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2021 (7) TMI 581 - AT - Insolvency and BankruptcyMaintainability of application - initiation of CIRP - Corporate Debtor failed to make repayment of its dues - Financial Creditors or not - existence of debt and dispute or not - Exercise of jurisdiction by Adjudicating Authority while examining the nature of transaction - collusive application or not. Whether the Adjudicating Authority has exceeded in its jurisdiction while examining the nature of transaction in question? - HELD THAT - The IBC recognizes that for the success of Insolvency regime the real nature of transaction has to be unearthed in order to prevent any person from taking undue benefit of its provisions to the detriment of the rights of legitimate creditors. It means, while admitting the Application under Section 7 of the IBC, it is the duty of the Adjudicating Authority to investigate the real nature of the transaction in order to prevent any person from taking undue benefit of its provisions to the detriment of the rights of legitimate creditors. The Adjudicating Authority is obliged to investigate the nature of the transaction and should be very cautious in admitting the Application in order to prevent taking undue benefit of provisions of IBC to detriment of the rights of legitimate creditors as well as to protect the Corporate Debtor from being dragged into CIRP with malafide - the argument of Ld. Counsel for the Appellant that Ld. Adjudicating Authority when entered into investigating the nature of the transaction then exceeded in its jurisdiction under Section 7 (5) of the IBC, is not convincing. Whether the transaction in question is Financial Debt? - HELD THAT - As per the definition given in Section 5(8) of IBC, 'financial debt' means a debt along with interest, if any, which is disbursed against the consideration for the time value of money. The essential requirement is of disbursement and consideration for time value of money - The Financial Creditor is not doing financial business but manufacture of rice. On the other hand, the Corporate Debtor Company incorporated on 11.09.2018 having authorized and paid share capital of 7crores 30 lacs, as per the MCA data filed by the Financial Creditor showed that the Bank of Baroda has sanctioned cash credit limit to the tune of ₹ 24 crores in the year October, 2018. According to the Financial Creditor, they have granted a loan of ₹ 10 lacs on 20.04.2019 - it is not convincing that the Corporate Debtor Company having paid up share capital of 7 crores 30 lacs and cash credit limit to the tune of ₹ 24 Crores has to take a loan for ₹ 10 lacs from the Financial Creditor and that the Corporate Debtor is not able to make repayment of ₹ 10 lacs and has no objection if the Application under Section 7 is allowed and the CIRP initiated against the Corporate Debtor Company - the transaction in question is not a financial debt within the meaning of Section 5 (8) of the IBC. Whether a default has occurred? - HELD THAT - In support of date of default, the Financial Creditor has not filed any document. Therefore, it is not clear that how the financial creditor has arrived at date of default is 21.04.2019 (i.e., just next day of disbursement of loan) or 30.09.2019. It is not the case of the Financial Creditor that they have served demand notice on the Corporate Debtor and the Corporate Debtor has failed to make the payment or the loan was given for a specific period - the Financial Creditor has failed to satisfy that the transaction in question is a Financial Debt and a default has occurred. Whether the application in question is collusive? - HELD THAT - Nobody will believe that the Corporate Debtor Company having paid up capital of ₹ 7 Crores 30 lacs and Bank of Baroda has sanctioned cash credit limit for the amount of ₹ 24 Crores, is not able to make a payment of ₹ 10 lacs and they have no objection, if the CIRP is initiated against the Company. In this case when the Corporate Debtor has admitted the default in repayment then they should have make the prayer that they are ready to settle the matter with Financial Creditor instead of submitting that they have no objection in admitting the application. In the circumstances, Ld. Adjudicating Authority held that it is a case of collusive Application - Financial Creditor has filed MCA Data of the Corporate Debtor Company, which shown an open charge in favour of Bank of Baroda, such loan was sanctioned on 12.10.2018 and on 02.08.2019 bank declared the account of Corporate Debtor as NPA. Thereafter, the bank has initiated recovery proceedings against the Corporate Debtor under the provisions of Section 13 (4) SARFAESI Act. Ld. Adjudicating Authority has given a finding that the Corporate Debtor trying to seek benefits of moratorium under Section 14 of the IBC and other advantages in accordance with other provisions of the IBC and thereby rejected the Application filed under Section 7 of the IBC - the Ld. Adjudicating Authority, is agreed upon, as there is inevitable conclusion that the Financial Creditor colluded with the Corporate Debtor and filed the Application with other than the Resolution or for ulterior motive to prevent the Bank of Baroda to recover the debt from the Corporate Debtor. There is no merits in this Appeal - Appeal dismissed.
Issues Involved:
1. Whether the Adjudicating Authority has exceeded its jurisdiction while examining the nature of the transaction in question? 2. Whether the transaction in question is Financial Debt and the Corporate Debtor has committed default? 3. Whether the application in question is collusive? Issue-wise Detailed Analysis: Issue No. (i): Whether the Adjudicating Authority has exceeded its jurisdiction while examining the nature of the transaction in question? The judgment refers to the Supreme Court's stance in Phoenix Arc Pvt. Ltd. Vs. Spade Financial Services Ltd. & Ors., emphasizing that the Insolvency and Bankruptcy Code (IBC) mandates identifying and annulling avoidable transactions to prevent undue benefits to any party at the expense of legitimate creditors. The Supreme Court in Swiss Ribbons Pvt. Ltd. v Union of India highlighted that even if an application under Section 7 meets all requirements, the Adjudicating Authority must exercise discretion carefully to prevent malafide initiation of Corporate Insolvency Resolution Process (CIRP). The Adjudicating Authority must investigate the real nature of the transaction to prevent misuse of IBC provisions. Consequently, the Tribunal concluded that the Adjudicating Authority did not exceed its jurisdiction by investigating the nature of the transaction. Issue No. (ii): Whether the transaction in question is Financial Debt and the Corporate Debtor has committed default? As per Section 5(8) of IBC, 'financial debt' involves disbursement against consideration for the time value of money. The Supreme Court in Phoenix Arc Pvt. Ltd. and Anuj Jain IRP for Jaypee Infratech Ltd. Vs. Axis Bank Ltd. clarified that the essential elements of financial debt include disbursement and consideration for the time value of money. The Tribunal found that the Financial Creditor is primarily a rice manufacturer, not a financial business entity, and the Corporate Debtor, with substantial authorized capital and a significant cash credit limit from Bank of Baroda, would unlikely need a small loan of ?10 lacs from the Financial Creditor. The transaction lacked essential elements such as a loan agreement, interest stipulation, and repayment period, indicating it was not a financial debt. Furthermore, the evidence did not support the claimed default date, making the financial debt and default assertions unsubstantiated. Issue No. (iii): Whether the application in question is collusive? The Tribunal referred to the Supreme Court's definition of collusive transactions in Phoenix Arc Pvt. Ltd., where such transactions create an illusion of debt disbursement with ulterior motives. The Corporate Debtor's lack of objection to the CIRP initiation, despite having substantial financial backing, suggested collusion. The Corporate Debtor's affidavit admitting default without seeking settlement indicated an ulterior motive, possibly to benefit from the moratorium under Section 14 of the IBC and hinder Bank of Baroda's recovery efforts. The Tribunal agreed with the Adjudicating Authority's conclusion that the application was collusive, aimed at preventing legitimate debt recovery. Conclusion: The Tribunal dismissed the appeal, agreeing with the Adjudicating Authority that the application was collusive and the transaction did not constitute financial debt. The interim order was vacated, and no costs were imposed.
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