2021 (5) TMI 319 - Tri - Insolvency and Bankruptcy

Financial Creditor's Petition Admitted, Initiates Corporate Insolvency Resolution Process

The Financial Creditor filed a petition under Section 7 of the Insolvency and Bankruptcy Code, 2016 against the Corporate Debtor for defaulting on a ... Conversion of operational debt into financial debt by subsequent agreement - maintainability of Section 7 petition - requirement of record of default / information utility evidence - admission of petition under Section 7 and commencement of CIRP - declaration of moratorium and its consequences - appointment of Interim Resolution ProfessionalConversion of operational debt into financial debt by subsequent agreement - The contractual conversion of amounts due for supply of goods into a loan by mutual agreement resulted in the operational debt becoming a financial debt. - HELD THAT: - The Tribunal found as a matter of fact that goods were supplied pursuant to a purchase order and payment remained unpaid. The parties thereafter entered into a Loan Agreement dated 05.03.2018 to repay the due amount in twelve instalments commencing April 2018. Having regard to this subsequent consensual agreement to convert the outstanding sum into a repayable loan, the Tribunal held that the earlier operational debt was transformed into a financial debt in consequence of the Loan Agreement. The Tribunal rejected the Corporate Debtor's contention that the amount remained only an operational debt and was therefore not a permissible basis for a Section 7 petition, noting that the subsequent agreement effected the change in the nature of the debt. [Paras 11, 14]The outstanding amount was a financial debt by virtue of the Loan Agreement and not merely an operational debt.Maintainability of Section 7 petition - requirement of record of default / information utility evidence - The petition under Section 7 was maintainable despite the Corporate Debtor's contention regarding absence of information-utility record. - HELD THAT: - The Corporate Debtor argued non-maintainability on the ground that the Financial Creditor had not furnished record of default from an information utility as required by Section 7(3). The Tribunal, however, observed that the Financial Creditor had produced evidence of supply, non-payment and the Loan Agreement evidencing the debt and default. The Tribunal treated the Corporate Debtor's objection as not sufficiently substantiated to negate the Financial Creditor's claim and held that the petition could be admitted on the established facts of default under the Loan Agreement. The Tribunal therefore did not accept the submission that failure to file an information utility record alone warranted dismissal. [Paras 12, 14]The Section 7 petition was maintainable and the objection based on absence of information-utility record did not bar admission.Admission of petition under Section 7 and commencement of CIRP - declaration of moratorium and its consequences - appointment of Interim Resolution Professional - The petition was admitted under Section 7, moratorium declared, and an Interim Resolution Professional appointed. - HELD THAT: - On finding that a financial debt was due and the Corporate Debtor had defaulted, the Tribunal admitted the petition under Section 7 of the IBC. Consequential directions were issued declaring the moratorium in terms of Section 14, including prohibition on institution or continuation of suits, transfer or disposal of assets, and protection of supplies of essential goods and services. The Tribunal directed immediate public announcement of the CIRP and appointed the proposed individual as Interim Resolution Professional upon satisfaction of the requisite consent and authorization formalities. [Paras 15, 16]The petition was admitted, moratorium declared, public announcement directed and the named Interim Resolution Professional appointed.Final Conclusion: The Tribunal held that the debt arising from supply of goods was converted into a financial debt by the Loan Agreement dated 05.03.2018, admitted the Section 7 petition on finding of default, declared moratorium under Section 14, directed public announcement of the CIRP and appointed the named Interim Resolution Professional. Issues:1. Admission of petition under Section 7 of the Insolvency and Bankruptcy Code, 2016.2. Maintainability of the petition based on the nature of the alleged financial debt.3. Submission of required documents by the Financial Creditor.4. Dispute regarding the financial debt between the parties.5. Conversion of operational debt into financial debt through a Loan Agreement.6. Decision on the admission of the petition and declaration of moratorium.Issue 1: Admission of petition under Section 7 of the Insolvency and Bankruptcy Code, 2016:The petition was filed by the Financial Creditor alleging default by the Corporate Debtor in repaying a substantial sum, seeking admission under Section 7 of the IBC. The Financial Creditor provided detailed averments regarding the transaction history, including a Purchase Order for supply of goods, subsequent non-payment, and conversion of the due amount into a Loan Agreement.Issue 2: Maintainability of the petition based on the nature of the alleged financial debt:The Corporate Debtor contested the maintainability of the petition, arguing that the transaction did not constitute financial debt as per Section 7(1) of the IBC. The Financial Creditor's submission highlighted the conversion of operational debt into financial debt through the Loan Agreement, which was crucial in establishing the basis for the petition.Issue 3: Submission of required documents by the Financial Creditor:The Corporate Debtor raised a procedural issue, stating that the Financial Creditor failed to submit the necessary records with the information utility as mandated. However, the Tribunal noted that despite this lapse, the subsequent Loan Agreement and the conversion of the debt justified the admission of the petition.Issue 4: Dispute regarding the financial debt between the parties:The Corporate Debtor denied the averments made by the Financial Creditor, claiming that the petition was an abuse of process of law. The Financial Creditor maintained that there was no dispute regarding the financial debt and proceeded with the application for recovery of dues based on the Loan Agreement.Issue 5: Conversion of operational debt into financial debt through a Loan Agreement:The Tribunal observed that the initial transaction for the supply of goods evolved into a Loan Agreement due to non-payment by the Corporate Debtor. This conversion of operational debt into financial debt was crucial in establishing the validity of the petition and the Financial Creditor's right to seek recovery through the insolvency process.Issue 6: Decision on the admission of the petition and declaration of moratorium:After considering the submissions and documents provided, the Tribunal admitted the petition under Section 7 of the IBC. A moratorium was declared, prohibiting legal actions against the Corporate Debtor, appointing an Interim Resolution Professional, and outlining the necessary steps for the Corporate Insolvency Resolution Process.This detailed analysis of the judgment highlights the key legal arguments, procedural aspects, and decision-making process involved in the case before the National Company Law Tribunal, Hyderabad Bench.