2020 (7) TMI 202 - Tri - Insolvency and Bankruptcy

Maintainability of petition - initiation of CIRP - Corporate Debtor failed to make repayment of its debt - existence of debt and dispute or not - HELD THAT - Proceedings under the Code are summary proceedings, where even if there was a debt, the same should be undisputed and the default, as defined under section 3(12) of the Code should be clearly established. While the amounts had been given in December 2016 and January 2017, and became due by June 2017, the demand notice (under section 9 and not under section 7 of the Code) was sent by the Petitioner only on 26.09.2018, that is, after a lapse of more than a year. In the intervening period, when she wielded full powers, took all the decisions and signed all the minutes of the Meetings, there were disputes that led to financial due diligence being undertaken by the Company through an independent Malaysian Financial Consultant, at the behest of the investing Company/foreign Directors, which led ultimately to the resignation of the Petitioner in July 2017 from the Company, as it threw up issues of misrepresentation and misappropriation, fabrication of documents and accounts etc. It is a settled position of law that the provisions of the Code cannot be invoked for recovery of outstanding amount but can be invoked to initiate CIRP for justified reasons as per the Code. The Hon'ble Supreme Court in the case of MOBILOX INNOVATIONS PRIVATE LIMITED VERSUS KIRUSA SOFTWARE PRIVATE LIMITED 2017 (9) TMI 1270 - SUPREME COURT , has inter alia, held that Code, 2016 is not intended to be a substitute to a recovery forum and cannot be used to jeopardize the financial health of an otherwise solvent company by pushing it into insolvency. Section 7 (5) of the Code uses the term may , which gives this Adjudicating Authority the option to weigh the pros and cons of initiating a CIRP against the Corporate Debtor. In the circumstances stated above, it is not considered justifiable to send the Respondent into CIRP, as that would have serious socio-economic repercussions on an Export oriented Company with huge foreign funding, and of the stature mentioned above, especially on the hundreds of employees and other stakeholders and customers, and that too when the Respondent Company is undergoing a temporary funding lull and expects to recover soon. The dismissal of this Petition will not come in the way of the Petitioner to settle its dispute, if any, with the Respondent/Corporate Debtor and seek refund of any amount due to it, by approaching any other forum or under any other Law - Petition dismissed.

Summary

Issues Involved:
1. Validity of the Petition under Section 7 of the Insolvency and Bankruptcy Code (IBC), 2016.
2. Nature of the debt: Financial Debt vs. Operational Debt.
3. Admissibility of the Petition based on the existence of a valid Demand Notice.
4. Solvency of the Respondent Company.
5. Allegations of mismanagement and misappropriation by the Petitioner.

Issue-wise Detailed Analysis:

1. Validity of the Petition under Section 7 of the Insolvency and Bankruptcy Code (IBC), 2016:
The Petitioner filed the petition under Section 7 of the IBC, 2016, as a Financial Creditor. However, the Tribunal noted that the Petitioner had previously issued a Demand Notice under Section 9 of the IBC, treating the debt as an Operational Debt. This contradiction rendered the Petition defective and invalid. The Tribunal cited a similar case, Sanaya Tea Private Limited v. Vinergy International Pvt. Ltd., where such contradictions led to the dismissal of the Petition.

2. Nature of the debt: Financial Debt vs. Operational Debt:
The amounts were given by the Petitioner when she was a Director in the Respondent Company to meet its funding requirements. The Tribunal noted that there was no prior agreement or approval for the borrowing, nor any document to establish the debt. The amounts were contributed for operational expenses, and the Petitioner herself was involved in the decisions regarding these funds. The Tribunal concluded that the amounts given did not constitute a "financial debt" as defined under Section 5(8) of the IBC.

3. Admissibility of the Petition based on the existence of a valid Demand Notice:
The Tribunal highlighted that the Petitioner had issued a Demand Notice under Section 9 of the IBC, treating the debt as an Operational Debt. This was in contradiction to the Petition filed under Section 7, treating the debt as a Financial Debt. The Tribunal ruled that in the absence of a valid Demand Notice under the correct provision, no default could be established. This defect alone was sufficient to dismiss the Petition.

4. Solvency of the Respondent Company:
The Tribunal observed that the Respondent Company was solvent, with significant assets and net worth. The Respondent Company was a 100% Export Oriented Unit with substantial foreign investments and no secured loans. The Tribunal noted that the Company had temporary cash flow issues but was not insolvent. The Tribunal emphasized that proceedings under the IBC are for initiating insolvency proceedings when a Corporate Debtor is completely unable to repay its debts, which was not the case here.

5. Allegations of mismanagement and misappropriation by the Petitioner:
The Respondent Company alleged that the Petitioner was involved in mismanagement, misappropriation of funds, and financial irregularities. The Tribunal noted that there were disputes regarding the Petitioner's actions and the amounts given to the Respondent Company. The Tribunal emphasized that the IBC proceedings are not intended to be a substitute for debt recovery and cannot be used to jeopardize the financial health of a solvent company.

Conclusion:
The Tribunal dismissed the Petition filed under Section 7 of the IBC, 2016, on multiple grounds, including the contradiction in the nature of the debt, the absence of a valid Demand Notice, and the solvency of the Respondent Company. The Tribunal clarified that the dismissal would not prevent the Petitioner from seeking recovery of any amount due through other legal forums.