2019 (2) TMI 1499 - Tri - Insolvency and Bankruptcy

Corporate insolvency process - HELD THAT - Corporate Debtor has conceded the agreements and addendums but has gone to say that it has been paying interest and the Financial Creditor was to clear its liabilities within a maximum period of five years and are deliberately avoiding to perform their part of obligation despite being fully aware that interest and penalty is accruing day by day - the Corporate Debtor has stated in categorical terms that they are not liable to pay to the Financial Creditor any amount till it clears the liabilities of K.K. Kohli & Brothers Private Limited (now known as SRS Automotive Components Pvt. Ltd.) for the period upto 31.03.2008 and submit proof thereof. The amount is to become due and payable on the performance of obligation undertaken by the Financial Creditor but not before that. In the petition a copy of the reply dated 06.12.2017 filed by the Corporate Debtor has been attached but no detailed explanation has been given has to how the Financial Creditor is not liable to perform its obligations. We are of the view that in the absence of performance of its own obligation the amount would not be due and payable to the Financial Creditor. As a sequel to the above discussion we find that the petitioners do not satisfy the requirements of Section 7(5) of the Code insofar as no default appears to have occurred which is to arise only after fulfilling the obligations on the part of the Financial Creditor. The default would occur only when the amount is due and payable as stated in the above paras. The petition fails and the same is dismissed. The dismissal of the petition shall not be construed as an expression of opinion on the merit of the controversy in any other proceedings.

Summary

Issues Involved:
1. Whether the petitioners qualify as 'financial creditors' under Section 7 of the Insolvency and Bankruptcy Code, 2016.
2. Whether there is a default on the part of the corporate debtor that warrants the initiation of the Corporate Insolvency Resolution Process.

Issue-wise Detailed Analysis:

1. Qualification as 'Financial Creditors':

The petitioners, claiming to be 'financial creditors,' filed the petition under Section 7 of the Insolvency and Bankruptcy Code, 2016, seeking the initiation of Corporate Insolvency Resolution Process against the respondent company, M/s. Trustworthy Gems & Jewellers Private Limited. The Tribunal examined whether the petitioners meet the definition of 'financial creditors' as per Section 5(7) and 5(8) of the Code.

Section 5(7) defines a 'financial creditor' as any person to whom a financial debt is owed, including those to whom such debt has been legally assigned or transferred. Section 5(8) defines 'financial debt' as a debt along with interest, if any, which is disbursed against the consideration for the time value of money. The Tribunal noted that financial transactions typically involve the consideration of the time value of money, where compensation is based on the inherent risk factor in the series of payments. The Tribunal concluded that the petitioners satisfy the initial requirement of Section 5(8) of the Code, as their claim involved disbursement against the time value of money.

2. Existence of Default:

The Tribunal then examined whether there was a default by the corporate debtor. The petitioners contended that they had deposited a sum of ?1,85,00,000 with the respondent company towards the security of liabilities of K.K. Kohli & Brothers Private Limited (now SRS Automotive Components Pvt. Ltd.) and that the respondent had failed to pay the agreed interest from December 2015 onwards. The petitioners provided a confirmation of account dated 01.04.2017, indicating the deposit amount and the accrued interest.

The respondent, in its reply, argued that the petitioners had not cleared their own liabilities within the agreed period, and thus, the respondent was not liable to pay any amount until the petitioners fulfilled their obligations. The Tribunal referred to the agreements and addendums between the parties, which stipulated that the petitioners were to clear the liabilities of K.K. Kohli & Brothers Private Limited within a maximum of five years. The respondent claimed that the petitioners had failed to do so, and as a result, the amount was not due and payable.

The Tribunal emphasized that for a default to be established, the debt must be due and payable, as defined in Section 3(11) and 3(12) of the Code. The Tribunal referred to the Supreme Court's decision in Innoventive Industries Ltd. v. ICICI Bank, which stated that the Adjudicating Authority must be satisfied that a default has occurred, and the corporate debtor can argue that the debt is not due or payable in law or fact.

The Tribunal concluded that the petitioners had not fulfilled their obligations as per the agreements, and therefore, the amount was not due and payable. Consequently, no default had occurred, and the requirements of Section 7(5) of the Code were not satisfied.

Conclusion:

The Tribunal dismissed the petition, stating that the petitioners did not meet the requirements of Section 7(5) of the Code, as no default had occurred due to the petitioners' failure to fulfill their obligations. The dismissal was not to be construed as an opinion on the merits of the controversy in any other proceedings, and the Tribunal emphasized that these were summary proceedings.