Petition Dismissed: Debt Converted to Equity, Claim for Interest Rejected

The Tribunal dismissed the Petition under Section 7 of the I&B Code, 2016, as the conversion of interest into equity shares extinguished the debt, and no financial debt or default was found. The Petitioner's claim for further interest on delayed payments was rejected, emphasizing that the I&B Code is not meant for mere recovery but for initiating CIRP for valid reasons. The Petitioner was directed to pursue recovery through other legal avenues.

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Issues Involved:

1. Whether the Petition under Section 7 of the I&B Code, 2016 is maintainable.
2. Whether there was a financial debt and default by the Respondent.
3. Whether the conversion of interest into equity shares extinguished the debt.
4. Whether the Petitioner is entitled to further interest on the delayed payment of interest.
5. Whether the proceedings under IBC can be used as a recovery mechanism.

Issue-Wise Detailed Analysis:

1. Maintainability of Petition under Section 7 of the I&B Code, 2016:

The Petition was filed by the Petitioner/Financial Creditor under Section 7 of the I&B Code, 2016, seeking to initiate Corporate Insolvency Resolution Process (CIRP) against the Respondent/Corporate Debtor for a default amount of Rs. 54,13,582/- as on 31.08.2018. The Respondent contended that the Petition is not maintainable as no financial debt was owed to the Petitioner, and any accrued interest had been converted into equity shares, extinguishing the debt.

2. Existence of Financial Debt and Default:

The Tribunal analyzed the financial transactions and obligations between the parties. The Respondent had borrowed Rs. 150 lakhs from the Petitioner, and the BIFR had declared the Respondent a sick industrial company, sanctioning a rehabilitation scheme. The Respondent defaulted in payments, resulting in accrued interest of Rs. 32,09,583/-. The Petitioner argued that the Respondent was liable for further interest due to delayed payments.

3. Conversion of Interest into Equity Shares:

The BIFR allowed the conversion of accrued interest into equity shares, and the Respondent issued shares worth Rs. 32,09,000/- to the Petitioner on 17.01.2008. The Tribunal noted that the Petitioner accepted these shares and could have sold them in the market. The BIFR's order and subsequent modifications were not appealed against by the Petitioner, indicating acceptance of the conversion terms.

4. Entitlement to Further Interest on Delayed Payment of Interest:

The Petitioner claimed further interest on the delayed payment of interest, amounting to Rs. 24,78,506/-. The Tribunal held that once the interest was converted into equity shares and accepted by the Petitioner, the debt was discharged. The claim for further interest did not constitute a financial debt under the I&B Code, as it was not disbursed against the consideration for the time value of money.

5. Use of IBC Proceedings as a Recovery Mechanism:

The Tribunal emphasized that the I&B Code is not a substitute for a recovery forum. The Supreme Court's judgments in Mobilox Innovations Private Limited vs. Kirusa Software Private Limited and Transmission Corporation of A.P. Ltd. vs. Equipment Conductors and Cables Ltd. were cited to support the position that the Code cannot be invoked for recovery of outstanding amounts but for initiating CIRP for justified reasons. The Tribunal concluded that there was no undisputed debt within the meaning of the Code, and the Petition was an attempt at recovery rather than resolution.

Conclusion:

The Tribunal dismissed the Petition, stating that the conversion of interest into equity shares extinguished the debt, and no financial debt or default existed under the I&B Code. The Petitioner was advised to seek recovery of dues, if any, under other laws or forums. No order as to costs was made.

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