Vijay Jain And Ors vs Laxmi Foils Private Limited

[Arising out of order dated 05.07.2023 passed by the Adjudicating Authority, National Company Law Tribunal, New Delhi Bench (Court-II) in CP (IB) No.742(ND)/2022]

IN THE MATTER OF:

Vijay Jain & Ors. H-30, Phase-I, Ashok Vihar, Delhi - 110 052 ...Appellants

Versus

Laxmi Foils Pvt. Ltd. Shop No. G-22 (UGF), D-1 (K-84), Green Park Main, South Delhi, Delhi - 110016 ...Respondent

Present:

Appellants: Mr. Krishnendu Datta, Sr. Advocate, Mr. Ashish Verma, Ms. Salonee Keshwani, Mr. Rahul Gupta, Advocates.

Respondent:

Company Appeal (AT)(Insolvency) No. 1474 of 2023 & IA No.5225 of 2023 1 JUDGMENT

[Per: Barun Mitra, Member (Technical)]

The present appeal filed under Section 61 of Insolvency and Bankruptcy

Code, 2016 ("IBC" in short) by the Appellants arises out of the Order dated

05.07.2023 (hereinafter referred to as "Impugned Order") passed by the

Adjudicating Authority (National Company Law Tribunal, New Delhi Bench

(Court-II) in CP (IB) No.742(ND)/2022. By the impugned order, the

Adjudicating Authority has dismissed the Section 7 application filed by Mr.

Vijay Jain and 13 others seeking initiation of Corporate Insolvency Resolution

Process ("CIRP" in short) against M/s Laxmi Foils Private Limited-the present

Respondent. Aggrieved by the impugned order, the present appeal has been

filed by Mr. Vijay Jain and 13 others-the present Appellants.

2. The Learned Senior Counsel for the Appellants submitted that the

Appellants had extended loans to M/s Laxmi Foils Private Limited-the

Corporate Debtor for business purposes. The Appellants had extended the

credit facilities to the Respondent in the form of interest-free unsecured loans

as erstwhile shareholders of the Corporate Debtor. It was further stated that

a Memorandum of Understanding (hereinafter referred to as "MoU") was

entered into between the Corporate Debtor, a company named OFB and

Appellants (the Promoter Group) in terms of which the OFB was to purchase

the shareholding of the Corporate Debtor for Rs.51 crore. Subsequent to the

MoU being signed, the OFB and the Appellants entered into a Share-Purchase

Agreement (hereinafter referred to as "SPA") on 03.02.2022. In terms of MoU

dated 25.11.2021 and SPA executed on 03.02.2022, the entire shareholding Company Appeal (AT)(Insolvency) No. 1474 of 2023 & IA No.5225 of 2023 2 of the Appellants in the Corporate Debtor was agreed to be sold to OMAT

which was a subsidiary of OFB. OFB was to purchase the shares of the

Appellants for Rs.10.62 crore and until the payment was done by OFB, the

Appellants were to remain in control of the Corporate Debtor. It has also been

submitted that the Appellants and the Corporate Debtor entered into two

Finance Facilities Agreement (hereinafter referred to as "FFA") recording the

terms and conditions for repayment of credit facilities advanced by the

Appellants to the Corporate Debtor. The FFAs signify that the Corporate

Debtor acknowledged the debts of the Appellants and undertook to discharge

them. Further, in terms of the MoU and SPA, it had been agreed that the loans

extended by the Appellants to the Corporate Debtor would be repaid by the

Respondent on the closing date. As the Respondent had agreed to pay the

unsecured loans by the closing date, cheques for an amount of Rs.1.66 crore

were to be issued in favour of the Appellants by the Corporate Debtor towards

discharge of the outstanding credit facilities. Pursuant thereto, cheques were

prepared by the Corporate Debtor but were not counter-signed by Mr. Lokesh

Garg, Authorized Representative of the Corporate Debtor for presentment and

hence debt could not be discharged. Since these cheques were not counter-

signed by the Authorized Representative and the Corporate Debtor failed to

make repayment of the credit facilities, the default occurred on 04.03.2022.

The Appellants sent demand notices seeking repayment of their loans.

However, the Corporate Debtor having failed to make payments, there was a

clear incidence of debt and default and hence the Appellants filed a Section 7

petition. It has been contended that the Section 7 application was erroneously

rejected by the Adjudicating Authority.

Company Appeal (AT)(Insolvency) No. 1474 of 2023 & IA No.5225 of 2023 3

3. We have duly considered the arguments advanced by the Learned

Senior Counsel for the Appellants and perused the records carefully. The

short point for consideration is whether this was a case of debt and default in

the context of IBC which deserved admission of Section 7 application filed by

the Appellants.

4. It is the case of the Appellants that the Respondent had accepted and

acknowledged its liability in respect of the unsecured loan amounts and

agreed to repay the same as is seen from the SPA and FFAs. The FFA was sent

by the Corporate Debtor/Respondent to the Appellant on 07.02.2022 and

therefore the Corporate Debtor/Respondent cannot claim that they were not

party to these agreements.

5. It has been the case of the Respondent before the Adjudicating

Authority that the Appellants did not bring on record any documentary

evidence to show that FFAs were ever executed between the parties. The

Adjudicating Authority had also recorded the submissions of the Respondent

that their email of 07.02.2022 had conveyed only a draft FFA which never got

firmed up or executed. The so-called FFAs were signed by Appellants and did

not bear the signature of any person from the management of the Respondent.

6. We find that the Adjudicating Authority has recorded the finding that

the Facility Agreement relied upon by the Appellants in support of their debt

is un-dated and hence discounted the same to be credible evidence to prove

the existence of debt. More importantly, if the email of 07.02.2022 from the

Respondent to the Appellants sharing the FFA is perused as has been placed Company Appeal (AT)(Insolvency) No. 1474 of 2023 & IA No.5225 of 2023 4 at page 231 of the Appeal Paper Book ('APB' in short), we find that it is only a

draft agreement seeking comments/observations of the Appellants.

Furthermore, we notice that the FFA which has been placed on record at

Annex A-5 of the APB does not have the signature of the Respondent but it is

the Appellant No. 6 who has signed for the Corporate Debtor as may be seen

at page 270 of the APB.

7. Given this position, we do not find any mistake on the part of the

Adjudicating Authority in not relying on the FFA to prove the existence of debt.

8. The other ground to prove existence of doubt which has been adverted

to by the Appellants is that the financial debt is also disclosed in the

provisional balance sheet dated 03.03.2022 as shared by the Respondent

themselves vide their email dated 04.03.2022. Furthermore, it has been

contended that the Respondent after carrying out due diligence had admitted

the balance sheet as on 03.03.2022 which reflects the credit facilities

advanced by the Appellants. The Respondent failed to repay the said credit

facilities and hence this is a clear case of debt and default.

9. Assertion has also been made by the Appellant that though the debt

amounts got removed in the 04.03.2022 balance sheet, this nil statement

occurred on account of cheques having been issued by the Corporate Debtor

towards discharging the liability appearing in the balance sheet of

03.03.2022. It was contended that cheques for an amount of Rs.1.66 crore

was prepared by the Corporate Debtor on 04.03.2022 which was sent for

counter signature of their Authorized Representative, Mr. Lokesh Garg. Based

Company Appeal (AT)(Insolvency) No. 1474 of 2023 & IA No.5225 of 2023 5 on this assurance, due effect was given in the books of accounts which led to

nil statement on 04.03.2022. The cheques however could not be encashed on

account of non-countersigning of cheques by the Authorized Representative

of the Corporate Debtor. The Corporate Debtor thus having failed to make

repayment of the credit facilities, the default occurred on 04.03.2022.

10. It was also argued that the Clause 6.5 waiver in the SPA claimed by the

Respondent is a sham argument because if the waiver had actually taken

place, then the loan facility should not have been reflected in the balance

sheet on 03.03.2022. It has been contended that Clause 6.5 was not

applicable to these unsecured loans as the SPA was entered into with the

assurance that the unsecured loans will be repaid by the closing date.

11. As is seen from the impugned order, the Respondent had countered

similar submissions made by the Appellants before the Adjudicating Authority

wherein it was submitted that the 14 cheques dated 04.03.2022 which was

allegedly claimed by the Appellant to have been issued by the Corporate

Debtor in their favour was surprisingly signed by one of the Appellants (Rajesh

Jain) on 04.03.2022 and therefore cannot be treated as cheques having been

sent by the Corporate Debtor. It was also pointed out before the Adjudicating

Authority that Mr. Rajesh Jain did not have any authorization for signing

these cheques on behalf of the Corporate Debtor. The alleged cheques were

therefore forged instruments made with the intent to extort money from the

Respondent and subject them to insolvency proceedings fraudulently and

maliciously. Submission had also been made before the Adjudicating

Authority that because of this mala-fide intent of the Appellants, several police

Company Appeal (AT)(Insolvency) No. 1474 of 2023 & IA No.5225 of 2023 6 complaints were filed against them and in retaliation of which, the Section 7

application has been filed.

12. Furthermore, pursuant to the SPA, the entire shares of the Corporate

Debtor held by the Appellants was transferred at a consideration of Rs.10.62

crore of which Rs.7.96 crore was already paid to the Appellants. Payment of

Rs.2.65 crore was deferred to verify the authenticity of the transactions and

the warranties of promise, assurances, undertakings, indemnities and other

covenants contained in the SPA. In view of the false material representations

and warranties made by the present Appellants, a legal notice was issued on

25.08.2022 invoking the right of indemnification as provided for in Clause 10

of the SPA seeking recovery of Rs. 10.94 crore paid in terms of SPA and

seeking damages of Rs.3 crore. OMAT also terminated the SPA dated

03.02.2022 and resorted to arbitration in terms of Clause 12 of the SPA.

Furthermore, the Corporate Debtor had received demand notices from four

alleged Operational Creditors for a total amount of Rs.6.10 crore. On receipt

of these demand notices, it came to the knowledge of the Corporate Debtor

that the Appellants in their capacity as erstwhile shareholders had entered

into certain transactions beyond the accounts date defined in the SPA. It was

also pointed out before the Adjudicating Authority that the demand notices of

the Operational Creditors were signed by none other than one of the

Appellants (Rajesh Jain) on behalf of the Corporate Debtor post-execution of

the SPA and that the Corporate Debtor was kept unaware of these

transactions nor were the transactions carried out in the ordinary course of

business.

Company Appeal (AT)(Insolvency) No. 1474 of 2023 & IA No.5225 of 2023 7

13. In their defence before the Adjudicating Authority, the Respondent had

also explained that the said credit facilities were waived pursuant to execution

of the SPA and particular reference was made to Clause 6.5 thereof. It was

also contended before the Adjudicating Authority that the balance sheet of the

Corporate Debtor dated 04.03.2022 which has been acknowledged by

Appellants show that no amount as claimed by them was due and payable.

14. Before we go into the merits of their rival positions, we may take note

Clause 6.5 of the SPA which is to the following effect:

"6.5 Each seller, hereby irrevocably and unconditionally as on the closing date, releases, waives and discharges, and undertakes and confirms that all the affiliates of such seller have irrevocably and unconditionally released, waived and discharged, for all purposes any and all of their respective rights (whether contractual or otherwise) claims, demands, damages, losses, costs, expenses, actions or causes of action or lawsuits (in law or an equity), of nature, whether known or unknown, fixed or contingent, direct or indirect, that such seller or any of its affiliates, or their respective assigns and successors (collectively, ''the Released parties''), may have against the company or company's past or present directors, officers, employees, agents, assigns, successors, shareholders investors (collectively , "the Released Parties") in relation to any and all claims and all amounts payable and or due in respect of any event prior to the closing date and arising from or relating to company's obligations and all liabilities arising out of or in relation to, any past event, actions, inactions, omissions or activities or any contact between any Releasing Party and any Released Party prior to the closing date, whether asserted by any Releasing party or any

Company Appeal (AT)(Insolvency) No. 1474 of 2023 & IA No.5225 of 2023 8 person on behalf of any releasing party or by any successor, assignee or transferee of any Releasing Party."

15. A plain reading of the Clause 6.5 leaves no doubt in our minds that the

erstwhile shareholders had released/waived/discharged all/any rights and

claims against the Corporate Debtor/Respondent. Having relinquished their

rights/claims under the SPA, the contention of the Respondent that debt

claims of the Appellant stood discharged is prima-facie logical. The absence

of proof of crystallized debt is also validated by the balance sheet of the

Corporate Debtor dated 04.03.2022 which has been acknowledged by

Appellants which reflects that no amount as claimed by them was due and

payable. Once the closing had been achieved by the Corporate Debtor in terms

of the SPA and the same had been acknowledged by the Appellants upon

signing the balance sheet with nil statement, the issue with respect to any

amount due and payable by the Corporate Debtor does not arise.

16. Coming to our analysis and assessment, it is well settled that in terms

of Section 7 of the IBC, a Financial Creditor may file an application for the

initiation of CIRP against a Corporate Debtor. However, Section 7(5)(a)

provides that only upon the Adjudicating Authority being satisfied that default

on a debt had occurred and that the threshold for filing such an application

had been met and that the application under Section 7(2) was complete, it

may then only admit the Corporate Debtor into CIRP. It has been well settled

by the Hon'ble Supreme Court of India in M/s Innoventive Industries Ltd. v.

ICICI Bank in C.A. Nos. 8337-8338 of 2017 that upon the Adjudicating

Authority being satisfied that a debt was due and that default had occurred, Company Appeal (AT)(Insolvency) No. 1474 of 2023 & IA No.5225 of 2023 9 it was bound to commit the Corporate Debtor into insolvency. It may be

relevant to notice the relevant paragraph of this judgment which is as follows:

"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."

17. At this juncture, we may notice the relevant findings with regard to debt

and default thereto as recorded by the Adjudicating Authority in the

impugned order which has come up in appeal. The relevant portions are as

excerpted below:

"17. From the aforesaid facts, events, and analysis, we observe that the alleged debt claimed by the Applicants is doubtful since (a) the Facility Agreement relied upon by the Applicants in support of their debt is un-dated, (b) as per the Provisional Balance Sheet of the Respondent as of 04.03.2022 (which has been signed and authenticated by the Applicant No. 1 and 6 themselves), the unsecured loan owed to the Directors and Shareholders of the Respondent Company is shown as 'Nil', (c) the new management of the respondent has reportedly paid an amount of Rs.7,96,88,812/- out of the total consideration of Rs. 10,62,51,750/- to the all the shareholders and the debt of the Respondent is discharged in terms of Clause 6.5 of the Share Purchase Agreement dated 03.02.2022, and (d) the Respondent had shown cogent reasons, by Company Appeal (AT)(Insolvency) No. 1474 of 2023 & IA No.5225 of 2023 10 bringing on record the Section 8 Demand Notices issued to it as the reason for non-payment of the balance amount of Rs.2,65,62,937/- .

18. Thus, in our considered view, Applicants No. 1-10 have failed to prove the existence of any debt that is crystallized or exists beyond any doubt. As regards the alleged debt claimed on behalf of non-shareholders/Applicants No. 11 to 14, it is noticed that their default amount is less than the minimum threshold amount of Rs. 1 Crore prescribed under Section 4 of IBC, 2016. Hence, we have no option but to reject the Application. The Application is accordingly dismissed."

18. The Adjudicating Authority in the impugned order has noticed that the

Appellants had sold their shareholding to OMAT by executing the SPA on

03.02.2022 after payment of a lumpsum amount settled between the two

parties. The Adjudicating Authority after perusal of the SPA has further noted

that Schedule 1A and 1B of the SPA shows that the new management of the

Respondent had settled the deal with all the shareholders at a lumpsum

amount of Rs.10.62 crore. It has also noted that the provisional balance sheet

of the Respondent as of 04.03.2022 shows that unsecured loan owed to the

directors and shareholders of the Respondent Company as nil and this

document has been signed by Appellants No. 1 and 6. Cognizance has also

been taken of the fact that the Corporate Debtor had received demand notices

from four alleged Operational Creditors for a total amount of Rs.6.10 crore

and hence they held back part of the consideration amount for purchase of

shares. After making these observations, on the question as to whether debt

and default was adequately demonstrated to the Adjudicating Authority, basis

Company Appeal (AT)(Insolvency) No. 1474 of 2023 & IA No.5225 of 2023 11 the records made available before it, the Adjudicating Authority has rightly

concluded that it was not satisfied with the evidence produced before it by the

financial creditor to prove that a debt had crystallized beyond doubt and that

a default has occurred. Having already given our findings on the FFAs and

the SPA at para 7 and 15 above, we find no cogent reasons to disagree with

the impugned order.

19. In sum, we are of the view that the Adjudicating Authority has rightly

dismissed the Section7 application filed by the Appellant. We are satisfied that

the impugned order does not warrant any interference. There is no merit in

the Appeal. The Appeal is dismissed. No order as to costs.

[Justice Ashok Bhushan] Chairperson

[Barun Mitra] Member (Technical)

Place: New Delhi Date: 03.01.2024

PKM

Company Appeal (AT)(Insolvency) No. 1474 of 2023 & IA No.5225 of 2023 12