2019 (11) TMI 685 - Tri - Insolvency and Bankruptcy

Maintainability of application - initiation of CIRP - alleged default on the part of the Corporate Debtor (Respondents) in repaying the loan amount - existence of dispute or not - whether the amount paid by the Applicant comes under the definition of Financial Debt as defined in the Code? - HELD THAT - There is no document or agreement which shows the terms on which the money was given by the Applicant to Rl and specifically that any interest was payable on the money. We are unable to persuade ourselves that the advance paid by the Applicant to Rl has commercial effect of borrowing. It is noteworthy that in the Balance Sheets for the F.Ys 2014-15 and 2015-16 of the Applicant it is clearly indicated that the money paid by the Applicant to Rl is Advance to others and not a loan. In view of the fundamental flaws in the arguments advanced by the Applicant we find that the application is devoid of merit and does not warrant admission - Application dismissed.

Summary

Issues Involved:
1. Whether the amount paid by the Applicant qualifies as 'Financial Debt' under the Insolvency and Bankruptcy Code, 2016.
2. Privity of contract between the Applicant and Respondents R2, R3, and R4.
3. Validity and enforceability of the proposed MoUs between the Applicant and R1.
4. Adequacy of evidence provided by the Applicant to support claims of financial debt.

Issue-wise Detailed Analysis:

1. Whether the amount paid by the Applicant qualifies as 'Financial Debt' under the Insolvency and Bankruptcy Code, 2016:
The Tribunal examined whether the amount paid by the Applicant to R1 could be classified as 'Financial Debt' under the Code. According to the Code, financial debt should include components such as interest and consideration for the time value of money. The Tribunal found that the Applicant failed to prove any interest or consideration against the time value of money. There was no document or agreement indicating the terms on which the money was given or specifying that any interest was payable. The Tribunal noted the absence of a fixed interest rate and a repayment schedule, as highlighted in the Applicant's own statement, "petitioner asked the respondents to immediately return the amount paid to the respondent no.1 with commercial interest of at least 24% per annum." This indicated that the interest rate was not predetermined. Additionally, the Applicant's balance sheets for FY 2014-15 and 2015-16 listed the money paid to R1 as "Advance to others" and not as a loan, further weakening the claim that it was a financial debt.

2. Privity of contract between the Applicant and Respondents R2, R3, and R4:
The Tribunal addressed the issue of privity of contract between the Applicant and the other Respondents (R2, R3, and R4). Respondents R2 and R3 filed applications seeking deletion as parties, arguing that there was no privity of contract between them and the Applicant. They contended that no document or representation existed to establish any privity or monetary transaction between them and the Applicant. The Tribunal found this argument persuasive, noting that the money was paid to R1 only, and there was no privity between the Applicant and R2, R3, or R4. Consequently, R2, R3, and R4 could not be considered corporate debtors in this application.

3. Validity and enforceability of the proposed MoUs between the Applicant and R1:
The Tribunal reviewed the proposed MoUs attached to the application, which were only draft documents. It clarified that these draft MoUs could not serve any purpose or support the contentions of either side. The Tribunal emphasized that the MoUs were not finalized agreements and thus lacked enforceability.

4. Adequacy of evidence provided by the Applicant to support claims of financial debt:
The Tribunal scrutinized the evidence provided by the Applicant to substantiate its claims of financial debt. The Applicant argued that the payments made to R1 were treated as long-term borrowings and reflected as "unsecured loans" in R1's balance sheets, which were due to the Applicant and liable to be repaid with interest. However, R1 countered that the reflection as "unsecured loan" was merely an accounting practice and did not indicate that the payment was a loan or borrowing. R1 also pointed out that the Applicant had stated to tax authorities that the payments were not loans, and the Applicant's balance sheet showed the payments as "Advance to others." The Tribunal found that the Applicant failed to provide adequate evidence to prove that the payments constituted a financial debt, as there was no agreement for any financial loan or borrowing or any interest.

Conclusion:
The Tribunal concluded that the application lacked merit and did not warrant admission. It dismissed the application, clarifying that the observations made in the order should not be construed as an expression of opinion on the merits of the case. The Applicant was granted the liberty to pursue any other remedy in accordance with the law, and the dismissal of the present application would not create a bar for any other legal remedy available.