2019 (9) TMI 1566 - Tri - Companies Law

Tribunal Admits Petition, Initiates Corporate Insolvency Resolution Process

Asset Reconstruction Co. (India) Ltd. Versus Palm Lagoon Backwater Resorts Pvt Ltd.

The Tribunal admitted the petition under Section 7 of the I&B Code, declaring a moratorium as per Section 14 of the Code. An Interim Resolution ... Maintainability of application - initiation of CIRP - Corporate Debtor failed to make repayment of its dues - Financial Creditors - assignment of debt - validity of Assignment Agreement - privity of contract - existence of debt and dispute or not - HELD THAT:- A Financial Creditor falls under section 5(7) can file an application for initiating corporate insolvency resolution process against a Corporate Debtor before this Adjudicating Authority when the default has occurred. No doubt the debt claimed is a financial debt as defined under section 5(8) of I & B Code. Herein this case Annexure 5 is found a legally executed assignment agreement. It is a registered document, stipulating all the terms and conditions. Annexure 5 proves that Financial Creditor is an assignee comes under the purview of section 5(7) of I & B code - The assignment of debt not at all affect the right of the principle borrower/corporate guarantor (Corporate Debtor in this case) and therefore, Corporate Debtor, being evident, does not have any right to object to the assignment of the debt by the lender. The rest of the allegations that Financial Creditor filed this petition with mala fide intention, that Financial Creditor suppressed material facts are all found not worthy for consideration. In an application of this nature, this Adjudicating Authority is bound firstly to consider as to whether there is existence of default from the records and information utility or based on other evidence furnished by the Financial Creditor. If the Financial Creditor succeeds in proving default of which the claim put forward by the Financial Creditor and satisfy Section 7(5)(a) of the I & B Code, this Adjudicating Authority is bound to admit the application. Application admitted - moratorium declared. Issues Involved:1. Status of Financial Creditor.2. Validity of Assignment Agreement.3. Classification of Corporate Debtor.4. Existence of Default.5. Privity of Contract between Financial Creditor and Corporate Debtor.6. Legality of Multiple Proceedings.Detailed Analysis:1. Status of Financial Creditor:The Financial Creditor, Asset Reconstruction Company (India) Limited, filed the application under Section 7 of the Insolvency and Bankruptcy Code, 2016, seeking initiation of the Corporate Insolvency Resolution Process (CIRP) against the Corporate Debtor. The Financial Creditor claimed its status based on an assignment agreement with United Bank of India, which had originally extended a term loan to the Principal Borrower, Nessa Leisure Limited. The Tribunal affirmed that the Financial Creditor qualifies as a 'Financial Creditor' under Section 5(7) of the I&B Code, as the debt owed to United Bank of India was legally assigned to it.2. Validity of Assignment Agreement:The Corporate Debtor challenged the validity of the assignment agreement, arguing that it was not legally executed and that the Financial Creditor had no privity of contract with the Corporate Debtor. The Tribunal found that Annexure 5, the assignment agreement, was legally executed and registered, thus validating the Financial Creditor's right to enforce the debt. The Tribunal cited the Delhi High Court's decision in Hindon River Mills Ltd. vs. IFCI & Anr., which held that the assignment of a debt does not affect the debtor's rights.3. Classification of Corporate Debtor:The Corporate Debtor argued that it did not owe any debt to the Financial Creditor and thus could not be classified as a Corporate Debtor under Section 3(8) of the I&B Code. The Tribunal rejected this argument, stating that a Corporate Debtor is defined as a corporate person who owes a debt, which includes any counter-indemnity obligation in respect of a guarantee. Since the Corporate Debtor had guaranteed the loan extended to the Principal Borrower, it was classified as a Corporate Debtor.4. Existence of Default:The Tribunal examined the evidence provided by the Financial Creditor, including acknowledgments of debt by the Principal Borrower and the classification of the loan account as a Non-Performing Asset (NPA). The Tribunal found that the Financial Creditor had successfully proven the existence of default, citing letters and statements of accounts that showed the amount due from the Corporate Debtor.5. Privity of Contract between Financial Creditor and Corporate Debtor:The Corporate Debtor contended that there was no privity of contract between it and the Financial Creditor. The Tribunal dismissed this contention, stating that the assignment of the debt did not require a new contract between the assignee (Financial Creditor) and the Corporate Debtor. The Tribunal emphasized that the assignment agreement legally transferred all rights and obligations from the United Bank of India to the Financial Creditor.6. Legality of Multiple Proceedings:The Corporate Debtor argued that the Financial Creditor had already initiated proceedings against the Principal Borrower in another forum, making the current application illegal and non-maintainable. The Tribunal rejected this argument, stating that the Financial Creditor had the right to initiate CIRP against the Corporate Debtor independently of other proceedings. The Tribunal also noted that any amount recovered from the Principal Borrower would be proportionately reduced from the claim against the Corporate Debtor.Conclusion:The Tribunal admitted the petition under Section 7 of the I&B Code, declaring a moratorium as per Section 14 of the Code. The Tribunal appointed an Interim Resolution Professional (IRP) and directed necessary public announcements. The Tribunal concluded that the Financial Creditor had successfully established its claim and the existence of default, thus warranting the initiation of CIRP against the Corporate Debtor. The application was disposed of with no order as to costs.