2023 (1) TMI 551 - AT - Insolvency and Bankruptcy

Initiation of CIRP - Financial debt or not - application dismissed on the ground that the Appellant has failed to establish the terms of advancing the money, the repayment of money and default by the Respondent - existence of debt and dispute or not - HELD THAT - There is no denial of the fact that the parties to the lis entered into an agreement dated 31.08.2012, as per which the Respondent as an owner asked the Appellant as a developer, to develop a piece of land in a residential area. The owner was to get Rs. 4 Crores in the form of a non-refundable deposit, 42% of the total sales from saleable area whereas the developer was to get 58% of the total sales from saleable areas. There is a clause of loan in the said agreement as per which the developer was to provide additional loan of Rs. 11 Crores to the owner which shall carry interest @24% per annum. The owners have represented that the said loan shall be used for acquisition of additional land and decided to pay monthly interest failing which compounding interest of loan was to be adjusted by the developer through the escrow account till such time the entire interest is repaid/adjusted out of the owner share of revenue of the saleable areas - The evidence is there on record of the transfer of the amount in question from the account of the developer to the account of the owner and also the payment of interest by the owner to the developer. It is also a fact on record that the owner stopped the payment of interest and as a matter of fact the amount advanced by the Appellant to the Respondent, used for the purpose of purchasing the land by the owner in its name and the project has not been started at all because the owner failed to take necessary licence for change of land use, triggered the application filed under Section 7 of the Code for resolution of the amount of Rs. 6 Crores advanced as a loan and Rs. 1 Crores as refundable security. The definition of debt and default which is the only thing required for the purpose of maintaining the application under Section 7 of the Code, is satisfied - the Adjudicating Authority has committed a patent error in misreading and mis-appreciating the evidence available on record while dismissing the application, filed by the Appellant for the initiation of CIRP of the Corporate Debtor/Respondent. Appeal allowed.

Summary

Issues:
Adjudication of application under Section 7 of the Insolvency and Bankruptcy Code, 2016.

Analysis:
The Appellant, a financial creditor, filed an appeal against the Adjudicating Authority's order dismissing an application under Section 7 of the Code for initiating Corporate Insolvency Resolution Process (CIRP) against the Respondent, a corporate debtor. The dispute arose from a collaboration agreement between the parties for developing land. The Appellant claimed to have advanced Rs. 6 Crores as a loan and Rs. 1 Crore as a refundable deposit to the Respondent. The Appellant alleged default by the Respondent in repayment, leading to the application under Section 7. The Respondent contended that the loan was covered by the collaboration agreement and the refundable deposit did not qualify as a financial debt under the Code.

The Adjudicating Authority dismissed the application citing the Appellant's failure to establish the terms of advancing money, repayment, and default by the Respondent. The Authority noted discrepancies between the agreement, term sheet, and addendums, questioning the Appellant's conduct in reconciling the differing terms. The Authority found the escrow agreement unexecuted and not a valid contract. The Appellant argued that the loan was advanced with interest, secured by an equitable mortgage and guarantees, supported by board resolutions and bank statements. The Appellant claimed default due to the Respondent ceasing interest payments.

The Appellant's counsel emphasized the debt and default elements required for maintaining the application under Section 7. The Respondent's counsel contended that the collaboration agreement must be considered along with the term sheets. The Tribunal acknowledged the agreement between the parties for land development, loan provision, interest terms, and security arrangements. It noted the transfer of funds, interest payments, and the Respondent's failure to start the project due to land use license issues, leading to the application under Section 7. The Tribunal found the evidence sufficient to establish debt and default, overturning the Adjudicating Authority's decision.

In conclusion, the Tribunal allowed the appeal, setting aside the Authority's order and directing the admission of the application under Section 7 for further proceedings in accordance with the law.