was Assignee of IFIN when itself described

the amount of Rs.210 Crores as Capital Advance, it is clear that it was

understood even by the Assignee that the amounts were in the nature of

Capital Advance for the purposes of supply and services. The Balance

Confirmation which was issued by the Borrower in the year 2017, which is

part of the Reply filed by the Corporate Debtor, also mentions the amount

as project advance. It is useful to extract the Balance Confirmation, which

is to the following effect:

"IL&FS Wind Projects Development Limited (IWPDL) Balance Confirmation as on March 31, 2017 Wind World Wind Farms (MP) Pvt. Ltd. (WWWMPL)

We confirm the following balance on behalf of Wind World (India) Ltd. as on 31.03.2017, to whom we have assigned the above projects advance as on 31.12.2016.

1. Project advance Rs. 210,00,00,000

2. Interest & other dues Rs. 23,33,65,872 _____________________ Rs. 233,33,65,872 _____________________

Wind World Wind Farms (MP) Pvt. Ltd. Wind World (India) Limited Authorised Signatory Authorised Signatory"

Company Appeal (AT) (Insolvency) No. 815 of 2022 -17-

13. The email which was sent by the IEDCL on behalf of IL&FS which

has been referred by and relied by the Adjudicating Authority is also

relevant to be noticed. Reliance has been placed on email dated 08.07.2015

sent by an official of IL&FS on the subject, summary of IREL transactions,

amount paid and contractual dues. The email specifically refers to IFIN

loan of 110 Crores + 100. The email contains following description about

the above:

"4. IPIN 1ean of 110 Crores 100:

Rs. 110 Cores Transaction

Summary of the transaction.:

1. MWEPL paid IFIH Rs. 110 Crores to reduce WWIL exposure to IFIN. This is showing as an on account advance in the books of the SPV.

2. IFIN gave a fresh loan to WWIL sub of Rs. 110 Crores.

3. WWIL sub parked this Rs. 110 Crores with MWEPL.

settlement of this transaction - for simplicity sake explaining what will happen.

1. WWIL will produce supplies worth Rs. 110 Crores.

2. MWEPL will reduce the advance by Rs. 110 Crores and will credit CHIP by the 110 Crores.

3. Against these supply invoices of Rs. 110 Crores, Wind SPVs will draw down money from the FII Bank and pay IFIN Rs. 110 Crores to be adjusted against the liability of the security deposit.

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4. The security deposit will go to 0.

5. At the end of the transaction, IFIN will be paid off.

Rs. 100 Cr Transaction:

1. WWIL will deliver an additional Rs. 100 Crores of supplies (in addition to the Rs. 110 Crores specified above) to Wind SPVs.

2. Wind SPVs will pay IFIN Rs. 100 Crores in liue of WWIL to settle this outstanding liability.

3. IFIN outstanding will go to 0.

Warm Regards,

Akshay Sharma"

14. The above email clearly indicate that Rs.110 Crores and Rs.100

Crores were for supplies. The contemporaneous mail which was issued in

proximity of time when the coloured loan agreement were executed,

indicate that what was the real nature and purpose of the transactions.

There are other materials on the record which had been relied by the

Adjudicating Authority to come to the finding that financial debt was not

there.

15. Learned counsel for the Appellant has relied on the judgment of

Hon'ble Supreme Court in "Innoventive Industries Limited vs. ICICI

Bank and Another, (2018) 1 SCC 407", paras 27 and 30. In Paras 27

and 30 following has been held:

Company Appeal (AT) (Insolvency) No. 815 of 2022 -19-

"27. The scheme of the Code is to ensure that when a default takes place, in the sense that a debt becomes due and is not paid, the insolvency resolution process begins. Default is defined in Section 3(12) in very wide terms as meaning non-payment of a debt once it becomes due and payable, which includes non-payment of even part thereof or an instalment amount. For the meaning of "debt", we have to go to Section 3(11), which in turn tells us that a debt means a liability of obligation in respect of a "claim" and for the meaning of "claim", we have to go back to Section 3(6) which defines "claim" to mean a right to payment even if it is disputed. The Code gets triggered the moment default is of rupees one lakh or more (Section 4). The corporate insolvency resolution process may be triggered by the corporate debtor itself or a financial creditor or operational creditor. A distinction is made by the Code between debts owed to financial creditors and operational creditors. A financial creditor has been defined under Section 5(7) as a person to whom a financial debt is owed and a financial debt is defined in Section 5(8) to mean a debt which is disbursed against consideration for the time value of money. As opposed to this, an operational creditor means a person to whom an operational debt is owed and an operational debt under Section 5(21)

Company Appeal (AT) (Insolvency) No. 815 of 2022 -20-

means a claim in respect of provision of goods or services.

30. On the other hand, as we have seen, in the case of a corporate debtor who commits a default of a financial debt, the adjudicating authority has merely to see the records of the information utility or other evidence produced by the financial creditor to satisfy itself that a default has occurred. It is of no matter that the debt is disputed so long as the debt is "due"

i.e. payable unless interdicted by some law or has not yet become due in the sense that it is payable at some future date. It is only when this is proved to the satisfaction of the adjudicating authority that the adjudicating authority may reject an application and not otherwise."

16. The proposition laid down in the above case is to be followed by all

concerned. In the above case the Hon'ble Supreme Court was explaining

the scope and ambit of Section 7 and laid down that when the Corporate

Debtor commits default of a financial debt, the Adjudicating Authority has

merely to see the records of the information utility or other evidence

produced by the financial creditor to satisfy itself that a default has

occurred. In the present case, the very nature of the transaction as

financial debt has been challenged. When the Corporate Debtor has

challenged the very nature of the financial debt, the Adjudicating Authority

was required to look into the nature of transactions to decide as to whether

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the transactions falls within the meaning of Section 5 Sub-section (8) of the

I&B Code.

17. Learned counsel for the Appellant has also placed reliance on the

judgment of Hon'ble Supreme Court in "E.S. Krishnamurthy & Ors. vs.

Bharath Hi-Tech Builders Pvt. Ltd., (2022) 3 SCC 161". The Hon'ble

Supreme Court in the above judgment has held that if the Adjudicating

Authority is satisfied that default is occurred it has to admit the

application. In Paras 31 and 34 following has been held:

"31. On a bare reading of the provision, it is clear that both, Clauses (a) and (b) of sub-Section (5) of Section 7, use the expression "it may, by order"

while referring to the power of the Adjudicating Authority. In Clause (a) of sub-Section (5), the Adjudicating Authority may, by order, admit the application or in Clause (b) it may, by order, reject such an application. Thus, two courses of action are available to the Adjudicating Authority in a petition under Section 7. The Adjudicating Authority must either admit the application under Clause (a) of sub-Section (5) or it must reject the application under Clause (b) of sub-Section (5). The statute does not provide for the Adjudicating Authority to undertake any other action, but for the two choices available.

34. The Adjudicating Authority has clearly acted outside the terms of its jurisdiction under Section 7(5) of the IBC. The Adjudicating Authority is empowered only to verify whether a default has

Company Appeal (AT) (Insolvency) No. 815 of 2022 -22-

occurred or if a default has not occurred. Based upon its decision, the Adjudicating Authority must then either admit or reject an application respectively. These are the only two courses of action which are open to the Adjudicating Authority in accordance with Section 7(5). The Adjudicating Authority cannot compel a party to the proceedings before it to settle a dispute."

18. There can be no dispute to the proposition as laid down by the

Hon'ble Supreme Court in the above case. The present is not a case where

default in payment of debt is an issue. The principal issue which was

raised by the Corporate Debtor in its Reply was that the transaction itself

is not a financial debt. Further, there can be no dispute that in law a

Guarantor is a Corporate Person and if the Corporate Debtor committed

default in payment of debt, application under Section 7 can very well be

filed against the Corporate Guarantor but the question in the Section 7

application before the Adjudicating Authority was very nature of the

transaction. The Corporate Debtor has questioned the very nature of the

transaction pleading that it was not a financial debt not disbursed for time

value of the money and it was for the purposes of only arranging the

advance payment which was to be made by the IL&FS entities in favour of

WWIL and its subsidiaries.

19. The Adjudicating Authority has also noticed that the Appellant who

had filed Section 7 application has not filed in rejoinder refuting the various

pleadings and materials brought on record by the Corporate Debtor in its

Company Appeal (AT) (Insolvency) No. 815 of 2022 -23-

detailed reply alongwith Annexures A to V which was contained in pages 1

to 827.

20. The Adjudicating Authority after considering all the relevant facts

and circumstances has rightly come to the conclusion that application

under Section 7 did not deserve admission. We do not find any merit in

the Appeal. Appeal is dismissed.

[Justice Ashok Bhushan] Chairperson

[Barun Mitra] Member (Technical)

NEW DELHI

6th January, 2023

Archana

Company Appeal (AT) (Insolvency) No. 815 of 2022