2021 (7) TMI 581 - AT - Insolvency and Bankruptcy

Tribunal dismisses appeal, deems application collusive, transaction not financial debt. Interim order vacated.

Shree Ambica Rice Mill Versus M/s KaneriAgro Industries Limited

Shree Ambica Rice Mill Versus M/s KaneriAgro Industries Limited - TMI Issues Involved:1. Whether the Adjudicating Authority has exceeded its jurisdiction while examining the nature of the transaction in questionRs.2. Whether the transaction in question is Financial Debt and the Corporate Debtor has committed defaultRs.3. Whether the application in question is collusiveRs.Issue-wise Detailed Analysis:Issue No. (i): Whether the Adjudicating Authority has exceeded its jurisdiction while examining the nature of the transaction in questionRs.The judgment refers to the Supreme Court's stance in Phoenix Arc Pvt. Ltd. Vs. Spade Financial Services Ltd. & Ors., emphasizing that the Insolvency and Bankruptcy Code (IBC) mandates identifying and annulling avoidable transactions to prevent undue benefits to any party at the expense of legitimate creditors. The Supreme Court in Swiss Ribbons Pvt. Ltd. v Union of India highlighted that even if an application under Section 7 meets all requirements, the Adjudicating Authority must exercise discretion carefully to prevent malafide initiation of Corporate Insolvency Resolution Process (CIRP). The Adjudicating Authority must investigate the real nature of the transaction to prevent misuse of IBC provisions. Consequently, the Tribunal concluded that the Adjudicating Authority did not exceed its jurisdiction by investigating the nature of the transaction.Issue No. (ii): Whether the transaction in question is Financial Debt and the Corporate Debtor has committed defaultRs.As per Section 5(8) of IBC, 'financial debt' involves disbursement against consideration for the time value of money. The Supreme Court in Phoenix Arc Pvt. Ltd. and Anuj Jain IRP for Jaypee Infratech Ltd. Vs. Axis Bank Ltd. clarified that the essential elements of financial debt include disbursement and consideration for the time value of money. The Tribunal found that the Financial Creditor is primarily a rice manufacturer, not a financial business entity, and the Corporate Debtor, with substantial authorized capital and a significant cash credit limit from Bank of Baroda, would unlikely need a small loan of Rs. 10 lacs from the Financial Creditor. The transaction lacked essential elements such as a loan agreement, interest stipulation, and repayment period, indicating it was not a financial debt. Furthermore, the evidence did not support the claimed default date, making the financial debt and default assertions unsubstantiated.Issue No. (iii): Whether the application in question is collusiveRs.The Tribunal referred to the Supreme Court's definition of collusive transactions in Phoenix Arc Pvt. Ltd., where such transactions create an illusion of debt disbursement with ulterior motives. The Corporate Debtor's lack of objection to the CIRP initiation, despite having substantial financial backing, suggested collusion. The Corporate Debtor's affidavit admitting default without seeking settlement indicated an ulterior motive, possibly to benefit from the moratorium under Section 14 of the IBC and hinder Bank of Baroda's recovery efforts. The Tribunal agreed with the Adjudicating Authority's conclusion that the application was collusive, aimed at preventing legitimate debt recovery.Conclusion:The Tribunal dismissed the appeal, agreeing with the Adjudicating Authority that the application was collusive and the transaction did not constitute financial debt. The interim order was vacated, and no costs were imposed.