2022 (9) TMI 141 - AT - Insolvency and Bankruptcy

Maintainability of application - initiation of CIRP - Corporate Debtor failed to make repayment of dues of Financial Creditors - application not maintainable for want of valid authorization - maintainability also questioned on the ground that the loan advanced by the Appellant was converted into equity by her own act and conduct and as such it does not fall within the definition of financial debt which is due and payable. HELD THAT - The facts are not much in dispute but, during the course of the hearing, Counsel for the Respondent was pertinently asked to show any document available on record indicating the consent by the Appellant for converting her loan into capital contribution. It is pertinent to mention that no such document was shown by Counsel for Respondent. Thus, in view of the fact that the loan advanced by the Appellant has been converted into capital contribution without her consent cannot be treated as a capital contribution in order to dismiss the application filed under Section 7 of the Code by her. No other point has been raised. Appeal allowed by way of remand.

Summary

Issues:
1. Maintainability of the application under Section 7 of the Insolvency and Bankruptcy Code, 2016.
2. Determination of whether the loan advanced was converted into equity.

Issue 1 - Maintainability of the Application under Section 7:
The appeal was filed against the order dismissing an application under Section 7 of the Insolvency and Bankruptcy Code, 2016, on the grounds of lack of valid authorization and the loan being converted into equity. Initially, the Appellate Tribunal dismissed the appeal, but later, the Supreme Court allowed the Civil Appeal, noting the lack of independent application of mind by the Appellate Authority. The matter was remanded back for fresh disposal. Notably, the Appellate Authority reversed one finding in favor of the Respondent regarding the maintainability of the application, which was not challenged further.

Issue 2 - Loan Conversion into Equity:
The Appellant had advanced a loan to a Limited Liability Partnership (LLP) under a loan agreement. The grievance arose when the loan was allegedly converted into equity without the Appellant's consent, contrary to the agreement's terms. The Respondent argued that the Appellant had become a general partner and voluntarily agreed to convert the loan into equity. During the proceedings, no document indicating the Appellant's consent for the conversion was presented. Consequently, the conversion of the loan into capital contribution without consent was deemed improper, leading to the appeal being allowed, and the impugned order set aside. The matter was remanded back to the Adjudicating Authority for further proceedings.

In conclusion, the judgment addressed the issues of maintainability of the application under Section 7 and the conversion of a loan into equity. The decision highlighted the importance of consent in such conversions and emphasized the need for proper documentation to support claims. The Appellant's appeal was allowed, setting aside the previous order and remanding the matter for further proceedings.