2019 (8) TMI 1381 - Tri - Insolvency and Bankruptcy

Initiation of Corporate Insolvency Resolution Process - financial debt or not - Section 33(1) of the Karnataka Stamp Act, 1957 - Sections 5(7) and 5(8) of I B Code, 2016 - HELD THAT - The amount in question has been advanced by the Petitioner, and utilized by the Respondent, based on the loan agreement and in the Real Estate Project or purchase of Flat and hence, it cannot be disputed that he is not a Financial Creditor as also by going through the audited balance sheet as on 31.03.2016 duly submitted by the Advocate for the Petitioner in respect of the Respondent Company the health of the Company does not seems to be very good as Reserve and surplus is only ₹ 34,53,140/- with the Company. The Respondent Company started since 2002 and it is carrying lot of current and non-current liability and is blocked in current assets i.e. inventories, Trade Receivables. All these circumstances suggest, that it is fit case to be admitted, under Section 7 of Insolvency Bankruptcy Code for Corporate Insolvency Resolution Process to be initiated. Petition admitted - moratorium declared.

Summary

Issues Involved:
1. Legality and enforceability of the loan agreement.
2. Determination of the petitioner as a financial creditor.
3. Compliance with the Foreign Exchange Management Act (FEMA), 1999.
4. Admissibility of the claim under the Insolvency and Bankruptcy Code (IBC), 2016.
5. Financial status and insolvency of the respondent company.
6. Appointment of Interim Resolution Professional (IRP) and initiation of Corporate Insolvency Resolution Process (CIRP).

Detailed Analysis:

1. Legality and Enforceability of the Loan Agreement:
The petitioner, through his authorized Power of Attorney, submitted an application under Section 7 of the IBC, 2016, seeking to initiate CIRP against the corporate debtor, M/s Value Design Build Private Limited. The petitioner claimed a debt of ?5,02,23,791, which included principal and interest amounts. The respondent argued that the loan agreement was void as it was not sufficiently stamped under the Karnataka Stamp Act, 1957, and should be impounded. However, the tribunal cited the Supreme Court’s ruling in Chilakuri Gangulappa v. Revenue Divisional Officer, Madanapalle, allowing the petitioner to remit the deficient stamp duty and penalty, thus validating the loan agreement for consideration.

2. Determination of the Petitioner as a Financial Creditor:
The tribunal examined Sections 5(7) and 5(8) of the IBC, 2016, which define "Financial Creditor" and "Financial Debt." The petitioner provided evidence of disbursed amounts and interest accrued, supported by email correspondences where the respondent acknowledged the debt and agreed to repayment schedules. The tribunal concluded that the petitioner is indeed a financial creditor, as the debt was disbursed against the consideration for the time value of money.

3. Compliance with the Foreign Exchange Management Act (FEMA), 1999:
The respondent contended that the transactions violated FEMA regulations, arguing that the petitioner, a foreign national, could not lend money without RBI approval. The tribunal reviewed the relevant FEMA regulations and found that the transactions were bona fide, conducted through proper banking channels, and did not attract FEMA violations. The petitioner’s funds were utilized by the respondent, and any contravention of exchange laws was the respondent’s liability.

4. Admissibility of the Claim under the Insolvency and Bankruptcy Code (IBC), 2016:
The tribunal noted that the debt due and payable by the respondent exceeded ?1,00,000 and was not barred by limitation. The petitioner’s claim was found to be maintainable under the IBC, 2016, as the debt was acknowledged by the respondent in various correspondences and payments made towards interest.

5. Financial Status and Insolvency of the Respondent Company:
The tribunal reviewed the respondent company’s financial health, noting significant liabilities and insufficient reserves and surplus. The company’s inability to pay even admitted liabilities indicated insolvency. The tribunal concluded that the respondent company was insolvent and unable to meet its financial obligations.

6. Appointment of Interim Resolution Professional (IRP) and Initiation of Corporate Insolvency Resolution Process (CIRP):
The tribunal appointed Shri Ravishankar Devarakonda as the IRP and initiated CIRP against the corporate debtor. A moratorium was declared, prohibiting suits, proceedings, asset transfers, and recovery actions against the corporate debtor. The IRP was directed to follow the provisions of the IBC, 2016, and file progress reports with the tribunal.

Conclusion:
The tribunal admitted the petition under Section 7 of the IBC, 2016, initiating CIRP against the corporate debtor. The petitioner was recognized as a financial creditor, and the debt was found to be valid and enforceable. The tribunal appointed an IRP and declared a moratorium, ensuring compliance with the IBC and related regulations.