2024 (10) TMI 571 - AT - IBC

Admission of Section 7 application - locus of appellant to challenge the order of admission passed by the Adjudicating Authority - pending Section 66 application - loan transaction is a sham or collusive or not - illusion that money has been disbursed to a borrower. Locus of appellant to challenge the order of admission passed by the Adjudicating Authority - HELD THAT - The Appellant s case as set up on the appeal is that the Appellant has entered a Share Purchase Agreement dated 17.05.2019 with two shareholders of the Corporate Debtor namely Vision India Fund (VIF) and Infra Resurrection Fund (IRF). Share Purchase Agreement has been brought on the record by the Appellant which indicate that it was entered with two entities VIF and IRF and the Corporate Debtor was also part of the Share Purchase Agreement entered with two shareholders of the Corporate Debtor. The Appellants could not acquire any shareholding of the Corporate Debtor since according to its own case the Share Purchase Agreement could not be given effect to in view of attachment of land by the Enforcement Directorate (ED) on 04.02.2020. The Appellant has referred to Settlement Award dated 19.04.2021 where it was agreed between the parties that the Appellants would be liable to pay the amounts due towards repayment of the loan amount received by Varutha Developers Private Limited (VDPL) within 360 days of the variation of the ED order, whereunder the Land had been attached by the ED. Provisional attachment has been confirmed by the Adjudicating Authority under the PMLA Act. Section 7 application has been filed by the SREI Equipment Finance Limited challenging default on part of the Corporate Debtor in repayment of loan of Rs.300 crores. The Appellant s case itself is that it has undertaken to pay the loan of the Corporate Debtor. Thus, the Appellant is not disputing the debt and default committed by the Corporate Debtor in repayment of loan. The debt and default is not denied only by the Corporate Debtor but the Appellants also. There are no valid ground on which Appellants can question order of Adjudicating Authority admitting the Section 7 application - The Appellant has every right or jurisdiction to enforce his Settlement Award. Appellant has also brought on the record application filed by Appellant for execution of award dated 19.04.2021 before the District Judge Cum Presiding Officer Special Commercial Court, Gurugram, Haryana. There being debt and default against the Corporate Debtor, which is an admitted fact, no error has been committed by the Adjudicating Authority in admitting Section 7 application - Appeal dismissed.

Summary

Issues Involved:

1. Locus Standi of the Appellant to challenge the order of admission under Section 7.
2. Validity of the Section 7 application amidst pending Section 66 application.
3. Allegations of the loan transaction being a sham or collusive.
4. Impact of the Settlement Award and its enforceability.

Issue-wise Detailed Analysis:

1. Locus Standi of the Appellant to Challenge the Order of Admission under Section 7:

The primary issue was whether the appellant had the legal standing to challenge the order admitting the Section 7 application against the Corporate Debtor. The appellant, who had entered into a Share Purchase Agreement with the shareholders of the Corporate Debtor, argued that their rights would be prejudiced by the initiation of the Corporate Insolvency Resolution Process (CIRP). However, the Tribunal found that the appellant had no locus standi as they were not a shareholder of the Corporate Debtor, and the Share Purchase Agreement had not been fructified due to the attachment of land by the Enforcement Directorate. The Tribunal emphasized that the appellant's own admission of the debt and default by the Corporate Debtor undermined their position to challenge the Section 7 proceedings.

2. Validity of the Section 7 Application amidst Pending Section 66 Application:

The appellant contended that the Section 7 application should not proceed while a Section 66 application, which questioned the legitimacy of the Rs.300 crore loan transaction, was pending. The Tribunal clarified that the purpose of a Section 66 application is distinct and does not impede the proceedings under Section 7. The existence of debt and default was established, and the Tribunal upheld that the mere pendency of a Section 66 application cannot serve as a barrier to the Section 7 application, which was filed to address the insolvency resolution of the Corporate Debtor due to the default.

3. Allegations of the Loan Transaction Being a Sham or Collusive:

The appellant alleged that the Rs.300 crore loan transaction was a sham. The Tribunal referred to the judgment in "Phoenix ARC Private Limited vs. Spade Financial Services Limited & Ors." to address the concept of sham transactions. However, it found that the disbursement of the loan was not in dispute, and the appellant had acknowledged the loan liability in the Settlement Award. Therefore, the Tribunal concluded that the loan transaction was genuine, and the Section 7 application was rightly admitted based on the proven debt and default.

4. Impact of the Settlement Award and Its Enforceability:

The appellant highlighted a Settlement Award dated 19.04.2021, where they had undertaken to clear the debt. The Tribunal noted that the Settlement Award acknowledged the loan liability and the appellant's commitment to repay. It was observed that the appellant had the right to enforce the Settlement Award independently and had already initiated execution proceedings. However, this did not affect the validity of the Section 7 application, as the debt and default by the Corporate Debtor were undisputed, and the CIRP was necessary to address the insolvency.

In conclusion, the Tribunal dismissed the appeal, affirming that the Section 7 application was correctly admitted due to the undisputed debt and default. The appellant was advised to pursue their claims within the CIRP framework or through enforcement of the Settlement Award as per legal procedures.