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TMI Blog2019 (10) TMI 59X X X X Extracts X X X X X X X X Extracts X X X X ..... For The Respondent : Mr. S. N. Mukherjee, Sr. Advocate with Mr. V. V. Sastry, Mr. Sabyasachi Chowdhury, Mr. Rakesh Sinha, Mr. Jeemon Raju and Mr. K. S. Avinash Singh, Advocates JUDGMENT BANSI LAL BHAT, J. Application under Section 7 of the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as I B Code ) filed by the Appellant State Bank of India (Financial Creditor) for initiation of Corporate Insolvency Resolution Process against the Respondent- Visa Infrastructure Ltd (hereinafter referred to as Corporate Debtor ) stands rejected in terms of the order dated 11th January, 2019 passed by the Adjudicating Authority (National Company Law Tribunal), Kolkata Bench, Kolkata on the ground that the Corporate Debtor discharged the obligation as per the terms of the guarantee and therefore there was no debt due from the Corporate Debtor. Aggrieved thereof, the Financial Creditor has impugned the aforesaid order of rejection of his application through the medium of instant appeal assailing the impugned order, inter-alia on the grounds that the Adjudicating Authority erred in holding that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is also a Promoter of the Borrower Company. In terms of the Guarantee Deed, the Corporate Debtor guaranteed due repayment of the debts of Borrower Company to the lenders. The Corporate Debtor also passed the Board Resolution dated 29th September, 2012 agreeing to execute a Corporate Guarantee in favour of the lenders and also create negative lien on the Respondent s property situated at Visa House, Alipor Road, Kolkata to secure the restructured debt. Deed of Corporate Guarantee dated 19th December, 2012 came to be executed by the Respondent favouring the lenders. According to Appellant, the terms of CDR Package provided for infusion of equity by way of unsecured loans/ preference share capital or by fresh share through the structured investments of investor by merging/ demerging of some of the business divisions of the Borrower Company. However, according to Appellant, the condition of bringing the additional equity of ₹ 125 Crores over and above the Promoter s contribution of ₹ 325 Crores was not fulfilled by the Borrower Company as per the CDR Package of 2012. CDREG approval for business reorganisation of the Borrower Company was made in the year 2014, in pursuance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ower Company, which is pending admission as the Borrower Company has challenged the initiation of Corporate Insolvency Resolution Process against it by the Appellant Bank before Hon ble High Court of Orissa through the medium of a Writ Petition being WP (C) No. 2511 of 2018. Appeal against vacation of interim order of stay is stated to be pending with the Appellate Bench in WA No. 237/2018 wherein an interim order restraining initiation of Corporate Insolvency Resolution process against the Borrower Company has been granted till disposal of the Writ Petition, which has been reserved for order since 29th June, 2018. Another petition of similar nature filed against one of the Corporate Guarantors for the same default of the Borrower Company stands admitted before Adjudicating Authority, (National Company Law Tribunal), Kolkata Bench. In which such Corporate Guarantor (Corporate Debtor) has been ordered to be liquidated vide order dated 31st August, 2018. The Appellant issued letter dated 13th December, 2017 demanding from the Respondent Company the outstanding debt of ₹ 977,61,86,875.84 and as the demand in terms of aforesaid letter was not met, the Appellant filed CP (IB) No. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... learly establishing that merger of VBL with VSL has lead to infusion of 31.593 Crores which is far less than ₹ 125 Crores as approved in the CDR Package. It is therefore submitted that there was no infusion of funds amounting to ₹ 125 Crores by the merger of VBL with VSL. 7. Per contra learned counsel for Respondent submitted that the Respondent being the Corporate Guarantor to the financial facilities availed by VSL had discharged its obligations under the contract of guarantee and the guarantee stands discharged. Repelling the argument advanced on behalf of Appellant that the additional equity to be infused had to be only in Cash , it is pointed out that in the letter issued by CDR Cell to Appellant reference is made to initial contribution of ₹ 325 Crores by the Promoters as equity funds but while dealing with additional equity of ₹ 125 Crores, it does not use the expression additional equity funds . It is submitted that the letters of undertaking relied upon by the Appellant have been executed by the Promoters and not in the capacity as a Corporate Guarantor . It is further pointed out that the Deed of Guarantee refers to only add ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... approved scheme of amalgamation which provides that the merger will amount to fulfilment of the obligation of additional equity of ₹ 125 Crores . It is submitted that the approved scheme has statutory force and binds all creditors including the Appellant and in view of the same not only in law but also in fact there is no liability to pay. In the alternative it is argued that initiation of Corporate Insolvency Resolution Process against Visa International Limited (another Corporate Guarantor) by the Appellant in regard to the same debt would preclude the Appellant from initiating CIRP against the Respondent. 8. Heard learned counsel for the parties at length and perused the record. Initiation of Corporate Insolvency Resolution Process by Financial Creditor is regulated by the provision engrafted in Section 7 of I B Code, which reads as under: 7. Initiation of corporate insolvency resolution process by financial creditor. -( 1) A financial creditor either by itself or jointly with other financial creditors may file an application for initiating corporate insolvency resolution process against a corporate debtor before ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ause (a) of sub-section (5) to the financial creditor and the corporate debtor; ( b) the order under clause (b) of sub-section (5) to the financial creditor, within seven days of admission or rejection of such application, as the case may be. Dealing with the ambit and scope of Section 7 of I B Code in Innoventive Industries Ltd. Vs. ICICI Bank and Ors. (2018)1 SCC 407 , the Hon ble Apex Court observed as under: 28. When it comes to a financial creditor triggering the process, Section 7 becomes relevant. Under the explanation to Section 7(1), a default is in respect of a financial debt owed to any financial creditor of the corporate debtor - it need not be a debt owed to the applicant financial creditor. Under Section 7(2), an application is to be made under sub-section (1) in such form and manner as is prescribed, which takes us to the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016. Under Rule 4, the application is made by a financial creditor in Form 1 accompanied by documents and records required therein. Form 1 is a detailed form in 5 parts, which requires particula ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , arises out of default in payment of debt which has become due. Section 3(11) defines debt as a liability or obligation in respect of a claim which encompasses a right to payment even if disputed. Default as defined under Section 3(12) postulates non-payment of a due and payable debt including part thereof or an instalment amount. Insolvency Resolution Process can be triggered, if the default is to the tune of ₹ 1 Lakh or more. In so far as triggering of Insolvency Resolution Process at the hands of a Financial Creditor is concerned, same can be initiated in respect of a debt owed to any Financial Creditor in respect whereof default has been committed though the debt may not be owed to the applicant Financial Creditor. Once a Financial Creditor approaches the Adjudicating Authority for initiation of Corporate Insolvency Resolution Process with an application under Section 7 of I B Code filed in Form 1 accompanied by documents, records and evidence of default, he is required to dispatch a copy of the application to the registered office of the Corporate Debtor by registered post or speed post. Within 14 days thereof the Adjudicating Authority is required to ascertain th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the Borrower Company as per the CDR Package of 2012. The CDR EG approval for business reorganization of VSL was subjected to review and in consequence of fresh letter of approval the Borrower Company executed and arranged various instruments including Corporate Guarantee furnished by the Respondent Company. Letter of approval dated 31st December, 2014 envisaged demerger of VSL s steel business into a separate company styled as VSSL through a scheme of arrangement while its subsidiary VBL was to merge with VSL. It is the admitted position in the case that the Promoters of VSL had infused ₹ 325 Crores in the form of equity. Respondent Company, in terms of its Board Resolution dated 23rd March, 2015 executed Deed of Corporate Guarantee dated 28th March, 2015 in favour of the lenders which was to be a continuing guarantee subsisting till the Borrower Company repays the full restructured facilities alongwith interest and costs etc. Respondent Corporate Guarantor accepted the liability to the tune of ₹ 3405.31 Crores plus interest. Admittedly, demerger of Steel Business Division of the Borrower Company did not take off in terms of the CDR Package though the Borrower Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the Borrowing Company is an independent contract in itself so far as the obligations and liabilities of Guarantor are concerned. Clauses 32 and 37 of the CDR Package refer only to additional equity with the expression funds being conspicuously absent (page 33 of CC). As regards letter dated 13th September, 2013 issued by VSL to Appellant (page 58 to 60 of CC), be it noticed that the same only speaks of consolidation of Ferro-chrome business of VBL and VSL, thereby making Bao Steel a shareholder in VSL. It also refers to fund raising by inviting strategic investor in the Ferro-chrome business. It is amply clear that the letter only deals with the proposal of merger of VBL into VSL and inviting of strategic investor. The letter in no manner advances the argument of Appellant that the strategic investor will be the way with which the obligation of the Guarantor will be fulfilled or that the obligation to provide additional equity of ₹ 125 Crores would be only in the form of cash infusion . Even otherwise post-merger fair value of the assets of VSL shown to be in excess of ₹ 125 Crore in pursuance of merger/ demerger when Bao Steel came in as a strategic investor, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ccount of the Transferee Company shall be treated as infusion by way of additional equity by reason of the merger in terms of the restructuring package approved by the CDR EG vide letter dated 27th September, 2012. The provision in the approved scheme of amalgamation is loud and clear that the business value of VBL as reflected in the books of account of the Transferee Company shall be treated as infusion by way of additional equity on account of merger as per CDR Package. Thus, there is no escape from the conclusion that the merger will have the effect of fulfilling the obligation of additional equity of ₹ 125 Crores. It is well settled that an approved scheme of amalgamation/ merger has the statutory force and is binding on all stakeholders including the creditors, the order of Tribunal sanctioning such scheme operating as a judgment in rem. It is not in dispute that the Respondent had brought to the notice of the Appellant that the merger of VBL would result in discharge of the obligation of bringing in additional equity of ₹ 125 Crores as reflected in Letter dated 8th December, 2017 (page No. 2247 of the paper book). Viewed in this background, it c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bunal, Kolkata Bench, Kolkata vide order dated 11th January, 2019 on the ground that the Corporate Debtor discharged the obligation as per the terms of guarantee and therefore there was no debt due from the Corporate Debtor. Financial Creditor, being aggrieved of the said order of rejection of application under Section 7 of the I B Code, has filed the present appeal assailing the impugned order, on the grounds that the Adjudicating Authority erred in holding that the inflation of assets valuation in equal to the infusion of additional equity and that the additional equity of ₹ 125 crore had to be brought in by the Promoter in the form of cash/equity. 2. The case is that the Corporate Debtor stood as Corporate Guarantor for Visa Steel Limited (Borrower Company) in whose favour loan and various credit facilities were granted by the Financial Creditor. The Corporate Debtor executed Deed of Guarantee and Letter of Guarantee and the Corporate Debtor rendered itself liable to repay the outstanding dues. The debt was restructured by the Financial Creditor in the year 2012. As per Financial Creditor, the Corporate Debtor being Corporate Guarantor fai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of funds aggregating to ₹ 125 crores over and above ₹ 325 crores either in VISA Steel Ltd or in VISA Special Steel Limited (after transfer of special steel Business to VISA Special Steel Limited) in the form of unsecured loan/preference share capital or by issue of fresh shares through QIP/FPO/PE/Strategic Investment etc or by merger/demerger/slump sale of some business divisions of VISA Steel Limited into separate companies/SPV s through scheme/slump sale or inviting strategic investors. 4. The Respondent Company vide its letter dated 25th October, 2017 (Page 2240 Vol XII of appeal) informed the appellant that the liability under the Guarantee Agreement has been discharged as upon merger of assets and liabilities of VBL with Borrower Company. The contents of the letter dated 25th October, 2017 are as under: This is with reference to the Guarantee dated 19th December, 2012 pursuant to CDR LOA dated 27th September, 2012 valid till infusion of ₹ 125 crores in VISA Steel Limited which may be brought in the form of unsecured loan/preference shares or by issuing fresh shares through QIP/FPO/PE/Strategic investment etc. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld be valid only till the happening of the events mentioned in Clause 24 of the guarantee agreement dated 28.3.2015; that the promoter borrowers discharged its obligation to be performed as per the terms of the guarantee agreements dated 19.12.2012 and 28.3.2015, that there is no further obligations to be performed by the corporate guarantor/corporate debtor; that upon performance of the obligations as per the terms of the guarantee there is no default in discharging the obligations created as per the guarantee agreements; that the non obstante clause 37 in the guarantee agreement is valid and binding on the applicant bank and that the acknowledgement of liability issued by the principal borrower is not binding on the corporate debtor because on the date of issuance of acknowledgement of liability by the principal borrower, the guarantee remained not in force or subsisting on account of performance of obligations as referred to above by the principal borrower, are factors proving the contentions of the corporate debtor that the demand to make payment by the corporate debtor is against the terms of obligations liable to be performed by the corporate debtor. 70. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted Corporate Guarantee. Learned counsel argued that one of the conditions of the Corporate Guarantee as accepted in the CDR package dated 27.9.2012 (Page 1774, Volume 9 of Paper Book) was Corporate Guarantee of Visa Infrastructure Ltd with negative lien on Visa House situated at Alipore, Kolkata to be provided till the company brings in additional equity of ₹ 125.00 crores over and above ₹ 325.00 crore as considered in our proposal . The same has been reiterated in para 32 and 37 of Deed of Guarantee dated 19th December, 2012 signed by the Corporate Debtor at page 109 of Appeal Paper Book. The same has been again reiterated in para 12 of the Guarantee Agreement dated 28th March, 2015 duly signed by Corporate Debtor at Page 124 of Appeal Paper Book. This has also been reiterated in para (v) (vi) of Common Loan Agreement dated 28th March, 2015 duly signed/executed by Financial Creditors and the Respondents at Page 1365, Volume VII of appeal paper book. Learned counsel for the appellant argued that the CDR approval states that the additional equity funds of₹ 125.00 crores over and above ₹ 325 crores has to be infused in the similar form as ₹ 3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ional funds of ₹ 125 crores to meet the shortage of cash flow, to service debts, and therefore, there is Debt Due from the Corporate Debtor and there is a default and the ingredients of Section 7 of I B Code are satisfied. 13. Learned counsel for the appellant further argued that as per the Scheme of Amalgamation of Visa Bao Ltd with VSL as approved by Learned NCLT Kolkata all the loan and liabilities etc of Visa Bao Ltd stand transferred to VSL and it is the duty and obligation of Transferee Company to discharge and satisfy the same. Learned counsel for the appellant argued that valuation of Visa Bio Ltd to value the equity stocks was based Cost or Asset Based Method wherein it was mentioned that the asset base represents the fair value of the business. Learned counsel argued that as per this method the Valuation of Visa Bio Ltd as on 31.3.2015 was ₹ 315.93 lakhs (Page 2732 of Appeal Paper Book). Learned counsel for the appellant further argued that the Chartered Accountant so appointed by the Borrower Company to determine Share Exchange Ratio between VSL and Visa Bio Ltd gave its opinion and stated that the fair value of VBL is INR 3.47 per equity shar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .2012 refer to only additional equity and there is no reference to funds or cash infusion. Learned counsel for the Respondents argued that infusion of the additional equity of ₹ 125 crores does not mean that the equity will be cash infusion alone. Learned counsel for the Respondent argued that in the instant case BaoSteel comes in as a Strategic Investor in Visa Steel consequent to the merger with proper valuation which valuation when undertaken post merger on fair vlue basis shows in excess of ₹ 125 crores. Learned counsel for the Respondent further argued that the valuation of Visa Bao is by asset based method. The infusion of additional equity has got nothing to do with such valuation. According to learned counsel additional equity has to be determined on the basis of the preparation of financial statements as per the sanctioned scheme which reflects additional equity in excess of ₹ 125 crores. 16. Learned counsel for the Respondent further argued that the scope of Section 7 of the I B Code is very limited and the only consideration that is required to be seen is where there has been any default. Learned counsel argued that in the instant case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d of guarantees and letter of undertaking to stress that the Respondents have agreed to infuse the equity of ₹ 125 crores in cash. On the other hand learned counsel for the Respondent have argued that deed of guarantee also refers to only additional equity and there is no reference to funds or cash infusion. Learned counsel for the Respondent argued that the letter dated 13.9.2013 of Borrower company to SBI for merger of Visa Bao into Visa Steel does not refer to infusion of the additional equity of ₹ 125 crores but it only highlights that the consolidation of Ferro Chrome Business of VISA Bao and Visa Steel will make Bio Steel a shareholder in VISA Steel and offer further fund raising opportunities from other Strategic Investors. Learned counsel for Respondent further argued that it does not say that inviting Strategic Investor will be the way with which the obligation of the Guarantor will be fulfilled or the additional equity of₹ 125 crores had to be by way of cash infusion alone. I have considered the submissions made by the parties and in my view infusion of equity can be taken by both the routes bringing in cash or bringing in the assets, n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aluation which valuation when undertaken post merger on fair value basis shows in excess of ₹ 125 crores infusion in equity of Visa Steel. Learned counsel for the Respondent further argued that Valuation of Visa Bao is by asset based method. Learned counsel for the Respondent further argued that additional infusion of additional equity has got nothing to do with such valuation and additional equity has to be determined on the basis of the preparation of financial statements as per the sanctioned scheme which reflects additional equity in excess of ₹ 125 crores. Learned counsel for the Respondent argued more than ₹ 125 crores equity has been infused, therefore, the appeal may be dismissed. I have considered the submissions made by the parties. The Corporate Debtor had given guarantee that the guarantee and the negative lien on their Alipore, Kolkata property shall be valid till the infusion of funds aggregating to ₹ 125 crores over and above ₹ 325 crores either in VISA Steel Ltd or in VISA Special Steel Limited (after transfer of special steel Business to VISA Special Steel Limited). The Borrower Company and Corporate Debtor vide their l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o creatively show through book entry that the obligation under the CDR has been met without following it in letter and spirit. Therefore, I am of the firm opinion that Corporate Debtor has not met its obligation. 22. During the arguments Learned counsel for the Respondent placed a copy of order dated 7th August, 2019 passed in CP(IB)No.759/LB/2017 SBI Vs Visa International Ltd and argued that even if there was debt payable by the Respondent, the CIRP Process having been admitted against Visa International Ltd for the same debt, another Corporate Guarantor cannot be proceeded with. Learned counsel for Respondent placed reliance on the Judgement of NCLAT in the case of Dr.Vishnu Kumar Agarwal Vs Piramal Enterprises Ltd dated 9.1.2019 in Company Appeals No.346 and 347 of 2018. I have considered his argument. This logic, suggested by Respondent, does not stand on his leg as on the date of rejection of present application on 11.01.2019 by NCLT, there was no admission of CIRP against another guarantor by this date and the subsequent admission of CIRP on 7.8.2019 against another guarantor will not come in its way in deciding this appeal on merit. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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