2018 (12) TMI 887 - Tri - Insolvency and Bankruptcy

Corporate Insolvency Resolution Process against the Corporate Debtor - Whether the claim of the Financial Creditors is barred by limitation? - Held that - An amendment has been made in I&B Code, 2016 based on which Section 238 A, has been inserted by which the provisions of the Limitation Act, 1963 are made applicable to the proceedings under I&B Code, 2016. The said amendment has been brought into force on 06.06.2018, which operates prospectively, because the newly inserted section is a substantive provision of Law. Thus, in the light of the above legai position, the right to apply under Section 7 of I&B Code, 2016 had accrued to the Financial Creditors on 01.12.2016 when the I&B Code was brought into force. Therefore, the Application f led by the Financial Creditors is held within the period of limitation. Hence, the plea that has been taken by the Corporate Debtor that the Application is barred by limitation, stands rejected. Whether the claim made by the Financial Creditors relates to Financial Debt and thereby being a financial transaction? - Held that - It is clearly established that the amount that has been advanced by lst and 2nd Financial Creditors to the Corporate Debtor for the space as mentioned above is for consideration for the time value of money and the said transactions have a commercial effect of borrowing. Subsequently, the project could not see the light of the day and the Corporate Debtor has time and again acknowledged the debt by providing Cheques, Promissory Notes and sending e-mail Communications from time to time on the demand raised by the Financial Creditors. Therefore, the debt in question falls within the purview of the definition of Financial Debt as defined under Section 5(8) of the I&B Code, 2016. Thus, the issue stands decided in favour of the Financial Creditors and against the Corporate Debtor. Whether the interest charged by the Financial Credits is exorbitant and barred by the Usurious Loans Act, 1918 and the Madras Debtor Protection (Amendment) Act, 1935? - Held that - If at the time of advancement of the money, the rate of interest was not considered as exorbitant by the Corporate Debtor, subsequently it cannot object to the said rate of interest. It is otherwise clear from the record that the Financial Creditors have not got an adequate security i.e., the space for the money advanced as the project in question stated to have been scraped by the Corporate Debtor. Therefore, the interest charged by the Financial Creditors cannot be said excessive. In the circumstances, the objection of the Corporate Debtor that the Madras Debtor Protection (Amendment) Act, 1935, is barring the charging of exorbitant interest is devoid of merits and stands rejected. This view is also fortif ed by the reasoning that 24% compound interest in modem business exigencies is common and as such, is an accepted arm s length rate of interest for commercial loans. It is otherwise not the case of the Corporate Debtor that he is in any way willing to pay the outstanding debt on the terms of the lesser rate of interest. Whether the documents placed on record by the Financial Creditors are sufficient in its nature to ascertain the existence of default in the absence of the record of Information Utility and Financial Contract? - Held that - There cannot be any room for rejection of the computation sheets and other documents flled by the Financial Creditors, and these can be considered as other record or evidence to ascertain the existence of default on the part of the Corporate Debtor in the absence of the record of the Information Utility, as the Information Utility is still at an inception stage and is not capable of providing record pertaining to financial debt as envisaged under Sub-Section (4) of Section 7 of the I&B Code, 2016. In short, the plea of the learned Sr. Counsel for the Corporate Debtor that the documents placed on record are inadmissible in evidence stands rejected. Thus, the issue is decided in favour of the Financial Creditors and against the Corporate Debtor. Whether the Financial Creditors can file the Application under Section 7 of I&B Code, jointly when all of them are not the corporate persons? - Held that - Financial Creditors has submitted that the interpretation with regard to the entries of Form-I given by the learned Sr. Counsel for the Corporate Debtor is not in consonance with the definition as mentioned above and such interpretation is narrowing the scope of the Application to be filed under Section 7 of the I&B Code, 2016. This Adjudicating Authority finds force in the submissions of the learned Sr. Counsel for the Financial Creditors. The same is also fortified with the ruling given by the Hon ble Apex Court in Life Insurance Corpn. of India v. Escorts Ltd. 1985 (12) TMI 289 - SUPREME COURT OF INDIA wherein a similar issue has come up for consideration before their Lordships and after examination it was opined that the Form cannot control the Act. Therefore, the plea taken by the learned Sr. Counsel for the Corporate Debtor stands rejected. Whether the Application fixed under Section 7 of the I&B Code, is maintainahle under law on the basis of the authorization given by the 2nd to 7th Financial Creditors through Power of Attorney? - Held that - If a person is duly authorised by the Financial Creditors, even by way of Power of Attorney, is competent to file the Application under Section 7 of I&B Code, 2016. Thus, the submission made by learned Sr. Counsel for the Corporate Debtor stands overruled as the submission made by the learned Sr. Counsel for the Financial Creditors is found plausible, and backed by the ruling of the Hon ble NCLAT given in Sumeet Ahuja s case (supra). Whether the Corporate Debtor has borrowed the loan from the Financial Creditors against its Articles of Association, thereby it is ultra vires and does not bind the Corporate Debtor - Held that - It can safely be concluded that the debt claimed by the Financial Creditors is due and payable, which the Corporate Debtor failed to pay. This Authority is satisfied that there is an existence of default on the part of the Corporate Debtor as is evidenced from the record placed on the file by the Financial Creditors. In view of the facts and circumstances and the legal position stated above, the Application of the Financial Creditors is complete in all respect. CP admitted and the commencement of the Corporate Insolvency Resolution Process is ordered which ordinarily shall get completed within 180 days, reckoning from the day this order is passed.

Summary

Issues Involved:

1. Whether the claim of the Financial Creditors is barred by limitation?
2. Whether the claim made by the Financial Creditors relates to Financial Debt and thereby being a financial transaction?
3. Whether the interest charged by the Financial Creditors is exorbitant and barred by the Usurious Loans Act, 1918 and the Madras Debtor Protection (Amendment) Act, 1935?
4. Whether the documents placed on record by the Financial Creditors are sufficient in their nature to ascertain the existence of default in the absence of the record of Information Utility and Financial Contract?
5. Whether the Financial Creditors can file the Application under Section 7 of I&B Code, jointly when all of them are not corporate persons?
6. Whether the Application filed under Section 7 of the I&B Code, is maintainable under law on the basis of the authorization given by the 2nd to 7th Financial Creditors through Power of Attorney?
7. Whether the Corporate Debtor has borrowed the loan from the Financial Creditors against its Articles of Association, thereby it is ultra vires and does not bind the Corporate Debtor?

Issue-wise Detailed Analysis:

Issue No. i: Limitation

The Corporate Debtor argued that the claim is barred by the period of limitation. However, the tribunal noted that the Corporate Debtor had continually acknowledged its liability through various documents, including promissory notes, cheques, confirmation letters, and emails. The application was filed within the period of limitation, considering these acknowledgments. The tribunal also noted that the right to apply under Section 7 of the I&B Code accrued on 01.12.2016, and the application was filed within the permissible period. Thus, the plea of limitation was rejected.

Issue No. ii: Financial Debt

The Corporate Debtor contended that the Financial Creditors did not produce any 'financial contract' showing underlying financial transactions. However, the tribunal found that various documents, including mortgage deeds, Memorandum of Agreements (MoAs), promissory notes, and cheques, evidenced the financial transactions. The tribunal concluded that the debt in question fell within the definition of "Financial Debt" under Section 5(8) of the I&B Code, 2016, as it involved consideration for the time value of money with a commercial effect of borrowing. Thus, the issue was decided in favor of the Financial Creditors.

Issue No. iii: Exorbitant Interest

The Corporate Debtor argued that the interest rate of 24% per annum was exorbitant and violated the Tamil Nadu Prohibition of Charging Exorbitant Interest Act, 2003. The tribunal, relying on precedents, held that the interest rate agreed upon at the time of the loan could not be considered exorbitant subsequently. It was noted that the Financial Creditors had not received adequate security for the loan, and 24% interest was a common rate for commercial loans. Therefore, the objection regarding exorbitant interest was rejected.

Issue No. iv: Sufficiency of Documents

The Corporate Debtor challenged the admissibility of documents, including emails, without a certificate under Section 65B of the Indian Evidence Act. The tribunal held that the requirement of such a certificate is not always mandatory, especially when the party relying on the documents does not possess the original device. The tribunal found that the documents, including promissory notes, cheques, and computation sheets, were sufficient to establish the default. Thus, the issue was decided in favor of the Financial Creditors.

Issue No. v: Joint Application by Financial Creditors

The Corporate Debtor argued that the application could not be filed jointly by Financial Creditors, including individuals, HUF, and corporate bodies. The tribunal referred to the definitions of "Financial Creditor" and "person" under the I&B Code, which include individuals, HUF, and corporate entities. It was concluded that the joint application was maintainable, and the plea was rejected.

Issue No. vi: Authorization through Power of Attorney

The Corporate Debtor contended that the application could not be filed based on a Power of Attorney. The tribunal referred to precedents where it was held that a duly authorized person, even through a Power of Attorney, could file the application. The tribunal found that the authorization was valid, and the submission by the Corporate Debtor was overruled.

Issue No. vii: Ultra Vires Borrowing

The Corporate Debtor argued that the borrowing was against its Articles of Association and thus ultra vires. The tribunal referred to the principle that a party cannot benefit from its own wrong. It was held that the Corporate Debtor could not challenge its own action of borrowing. Thus, the plea was rejected.

Conclusion:

The tribunal concluded that the debt claimed by the Financial Creditors was due and payable, and the Corporate Debtor had defaulted. The application was complete and satisfied the legal requirements. The tribunal admitted the application, ordered the commencement of the Corporate Insolvency Resolution Process (CIRP), declared a moratorium, and appointed an Interim Resolution Professional (IRP). The order was pronounced in open court in the presence of the counsels for both parties.