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TMI Blog2019 (3) TMI 1188X X X X Extracts X X X X X X X X Extracts X X X X ..... ithin this definition. Other transactions such as “derivative transaction” or “counter indemnity obligation” or “value” of a transaction, may be calculated on the basis of market value and to be taken into account for the purpose of claim of “Financial Debt”. In the light of the above discussion and on due perusal of the documents annexed, the Debt is to be qualified as “Financial Debt” as defined under section 5(8) of Insolvency & Bankruptcy Code, 2016. As a result, the Financial Creditor has filed this Application for initiating Corporate Insolvency Resolution Process (CIRP) against the Corporate Debtor. Since this is a Petition of “Financial Creditor”, therefore, the Insolvency Process shall commence as prescribed under Section 7 of IBC, 2016. The occurrence of “default” is established. The Financial Debtor had failed to pay the amounts due. Debt in question is a 'Financial Debt' and that the occurrence of 'default' is recognized, hence considering the state of affairs mentioned supra the Petition under consideration deserves to be “Admitted”. - T.C.P. No. 919/I&BC/NCLT/MB/MAH/2017 - - - Dated:- 28-8-2018 - MR BHASKARA PANTULA MOHAN MEMBER (JUDICIAL) AND M.K. SHRAWAT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tal as on 31.07.2016 of only ₹ 1 Lakh. The main object for which the Respondent Company was incorporated is to carry on the business to hold, sell, buy or otherwise deal in shares, debentures, stocks etc. The Respondent Company, as is evident from the record, is a closely held company whose shareholding is stated to be held by Mr. Jignesh Shah and his mother Mrs. Pushpa Shah. Mr. Shah is a Director of the Company. 4. As per the Synopsis of the Petition filed before the High Court, Mr. Jignesh Shah happened to be a Promoter and 50% shareholder of the Respondent Company and the Respondent Company, in turn, is a Promoter of Financial Technologies India Limited (for short FTIL ). Mr. Jignesh Shah was, at the relevant time, the Chairman and Group CEO of FTIL, and the Vice Chairman of Multi Commodity Exchange of India Limited ( MCX ) and MCX Stock Exchange Ltd. ( MCX-SX ). 5. BRIEF FACTS ABOUT CONTROVERSY :-- Point-wise details are as under :- a. It is stated that prior to 20.08.2009 the Petitioner (ILFS) was holding approximately 5% of the equity shares of MCX. b. Pursuant to a negotiation, it was agreed between the Petitioner and the MCX Group that (i) the Petitioner ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s ) as stipulated by the Securities Exchange Board of India (SEBI) and; (ii) acknowledgement of the fact that the sale of the promoters' shareholding in order to comply with the MIMPS Regulations would unacceptably delay the required compliance. Under the heading Effects of the Proposed Reduction , the Explanatory Statement set out: Post reduction, the promoters would not be acquire any equity shares in the Company in excess of limit specified in MIMPS Regulations, at any point of time. i. As per the Petitioner the proposed Scheme of Reduction was prejudicial to its interest, hence decided to vote against the proposal. The Petitioner has conveyed the decision to the Respondent Company (La-Fin) through an e-mail dated 11.12.2009. j. However, the Petitioner and the Respondent (MCX Group) entered into negotiation and arrived at a resolution between the parties, whereby MCX in its capacity as Promoter of MCX-SX addressed a letter dated 14.12.2009 (in short 2009 MCX letter ) to the Petitioner as under : - (i) MCX would call the warrants issued in favour of the Petitioner to be purchased immediately on the approval of the Scheme of Reduction and in any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent. The order is under Section 4 of the Securities Contracts (Regulation) Act, 1956 (SCRA) and Sections 11(1) and 19 of the Securities and Exchange Board of India Act, 1992. The Petitioner had challenged the legality of the said order before the Hon'ble Bombay High Court. As far as the question of validity of buy back agreement was concerned, the relevant observations of the Hon'ble High Court were as under :- 74 Now, it is in this background that the finding of illegality in the impugned order must be assessed. The buy back agreements furnish to PNB and IL FS an option. The option constitutes a privilege, the exercise of which depends upon their unilateral volition. In the case of PNB, the buy back agreements contemplated a buy back by FTIL after the expiry of a stipulated period. But, in the event that PNB still asserted that it would continue to hold the shares, despite the buy back offer, FTIL or its nominees would have no liability for buying back the shares in future. In the case of IL FS, La-Fin assumed an obligation to offer to purchase either through itself or its nominee the shares which were sold to IL FS after the expiry of a stipulated period. In both case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A suit was also filed (Suit No. 449/2013) against the Respondent Company seeking specific performance of Respondent Company's obligation under LoU. 7.1 The Petitioner issued a Statuary Demand Notice on 03.11.2015 under sections 433 and 444 of Companies Act, 1956 calling upon the Respondent Company to pay outstanding debt of ₹ 232,50,00,000/-, along with further interest of 15% per annum on the amount invested by the Petitioner in respect of MCX shares. 7.2. The Respondent Company replied on 18.11.2015 and denied the payment on the ground that the Petitioner filed a suit (Suit No.449/2013), pending before the Hon'ble High Court and the matter being subjudice payment could not be made. 8. The Petitioner (ILFS) therefore filed a Petition under the old provisions of the Companies Act, 1956 seeking relief that the Respondent Company (La-Fin) be wound up by the directions of the Hon'ble High Court and the Respondent Company or its Promoter be directed to deposit an amount due as on 19.10.2016 ₹ 266,39,08,560/-, inclusive of interest for clearing the amount due. During the Pendency, the said Petition was transferred to NCLT in terms of Notification dated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arding an Extra-ordinary General Meeting was to consider, and if thought fit, pass a special resolution that would effectuate a Scheme of reduction of the share capital of MCX-SX ( the Scheme of reduction ). 4. Since the proposed Scheme of reduction was prejudicial to our client and its interest, our client decided to vote against it at the Extra-ordinary General Meeting of the members of MCX-SX scheduled for 15th December, 2009. This was duly communicated by our client to the MCX Group by e-mail. This ultimately ted to a satisfactory resolution with MCX Ltd., in its capacity as promoter of MCX-SX, addressing a letter dated 14th December, 2009 to our client, referring to the SPA and the La-Fin Letter of Undertaking and inter alia confirming that the Scheme of reduction and the terms thereof were in no way to be construed as dilution of the terms of the SPA and the Letter of Undertaking issued by you and all the terms of these documents would continue to be true and valid and requesting our client (in these circumstances) to approve the Scheme of reduction in the Extra-ordinary General Meeting of the Shareholders of MCX-SX which was proposed to be held on 15th December, 2009. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gations under the Letter of Undertaking on totally specious and untenable grounds. You inter alia sought to contend that: (i) the Letter of Undertaking recorded that any purchase of shares by you was at your sole discretion and therefore, there was no obligation on you to do so; (ii) the obligation to buy the shares of MCX-SX from our client had stood extinguished by the Scheme of reduction and, by according consent to the Scheme of reduction, our client had relinquished its rights under the arrangement that you would buy the shares of MCX-SX held by it with full knowledge and consent; (iii) the Letter of Undertaking was void under law and unenforceable in light of the alleged prohibition contained in the Securities Contracts (Regulation) (Stock Exchange and Clearing Corporations) Regulations, 2012 ( SECC Regulations ) which replaced the Securities Contract (Regulation) (Manner of Increasing and Maintaining Public Shareholding in Recognized Stock Exchanges) Regulation, 2006 ( MIMPS Regulations ) and imposed a bar on holding equity in excess of limits prescribed therein; which prohibition was subsequent to the Letter of Undertaking; and that the arrangement had become impossible ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lient of the price thereof in accordance with the provisions of the Letter of Undertaking. 8.2 In a reply to the said Legal Notice, it was responded on 18.11.2015 that a suit had already been passed bearing Suit No. 449/2013 in Hon'ble Bombay High Court, pending for adjudication the issue being subjudice no fresh suit be filed. It was suggested and called upon the Petitioner to withdraw the Petition in writing. 9. Contention of RESPONDENT DEBTOR :- When the matter was listed for hearing before this Bench a vehement objection was raised from the side of the Respondent Corporate Debtor that the Petition filed on Form No.1 in the capacity of a Financial Creditor is bad in law. According to the Respondent Debtor the alleged claim does not fall within the definition of Financial Debt . It is pleaded that the letter dated 20.08.2009 was nothing but letter of comfort issued by the Respondent to the Applicant. The arrangement between the Petitioner and Respondent as recorded in the letter dated 20.08.2009, did not involve any disbursement against the consideration for the time value of money . The Respondent did not owe any Financial Debt . There was no date of disbursem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Section 5(8) of the IBC is not satisfied; (b) The LoU does not have the commercial effect of borrowing. This is because :- * No amount was received by CD by loan or otherwise under LoU. * It is nobody's case that any sum was borrowed by CD; * No Annual Accounts of the Applicant purporting to show any payment having been made under the LoU or the Share Purchase Agreement (SPA) DATED 20.08.2009 (PB Pages 70 to 85) as a loan or advance has been disclosed by the Applicant. * No Annual Accounts of CD has been disclosed by the Applicant to show that there is a debt due and payable by the CD to the Applicant; (c) Instead, the SPA and the LoU show the following:- * IL FS approached MCX to purchase specified shares held by MCX in MCX - SX; [See PB Pages 72 - 73 Recital] A lender does not approach a borrower. * The document itself is described as a SHARE PURCHASE AGREEMENT and IL FS is described as PURCHASER AND MCX is described as SELLER (PB Page 72); * The payment made/to be made under the SPA is described as PURCHASE CONSIDERATION (PB Page 75, Articles 2.1 to 2.3); * The obligations of MCX and IL FS under th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cant (PB Pages 266 and 267) refer to exercise of Put Option/Buy Back for the Equity Investment . This has nothing to do with debt. (f) IL FS has also described the arrangement as an exit arrangement (PB Para 25 at Page 135) in its Letter dated 11.08.2010 addressed to SEBI which is recorded in the order and judgment dated 14th March, 2012 of the Division Bench of the High Court of Judicature at Bombay in Writ Petition No. 213 of 2011. (g) The Civil Suit filed by the Applicant before the High Court of Judicature at Bombay being Suit No. 449 of 2013, the Plaint of which was suppressed by the Applicant from the NCLT, clearly shows that there is no debt which is being sought to be recovered by the Applicant from the CD. What is being sought in the Suit is a decree for specific performance of the LoU along with a prayer seeking a declaration as to the validity of the LoU (See Reply of CD Pages 20 to 57 at Para 33 Pages 37 to 44 at sub-Para (e) Pages 43 to 44 Paras 35 to 38 Pages 44 to 46 Paras 43 to 51, and reliefs Pages 51 to 53). (iii) There is no financial debt within the meaning of Section 5(8)(i) of the IBC as the LoU does not guarantee the liability of any p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the 'Company'. The 'Purchaser' has approached the Seller with offer to purchase 4,42,00,000 equity shares held by the Seller representing 2.6% of the equity capital share of the said Company. Side by side on that very day i.e. 20.08.2009 a letter was executed in which the Respondent Debtor i.e. La-Fin had given an assurance and undertaking as under :- 1. La-Fin Financial Services Pvt. Ltd. (LA-Fin) or its appointed nominees have an obligation to offer to purchase at any time during the Agreed period (as defined hereinafter) in its sole discretion considers appropriate all the shares purchased by you under the SPAS in MCX-SX by giving a written notice at any time after completion of one (1) year from the date of investment but no later than three (3) years from the date of investment ( Agreed Period ) post which your rights herein stated shall laps. You will have to confirm your acceptance/non-acceptance for the offer within a maximum period of 30 days. The price at which such shares will be offered to be purchased by us will be at a price which will be higher of the following ( Buy Back Price ). (i) Price which provides an internal rate of return IRR ) of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,000 equity shares in MCX-SX (representing 2.46% of its equity share capital); and (iv) the Defendant (as a condition to the Plaintiff purchasing the said 4,42,00,000 shares of MCX-SX) would offer to buy or cause to be bought from the Plaintiff the said 4,42,00,000 shares at an agreed price within an agreed period. 10.6 Under the signatures of Mr. Jignesh Shah an undertaking was given that La-Fin had agreed to invest on the assurance of Mr. Shah and that La-Fin is under obligation to offer to purchase anytime during the agreed period all the shares purchased by ILFS under SPA within a time period on completion of one year from the date of investment but not later than three years from the date of investment. The price at that time had also been fixed and the shares would be offered to be purchased by the Group of Jignesh Shah stated to be Buy Back Price which shall provide an Internal Rate of Return (IRR) of 15% on the investment, or in the alternative price at which the most recent transaction of MCX-SX equity share is carried out. It has also been assured that MCX-SX shall not issue any shares to any person at a price below ₹ 35/- per equity share. 10.7 On the bas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the fundamental premise of its Investment in MCX-SX was arrangement provided by the Group to buy the shares held by the Plaintiff. Even post implementation of share reduction scheme, the liability of MCX Group to buy the shares from ILFS had not ceased to exist. Having faith in the representation made the Plaintiff had accorded its consent to the scheme because it was categorically confirmed that there would be no dilution of the terms either of SPA or La-Fin LoU . 10.10 Within the Agreed Period ILFS wrote a letter on 03.08.2012 expressing to sale the entire shareholding 2,71,65,000 equity shares, to which La-Fin is under obligation to purchase. However, on 16.08.2012 La-Fin in reply had informed that there was no legal obligation and the demand of purchase was untenable. The purchase of share was the Sole Discretion of La-Fin hence, there was no obligation. 10.11 Attention has also been drawn on Writ Petition No.213/2011 filed by MCX-SX against SEBI, judgment dated 14.03.2012 which was disposed of by the Hon'ble Court accepted therein that the La-Fin LoU dated 20.08.2009 was lawful, biding and enforceable. As a consequence, on 15.04.2013, the Plaintiff sen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he time value of money. The second is any amount raised under any other transaction having commercial effect of a borrowing. It is not necessary that there is always a disbursement of money, because of the reason that in the first segment a Financial Debt is to be disbursed against the consideration for the time value of money. In this category, therefore, money borrowed against the payment of interest falls within the definition of Financial Debt as defined in sub-section (a) of Section 5(8). But there are examples where there is no actual disbursement of money. In other word there are examples of Financial Debt where the money in kind has not change hands or transferred from an account of lender to the account of borrower. For e.g. in the definition of Financial Debt Section 5(8) as per clause (g) of I B Code, any derivative transaction entered into in connection protection against or benefit from fluctuation in any rate or price and for calculating the value of any derivative transaction, only the market value of such transaction shall be taken into account. Under this category of Financial Debt only a value of transaction is taken into account as there is no physical exchan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons under which this impugned transaction can be held as a 'Financial Debt' are hereinbelow examined as per my humble understanding :- (a) The entire deal can be said to be a commercial deal with the element of earning gain as a consideration for money transaction. (b) The terms of the transaction involved is not with the intention or purpose to acquire or hold the rights in perpetuity in the Company viz. MCX-SX. (c) The transaction does not involve a long term investment. The period of transaction is limited as already described in above paragraph. The date of SPA was 20.08.2009. The date by which the amount of transaction was to be repaid by the Debtor i.e. La-Fin had fallen due on 19.08.2012. Because of this undisputed fact it is safe to hold that there was an element of time value of money . (d) As per one of the condition there was a clause for internal rate of return of 15% on the transaction. Therefore, it is not a case that there was no element of payment of interest . In the LoU dated 20.08.2009 the defaulter i.e. La-Fin had agreed to reverse the transaction by purchasing the shares within a specified time along with the payment of 15% accrual. 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /2016-17/1452. The proposed IRP has furnished the requisite Certificate on Form No.2 that no Disciplinary Proceedings is pending. On due consideration, the proposal of appointment of the IRP is hereby confirmed. 17. Upon Admission of the Application and Declaration of Moratorium the Insolvency Process such as Public Announcement etc. shall be made immediately as prescribed under section 13 read with section 15 of The Code. The appointed IRP shall perform the duties as an Interim Resolution professional as defined under section 18 of The Code and inform the progress of the Resolution Plan and the compliance of the directions of this Order within 30 days to this Bench. A liberty is granted to intimate even at an early date, if need be. The IRP shall submit the Resolution Plan for approval as prescribed under section 31 of The Code. 18. It is hereby pronounced that the Moratorium as prescribed under Section 14 of the Code 2016 shall come into operation. As a result, institution of any suit or parallel Proceedings before any Court of Law are prohibited. The assets of the Debtor must not be liquidated until the Insolvency Process is completed. However, the supply of essential ..... X X X X Extracts X X X X X X X X Extracts X X X X
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