2019 (2) TMI 1040 - Tri - Insolvency and Bankruptcy

Initiation of Corporate Insolvency Resolution Process - proof of outstanding financial Debt - HELD THAT - Applicants are not strangers to the Corporate Debtor and they have participated in the management of the Company since incorporation. When this much material is staring at us from the Corporate Debtor side proving that no debt was in existence as on the date of filing winding up petition, this case could not be considered as financial debt. If at all any claim is left payable, it could be share application money pending with the Company not any financial debt as stated by the Applicant. In view of these reasons, no financial debt is in existence between the parties as on the date of filing this case. If any disbursement was made to the firm, the corporate debtor having set out all that was paid and adjusted towards share application money, burden lies upon the applicant to prove no such payments has come to their account, that the applicant has not done. The corporate debtor, in any event, having not only established that no debt payable to the Applicants is in existence as on the date of filing this Company Petition, but also established that this debt is time barred, therefore this Company Petition is hereby dismissed as misconceived.

Issues Involved:
1. Existence of Financial Debt
2. Locus Standi of Applicants
3. Payments Made by Corporate Debtor
4. Conversion of Loan to Share Application Money
5. Limitation Period for Debt Recovery
6. Proof of Financial Debt

Detailed Analysis:

1. Existence of Financial Debt:
The Applicants, husband and wife, filed an application under Section 7 of the Insolvency & Bankruptcy Code, 2016, seeking initiation of Corporate Insolvency Resolution Process (CIRP) against the Corporate Debtor for defaulting on a debt of ?4,41,60,000. The Corporate Debtor argued that no financial debt existed as defined under Section 5(8) of the Code. The Tribunal noted that the Applicants did not provide sufficient material to prove the existence of a financial debt or default. The Tribunal emphasized that a financial debt must be disbursed against the consideration for the time value of money, which was not established by the Applicants.

2. Locus Standi of Applicants:
The Corporate Debtor contended that the Applicants had no locus standi to file the application as the debt was initially advanced to a sole proprietorship concern, Radha Exports, and not to the Corporate Debtor. The Tribunal observed that the Applicants failed to prove that the debt was transferred to the Corporate Debtor upon its incorporation in 2004.

3. Payments Made by Corporate Debtor:
The Corporate Debtor provided evidence of payments made to the Applicants, amounting to ?1,08,14,650, before its incorporation. The Tribunal verified these payments through bank statements and found them to be accurate. The Applicants did not provide any material to counter the Corporate Debtor's evidence. Additionally, further payments totaling ?43,25,000 were made by the Corporate Debtor to the Applicants after its incorporation.

4. Conversion of Loan to Share Application Money:
The Corporate Debtor claimed that ?90,00,000 of the debt was converted to share application money at the request of the Applicants. The Tribunal examined letters addressed by the Applicants to the Income Tax Department confirming this request. The Tribunal found that the Applicants acknowledged the conversion of ?90,00,000 to share application money, leaving a balance of ?21,85,350 as an unsecured loan.

5. Limitation Period for Debt Recovery:
The Corporate Debtor argued that the debt was barred by limitation as the money was advanced between 2002 and 2003, and the application was filed in 2018. The Tribunal agreed, noting that the Applicants did not provide any explanation for the delay or evidence of part payments to extend the limitation period. The Tribunal concluded that the claim was time-barred.

6. Proof of Financial Debt:
The Tribunal emphasized the need for strict adherence to the mandates of the Code and the Insolvency and Bankruptcy Board of India (IBBI) regulations. The Applicants failed to provide records from an information utility, financial contracts supported by financial statements, or an order from a court or tribunal adjudicating the non-payment of debt. The Tribunal noted that the Applicants did not file any financial statements reflecting that the debt had not been repaid, whereas the Corporate Debtor provided substantial evidence of payments made.

Conclusion:
The Tribunal concluded that no financial debt existed between the parties as on the date of filing the application. The Corporate Debtor successfully established that the debt was repaid and any remaining amount was converted to share application money. The Tribunal dismissed the application, stating that it was misconceived and barred by limitation.

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