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TMI Blog2025 (3) TMI 390X X X X Extracts X X X X X X X X Extracts X X X X ..... he CD, with common Directors during the relevant period when the alleged debt and default occurred. There are merit in the argument that the Mittal family members, who controlled both entities at the time, orchestrated the Loan Arrangement, making the claim self-serving and legally untenable. The Appellant and its related entities were actively involved in the management of the CD during the transactions in question, reinforcing the case for malice. The Appellant's Section 7 Petition was filed with ulterior motives. Consequently, there are no infirmity in the findings of the AA, as they are based on the material on record. Existence of debt or not - HELD THAT:- All the amounts shown as amount paid by the Appellant, were paid to acquire stake in CD and appoint the Directors. It is concluded that the amount of Rs 92,00,000/- in question was not a loan but instead infused by the Appellant as an investment in equity to acquire control and Directorship in the CD, and not as a loan or financial debt. And the said investment was not in the nature of a disbursement against time value of money, which is a fundamental criterion for a financial debt. The rejection of the CIRP Application w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oshi Finlease Pvt Ltd, filed a Section 7 Application under the Insolvency and Bankruptcy Code (IBC), 2016, against the Corporate Debtor - M/s Mothers Pride Dairy India Pvt Ltd for non- payment of a loan amount of INR 4,89,28,694/- (rupees four crores, eighty- nine lakhs, twenty-eight thousand, six hundred and ninety-four only) disbursed from 08.07.2019 to 15.11.2019. The loan was sanctioned under a term "loan agreement" signed on 17.08.2019, with interest set at 18% per annum, payable quarterly, and various terms for loan disbursement and processing fees. The total outstanding amount due from the Corporate Debtor is INR 9,32,52,937/- (rupees nine crores, thirty-two lakhs, fifty-two thousand, nine hundred and thirty-seven only) including both principal (INR 4,89,28,694/- rupees four crores, eighty-nine lakhs, twenty-eight thousand, six hundred and ninety-four only) and interest (INR 4,43,24,243/- rupees four crores, forty-three lakhs, twenty-four thousand, two hundred and forty- three only). The State Bank of India (SBI), as Respondent No. 1, filed IA No. 1695/2023 alleging that the Appellant's application for Corporate Insolvency Resolution Process (CIRP) was fraudulent and mal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mitted into CIRP by way of the order passed by Hon'ble NCLT dated 13.11.2019 and the CIRP process was commenced in terms of the provisions of the IBC, 2016. In the CIRP of the Corporate Debtor, claims were invited and the collated by the Resolution Professional and accordingly the constitution of the CoC was carried over the period of the CIRP. During the CIRP the claims of the present Appellant (Santoshi Finlease Private Limited) as well as its sister concern (Santoshi Hyvolt Electricals Private Limited) were filed as financial debt. Accordingly, they were part of the list of financial creditors, without having a right to vote, being a related party to the Corporate Debtor. During the first few meetings of the CoC, the Mittal Family Members were attending the meetings, as part of "Suspended Management/Suspended Directors". During the CIRP, the then resolution professional, following the process laid down under the Code, invited prospective resolution applicants to submit the resolution plan and accordingly certain resolution plans were submitted in the CIRP of the Corporate Debtor and were discussed by the CoC over the period of various CoC meetings. During the 14ª CoC me ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... truction of the CD. All payments were made through account transfer. It claims that Rs. 92 lakhs were paid directly to the CD and remaining was paid to the vendors of the Respondent No.2 - CD. It is claimed that the Appellant transferred a sum of Rs 4,89,28,694/- (rupees four crores, eighty-nine lakhs, twenty-eight thousand, six hundred and ninety-four only) to Respondent No. 2 or its vendors between 08.07.2019 and 15.11.2019, which is reflected in the ledger maintained by Respondent No. 2. The Appellant argues that the debt and default were adequately proven to initiate CIRP against Respondent No. 2. It claims that there is a "loan agreement" which was signed between the companies, there is a provision of interest @ 18% as per the loan agreement. Since there was a default in the payment of the loan and the default was more than the minimum threshold stipulated in Section 4(1) of the IBC, the Adjudicating Authority had no further discretion except to admit the Section 7 Application and consequently initiate the CIRP against the Respondent No.2. Adjudicating Authority has not accepted the petition and rather has entertained the IA of Respondent No.1 - SBI under Section 65 of the IBC ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... due consideration of the full scope of evidence and circumstances. 11. The AA also failed to recognise that Respondent No. 1 had a mala fide intention when filing its Application to dismiss the Section 7 Petition filed by the Appellant. At the time of filing the Petition, Respondent No. 1 had already initiated SARFAESI proceedings against Respondent No. 2 before the DRT. The goal of this Application was to achieve a favourable outcome that would allow Respondent No. 1 to recover money from Respondent No. 2 while harming the interests of other stakeholders, who were seeking to revive Respondent No. 2 through CIRP. Additionally, the collusion between Respondent Nos. 1 and 2 is evident because Respondent No. 2 has not opposed the ongoing SARFAESI proceedings and, during the previous CIRP initiated on 13.11.2019, Respondent No. 1 sold properties of the Guarantor (Respondent No. 2) in violation of the moratorium. The Interim Resolution Professional (IRP) had filed several Applications (IA Nos. 3340/2020 and 4296/2020) against Respondent No. 1 in relation to this violation. To avoid further scrutiny of these violations, Respondent No. 1 is attempting to prevent Respondent No. 2 from en ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nfounded, resulting in the wrongful acceptance of Respondent No. 1's Section 65 Application. 15. The AA erred in recognizing the loan agreement and default, but still dismissed the Section 7 Petition based on Respondent No. 1's assertions. The Appellant contends that this decision is legally flawed and should be set aside. During a prior CIRP (CP(IB) 2122/2019) for Respondent No. 2, Respondent No. 1 was found colluding with Respondent No. 2 in financial irregularities. Despite the moratorium, Respondent No. 1 regularized directors and shareholdings, violating court orders-an issue raised before the Tribunal. 16. Respondent No. 1, holding a 92% share in the CoC, incurred CIRP costs exceeding ₹3 crores, funded through payments from the Appellant under the 17.08.2019 loan agreement. After NCLAT set aside the CIRP, Respondent No. 1 should have pursued recovery from Ms. Shalini Choudhary, the Financial Creditor in CP(IB)/2122/2019, under Section 65 of the IBC. 17. The AA failed to properly establish or explain the necessary prima facie opinion under Section 65 of the IBC. Specifically, it did not provide any justification for why the Appellant's initiation of CIRP through t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that there was no dispute regarding the loan amount. 21. Despite the resignation of the Mittal group members from their Director positions at Respondent No. 2 on 24.09.2019, the Financial Creditor continued to make payments as per the loan agreement dated 17.08.2019, based on specific requests from Respondent No. 2's CEO, Mr Navneet Jain, and director Ms Swati Bhatnagar. These payments, amounting to ₹1,30,04,561/- (rupees one crore, thirty lakhs, four thousand, five hundred and sixty-one only) were directed to vendors of Respondent No. 2. The Tribunal failed to recognise that these transactions were fully documented and executed through account transfers, as outlined in the loan agreement. The Financial Creditor filed necessary records (eg, documents dated 20.08.2019, 07.09.2019, and 12.09.2019) demonstrating the ongoing fulfilment of the loan terms even after the resignation of the Mittal group. The payments were made to support Respondent No. 2 and protect it from the negative consequences of multiple CIRPs. 22. The Appellant has relied upon the following judgements to support his case: 'Innoventive Industries Ltd vs ICICI Bank,' 2018 (1) SCC 407: an Application un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... signed from the Board and transferred their entire shareholding to Sh Naveen Jain. Respondent No. 2 changed its management without obtaining prior permission from Respondent No. 1. To revive the company, Sh Naveen Jain approached various companies and, on 14.03.2018, entered into a Memorandum of Understanding with Mothers Dairy Fruit and Vegetables Pvt Ltd. The agreement outlined that Mothers Dairy would start poly pack milk operations under its brand, based on a sales and purchase agreement model, on a principal-to-principal basis. In 2019, the then directors of Respondent No. 2 entered into an investment arrangement with a group of individuals known as the Mittal family members-Ms Seema Mittal, Mr Kaushal Mittal, Mr Yug Mittal, and Mr Rishik Mittal. All four became directors of Respondent No. 2 from 01.07.2019 to 24.09.2019, as reflected in the master data of Respondent No. 2 available on the MCA website. From 01.07.2019 to 23/24.09.2024, the Mittal family members held the majority on the Board of Respondent No. 2. During this period, an alleged board resolution was passed on 30.07.2019, and an alleged loan agreement was executed between the Appellant and Respondent No. 2 on 17.0 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e following Resolution Applicants, who had submitted their plans, be presented to the CoC members with voting rights, namely State Bank of India (Respondent No. 1) and Smt Shalini Chaudhary: "Maharaja Agro Foods Pvt Ltd, Sushil Kumar Singh in Consortium with M/S Fair Deal Food Ventures Pvt Ltd, Mr Navneet in consortium with M/S Capital Trade Link Ltd and Santoshi Hyvolt Electricals Pvt Ltd (as associate concern of the Appellant herein)" None of the Resolution Plans were approved by the CoC, as none of the plans were deemed acceptable to the CoC. 27. One of the directors of Respondent No. 2 filed an Appeal before the Tribunal, which, by Order dated 05.08.2022, dismissed the Impugned Order dated 13.11.2019, passed by the AA. As a result, Respondent No. 2 was removed from the CIRP. After Respondent No. 2 was removed from the CIRP, Respondent No. 1, as the sole Secured Financial Creditor, re-initiated the SARFAESI proceedings. They arranged for a fresh valuation of the properties and sought redirection of CMM/DM Orders issued three years prior. The reserve price for the e-auction under SARFAESI was set at INR 28.68 crores as of 08.02.2023. Subsequently, Respondent No. 1 took physic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inst Mr Anant Chaudhary, Mrs Shalini Chaudhary, Mr Vikas Yadav, and Mr Navneet Jain. Additionally, Respondent No. 2 claimed that the disputes stemmed from the Mittal family's failure to invest the agreed amount. The Appellant's case before the AA was that Respondent No. 2 borrowed INR 5 crores from the Appellant under a loan agreement dated 17.08.2019, which Respondent No. 2 failed to repay. The loan agreement was executed between the Appellant and Respondent No. 2 during the period when the Mittal family members were in control of Respondent No. 2, specifically from 01.07.2019 to 23/24.09.2019. The Mittal family members, who controlled both the Appellant Company and Respondent No. 2, decided to borrow the money from the Appellant. Mr Yug Mittal, who filed CP (IB) No. 662 of 2022 on behalf of the Appellant, signed the loan agreement on behalf of Respondent No. 2. Additionally, his sister, Ms Kriti Mittal, who was admitted by the Appellant's Counsel to be his sister, signed the loan agreement on behalf of the Appellant Company. 29. A CIRP was initiated against Respondent No. 2 by an earlier Order dated 13.11.2019 in CP No. IB 2122(ND)/2019. During the process, the Appel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 2, as outlined in the chart presented by the Appellant. These repeated attempts to initiate CIRP underscore the ongoing legal battles and challenges faced by Respondent No. 2. 30. The AA correctly allowed the Application of Respondent No. 1 and dismissed the CP (IB) No. 662 of 2022 filed by the Appellant on 12.06.2023. The Authority held that the Petition was filed by the Appellant with malicious and fraudulent intent, specifically to push Respondent No. 2 into CIRP and wrongfully take control of the company. Therefore, the AA did not err in dismissing the Petition, as the Appellant's only intent was to initiate the CIRP for improper purposes. 31. The Respondent argues that the AA rightly allowed IA 1695 of 2023 and imposed the fine on the Appellant for filing a Petition with malicious and fraudulent intent. Appraisal 32. We have heard Counsels of both sides and perused materials on record. 33. The main issues before us are whether there is a debt and default for Section 7 Petition to be admitted and whether the Section 7 Petition was filed with malicious intent or not and also whether the penalty of Rs 10,00,000/- imposed on the Appellant is justified or not. 34. First of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 11.2019, the date mentioned in Part IV of the Company Petition, because by that time, a moratorium had come into effect due to the first round of insolvency. Given that the Loan Agreement was valid from 08.07.2019 to 31.10.2019, and during this period, both Kaushal Mittal and Yug Mittal were Directors in both the CD and the Appellant, they were directly responsible for any default by the CD. The filing of the Section 7 Petition by these individuals, while being Directors of the Financial Creditor, was not intended to seek a genuine resolution for the CD but rather to harm its interests, thereby demonstrating malicious intent. The Appellant is a related party to the CD, with common Directors during the relevant period when the alleged debt and default occurred. We find merit in the argument that the Mittal family members, who controlled both entities at the time, orchestrated the Loan Arrangement, making the claim self-serving and legally untenable. The Appellant and its related entities were actively involved in the management of the CD during the transactions in question, reinforcing the case for malice. 36. Thus, we find strength in the arguments of Respondent No. 1-SBI that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ittal and Rishik Mittal were appointed as Directors in the CD on 01.07.2019 and remained Directors of the CD till 23/24.09.2019 [Page 14 and 15 of Reply]. Contemporary Investment Term Sheet dated 19.06.2019 was also signed, under which the Santoshi Group/Mittal Family acquired 80% shareholding in CD [@ Page 13 of the Rejoinder filed by the Appellant]. Even though it is claimed by the Appellant that the Term Sheet dated 19.06.2019 was entered amongst Mr Navneet Jain, Santoshi Group, Vikas Yadav and Mr Anant Choudhary for reviving the company, yet we don't find any other consideration except for payment of Rs 92 lakhs from the Santoshi Finance to the CD for acquiring stake in the company by subscribing to equity or preference share and obtaining Directorship in the CD and cannot be considered as loan. Therefore, in the facts and the circumstances of the case we find that all the amounts shown as amount paid by the Appellant, were paid to acquire stake in CD and appoint the Directors. We cannot but conclude that the amount of Rs 92,00,000/- in question was not a loan but instead infused by the Appellant as an investment in equity to acquire control and Directorship in the CD, and not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eriod. However, as these payments were not directly disbursed to the CD, they do not qualify as a financial debt under Section 5(8) of the Insolvency and Bankruptcy Code, 2016 ("Code"). Consequently, no debt, as defined under the Code, has arisen from these transactions, rendering the present claim untenable and failing to meet the necessary threshold for initiating proceedings under Section 7 of the Code. 42. For initiating proceedings under Section 7 of the Code, the existence of a "financial debt" and a corresponding "default" is a sine qua non. In the present case, we examine when the loan was recalled by the Appellant and whether a consequent default occurred. Assuming the alleged debt was disbursed under the purported Loan Agreement dated 17.08.2019, we note that the Agreement does not clearly specify a repayment date. The debt has been disbursed from 08.07.2019 to 15.11.2019 according to Part IV of the Company Petition under Section 7 of the Code, and the Appellant has designated 15.11.2019 as the date of default [Page 83 of the Appeal]. However, as of 13.11.2019, the CD had already been admitted into CIRP under another Company Petition. Furthermore, under Clause 7(d) of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Private Limited-an associate concern of the Appellant-had submitted a resolution plan to acquire the CD [@ Page 37 of Reply]. Moreover, the Appellant and its related entities were actively involved in the management of the CD at the time of the alleged transactions, demonstrating a clear element of malice. We find merit in the argument that the Mittal Family Members, who controlled both the CD and the Appellant during the relevant period, orchestrated the alleged loan arrangement, rendering the claim self-serving and legally untenable. It is evident that the present petition was filed with the sole intention of obstructing recovery proceedings. Although the first round of CIRP, initiated in 2019, was ultimately dismissed by this Hon'ble Appellate Tribunal on 05.08.2022, the current events indicate that, through this second unsuccessful attempt at CIRP-now the subject of this appeal-the Appellant is merely seeking to delay the legitimate recovery proceedings initiated by Respondent No. 1 under the SARFAESI Act. 45. The Appellant has sought to rely on the judgment of this Appellate Tribunal in Rahul Aneja vs Sushant Aneja and Anr (Company Appeal (AT) (Insolvency) No. 407 of 2018, da ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hority vested regarding the fraudulent or malicious initiation of proceedings: "65. Fraudulent or malicious initiation of proceedings: 1) If, any person initiates the insolvency resolution process or liquidation proceedings fraudulently or with malicious intent for any purpose other than for the resolution of insolvency, or liquidation, as the case may be, the Adjudicating Authority may impose upon such person a penalty which shall not be less than one lakh rupees, but may extend to one crore rupees." The IA filed by SBI specifically addressed this issue, and the Appellant had already submitted a written reply, including arguments, which are recorded on page 68 of the APB. Therefore, the claim that the principles of natural justice were not followed by the AA is unfounded. Furthermore, there is no requirement for the AA to form a prima facie view under Section 65, as the provision does not necessitate such a determination. 48. The Appellant has also contended that Respondent No. 1-SBI- acted with mala fide intent when filing its application to dismiss the Section 7 Petition submitted by the Appellant. Respondent No. 1 had already initiated SARFAESI proceedings against Responden ..... X X X X Extracts X X X X X X X X Extracts X X X X
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