2020 (6) TMI 755 - AT - Insolvency and Bankruptcy

Dismissed appeal over interest-free loan; Subordination Agreement upheld

The appeal was dismissed as the Adjudicating Authority concluded that the interest-free loan disbursed to the Corporate Debtor lacked consideration for ... Maintainability of application - initiation of CIRP - Corporate Debtor failed to make repayment of its dues - financial debt - default or not - application was brought before the Adjudicating Authority at the instance of Vishnu Dutt Gupta, the Appeal claims that Vishnu Dutt Gupta was not authorized and the list of dates states that Vishnu Dutt Gupta was removed as MD from the Board on 6th February, 2019 - HELD THAT:- The fact remains that Vishnu Dutt Gupta still appears to be Director of the Corporate Debtor and the Adjudicating Authority, accepted the material pointed out by the said Director, which was found to be relevant. We do not intend to interfere. The Appellants may deny that they were not signatories to the Subordination Agreement but in the face of Affidavit of the Officer of Canara Bank and Subordination Agreement pointed out by the Officer, it can be said that the Appellants cannot maintain the Application under Section 7. The Adjudicating Authority need not settle and decide the claim of the Appellants denying the signatures in the Subordination Agreement of 2014. That is not necessary for the Adjudicating Authority to decide in proceeding under Section 7 of IBC. Considering the documents executed in favour of Canara Bank in ordinary course of business which is admitted by Ajay Kumar Agarwal, it must be said that the Appellants failed to establish that the loan extended by them is payable and hence there is “default”. In the absence of settling dues of Canara Bank, Appellants cannot claim that their dues have become payable, and thus there is “default”. The Adjudicating Authority has after considering the record, found that there was material in the form of MOU dated 29.04.2007 and Agreement dated 8th February, 2012 which dealt with interest free unsecured loan and equity shares to be allotted to both the parties and concluded that there was no time value of money and that it was not financial debt. Keeping in view the relationships between the parties and record, we find no reason to interfere with such findings recorded by the Adjudicating Authority. There are no substance in the Appeal - appeal dismissed. Issues:1. Interpretation of unsecured loan disbursed to a corporate debtor under the Insolvency and Bankruptcy Code, 2016.2. Validity and enforceability of Subordination Agreement in relation to the loan.3. Authority of directors and conflicting claims within the corporate debtor.4. Consideration of interest and time value of money in determining financial debt under IBC.5. Discretion of Adjudicating Authority in admitting applications under Section 7 of IBC.Issue 1: Interpretation of unsecured loan under IBC:The Appellants filed an application under Section 7 of the Insolvency and Bankruptcy Code, 2016, claiming to be Financial Creditors against the Corporate Debtor. The loan disbursed was interest-free and reflected in the Annual Financial Statements. The Adjudicating Authority concluded that the loan lacked consideration for the time value of money and did not qualify as financial debt under IBC, as there was no fixed repayment time. The Adjudicating Authority also noted the Subordination Agreement where the Appellants agreed to prioritize Canara Bank's claims. Therefore, the application was rejected.Issue 2: Validity of Subordination Agreement:The Subordination Agreement, signed by the Appellants and other directors, bound them to prioritize Canara Bank's claims over their own. The Adjudicating Authority found this agreement to be binding and rejected the Appellants' claim that they had not signed it. The presence of this agreement influenced the rejection of the application under Section 7 of IBC.Issue 3: Authority of directors and conflicting claims:The conflicting claims of Vishnu Dutt Gupta and Ajay Kumar Agarwal regarding the directorship and authorization within the Corporate Debtor were noted. Despite the differences among the directors, the Adjudicating Authority did not need to reconcile these conflicting stands. The Authority accepted relevant material presented by Vishnu Dutt Gupta, even though he was later removed as MD, as he still appeared to be a Director of the Corporate Debtor.Issue 4: Consideration of interest and time value of money:The Adjudicating Authority considered the absence of interest provision and fixed repayment time in the loan agreements, emphasizing that the loan lacked consideration for the time value of money. This interpretation influenced the finding that there was no default under the IBC provisions.Issue 5: Discretion of Adjudicating Authority:The Adjudicating Authority exercised discretion in admitting applications under Section 7 of IBC, particularly when the object appeared to be different from resolution. In this case, the Authority found no reason to interfere with its findings based on the relationships between the parties and the loan agreements.In conclusion, the Appeal was dismissed as the findings of the Adjudicating Authority regarding the loan nature, Subordination Agreement, authority of directors, and application under IBC were upheld.