2017 (11) TMI 1339 - Tri - Insolvency and Bankruptcy

Petition Denied: Claim Not Financial Debt

Vivek Gupta Versus M/s Proactive Plast Pvt. Ltd.

The Tribunal rejected the petition to initiate Corporate Insolvency Resolution Process under Section 7 of the Insolvency and Bankruptcy Code, 2016, ruling ... Corporate Insolvency Resolution Process - proof of eligible debt - Held that:- The present claim does not fall within the definition of a financial debt nor is it an unsecured loan repayable on demand. There is no Demand Promissory Note executed, nor is there any agreement for payment of any interest. As submitted by the Corporate Debtor and not denied by the Operational Creditor, the amount given by him along with 6 others was for promoting and setting up a business. The terms for raising the Bank loan necessitated investment of the margin money. This was done by all the promoters and is reflected as unsecured loans, subordinate to the claim of the Bank. The Bank agreement corroborating this is on record. Though it is admitted by the Ld. Counsel for the Financial Creditor that this unsecured loan would be subordinate to the claim made by the Canara Bank, it appears that notwithstanding his agreement not to seek recovery of his unsecured loan till the liability of Canara Bank stands extinguished or his undertaking not to participate in Insolvency proceedings, it is his wish and desire that the Resolution Process be initiated and the entire project be dumped before it comes into operation, irrespective of whether he can realise any proceeds or not in the watershed for repayment should the assets of the Corporate Debtor be liquidated. It is being noted that Canara Bank is not an aggrieved party. The said attitude of the Financial Creditor is irreprehensible as the principal money lender i.e. Canara Bank has not made any claim. Insolvency Resolution Process of a corporate entity cannot be initiated on such grounds which reek of personal vendetta. The Financial Creditor seeks to scuttle the project even before it get into operation. Such arm twisting tactics cannot be the basis for initiation of Insolvency Process. Issues:Initiation of Corporate Insolvency Resolution Process under Section 7 of the Insolvency and Bankruptcy Code, 2016 based on non-payment of debt.Analysis:The petition was filed by a Financial Creditor seeking to initiate Corporate Insolvency Resolution Process against the Corporate Debtor due to non-payment of a loan amount of Rs. 1,81,00,000 with interest at 18% per annum. The Financial Creditor was also a Director and shareholder in the Respondent company. Despite various reminders and legal notices, the loan remained unpaid, as acknowledged in the financial statements of the Corporate Debtor for the relevant years.The Respondent company contested the claim, stating that the amount was not a loan but part of the Margin Money required for obtaining financial assistance from Canara Bank to set up the business. All shareholders, including the Financial Creditor, contributed to the Margin Money as unsecured loans, with no agreement for payment of interest. The Respondent also highlighted a Subordination Agreement with the bank, making the unsecured loans subordinate to the bank's claims.The Tribunal found merit in the Respondent's arguments, ruling that the claim did not qualify as a financial debt or an unsecured loan repayable on demand. The transaction was for setting up the business and was part of the Margin Money requirement for the bank loan. The Tribunal noted that the Financial Creditor's actions seemed driven by personal vendetta, seeking to scuttle the project without regard for the bank's interests. Initiating the Insolvency Resolution Process based on such grounds was deemed inappropriate.Ultimately, the petition was rejected, and costs of Rs. 25,000 were imposed on the Respondent Company. The Tribunal emphasized that personal motives and arm-twisting tactics should not form the basis for initiating the Insolvency Process, especially when the principal lender, Canara Bank, had not made any claims, and the project's viability was at stake.