2020 (8) TMI 546 - AT - Insolvency and Bankruptcy

Adjudication of Insolvency Petition: 'Financial Debt' Definition Upheld

The appeal involved the adjudication of an insolvency petition under Section 7 of the Insolvency and Bankruptcy Code. The Adjudicating Authority admitted ... Maintainability of application - Corporate Debtor failed to make repayment of its dues - Financial debt or not - Appellant has assailed the impugned order passed by the Adjudicating Authority on the basis that the alleged debt does not fall under the definition of ‘financial debt’ as defined under Section 5(8)(f) of the Code - HELD THAT:- The Petitioner, as Director has a status different than that of the Creditor. In the instant case, the Petitioner has invoked the provision of the Code as one of the Creditors of the Respondent Company, and the amount claimed by the Petitioner is a ‘financial debt’ within the meaning of the Code. The Petitioner contends that the bank statements reveal that the transactions have been made by him in favour of GNIDA on behalf of the Company, given the Resolution Plan passed by the Board of Directors in its meeting dated 01st September 2015. The copies of the balance sheets filed for the years ending 2015, 2016 and 2017 depict the borrowings from Directors, Shareholders and related parties under the heading ‘Short Term Borrowings’ to the tune of ₹ 9 crore. The record is sufficient to show that the amount as claimed by the Applicant is ‘due and payable’, which was disbursed by the Petitioner to GNIDA on behalf of the Respondent Company and based on the above the Adjudicating Authority has admitted the petition. Reliance was placed in the three Member’s Bench of this Tribunal in the case of DR. B.V.S. LAKSHMI VERSUS GEOMETRIX LASER SOLUTIONS PRIVATE LIMITED [2018 (2) TMI 447 - NATIONAL COMPANY LAW APPELLATE TRIBUNAL, NEW DELHI] has held that has noticed that the Appellant has failed to establish that there has been disbursement against consideration of time value and money. The amount, as reflected in the balance sheet of the Company merely describes certain ‘unsecured loans’ being payable to the Appellant whereas the Auditor certificate states that no amount is due and payable to the Appellants. In the circumstances, this Tribunal has rejected the contention of the Appellant and held that Appellant has failed to show that the amount has been raised by the Respondent under any other transaction, such as sale or purchase agreement, having the commercial effect of borrowing - the above case law does not apply to the facts of the present case. In the instant case, the Respondent No.1 has advanced various sums to the Corporate Debtor B.K. Educational Society to ease its liquidity crunch, thereby improving its economic prospects and to save the allotments by making direct payment to the GNIDA for the plot allotted in the name of Corporate Debtor - the amount deposited by the respondent No.1 in the account of GNIDA to save the corporate debtor on account of financial crunch to save the allotment made in the name of corporate debtor falls within the ambit of ‘financial debt’. Admittedly, the amount has not been paid back, and there is a default. The adjudicating authority had admitted the petition filed under Section 7 of the Insolvency & Bankruptcy Code, 2016. There are no justification for interfering with the impugned order - appeal dismissed. Issues Involved:1. Adjudication of an insolvency petition under Section 7 of the Insolvency and Bankruptcy Code, 2016.2. Determination of whether the claimed amount constitutes a 'financial debt' within the meaning of the Code.3. Examination of the validity of the alleged loan transactions and board resolution authorizing loans.4. Assessment of default in repayment obligations and admission of the insolvency petition.Issue 1: Adjudication of an insolvency petition under Section 7 of the Insolvency and Bankruptcy Code, 2016:The appeal stemmed from an order by the Adjudicating Authority admitting an application under Section 7 of the Insolvency and Bankruptcy Code against a Corporate Debtor. The Appellant contended that the Respondent had filed the insolvency petition to evade repayment obligations under a Memorandum of Understanding (MoU) dated January 27, 2016. The MoU stipulated that the Respondent was jointly liable to repay a specific amount to the Appellant and his wife, with shares of another entity held as security. The Adjudicating Authority found the application complete and admitted it, leading to the appeal.Issue 2: Determination of whether the claimed amount constitutes a 'financial debt' within the meaning of the Code:The Respondent argued that the claimed amount was not a 'financial debt' as per Section 5(8) of the Code. However, the Adjudicating Authority deemed the amount as 'due and payable,' observing that the Petitioner had disbursed funds to the Respondent Company, which defaulted in repayment exceeding the statutory limit. The Authority admitted the petition based on the understanding that the claimed amount qualified as a 'financial debt' under the Code.Issue 3: Examination of the validity of the alleged loan transactions and board resolution authorizing loans:The Appellant challenged the Adjudicating Authority's decision, claiming the amount did not fall under the definition of 'financial debt.' Reference was made to a previous Tribunal order emphasizing the necessity of establishing the debt's due and payable status. However, the Tribunal found that the Respondent's advances to the Corporate Debtor aimed at improving its financial health constituted a 'financial debt,' as there was no repayment and a clear default, leading to the petition's admission.Issue 4: Assessment of default in repayment obligations and admission of the insolvency petition:The Tribunal dismissed the appeal, upholding the Adjudicating Authority's decision to admit the insolvency petition. It emphasized that the Respondent's funds injection to save the Corporate Debtor during a financial crisis constituted a 'financial debt' due to the default in repayment. The Tribunal concluded that the claimed amount, deposited to prevent the Corporate Debtor's financial collapse, fell within the 'financial debt' category, justifying the petition's admission under Section 7 of the Insolvency & Bankruptcy Code, 2016.This detailed analysis provides an insight into the legal judgment's core issues and the rationale behind the decision-making process concerning the adjudication of the insolvency petition and the determination of the claimed amount as a 'financial debt' under the Insolvency and Bankruptcy Code.