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2025 (1) TMI 685 - AT - IBCMaintainability of section 7 petition - initiation of CIRP - assignment of debt - in accordance with the provisions of the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 as well as the Circulars issued by the Reserve Bank of India or not - applicability of principle of res-judicata - Corporate Debtors, who are running five star JW Marriott Hotel and Crown Plaza Hotel are profitable Companies earning substantial profits or not - denial of existence of Cash Management Agreement - requirement to consider amount transferred to Lenders under Cash Management Agreement towards servicing of debt for returning a finding of default by the Corporate Debtor - obligation to maintain DSRA reserve as per Loan Agreement. Whether Assignment dated 27.12.2022 made in favour of Omkara Assets Reconstruction Pvt. Ltd. by the Lenders was not in accordance with the provisions of the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 as well as the Circulars issued by the Reserve Bank of India, the account of Corporate Debtor having never declared as NPA or SMA? - HELD THAT - The Assignment dated 27.12.2022 made by the Lenders in favour of Omkara was challenged by GSTAAD before the High Court of Karnataka at Bengaluru in GSTAAD HOTELS PVT. LTD. VERSUS UNION OF INDIA, RESERVE BANK OF INDIA, NATIONAL CREDIT GUARANTEE TRUSTEE COMPANY LTD, PHL FININVEST PVT. LTD, PIRAMAL ENTERPRISES LIMITED, PIRAMAL CAPITAL AND HOUSING FINANCE LTD (PIRAMAL FINANCE) , FORMERLY KNOWN AS DEWAN HOUSING FINANCE LTD., OMKARA ASSETS RECONSTRUCTION PRIVATE LIMITED, IDBI TRUSTEESHIP SERVICES LIMITED 2024 (2) TMI 1504 - KARNATAKA HIGH COURT . The High Court has dismissed the Writ Petition. Copy of which order has been brought on record by the Appellant in its rejoinder affidavit. The challenge before the High Court of Karnataka of the Assignment by the Appellant was basically on the ground that accounts of CD having not been declared as NPA or SMA, the Lenders could not have assigned the debt in favour of Omkara. Violation of Circulars issued by Reserve Bank of India was relied before the High Court. The High Court held that assignment is not violative of Master Circular issued by the Reserve Bank of India. It was held that there is no statutory aberration and dispute between private parties for enforcement of a private agreement would not get the audience of the High Court under Article 226 of the Constitution of India - The prayer of the Appellant before the High court having not been accepted, questioning the assignment dated 27.12.2022, we are of the view that no fault can be found in the assignment at this stage. Whether due to dismissal of Section 7 Application filed on behalf of the Lenders, as withdrawn on 13.12.2022 and 22.12.2022, the Section 7 Application filed by Omkara Assets Reconstruction Pvt. Ltd. Being Company Petition (IB) 291 of 2023 and 290 of 2023 were not maintainable and were hit by principle of res-judicata? - HELD THAT - The earlier Section 7 Applications being CP(IB)No.1292 of 2021 and CP(IB) No.1287 of 2021 were filed by IDBI Trusteeship Ltd. on behalf of the Lenders alleging default on 15.04.2021 and 15.05.2021. The default in the aforesaid proceedings was default of Loan Agreement dated 27.12.2017. Section 7 Application, which has given rise to present Appeal has been filed alleging default of ECLGS-1 and ECLGS-2. In the earlier Section 7 Application initiated by IDBI Trusteeship Ltd., the ECLGS Facilities were not subject of consideration, nor the Applications were founded on any default under ECLGS Facility. Hence, we are of the view that the Applications CP(IB) No.291/MB/2023 and CP(IB)No.290/MB/2023, cannot be held to be barred by the principle of res-judicata. There are no substance in the submission of the Appellant that proceedings under Section 7 initiated by Omkara is barred by principle of res-judicata. Whether the Corporate Debtors, who are running five star JW Marriott Hotel and Crown Plaza Hotel are profitable Companies earning substantial profits? - HELD THAT - Both the Hotels were running Hotels and earning revenue and payments were made to the Lenders even during Covid-19 period and thereafter. The Lenders, who have given finances to the Corporate Debtor for a Project, are also obliged to support the Corporate Debtor in running the business and extend their helping hand to the Corporate Debtor. The object of IBC is insolvency resolution. There are substance in the submissions of the Appellant that JW Marriott Hotel and Crown Plaza Hotel, which are run by the Corporate Debtors were profitable Companies, earning substantial profits. Whether the Adjudicating Authority committed error in returning finding in paragraph 11 of the impugned order that due to denial of existence of Cash Management Agreement, the arguments of the Corporate Debtor on the basis of servicing of debt as per Cash Management Agreement, cannot be accepted? - Whether the Adjudicating Authority was obliged to consider the amount transferred to Lenders under Cash Management Agreement towards servicing of debt for returning a finding of default by the Corporate Debtor? - HELD THAT - It is clear that CMA between the parties was one of the most relevant Agreement to regulate the debt repayment. The CMA also imposed certain obligations on the Lenders and for finding out default on the part of the CD, CMA and consequent repayment under the CMA was required to be examined by the Adjudicating Authority. The Adjudicating Authority simply on mere denial of Omkara to the existence of CMA has rejected the submission of the Appellant. The observation of the Adjudicating Authority that CD could not prove existence of CMA by any correspondence between the parties is also without any basis. The CMA was duly contemplated into a Loan Agreement and was actually executed between the parties - The Adjudicating Authority is required to consider Section 7 Application afresh, after taking into consideration various clauses of the CMA and consequently remittance of the amount towards repayment of the loan in the Retention Account. Whether Lenders were obliged to maintain DSRA reserve as per Loan Agreement dated 26.12.2017, which amount was required to be appropriated towards payment of principal interest due under Loan Agreement ECLGS-I and ECLGS- II? - HELD THAT - The mere fact that no submission was advanced by the CD before the Adjudicating Authority on DSRA, cannot be a ground to preclude the Appellant to raise the submission in this Appeal. The DSRA was contemplated to be utilized for shortfall in any repayment and maintenance of debt service reserve and it was the obligation of the Lender. Hence, it is not open for the Lender to say that they had no obligation to maintain any DSRA and the submission advanced on behalf of the Appellant on DSRA has to be rejected. It is not persuaded to accept the submission of learned Counsel for the Respondent with regard to DSRA. The submission of the Appellant is that amount of Rs. 8 crores was undisbursed and was kept as reserved amount, which was to be utilized for shortfall in any repayment of interest/ principal. The said aspect of the matter was also needs to be looked into by the Adjudicating Authority before returning any finding of default - The Lenders were obliged to maintain Debt Service Reserve ( DSRA ) amount as per the Loan Agreement dated 26.12.2017, which amount was required to be appropriated towards payment of principal and interest due under the Loan Agreement. Whether the finding of the Adjudicating Authority in paragraph 8 that it is undisputed fact that the defaults in payment of Loan amount exists, are sustainable the Corporate Debtor having disputed the default in the pleadings and arguments before the Adjudicating Authority? - HELD THAT - Although, it is undisputed that loan amount exists, but the finding that there is default in payment has been challenged by the Counsel for the Appellant. It is useful to notice that in the very next sentence, the Adjudicating Authority has observed The Ld. Counsel for the Corporate Debtor argued that no default has actually taken place . When the Corporate Debtor has submitted before the Adjudicating Authority that no default has actually taken place, the observation of the Adjudicating Authority that it is undisputed that there are defaults in payment thereof, cannot be sustained. In the Appeal, the Appellant has made various submissions challenging the finding of default and it is submitted by the Appellant that no default was committed by the Appellant towards Loan Agreement and ECLGS-1 and ECLGS - The Corporate Debtor had disputed the default before the Adjudicating Authority itself. Thus, it cannot be accepted that default by the CD is undisputed fact. Whether out of amount sanctioned by Lenders under ECLGS- I and ECLGS-II of Rs. 98 crores Rs. 65 crores Rs. 163 crores, the Lenders have used the amount of about Rs. 140 crores to service its own debts and dues contrary to Agreement dated 30.12.2020 and 21.03.2022 and Adjudicating Authority rightly rejected the submission of Corporate Debtor on ground of end use Certificate issued by Corporate Debtor? - HELD THAT - The Adjudicating Authority has relied on the end use Certificate, which was required to be furnished by the Corporate Debtor, as per the Agreement dated 30.12.2020. It is true that end use Certificate was submitted by the CD as per the Agreement. The Appellant has referred to the Bank statements to show that amounts after receipt of the loan under the ECLGS Facility, was directly transferred from Retention Account to the Loan Account on the same day. Even though no end use Certificate was given by the CD, but when categorical submission before the Adjudicating Authority was raised that amount out of Rs. 163 crores, which has been received by the CD under ECLGS-1 and ECLGS-2 and amount of about Rs. 140 crores have been utilized for servicing the debt by the Lenders, the question was required to be considered by the Adjudicating Authority and merely on the point of end use Certificate, the said argument was not required to be rejected - the findings returned by the Adjudicating Authority in paragraph 12 of the order, rejecting the submission of the Appellant that ECLGS credit proceeds were used towards servicing of interest outstanding on the Loan Account not approved. Whether Corporate Debtor has committed default towards ECLGS-1 sanctioned on 30.12.2020 as per date of default 15.11.2022? - HELD THAT - The finding returned by the Adjudicating Authority regarding default, thus is without considering of the materials on the record and are unsustainable. We have already held that DSRA was also required to be looked into, which has not even adverted to by the Adjudicating Authority. The Adjudicating Authority is required to consider the default of ECLGS and loan account, afresh, after considering the relevant materials on record, including the observations as made in this order. Whether the Financial Creditors have been able to prove default under the Loan Agreement dated 26.12.2017 and the ECLGS-II sanctioned on 21.03.2022? - HELD THAT - The default under the Loan Agreement dated 26.12.2017 could not have been pronounced without considering the CMA and amounts transferred by the Lenders to the Retention Account. The Adjudicating Authority having not examined and considered the CMA, no default with regard to Loan Agreement dated 26.12.2017 can be pronounced. Paragraph 16, itself indicates that with regard to ECLGS-2, repayment has to take place from 05.04.2024. In paragraph 16, the Adjudicating Authority has not returned any finding that there is a default with regard to ECLGS-2. Thus, the finding of the Adjudicating Authority is only with regard to ECLGS-1, which we have already dealt above. We, thus, are of the view the default with regard to ECLGS Facility could not have been pronounced by the Adjudicating Authority, without considering the CMA and amounts transmitted to Retention Account - Adjudicating Authority is required to consider the default under the loan account afresh. There being no finding of default regarding ECLGS-2 by the Adjudicating Authority, no further consideration is required with regard to ECLGS-2. Conclusion - i) No fault can be found in the assignment at this stage. ii) There are no substance in the submission of the Appellant that proceedings under Section 7 initiated by Omkara is barred by principle of res-judicata. iii) Both the Hotels were running Hotels and earning revenue and payments were made to the Lenders even during Covid-19 period and thereafter. iv) The Adjudicating Authority committed error while holding in paragraph-11 that due to denial of existence of Cash Management Agreement, the submission of the Appellant on the basis of Cash Management Agreement, cannot be accepted. v) The Adjudicating Authority was obliged to consider the amounts transferred to Lenders under the Cash Management Agreement towards servicing of debt for returning the finding of default by the Corporate Debtor. vi) The Lenders were obliged to maintain Debt Service Reserve ( DSRA ) amount as per the Loan Agreement dated 26.12.2017, which amount was required to be appropriated towards payment of principal and interest due under the Loan Agreement. vii) The Corporate Debtor had disputed the default before the Adjudicating Authority itself. Thus, it cannot be accepted that default by the CD is undisputed fact. viii) The amounts sanctioned by Lenders under ECLGS-1 and ECLGS-2 of Rs. 98 crores and Rs. 65 crores, whether the said amount was used by the Lenders for servicing its own debts or dues, contrary to the Agreement dated 30.12.2020 and 21.03.2022, was required to be considered by the Adjudicating Authority and the said argument raised on behalf of the CD, could not have been brushed aside on the ground that end use Certificate was given by the CD. ix) The Adjudicating Authority is required to consider the default of ECLGS and loan account, afresh, after considering the relevant materials on record, including the observations as made in this order. x) Adjudicating Authority is required to consider the default under the loan account afresh. There being no finding of default regarding ECLGS-2 by the Adjudicating Authority, no further consideration is required with regard to ECLGS-2. The impugned order is set aside - appeal allowed. 1. ISSUES PRESENTED and CONSIDERED The judgment considered the following core legal questions:
2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Assignment to Omkara
Issue 2: Res-Judicata
Issue 3: Profitability of Corporate Debtors
Issue 4 & 5: Cash Management Agreement (CMA)
Issue 6: Debt Service Reserve Amount (DSRA)
Issue 7: Default Finding
Issue 8: Misuse of ECLGS Funds
Issue 9 & 10: Proving Default
3. SIGNIFICANT HOLDINGS
The judgment underscores the importance of thoroughly examining financial arrangements and agreements before initiating insolvency proceedings, ensuring that all relevant factors and evidence are considered to determine genuine financial distress.
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