Vishwa Nath Singh vs M/S. Visa Drugs & Pharmaceuticals Pvt. ...

Vishwa Nath Singh Director, Swan Aluminiums Pvt. Ltd. House No. C-1, 301, Valley Tower, Gladys Alwares, Manpada, Thane West Maharashtra - 400 607 ...Appellant

Vs.

M/s. Visa Drugs & Pharmaceuticals Pvt. Ltd. 1 A.J.C., Bose Road, Third Floor (Opp. Lord Sinha Road), B-Wing, Kolkata, West Bengal - 700 020 ...Respondent

Present:

For Appellant : Shri Virender Ganda, Senior Advocate assisted by Shri Vipul Ganda, Shri Mohit Oommen and Ms. Shreya Jain, Advocates

For 1st Respondent : Shri Yash Pal Gupta, Advocate

JUDGMENT

SUDHANSU JYOTI MUKHOPADHAYA, J.

The appellant, Director/shareholder of M/s. Swan Aluminiums Private

Limited has preferred these appeals against orders dated 4th September, 2017

and 18th September, 2017 both passed by the Adjudicating Authority

(National Company Law Tribunal), Chandigarh Bench, Chandigarh in C.P. No.

209/2016. By the first order, the application preferred by the respondent -

Company Appeal (AT) (Insolvency) No. 234 - 235 of 2017 1 M/s. Visa Drugs & Pharmaceuticals Pvt. Ltd. under Sections 433 and 434 of

the Companies Act, 1956 for winding up has been treated as an application

under Section 7 of the Insolvency and Bankruptcy Code, 2016 (hereinafter

referred to as the 'I&B Code') by the Adjudicating Authority admitted the

application, passed order of moratorium with certain directions and called for

the names of Interim Resolution Professionals and adjourned the matter for

appointment of Interim Resolution Professional.

In the second order dated 18th September, 2017 the Insolvency

Resolution Professional has been appointed with further directions as given

therein.

2. The relevant facts as pleaded are as follows:

The erstwhile shareholder i.e. Shri Ashok Kumar Aggarwala and others

approached M/s. Swan Aluminiums Private Limited (Corporate Debtor) for

sale of their entire shareholding in M/s. Swan Aluminiums Pvt. Ltd. A

Memorandum of Understanding was executed on 18th February, 2013

between M/s. Swan Aluminiums Pvt. Ltd. (Corporate Debtor) and Jupiter

Strips Private Limited wherein certain agreements were reached. On 9th

December, 2013, all bank accounts in the name of the company M/s. Swan

Aluminiums Pvt. Ltd. (Corporate Debtor) were closed after clearance of all

past/previous dues/liabilities, (both secured and unsecured) which was

reflected in the balance-sheet prepared by the erstwhile shareholders.

4. However, when audited the balance-sheet of M/s. Swan Aluminiums

Pvt. Ltd. (Corporate Debtor) were prepared on 31st March, 2014 and 31st

Company Appeal (AT) (Insolvency) No. 234 - 235 of 2017 2 March, 2015, debt due or liability payable to the respondent were not shown

therein.

5. On 11th August, 2016 six identical demand notices under Sections 433

and 434 of the Companies Act, 1956 were sent by erstwhile shareholders

including the respondent - M/s. Visa Drugs & Pharmaceuticals Pvt. Limited.

On 20th September, 2016, a common reply was sent by M/s. Swan Aluminium

Pvt. Ltd. (Corporate Debtor) disputing the claim. In the aforesaid background,

six company petitions were preferred by the respondent under Section 433(e),

434 and 439 of the Companies Act, 1956 before the Hon'ble High Court of

Punjab and Haryana.

6. Pursuant to the Notification No. G.S.R. 1119(E) dated 7th December,

2016, issued by Central Government under sub-section (1) and (2) of Section

434 of the Companies Act, 2013 read with sub-section (1) of Section 239 of the

'I&B Code', the winding up cases were transferred from Hon'ble High Court to

the Tribunal/Adjudicating Authority.

7. The case of M/s. Swan Aluminiums Pvt. Ltd. (Corporate Debtor), was

transferred to the Adjudicating Authority (National Company Law

Tribunal), Chandigarh Bench. The application under Sections 433(e), 434

and 439 preferred by the respondent were treated to be application(s)

under Section 7 of the I & B Code and were admitted, as noticed above.

8. Learned counsel for the Appellant has brought to our notice the Central

Government notification dated 7th December, 2016 issued from the Ministry of

Corporate Affairs. By the said notification, in exercise of the powers conferred

Company Appeal (AT) (Insolvency) No. 234 - 235 of 2017 3 under sub-sections (1) and (2) of Section 434 of the Companies Act, 2013 read

with sub-section (1) of Section 239 of the 'I&B Code', the Central Government

framed "The Companies (Transfer of Pending Proceedings) Rules, 2016".

9. Rule 5 relates to transfer of pending proceedings of winding up on the

ground of inability to pay debts which are to be transferred from the Hon'ble

High Court's to the respective Tribunal and reads as follows: -

"5. Transfer of pending proceedings of Winding up on

the ground of inability to pay debts.- (1) All petitions

relating to winding up under clause (e) of section 433

of the Act on the ground of inability to pay its debts

pending before a High Court, and where the petition

has not been served on the respondent as required

under rule 26 of the Companies (Court) Rules, 1959

shall be transferred to the Bench of the Tribunal

established under sub-section (4) of section 419 of the

Act, exercising territorial jurisdiction and such

petitions shall be treated as applications under

sections 7, 8 or 9 of the Code, as the case may be,

and dealt with in accordance with Part II of the Code:

Provided that the petitioner shall submit all

information, other than information forming part of

the records transferred in accordance with Rule 7,

Company Appeal (AT) (Insolvency) No. 234 - 235 of 2017 4 required for admission of the petition under sections

7, 8 or 9 of the Code, as the case may be, including

details of the proposed insolvency professional to the

Tribunal within sixty days from date of this

notification, failing which the petition shall abate.

2. All cases where opinion has been forwarded by

Board for Industrial and Financial Reconstruction, for

winding up of a company to a High Court and where

no appeal is pending, the proceedings for winding up

initiated under the Act, pursuant to section 20 of the

Sick Industrial Companies (Special Provisions) Act,

1985 shall continue to be dealt with by such High

Court in accordance with the provisions of the Act."

10. From the aforesaid Rule 5, it is clear after transfer of the case the

Applicant (Respondent herein) was required to submit all information, other

than information forming part of the records transferred from the High Court,

for admission of the petition under Sections 7, 8 or 9 of the 'I&B Code',

including details of the proposed 'Insolvency Professional' within sixty days,

failing which, the petition shall stand abated.

11. Learned counsel for the appellant submitted that the respondent - M/s.

Visa Drugs & Pharmaceuticals Private Limited was a shareholder and do not

come within the meaning of "Financial Creditor" as defined under sub-section

Company Appeal (AT) (Insolvency) No. 234 - 235 of 2017 5 (7) r/w sub-section (8) of Section 5 of the I & B Code. The respondent also

cannot claim to be an 'Operational Creditor'. He placed reliance on the

balance-sheet of M/s. Swan Aluminiums Pvt. Ltd. (pages 322-355 of the paper

book) wherein the details of "unsecured loans/advances" as on 5th December,

2013 has been shown and the name of "M/s. Visa Drugs & Pharmaceuticals

Private Limited" has been shown therein. It was submitted that the

unsecured loan having been taken without any interest cannot be termed to

be a 'financial debt' within the meaning of sub-section (8) of Section 5 of the I

& B Code.

12. "Financial Creditor" is defined in sub-section (7) of Section 5, which

means :

"any person to whom a financial debt is owed and includes

a person to whom such debt has been legally assigned or

transferred to".

13. Sub-section (8) of Section 5 defines 'financial debt', as follows:

"(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;

Company Appeal (AT) (Insolvency) No. 234 - 235 of 2017 6

(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 nonrecourse basis;

(f) any amount raised under any other transaction,

including any forward sale or purchase agreement,

having the commercial effect of a borrowing;

(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;

Company Appeal (AT) (Insolvency) No. 234 - 235 of 2017 7

(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;"

14. Learned counsel appearing on behalf of the respondent submits that the

loan given by the respondent comes within the meaning of 'financial debt' as

per clause (a) of sub-section(8) of Section 5 i.e. money borrowed against the

payment of interest. However, there is nothing on record to suggest that M/s.

Swan Aluminiums Pvt. Ltd. (Corporate Debtor) has borrowed money against

the payment of interest from the respondent - Visa Drugs & Pharmaceuticals

Pvt. Limited. There may be a loan taken by the Corporate Debtor from the

respondent but that does not mean that such loan amount can be termed a

money borrowed against the payment of interest.

15. 'Financial debt' means a debt along with interest, if any, which is

'disbursed against the consideration for the time value of money'. In 'Nikhil

Mehta and Sons vs. AMR Infrastructure Ltd. - Company Appeal (AT) (Insolvency)

No. 07 of 2017, this Appellate Tribunal, while discussing the aforesaid

provisions, observed as follows :

"17. The first question arises for consideration is as to who

is a 'Financial Creditor'. Learned Adjudicating

Authority, for determination of the aforesaid issue ii

examined the definition provided in Section 5 (7) and

5(8) and in the impugned judgement rightly observed:-

"12. A perusal of definition of expression 'Financial

Company Appeal (AT) (Insolvency) No. 234 - 235 of 2017 8 Creditor' would show that it refers to a person to

whom a Financial debt is owed and includes

even a person to whom such debt has been

legally assigned or transferred to. In order to

understand the expression 'Financial Creditorç

the requirements of expression financial debt'

have to be satisfied which is defined in Section

5(8) of the IBC The opening words of the

definition clause would indicate that a financial

debt is a debt along with interest which is

disbursed against the consideration for the time

value of money and it may include any of the

events enumerated in sub-clauses (a) to (i).

Therefore the first essential requirement of

financial debt has to be met viz, that the debt is

disbursed against the consideration for the time

value of money and which may include the

events enumerated in various sub-clauses. A

Financial Creditor is a person who has right to a

financial debt. The key feature of financial

transaction as postulated by section 5(8) is its

consideration for time value of money. In other

words, the legislature has included such

Company Appeal (AT) (Insolvency) No. 234 - 235 of 2017 9 financial transactions in the definition of

'Financial debt' which are usually for a sum of

money received today to be paid for over a period

of time in a single or series of payments in future.

It may also be a sum of money invested today to

be repaid over a period of time in a single or

series of instalments to be paid in future. In

Black's Law- Dictionary (9th edition) the

expression 'Time Value' has been defined to

mean "the price associated with the length of

time that an investor must wait until an

investment matures or the related income is

earned". In both the cases, the inflows and

outflows are distanced by time and there is a

compensation for time value of money. It is

significant to notice that in order to satisfy the

requirement of this provision, the financial

transaction should be in the nature of debt and

no equity has been implied by the opening words

of Section 5(8) of the IBC. It is true that there are

complex financial instruments which may not

provide a happy situation to decphe1 the true

nature and meaning of a transaction. It is

1 Company Appeal (AT) (Insolvency) No. 234 - 235 of 2017 0 pertinent to point out that the concept 'Financial

Debt' as envisaged under Section 5(8) of the IBC

is distinctly different than the one prevalent in

England as provided in its Insolvency Act, 1986

and the 'Rules' framed thereunder. It appears

that in England there is no exclusive element of

disbursement of debt laced with the

consideration for the time value of money.

However, forward sale or purchase agreement as

contemplated by Section-5 (8)(f) may or may not

be regarded as a financial transaction. A forward

contract to sell product at the end of a specified

period is not a financial contract. It is essentially

a contract for sale of specified goods. It is true

that some time financial transactions seemingly

restructured as sale and repurchase. Any

repurchase and reverse repo transaction are

sometimes used as devices for raising money. In

a transaction of this nature an entity may 13

require liquidity against an asset and the

financer in return sell it back by way of a forward

contract. The difference between the two prices

would imply the rate of return- to the financer.

1

Company Appeal (AT) (Insolvency) No. 234 - 235 of 2017 1 (See Twcman's Law Relating to IBC, 2016 by

Vinod Kothari & Sikha Barisal)."

16. In the present case, the respondent has failed to show that the amount

of loan treated to have been given to the Corporate Debtor were disbursed

against the consideration for the time value of money. In absence of any such

evidence on record to suggest that the amount was disbursed against the

consideration for the time value of money and was borrowed by the Corporate

Debtor against the payment of interest, we hold that the respondent - M/s.

Visa Drugs and Pharmaceuticals do not come within the meaning of 'financial

creditor'.

17. The Adjudicating Authority having failed to notice the facts, we have no

other option but to set aside the impugned orders dated 4th September and 18th

September, 2017.

18. In effect, order(s) passed by the Adjudicating Authority appointing

'Resolution Professional' declaring moratorium, freezing of account and all

other order(s) passed by the Adjudicating Authority pursuant to impugned

order and action taken by the 'Resolution Professional', including the

advertisement published in the newspaper calling for applications all such

orders and actions are declared illegal and are set aside. The application

preferred by Respondent under Section 433 and 434 stands abated. The

Adjudicating Authority will now close the proceeding. The Corporate Debtor

is released from all the rigour of law and is allowed to function independently

through its Board of Directors from immediate effect.

1

Company Appeal (AT) (Insolvency) No. 234 - 235 of 2017 2

19. The Adjudicating Authority will fix the fee of the 'Resolution

Professional' and the Corporate Debtor will pay the fees of the 'Resolution

Professional', for the period he has functioned. The appeal is allowed with

aforesaid observation and direction. However, in the facts and circumstances

of the case, there shall be no order as to cost.

[Justice S.J. Mukhopadhaya] Chairperson

[ Justice Bansi Lal Bhat ] Member(Judicial)

New Delhi

13th December, 2017

/ns/

1 Company Appeal (AT) (Insolvency) No. 234 - 235 of 2017 3