2020 (10) TMI 732 - Tri - Insolvency and Bankruptcy

Maintainability of application - initiation of CIRP - Corporate Debtor failed to make repayment of its dues - existence of debt and dispute or not - HELD THAT - The Principal amount had been paid by the Respondent and the interest thereupon had also been paid by issue of shares, and when the same had been accepted by the BIFR as the final settlement of its liability under the revised Scheme, further interest, i.e. interest on interest, being charged by the Petitioner would not constitute debt as per the Code, even if it is otherwise payable. As per Section 5(8) of the Code, financial debt means a debt along with interest, if any, which is disbursed against the consideration for the time value of money - The interest upon interest claimed after much time is not receivable against any disbursement against the consideration for the time value of money, or against any Agreement or Contract between the parties concerned, and does not give rise to a right to payment in the hands of the creditor. No claim or debt therefore arises. There could, therefore, also be no default under the Code. The Petition fails on this account. The entire exercise of repayment of debt in this Petition is an exercise in recovery. Once the matters have been brought under the IBC 2016, and all earlier matters have abated, they have to be considered under the provisions of the Code. It is a settled position of law that the provisions of the Code cannot be invoked for recovery of outstanding amount but can be invoked to initiate CIRP for justified reasons as per the Code - In the instant case there was no debt within the meaning of the Code, even if there may otherwise be amounts payable by the Respondent, and that too was disputed from the very beginning requiring the intervention of the BIFR with the Petitioner opposing various proposals, from time to time. There was. therefore, no clear debt. Proceedings under the Code are summary proceedings where the debt, if any, has to be undisputed and clear. This is not the case here. Petition dismissed.

Summary

Issues Involved:

1. Whether the Petition under Section 7 of the I&B Code, 2016 is maintainable.
2. Whether there was a financial debt and default by the Respondent.
3. Whether the conversion of interest into equity shares extinguished the debt.
4. Whether the Petitioner is entitled to further interest on the delayed payment of interest.
5. Whether the proceedings under IBC can be used as a recovery mechanism.

Issue-Wise Detailed Analysis:

1. Maintainability of Petition under Section 7 of the I&B Code, 2016:

The Petition was filed by the Petitioner/Financial Creditor under Section 7 of the I&B Code, 2016, seeking to initiate Corporate Insolvency Resolution Process (CIRP) against the Respondent/Corporate Debtor for a default amount of ?54,13,582/- as on 31.08.2018. The Respondent contended that the Petition is not maintainable as no financial debt was owed to the Petitioner, and any accrued interest had been converted into equity shares, extinguishing the debt.

2. Existence of Financial Debt and Default:

The Tribunal analyzed the financial transactions and obligations between the parties. The Respondent had borrowed ?150 lakhs from the Petitioner, and the BIFR had declared the Respondent a sick industrial company, sanctioning a rehabilitation scheme. The Respondent defaulted in payments, resulting in accrued interest of ?32,09,583/-. The Petitioner argued that the Respondent was liable for further interest due to delayed payments.

3. Conversion of Interest into Equity Shares:

The BIFR allowed the conversion of accrued interest into equity shares, and the Respondent issued shares worth ?32,09,000/- to the Petitioner on 17.01.2008. The Tribunal noted that the Petitioner accepted these shares and could have sold them in the market. The BIFR's order and subsequent modifications were not appealed against by the Petitioner, indicating acceptance of the conversion terms.

4. Entitlement to Further Interest on Delayed Payment of Interest:

The Petitioner claimed further interest on the delayed payment of interest, amounting to ?24,78,506/-. The Tribunal held that once the interest was converted into equity shares and accepted by the Petitioner, the debt was discharged. The claim for further interest did not constitute a financial debt under the I&B Code, as it was not disbursed against the consideration for the time value of money.

5. Use of IBC Proceedings as a Recovery Mechanism:

The Tribunal emphasized that the I&B Code is not a substitute for a recovery forum. The Supreme Court's judgments in Mobilox Innovations Private Limited vs. Kirusa Software Private Limited and Transmission Corporation of A.P. Ltd. vs. Equipment Conductors and Cables Ltd. were cited to support the position that the Code cannot be invoked for recovery of outstanding amounts but for initiating CIRP for justified reasons. The Tribunal concluded that there was no undisputed debt within the meaning of the Code, and the Petition was an attempt at recovery rather than resolution.

Conclusion:

The Tribunal dismissed the Petition, stating that the conversion of interest into equity shares extinguished the debt, and no financial debt or default existed under the I&B Code. The Petitioner was advised to seek recovery of dues, if any, under other laws or forums. No order as to costs was made.