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TMI Blog2021 (7) TMI 581X X X X Extracts X X X X X X X X Extracts X X X X ..... igate 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er 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. - Company Appeal ( AT ) ( Ins. ) No. 143 of 2021 - - - Dated:- 13-7-2021 - [Justice Jarat Kumar Jain] Member (Judicial) And [Dr. Ashok Kumar Mishra] Member (Technical) For the Appellant : Mr. Ketan Parikh, Advocate For the Respondent : Mr. Jaimin Dave, Advocate for R-1 JUDGEMENT Jarat Kumar Jain: J. The Appellant Shree Ambica Rice Mill (Financial Creditor) has filed this Appeal against the order dated 07.10.2020 passed by the Adjudicating Authority (National Company Law Tribun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Registry to issue Notice to the Financial Creditor under Section 65 of the IBC, 2016 to present their case as to why penalty may not be imposed on both the parties under this Section. 6. Being aggrieved with this order the Financial Creditor has filed this present Appeal. 7. We have admitted the Appeal and stayed the order of issuance of show cause notice under Section 65 of the IBC as against the Appellant (Financial Creditor), during the pendency of this Appeal. 8. Ld. Counsel for the Appellant (Financial Creditor) submitted that Ld. Adjudicating Authority failed to appreciate that the amount was actually due and payable to the Financial Creditor. There is no finding that the debt in question is not a Financial Debt. Ld. Adjudicating Authority has to be satisfied mainly on two grounds that whether there is a debt and the Corporate Debtor has committed default. The moment Adjudicating Authority is satisfied that a default has occurred, the Application must be admitted unless it is incomplete. For this purpose, he cited the Judgment of Hon ble Supreme Court in the case of M/s Innovative Industries Ltd. Vs. ICICI Bank Limited another reported in (2018) 1 SCC 407. He al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is collusive? Issue No. (i) Whether the Adjudicating Authority has exceeded in its jurisdiction while examining the nature of transaction in question? 15. We would like to refer the Judgment of Hon ble Supreme Court in the case of Phoenix Arc Pvt. Ltd. Vs. Spade Financial Services Ltd. Ors. Civil Appeal No. 2842 of 2020 decided on 1st February, 2021 which reads as under: 48 The IBC has made provisions for identifying, annulling or disregarding avoidable transactions which distressed companies may have undertaken to hamper recovery of creditors in the event of the initiation of CIRP. Such avoidable transactions include: (i) preferential transactions under Section 43 of the IBC; (ii) undervalued transactions under Section 45(2) of the IBC; (iii) transactions defrauding creditors under Section 49 of the IBC; and (iv) extortionate transactions under Section 50 of the IBC. The IBC recognizes that for the success of an insolvency regime, the real nature of the transactions 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. 16. With the aforesaid preposition of law, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 75. Punishment for false information furnished in Application. -Where any person furnishes information in the Application made under Section 7, which is false in material particulars, knowing it to be false or omits any material fact, knowing it to be material, such person shall be punishable with fine which shall not be less than one lakh rupees, but may extend to one crore rupees. 18. The Hon ble Supreme Court in the above-mentioned case held that even if the Application filed under Section 7 meets all the requirements, then also the Adjudicating Authority has exercised discretion carefully to prevent and protect the Corporate Debtor from being dragged into the Corporate Insolvency Resolution Process malafide. 19. Thus, it is clear that 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. Section 65 provides that if any person initiates the Insolvency Resolution Process or liquidation p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ant to discuss the meaning of the terms disburse and time value of money used in the principal clause of Section 5(8) of the IBC. This Court has interpreted the term disbursal in Pioneer Urban Land and Infrastructure Ltd vs. Union of India (2019)8SCC416 in the following terms: 70. The definition of financial debt in Section 5(8) then goes on to state that a debt must be disbursed against the consideration for time value of money. Disbursement is defined in Black's Law Dictionary (10th Edn.) to mean: 1. The act of paying out money, commonly from a fund or in settlement of a debt or account payable. 2. The money so paid; an amount of money given for a particular purpose. 71. In the present context, it is clear that the expression disburse would refer to the payment of instalments by the allottee to the real estate developer for the particular purpose of funding the real estate project in which the allottee is to be allotted a flat/apartment. The expression disbursed refers to money which has been paid against consideration for the time value of money . In short, the disbursal must be money and must be against consideration for the time valu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ₹ 10 lacs on 20.04.2019. We are unable to convince 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. 25. Apart from this significant feature of the transaction, we have considered the other circumstances which are as under: (a) The transaction in question has no backing of the board resolution of the Corporate Debtor Company. (b) There is no record to show that on date of disbursement i.e., 20.04.2019 the Corporate Debtor was in need of ₹ 10 lacs (As Loan) particularly when Corporate Debtor was having cash credit limit of ₹ 24 Crores by Bank of Baroda. (c) There is no agreement of loan and interest. (d) No document is to stipulate the period of repayment. (e) The essential ingredients for financial debt disbursement and consideration for the time value of money are missing. On the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Authority held that the transaction in question is a collusive. Hon ble Supreme Court in the case of Phoenix Arc Pvt. Ltd. (Supra) propound the test to judge that when the transactions can be held collusive and sham. G.3.3 Collusive Transactions 46 The above discussion shows that money advanced as debt should be in the receipt of the borrower. The borrower is obligated to return the money or its equivalent along with the consideration for a time value of money, which is the compensation or price payable for the period of time for which the money is lent. A transaction which is sham or collusive would only create an illusion that money has been disbursed to a borrower with the object of receiving consideration in the form of time value of money, when in fact the parties have entered into the transaction with a different or an ulterior motive. In other words, the real agreement between the parties is something other than advancing a financial debt. A useful elaboration of sham transactions can be found in the opinion of Diplock LJ in Snook vs. London and West Riding Investments Ltd.12: As regards the contention of the plaintiff that the transactions between himself, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction in admitting the application. In the circumstances, Ld. Adjudicating Authority held that it is a case of collusive Application. 31. Now, we have considered that whether the Application is filed with other than the Resolution or for ulterior motive. Ld. Adjudicating Authority observed in the impugned order that as per the practice, MCA Data of Corporate Debtor was not filed along with the Application under Section 7 of the IBC. Hence, the matter was fixed for filing the same. Then 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. 32. On the basis of aforesaid material 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. 33. We ..... X X X X Extracts X X X X X X X X Extracts X X X X
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