2019 (3) TMI 1191 - AT - Insolvency and Bankruptcy

Corporate Insolvency Resolution Process - existence of financial debt - period of limitation for application u/s 7 - evidences of alleged debt and occurrence of alleged default - HELD THAT - IL FS Financial Services Limited - ( Financial Creditor ) has disbursed the amount and the Corporate Debtor has raised the amount with an object of having economic gain or commercial effect of borrowing. The clauses of SPA if read along with the LoU , we find that the terms of transaction involved not only the purchase of shares but it shows the date by which the amount of transaction was to be repaid by the Corporate Debtor which had fallen due on 19th August, 2012. There was an element of time value of money , particularly, when one of the conditions related to internal rate of return of 15% on the transaction, therefore, the time value of money having already shown, we hold that the amount disbursed by IL FS Financial Services Limited - ( Financial Creditor ) and the Corporate Debtor had agreed to reverse the transaction by purchasing the shares within a specified time along with the payment of 15% accrual on 20th August, 2009. We hold that the amount if disbursed by IL FS Financial Services Limited - ( Financial Creditor ) comes within the meaning of financial debt , therefore, the IL FS Financial Services Limited - ( Financial Creditor ) has been rightly claimed to be a Financial Creditor and filed Form-1 under Section 7 of the I B Code . Limitation - HELD THAT - In the present case, it is not in dispute that right to apply under Section 7 accrues to IL FS Financial Services Limited - ( Financial Creditor ) since 1st December, 2016, when I B Code came into force. Therefore, the application under Section 7 being within the period of three years from the date of right to accrue the application, we hold that the application under Section 7 was well within the time. Whether the claim was barred by limitation or not? - HELD THAT - There is a continuous cause of action and the Corporate Debtor never raised the question of limitation and on the other hand, a reply vide letter dated 18th November, 2015 intimating that the suit is pending and therefore, to withdraw the petition. There being a continuous cause of action, we hold that the application under Sections 433 and 434 of the Companies Act, 1956 was not barred by limitation and the Corporate Debtor cannot take plea that there is no debt payable in law. Abatement - whether application under Sections 433 434 of the Companies Act, 1956 on transfer abated, IL FS Financial Services Limited - ( Financial Creditor ) having failed to file Form-1 under Section 7 within 60 days i.e. by 5th February, 2017? - HELD THAT - In view of the decision of the Hon ble Supreme Court in Zile Singh (2004 (10) TMI 553 - SUPREME COURT), we hold that the case of the Appellants is covered by the Notification dated 29th June, 2017 and it having filed Form-1 on 25th May, 2017 i.e. immediately after transfer of the case, the petition under Sections 433 434 of the Companies Act, 1956 has not abated. In so far as the amended order dated 30th August, 2018 is concerned, under sub-section (2) of Section 420 of the Companies Act, 2013 read with National Company Law Tribunal Rules, it is always open to the Adjudicating Authority to make necessary correction in the order passed by it. It is not in dispute that the application under Section 7 was considered by Mr. M.K.Shrawat, (Member (Judicial) and Mr. Bhaskara Pantula Mohan, (Member (Judicial). The order dated 28th August, 2018 has been signed by one of the Members namely- Mr. M.K.Shrawat, (Member Judicial), the other Member who agreed and signed, having not shown therein, it was open to the Adjudicating Authority to make necessary correction The application under Section 7 being complete and we having held that IL FS Financial Services Limited is the Financial Creditor and there is a debt and default, the application under Section 7 is to be admitted.

Summary

Issues Involved:
1. Existence of Financial Debt
2. Relationship between Corporate Debtor and Financial Creditor
3. Limitation Period
4. Abatement of Petition
5. Validity of Adjudicating Authority's Order

Detailed Analysis:

Existence of Financial Debt:
The appellants argued that there was no financial debt or creditor-debtor relationship between the Corporate Debtor and IL&FS Financial Services Limited (Financial Creditor). They contended that the principal documents, the Share Purchase Agreement (SPA) and Letter of Undertaking (LoU), did not create a financial debt. The SPA referred to the parties as purchasers and sellers, with the payment considered as purchase consideration. The LoU only obligated the Corporate Debtor to offer to purchase shares of MCX Stock Exchange Ltd. (MCX-SX) acquired by the Financial Creditor, which did not constitute a financial debt. The Tribunal, however, held that the amount disbursed by the Financial Creditor constituted a financial debt as it was disbursed against the consideration for time value of money. The terms of the SPA and LoU indicated an economic gain or commercial effect of borrowing, with a specified time for repayment and an internal rate of return of 15%, thus falling within the definition of financial debt under Section 5(8) of the Insolvency and Bankruptcy Code (I&B Code).

Relationship between Corporate Debtor and Financial Creditor:
The appellants argued that the relationship was not of debtor and creditor but of a commercial transaction involving share purchase and exit options. They cited various letters and financial statements to support their claim that the monies paid were classified as investments in shares. The Tribunal found that the SPA and LoU created an obligation for the Corporate Debtor to repurchase shares within a specified period, which included an element of time value of money, thereby establishing a financial creditor-debtor relationship.

Limitation Period:
The appellants contended that the application was barred by limitation, relying on the Supreme Court decision in B.K. Educational Services Pvt. Ltd. v. Parag Gupta & Associates. The Tribunal applied Article 137 of the Limitation Act, 1963, which provides a three-year limitation period for applications for which no specific period is provided. The right to apply under Section 7 of the I&B Code accrued on 1st December 2016, and the application was filed within three years, making it within the limitation period. The Tribunal also noted a continuous cause of action, with the Corporate Debtor acknowledging the pending suit and not raising the limitation issue earlier.

Abatement of Petition:
The appellants argued that the petition stood abated as Form-1 under Section 7 of the I&B Code was not filed within 60 days of the notification dated 7th December 2016. The Tribunal referred to subsequent amendments to the Companies (Transfer of Pending Proceedings) Rules, 2016, which extended the deadline to 15th July 2017. The Financial Creditor filed Form-1 on 25th May 2017, within the extended period, thus the petition did not abate.

Validity of Adjudicating Authority's Order:
The appellants challenged the validity of the order dated 28th August 2018, signed by a single member, and the addendum-cum-corrigendum order dated 30th August 2018. The Tribunal held that under Section 420 of the Companies Act, 2013, the Adjudicating Authority could rectify any mistake apparent from the record within two years. The correction made on 30th August 2018, showing that both members had agreed, was valid. The Tribunal found no merit in the technical challenge and emphasized that the application under Section 7 was complete, with the Financial Creditor rightly classified, and there was a debt and default.

Conclusion:
The Tribunal dismissed the appeals, affirming the initiation of the Corporate Insolvency Resolution Process against the Corporate Debtor and upholding the validity of the orders passed by the Adjudicating Authority. The Tribunal found that the Financial Creditor had a valid financial debt, the application was within the limitation period, the petition did not abate, and the procedural correction by the Adjudicating Authority was valid.