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TMI Blog2024 (5) TMI 424X X X X Extracts X X X X X X X X Extracts X X X X ..... t and if the application is complete, the application is required to be admitted by the Adjudicating Authority. It is for the Adjudicating Authority to look into the various documents, records and evidence of default as furnished in Part V of Form 1 of the application filed under Section 7 of IBC. There is no balance confirmation of the alleged unsecured loan coupled with admitted fact that the receivables due from the Corporate Debtor was no longer reflected separately in the balance sheet of IIL from 2017-18 onwards, we are of the view that the Adjudicating Authority has not erred in holding that confirmation letter of 25.05.2014 lacks relevance and cannot be relied upon to establish debt - there are no cogent reasons to differ with the findings of the Adjudicating Authority that debt and default on the part of the Corporate Debtor has not been brought out in clear, precise and specific terms which is the mandate of Section 7 of IBC. Nothing has been placed on record either by the Appellant to substantiate that the disbursement had been made for consideration for time value of money. There are no good reasons to disagree with the findings of the Adjudicating Authority that the fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... porate Debtor on 12.04.2017 for the purpose of obtaining confirmation of amounts owed by them to IIL in which letter Rs. 5.16 cr was mentioned as receivable from the Corporate Debtor. On 02.05.2017, the statutory auditor of the Corporate Debtor issued a balance confirmation to IIL stating that there were outstanding payables due to IIL and sought confirmation thereof. The balance confirmation sought was for Rs.2.26 cr as on 31.03.2017 as appearing in the books of account of the Corporate Debtor. Liquidation proceedings were admitted against IIL on 08.12.2017. The liquidator published the Process Memorandum on 14.06.2021 wherein the amount in default by the Corporate Debtor was recorded as Rs 5.10. The Appellant/Financial Creditor - Metamorphosis Trading LLP had bid for the assets/receivables of IIL and entered into a Deed of Assignment on 21.07.2021 with the Liquidator of IIL whereby the assets of IIL were transferred in favour of the Appellant. In terms of the Deed of Assignment, the debt of Rs.5.10 cr of the Corporate Debtor was transferred in favour of the Appellant/Financial Creditor. The Appellant issued legal notice on 16.09.2021 calling upon the Corporate Debtor for repaymen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 7. Refuting the contentions made by the Appellant, the Learned Senior Counsel for the Respondent stated that there is no documentary evidence which has been placed on record by the Appellant to establish the alleged financial debt. There is no proof of disbursement of the alleged loan to the Corporate Debtor either by way of any financial contract or loan agreement. The Deed of Assignment has been treated by the Appellant as the principal financial contract for the alleged loan but at the time of execution of the Deed of Assignment on 21.07.2021, no debt was due and payable by the Corporate Debtor to IIL as the financial statements from the year 2017-18 onwards reflect no debt on the part of the Corporate Debtor payable to IIL. The block of assets assigned to the Appellant under this Deed of Assignment, by which the purported financial debt was assigned to the Appellant included trade receivables. When the alleged debt has been shown as trade receivable, it cannot be held as a loan particularly so when there is no contract/agreement between the Corporate Debtor and IIL recording advance of any loan. 8. Submission was pressed that proof of existence of financial debt which is in d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in connection with protection against or benefit from fluctuation in any rate of price and for calculating the value of any derivative transaction, only the market value of such transaction shall be taken into account; (h) any counter-indemnity obligation in respect of a guarantee, indemnity, bond, documentary letter of credit or any other instrument issued by a bank or financial institution; (i) the amount of any liability in respect of any of the guarantee or indemnity for any of the items referred to in sub-clauses (a) to (h) of this clause; 11. A plain reading of the above definitions shows that for any creditor to become financial creditor under Section 5(7) of IBC, there must be a financial debt and for any debt to qualify as a financial debt, that debt along with interest, if any, should have been disbursed against the consideration for the time value of money. Use of expression if any as suffixed to the word interest leaves no shadow of doubt that the component of interest is not a sine qua non for bringing the debt within the fold of financial debt. What is material however is that the disbursement of debt should be against consideration for the time value of money irrespe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is a detailed form in 5 parts, which requires particulars of the applicant in Part I, particulars of the corporate debtor in Part II, particulars of the proposed interim resolution professional in part III, particulars of the financial debt in part IV and documents, records and evidence of default in part V. Under Rule 4(3), the applicant is to dispatch a copy of the application filed with the adjudicating authority by registered post or speed post to the registered office of the corporate debtor. The speed, within which the adjudicating authority is to ascertain the existence of a default from the records of the information utility or on the basis of evidence furnished by the financial creditor, is important. This it must do within 14 days of the receipt of the application. It is at the stage of Section 7(5, where the adjudicating authority is to be satisfied that a default has occurred, that the corporate debtor is entitled to point out that a default has not occurred in the sense that the debt , which may also include a disputed claim, is not due. A debt may not be due if it is not payable in law or in fact. The moment the adjudicating authority is satisfied that a default has o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y. It is for the Adjudicating Authority to look into the various documents, records and evidence of default as furnished in Part V of Form 1 of the application filed under Section 7 of IBC. 14. Coming to the case at hand, it is the case of the Appellant that IIL had provided financial assistance to the Corporate Debtor on their request and that these amounts were transferred in favour of the Corporate Debtor during November 2013 to March 2014. It is also contended that the Corporate Debtor had admitted the financial assistance provided by IIL by an email dated 24.05.2014 sent by them to the IIL confirming Rs.5.58 cr as due and payable to IIL. Moreover, the Corporate Debtor in its financial statements for F.Y. 2015-16 and 2016-17 had admitted that there were amounts due and payable to IIL. Subsequently, this financial debt of the Corporate Debtor qua IIL was assigned to the Appellant by way of a Deed of Assignment which was executed on 21.07.2021. It is also their case that the debt was due and payable is recorded with the Information Utility. It is also an admitted fact that the Appellant had served a legal notice on the Corporate Debtor on 16.09.2021 calling upon the Corporate Deb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... had directed the Statutory Auditor for the Corporate Debtor on 26.06.2023 to look into the audit working papers for the year 2016-17 and 2017-18. It has been noted in the impugned order that the statutory auditor in his affidavit dated 25.09.2023 has categorically submitted that the request for balance confirmation sought from the IIL on 02.05.2017 of an amount of Rs.2.26 cr being owed by the Corporate Debtor to the IIL remained un-responded by IIL. Hence, in the absence of balance confirmation from IIL for F.Y. 2016-17, it has been stated by the statutory auditor that the amount of Rs.2.26 cr was reflected as unsecured borrowing from Corporate Debtor to IIL with the qualifying remark that The company has certain balances payable/receivable from its erstwhile holding company namely Innoventive Industries Ltd. In the absence of balance confirmation, we are not in a position to ascertain and comment on the correctness of the outstanding balances and resultant impact on the financial statements of the company. Further, we also notice that the Adjudicating Authority directed the current statutory auditors for the Corporate Debtor on 16.10.2023 to produce the audited accounts from 2013 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l head in the Financials. However, in the absence of schedules to the balance sheet of Innoventive for Financial year 2017- 18 it is not feasible for the bench to cross verify this statement. 5.11 While adjudicating upon an application for admission into Resolution Process filed by a Financial Creditor, it is mandated to ascertain the existence of the debt, and any default in payment of such debt. In the facts and circumstances state supra, it is clear that the Applicant is unable to show the existence of Financial debts and default of the amount claimed in the petition. 21. On perusing the financial statements of IIL for F.Y. ending on March 31, 2017 at page 2145 of the Appeal Paper Book ( APB in short), we find that it is stated therein that: The holding company control was diluted on account of fresh issuance of shares as on 19th December, 2016. Accordingly, the Consolidated financial statement includes profit/(losses) of Sankalp Engineering and services Private Limited till the date the control ceases to exist. Further all assets and liabilities pertaining to this subsidiary have been derecognised from the financial statements . From the above statement in the financial stateme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the relevant clauses of the Deed of Assignment which is as extracted below: D. In pursuance of his powers and duties under the IBC, the Liquidator had issued a process memorandum dated 14 June 2021 ( Process Memorandum ) inviting bids for the auction of certain Claims/Transferred Assets of the Company and an electronic auction for such Transferred Assets of the Company was conducted on 25 June, 2021. The Assignee, having read the terms and conditions of the Process Memorandum and after undertaking their own diligence, bid for the Transferred Assets at a price of INR 25,00,000 (Indian Rupees Twenty Five Lacs only) ( Consideration ) and was selected as the successful bidder. E. Consequently, the Assignee and the Liquidator (on behalf of the Assignor) entered into a Letter of Intent dated 1 July 2021 ( LOI ), wherein the Assignee had agreed to acquire from the Assignor all the rights, title and beneficial interest/property of the Assignor in the Transferred Assets, on As is where is basis , As is what is basis , whatever there is basis and No recourse basis, which the Assignor has agreed to do upon the terms and conditions recorded hereinafter in this Deed. NOW THIS DEED WITNESSETH T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ets assigned to the Appellant under this assignment deed included trade receivable of Rs.5,10,61,270/- due from Corporate Debtor. Given the fact that it is well settled that an assignee steps into the shoes of the assignor and the rights of the assignee are no better than that of the assignor, we find substance in the contention of the Respondent that when the assigned amount has been clearly shown as trade receivable in the Deed of Assignment, it cannot be viewed as a loan particularly so when there is no contract/agreement between the Corporate Debtor and IIL recording advance of any loan. Nothing has been placed on record either by the Appellant to substantiate that the disbursement had been made for consideration for time value of money. For the reasons discussed above, we find no good reasons to disagree with the findings of the Adjudicating Authority that the facts of the present case are such that the debt qua the Appellant lack the trappings of a financial debt and that it had become due and payable and that there has arisen non-payment of the same beyond the threshold limit. 26. In result, we are of the view that the Adjudicating Authority did not commit any error in rejec ..... X X X X Extracts X X X X X X X X Extracts X X X X
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