2023 (12) TMI 1171 - AT - Insolvency and Bankruptcy

Initiation of CIRP - NCLT admitted the application - No outstanding dues - Squaring off of loans - case of appellant is that entire outstanding duty along with unsecured loans belonging to Shankar Khandelwal, his wife Guman Khandelwal and their concerns were squared off against outstanding debts and adjustment paying off balance outstanding in terms of LLP Agreement - HELD THAT - From the LLP Agreement dated 31.12.2015, it becomes clear that the Respondent Shankar Khandelwal resigned on 31.12.2015 to be effective from 01.04.2016 and the balance sheet of Corporate Debtor LLP was necessary to be drawn accordingly to settle his dues. It is also noteworthy that all outstanding of Guman Builders and Developers Pvt. Ltd and Guman Furniture Services Pvt. Ltd., was agreed to be adjusted to the account of outstanding partner i.e., the Respondent Shankar Khandelwal. The Respondent Shankar Khandelwal filed an application under Section 7 of Code alleging non-payment of financial debt of Rs. 38,73,94,501/- which has been disputed by the Appellant stating this to be highly inflated amount due from the Corporate Debtor whereas the only Rs. 5,16,55,842/- was due and payable to the Respondent Shankar Khandelwal by the Corporate Debtor at the time of his retirement from the LLP - the pleadings of the Appellant is accepted that based on combined examination of Ledger and balance sheet it is proven that all dues towards the Respondent Shankar Khandelwal stand settled. It is also noted that the allegations of the Appellants that the Respondent Shankar Khandelwal is allegedly attempting to recover tainted money from Corporate Debtor, which is forming a part of the proceeds of crime. Even if the alleged loan is found to not be a part of the proceeds of crime, any attempts towards recovery of the amount would have to be adjudicated by a civil court under a recovery suit. The intent of IBC is not to facilitate recovery for creditors - it is agreed that once all outstanding dues have been paid by the Corporate Debtor to the Respondent Shankar Khandelwal, disputed claims if any, can be raised in suitable other legal forum and IBC can not be used for such recovery proceeding. The main basis contained in the Impugned Order for admission of the Application under Section 7 of the Code is that the Corporate Debtor failed to show any valid proof that debt due and payment to the Respondent Shankar Khandelwal was paid in his individual capacity - No amount of financial debt was due to the Respondent Shankar Khandelwal on the date of filing of the Application under Section 7 of the Code before the Adjudicating Authority. Therefore, the Adjudicating Authority has patently erred in admitting the Application filed by the Respondent Shankar Khandelwal vide its Impugned Order dated 13.10.2021. The Adjudicating Authority erred in passing the Impugned Order dated 13.10.2021 admitting application under Section 7 of the Code and therefore Impugned Order deserves to be set aside accordingly - Appeal allowed.

Summary

Issues Involved:
1. Whether the Corporate Debtor owed any financial debt to the Respondent Shankar Khandelwal.
2. Whether the transactions between the Corporate Debtor and the Respondent Shankar Khandelwal constituted "financial debt" under the Insolvency and Bankruptcy Code, 2016.
3. Whether the Adjudicating Authority erred in admitting the application under Section 7 of the Code.

Summary:

1. Financial Debt Owed:
The Appellant argued that all amounts owed by the Corporate Debtor to Shankar Khandelwal had been repaid, emphasizing that the balance sheet for the Financial Year 2015-16 showed the balance due and payable to Shankar Khandelwal was Rs. 5,16,55,842/-, which was repaid by the Corporate Debtor. The Respondent Shankar Khandelwal contended that the LLP agreement dated 31.12.2015 was forged and that he was coerced into signing it. He claimed that Rs. 1,03,58,590/- remained due and payable to him.

2. Nature of Transactions:
The Appellant argued that the transactions were not "financial debt" as defined under the Code, citing judgments that emphasized the need to investigate the real nature of the transaction. The Appellant also highlighted that there was no written agreement specifying the terms of the debt, including the interest rate, and thus, the transaction did not constitute a "financial debt." The Respondent Shankar Khandelwal, however, maintained that the debt was valid and outstanding.

3. Adjudicating Authority's Error:
The Appellant contended that the Adjudicating Authority ignored the decision of the Hon'ble Supreme Court in Phoenix Arc Pvt Ltd v Spade Financial Services Ltd & Ors, which held that the Adjudicating Authority must investigate the real nature of the transaction when admitting a Section 7 application. The Appellant also argued that the Adjudicating Authority failed to consider that the Respondent was not a financial creditor under Section 5(8) of the Code. The Respondent Shankar Khandelwal argued that the FIR and chargesheet filed by the Enforcement Directorate were pending adjudication and did not bar him from initiating CIRP.

Judgment:
The Appellate Tribunal held that the balance sheet of the Corporate Debtor acknowledged debts due towards Shankar Khandelwal, and thus, the lack of an express loan agreement did not bar the financial creditor from initiating CIRP. However, the Tribunal noted that the LLP Agreement dated 31.12.2015, which was signed by all concerned parties, including Shankar Khandelwal, indicated that all outstanding dues had been settled. The Tribunal also emphasized that the payment to third-party entities, as specified in the LLP Agreement, was valid for settling the debt.

The Tribunal concluded that no amount of financial debt was due to Shankar Khandelwal on the date of filing the application under Section 7 of the Code. Therefore, the Adjudicating Authority erred in admitting the application, and the Impugned Order dated 13.10.2021 was set aside. The Appeals succeeded, and no costs were awarded. Interlocutory Applications, if any, were closed.