2019 (1) TMI 1313 - AT - Insolvency and Bankruptcy

Corporate insolvency process - financial creditor - grant of loan and admission of taking loan - Held that - In absence of any authorization letter given by either 2nd or 3rd Respondent to file a joint petition on behalf of 2nd and 3rd Respondents, we hold that the application under Section 7 of the I&B Code at the instance of 2nd and 3rd Respondents was not maintainable. There is nothing on the record to suggest that 2nd and 3rd Respondents had given the loan in favour of the Corporate Debtor which can be termed to be disbursement of an amount for consideration for the time value of money as required under Section 5(8). Merely grant of loan and admission of taking loan will ipso facto not treat the 2nd and 3rd Respondents as Financial Creditors , till they show that it complies with the substantive definition or any one or other clause of Section 5(8). Mere fact that the company paid interest @ 12% p.a. during certain period cannot be the ground to hold that the debt comes within the meaning of Financial Debt to treat the 2nd and 3rd Respondents as Financial Creditors . As we find that 1st Respondent who signed and filed the application under Section 7 of the I&B Code was not eligible to file the application not being a Financial Creditor , as held by the Adjudicating Authority, we hold that the petition at the instance of 2nd and 3rd Respondents were also not maintainable.

Summary

Issues:
1. Maintainability of joint application under Section 7 of the Insolvency and Bankruptcy Code at the instance of 2nd and 3rd Respondents.
2. Determination of whether the 2nd and 3rd Respondents qualify as 'Financial Creditors' under the Insolvency and Bankruptcy Code.

Issue 1:
The Adjudicating Authority admitted an application under Section 7 of the Insolvency and Bankruptcy Code filed by the 1st Respondent, seeking initiation of Corporate Insolvency Resolution Process against the Corporate Debtor. However, it was held that the application by the 1st Respondent was not maintainable. The 2nd and 3rd Respondents claimed to be Financial Creditors, but the Adjudicating Authority found that the joint application by them was maintainable as they were not party to the guarantee agreement. The main issue was whether the joint application by the 2nd and 3rd Respondents was maintainable after the rejection of the 1st Respondent's application.

Issue 2:
The key question was whether the 2nd and 3rd Respondents could be considered Financial Creditors under the Insolvency and Bankruptcy Code. The Appellant argued that the 1st Respondent was not competent to file the petition as he was not a Financial Creditor. It was contended that the joint application by the 2nd and 3rd Respondents was not maintainable due to the absence of signatures by them. Additionally, it was argued that the unsecured loan provided by the 2nd and 3rd Respondents did not constitute Financial Debt as per the Code. The Respondents claimed that the 2nd and 3rd Respondents were Financial Creditors based on the default amount, but the lack of details and authorization rendered their application not maintainable.

The judgment concluded that the joint application under Section 7 by the 2nd and 3rd Respondents was not maintainable due to the absence of authorization and failure to meet the criteria of Financial Creditors. The impugned order admitting the application was set aside, along with all subsequent actions like appointing an Interim Resolution Professional and declaring moratorium. The Corporate Debtor was released from the legal constraints, and the proceedings were closed. The Adjudicating Authority was tasked with determining the fee of the Interim Resolution Professional, if appointed, to be paid by the Corporate Debtor. The appeal was allowed without costs in the circumstances of the case.