2021 (4) TMI 947 - Tri - Insolvency and Bankruptcy

Application Dismissed Due to Novation of Contract - Section 7 Insolvency Code

Bank of Baroda Versus JBF Industries Ltd.

The Tribunal dismissed the application under Section 7 of the Insolvency and Bankruptcy Code, 2016, due to a novation of the original contract between the ... Maintainability of application - initiation of CIRP - Corporate Debtor failed to make repayment of its dues - Financial Creditors - accounts classified as NPA - loan given by consortium of lenders - novation of contract - existence of debt and dispute or not - HELD THAT:- It is an admitted position that the consortium of lenders headed by the Applicant had given working capital loan. It is also an admitted position that lead member of such consortium has also given corporate term loan. It is also not in dispute that the Corporate Debtor has defaulted in payment thereof. On behalf of Corporate Debtor, various technical pleas as regard to the completeness and validity of application filed under Section 7 of Insolvency and Bankruptcy Code, 2016, have been made. However, we are not inclined to deal with the same at this stage though generally such issues are decided at the first instance before deciding the issues on merit. In this case, this is being an application filed under Section 7 of Insolvency and Bankruptcy Code, 2016, we have to see the main factor i.e. whether debt is due and payable. A plea was made that this debt was not due and payable on the date of classification of the account of the Corporate Debtor As NPA as mentioned in the Form-1 filed by the Financial Creditor. Further, it was claimed that there was a restructuring of the loan and new time schedule was prescribed which was acted upon by both sides, hence, any application filed under Section 7 of Insolvency and Bankruptcy Code, 2016 could be filed only on the basis of default which took place thereafter. Accordingly, focussed argument was made that in the present application, debt was not payable and pre-mature. In this regard, based on the subsequent documents executed by and between the financial lenders and the Corporate Debtor, it was claimed that it was an instance of novation of contract as per the provisions of Section 62 of Indian Contract Act, 1872. There is established fact situation of a novation of contract between parties whereby earlier arrangement/contract stood extinguished and parties are governed by the new contract/arrangement. This factual position is of substantial nature and goes to the root of the matter because if such subsequent contract is ignored, then the sanctity of contract gets lost - the proceedings initiated on the basis of any default committed by the Corporate Debtor prior in 09.04.2018 are not maintainable. Application dismissed. Issues Involved:1. Completeness of the application under Section 7 of the Insolvency and Bankruptcy Code (IBC), 2016.2. Inconsistencies in the date of default.3. Alleged novation of contract.4. Validity and sufficiency of evidence of debt and default.5. Admissibility of unstamped and unregistered documents.Issue-wise Analysis:1. Completeness of the Application under Section 7 of IBC:The Corporate Debtor argued that the application filed by the Financial Creditor was incomplete, citing several deficiencies such as incomplete authorization, incomplete certificates of registration of charge, incomplete financial contracts, and absence of a certificate under the Banker's Books Evidence Act, 1891. The Financial Creditor countered that any alleged incompleteness was technical and had been rectified before the commencement of the hearing. The Tribunal noted that the Form-I contained the essential ingredients required to maintain a Section 7 application and that the alleged incompleteness did not affect the maintainability of the petition.2. Inconsistencies in the Date of Default:The Corporate Debtor pointed out several discrepancies in the date of default specified by the Financial Creditor. The Financial Creditor admitted an inadvertent error in mentioning the date of default in the petition and modified it accordingly. The Tribunal held that mentioning the wrong date in documents other than Form-1 does not have any relevance or bearing on the merits of the application filed under Section 7 of IBC, 2016. The Tribunal focused on the date mentioned in Form-1, which is the prescribed form for filing an application under Section 7.3. Alleged Novation of Contract:The Corporate Debtor claimed that the original contract was novated by a new agreement, citing a letter dated 25.10.2017, which offered to review and restructure the facilities for a period of 6 months. The Tribunal noted that the restructuring was done in pursuance of the RBI circular dated 12.02.2018, which was subsequently rescinded. The Tribunal held that the original contract/arrangement stood substituted by the new agreement, establishing a novation of contract between the parties. Consequently, the proceedings initiated on the basis of any default committed by the Corporate Debtor prior to 09.04.2018 were deemed not maintainable.4. Validity and Sufficiency of Evidence of Debt and Default:The Corporate Debtor argued that the Financial Creditor failed to furnish any record evidencing debt or default. The Tribunal noted that the consortium of lenders had given working capital and corporate term loans to the Corporate Debtor, and it was an admitted position that the Corporate Debtor had defaulted in payment. The Tribunal found that the Financial Creditor had provided sufficient evidence of debt and default, including acknowledgments of debt in the Corporate Debtor's financial statements and annual reports.5. Admissibility of Unstamped and Unregistered Documents:The Corporate Debtor contended that the agreements forming part of the financial contracts were insufficiently stamped, unstamped, and unregistered, making them unenforceable. The Financial Creditor argued that the submission was theoretical and vague, and the documents in question were not being enforced in the present proceedings. The Tribunal held that the question of appropriate stamping would only arise if the Financial Creditor sought to enforce the documents. The Tribunal also noted that even if the documents were assumed to be improperly stamped or unregistered, it did not affect the initiation of insolvency proceedings by a Financial Creditor under Section 7 of IBC.Conclusion:The Tribunal dismissed the application filed under Section 7 of IBC, 2016, on the grounds that the proceedings were based on an event that became invalid due to a subsequent contractual arrangement between the parties. The Tribunal also dismissed the interlocutory applications (IA 54 of 2021 and IA 180 of 2021) as superfluous and unnecessary in light of the decision on the main application.