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2024 (1) TMI 459 - AT - Insolvency and BankruptcyRejection of application filed - rejection of the claim of the Appellant - assignment of debt - Appellant is stated to have not recovered any amount under the deed of assignment rather it transpired later that the Corporate Debtor had practiced fraud upon the Appellant by making misleading and false representation in the said deed of assignment - no appointment of arbitrator - HELD THAT - There is no dispute to the fact that the Corporate Debtor had availed the loan from the Appellant. It is also not in dispute that the Corporate Debtor was unable to repay the loan and thus entered into a deed of assignment on 29.03.2017. It is also not in dispute that the Corporate Debtor represented to the Appellant that he had certain receivables which are without any charge or encumbrance which may be received by the Appellant for the purpose of settling the account and also agreed that in case it is found to be otherwise then it would be termed as an event of default and in the event of default the consequence would be the revival of all the financial contracts automatically. There is also no dispute to the fact that the SBI, lead consortium bank, vide letter dated 08.06.2017 informed that the Corporate Debtor had also created a charge/encumbrance on the receivables for the purpose of recovery of their dues. This fact triggered the clause of event of default and as a consequence, the financial contracts were automatically revived. The Adjudicating Authority rejected the application by its impugned order, inter alia, on the ground that rejection of the assignment agreement vide letter dated 15.06.2019 was not valid. Whereas it is also a fact that there is a categoric provision in the agreement itself that in the event of default, the existing financial agreements and all the obligation of the Corporate Debtor under the existing financial agreements shall automatically revive and become effective and the Appellant shall be entitled to exercise all the rights available to it against the Corporate Debtor under the existing finance agreements. The word automatically itself empowers the Appellant to put up the claim, declaring that the assignment agreement has been violated by the Appellant by making a false representation that their receivables were not encumbered or charged. The Corporate Debtor has no doubt made the misrepresentation in the deed of assignment which has become evident from the letter of SBI dated 08.06.2017, therefore, finding recorded by the Adjudicating Authority that the termination of the assignment was not valid is neither here nor there. Arbitration - HELD THAT - Admittedly, the arbitrator has not been appointed, no arbitration is pending nor any effort has been made by the Respondent (Corporate Debtor) by filing an appropriate application in terms of the Act of 1996, therefore, the RP has committed an error in relying upon Section 21 of the Act, 1996. It is really heartening to mention that this is the 3rd round of litigation at the instance of the Appellant in which the Appellant is only asking for admission of its claim by the RP which has been rejected on the flimsy grounds. There is an error in the impugned order in rejecting the application filed by the Appellant, therefore, the appeal is hereby allowed and the impugned order is set aside.
Issues Involved:
1. Validity of the rejection of the claim by the Resolution Professional (RP) on the ground of limitation. 2. Whether the termination of the assignment agreement by the Appellant was valid. 3. Whether the RP had jurisdiction to adjudicate the validity of the termination of the assignment agreement. 4. Whether the arbitration proceedings were validly commenced. 5. Whether the financial contracts were automatically revived upon the event of default. Summary: Issue 1: Validity of the Rejection of the Claim by the RP on the Ground of Limitation The Appellant's claim was initially rejected by the RP on the ground of limitation. However, the Appellate Tribunal held that the limitation period was extended due to the acknowledgment of debt in the annual reports and the Supreme Court's order extending the limitation period due to COVID-19. The Tribunal found that the application filed by the Appellant before the RP was well within the limitation period and was wrongly rejected. Issue 2: Validity of the Termination of the Assignment Agreement by the Appellant The Tribunal examined the deed of assignment dated 29.03.2017, which stipulated that if the receivables were found to be encumbered, it would constitute an event of default, automatically reviving the financial contracts. The Tribunal found that the Corporate Debtor had misrepresented the status of the receivables, which were encumbered in favor of SBI. This misrepresentation triggered the event of default, and the financial contracts were automatically revived. The Tribunal held that the termination of the assignment agreement by the Appellant was valid. Issue 3: Jurisdiction of the RP to Adjudicate the Validity of the Termination of the Assignment Agreement The Tribunal held that the RP's role was to collate and verify claims based on financial contracts and not to adjudicate the validity of the termination of the assignment agreement. The RP should have accepted the claim based on the revived financial contracts and not questioned the termination's legality. Issue 4: Validity of the Arbitration Proceedings The Tribunal noted that although the Corporate Debtor had invoked arbitration, no arbitrator was appointed, and no arbitration proceedings were pending. The RP erred in relying on Section 21 of the Arbitration and Conciliation Act, 1996, as no formal arbitration had commenced. Issue 5: Automatic Revival of Financial Contracts Upon Event of Default The Tribunal found that the assignment agreement clearly stipulated that upon an event of default, the financial contracts would automatically revive. Given the misrepresentation by the Corporate Debtor regarding the encumbrance of receivables, the financial contracts were automatically revived, entitling the Appellant to exercise all rights under these contracts. Conclusion The Tribunal allowed the appeal, set aside the impugned order, and directed the RP to accept the Appellant's claim based on the revived financial contracts. The Tribunal emphasized that the RP should not have rejected the claim on the grounds of limitation or questioned the termination's validity.
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