2021 (1) TMI 935 - Tri - Insolvency and Bankruptcy

Tribunal admits application against Corporate Debtor, initiates CIRP. Financial Creditors recognized.

The Tribunal held that the application was maintainable and not time-barred. It found the applicants to be Financial Creditors with a financial debt. ... Maintainability under limitation and applicability of the Limitation Act to applications under the IBC - acknowledgement of liability and Section 18 of the Limitation Act - financial debt as disbursed against consideration for the time value of money - commercial effect of borrowing - admission under section 7 of the IBC and initiation of CIRP - moratorium under section 14 of the IBCMaintainability under limitation and applicability of the Limitation Act to applications under the IBC - acknowledgement of liability and Section 18 of the Limitation Act - Whether the Section 7 application was barred by limitation or was maintainable. - HELD THAT: - The Tribunal applied the settled principle that the Limitation Act applies to applications under sections 7 and 9 of the IBC and that the right to sue accrues when default occurs. The Financial Creditors pleaded a date of default in 2016 which, if unrelieved, would have rendered the petition time-barred. The Tribunal examined the communications relied upon by the Financial Creditors and held that the WhatsApp communication dated 23-5-2019 constituted an acknowledgement of liability falling within the ambit of Section 18 of the Limitation Act. Relying on precedents concerning the legal effect of acknowledgements given during negotiations, the Tribunal concluded that the acknowledgement revived the claim and brought the Section 7 application within the limitation period. [Paras 14]The application is within limitation and therefore maintainable.Financial debt as disbursed against consideration for the time value of money - commercial effect of borrowing - Whether the amounts paid by the applicants constitute a 'financial debt' and whether the applicants are 'financial creditors'. - HELD THAT: - The Tribunal analysed the agreement between the parties and the contractual scheme of payments and returns. The agreement provided for sharing of rental pool income, a guaranteed minimum return (9% of consideration for initial four years if actual rental income is lower) and an undertaking to buy back at a specified premium after five years. These terms were held to evidence an element of time value of money and a commercial effect akin to borrowing. Applying the definition of 'financial debt', the Tribunal found that the transaction had the commercial effect of a borrowing and thus the amounts disbursed by the applicants fall within the definition of 'financial debt' under the IBC, making the applicants 'financial creditors'. [Paras 17]The amounts paid qualify as a 'financial debt' and the applicants are 'financial creditors'.Admission under section 7 of the IBC and initiation of CIRP - moratorium under section 14 of the IBC - Whether the Section 7 application should be admitted and CIRP initiated, and consequential orders (moratorium, appointment of IRP, public announcement, vesting of management). - HELD THAT: - Having held that there was a financial debt and that default existed and that the application was within limitation, the Tribunal found the application complete and admitted it under section 7 of the IBC. Consequentially, the Tribunal ordered initiation of the Corporate Insolvency Resolution Process, directed the declaration of moratorium under section 14, required public announcement as per section 13 and applicable regulations, and vested management in the Interim Resolution Professional. The Tribunal appointed an Insolvency Professional as IRP (with directions regarding fee compliance, functions, reporting and administrative formalities) and issued ancillary directions including communication of the order to stakeholders and intimating the Registrar of Companies for updating records. [Paras 18, 19]The petition is admitted; CIRP is initiated, moratorium is declared and an IRP is appointed with directions as recorded.Final Conclusion: The Tribunal held the Section 7 application to be maintainable (limitation cured by an acknowledgement), held the payments to be a 'financial debt' (transaction having commercial effect of a borrowing), admitted the petition and directed initiation of CIRP with moratorium and appointment of an IRP along with usual consequential directions. Issues Involved:1. Maintainability of the application and whether the debt is time-barred.2. Whether the applicants are Financial Creditors and the debt due is a Financial Debt.Issue-wise Detailed Analysis:1. Maintainability of the application and whether the debt is time-barred:The Corporate Debtor argued that the application is barred by limitation as the debt became due on 31-6-2016, and the three-year limitation period expired on 30-6-2019. The Corporate Debtor relied on several Supreme Court judgments to support this argument. The Tribunal referenced the Supreme Court decision in B.K. Educational Services (P.) Ltd., which clarified that the Limitation Act applies to applications filed under sections 7 and 9 of the Insolvency and Bankruptcy Code (IBC) from its inception. According to Article 137 of the Limitation Act, the right to sue accrues when a default occurs, and if the default occurred over three years before the application, it would be barred unless Section 5 of the Limitation Act is applied to condone the delay.The Tribunal also considered the judgment in Innovative Industries Ltd. v. ICICI Bank Ltd., which stated that the adjudicating authority only needs to see the records of the information utility or other evidence produced by the financial creditor to satisfy itself that a default has occurred. Additionally, the Tribunal referenced the Supreme Court judgment in ITC Ltd. v. Blue Coast Hotels Ltd., which held that an acknowledgment of liability, even if made 'without prejudice,' constitutes an acknowledgment under Section 18 of the Limitation Act.The Tribunal found that the WhatsApp communication dated 23-5-2019 from the Corporate Debtor constituted an acknowledgment of liability, thereby bringing the application within the limitation period.2. Whether the applicants are Financial Creditors and the debt due is a Financial Debt:The Tribunal examined whether the amount disbursed by the Financial Creditors constituted a 'financial debt' under Section 5(8) of the IBC. The Financial Creditors had entered into an agreement with the Corporate Debtor on 17-8-2015 to invest in a project and purchase a 1/6th undivided interest in a resort. The Corporate Debtor agreed to pay 1/6th of the rental pool income and, if the rental pool income was less than 9% of the total consideration, to pay 9% of the total consideration for the initial four years. The Corporate Debtor also undertook to buy back the fraction at 140% of the original sale price after five years.The Tribunal found that the amount disbursed by the Financial Creditors had the commercial effect of a borrowing, as it involved the consideration for time value of money. The agreement included elements such as sharing rental income and a buyback condition, which indicated an economic gain or commercial effect of borrowing. Thus, the amount paid by the Financial Creditors was deemed to be a 'financial debt.'Conclusion:The Tribunal held that the application was maintainable and not barred by limitation. It also determined that the Financial Creditors were indeed Financial Creditors and the debt due was a Financial Debt. Consequently, the application was admitted, and the Corporate Insolvency Resolution Process (CIRP) was initiated against the Corporate Debtor. The Tribunal appointed an Interim Resolution Professional (IRP) and ordered a moratorium as per Section 14 of the IBC. The Tribunal also directed the management of the Corporate Debtor to cooperate with the IRP and submit necessary documents and information.