2021 (8) TMI 545 - AT - Insolvency and Bankruptcy

Tribunal sets aside Insolvency Order, frees Corporate Debtor, shifts IRP fees

The Tribunal set aside the Order of Admission under Section 7 of the Insolvency and Bankruptcy Code, 2016. It released the Corporate Debtor from all ... Financial Debt - Financial Creditor - Corporate Insolvency Resolution Process - Service of Notice - speculative investor - lucrative Agreement - buy-back option - time value of money - default - moratoriumService of Notice - Rule 38 of NCLT Rules, 2016 - Service of notice on the Corporate Debtor was valid and in compliance with the NCLT Rules. - HELD THAT: - The Tribunal examined the record of postal delivery and email service and the affidavit of service. The Demand Notice had returned with postal endorsement 'refused to accept' and the e-mail was sent to the address appearing in the Corporate Debtor's master data. Rule 38 permits service by post or at the e-mail address provided in the petition or reply and contemplates filing an affidavit of service with proof. In view of the e-mail being addressed to the same master-data address and the affidavit filed, the Corporate Debtor's denial of receipt and the absence of company stamp on the hand-delivered acknowledgment did not vitiate service. Accordingly, there were no grounds to set aside the ex-parte consequent to defective service. [Paras 6, 8]Service was effected lawfully in accordance with Rule 38 and the Adjudicating Authority rightly proceeded ex-parte.Financial Debt - Financial Creditor - Corporate Insolvency Resolution Process - time value of money - speculative investor - lucrative Agreement - buy-back option - default - The transaction between the allottee and the Corporate Debtor constituted a 'lucrative Agreement' showing a speculative investor; the allottee was not a bona fide home-buyer entitled to initiate the corporate insolvency process. - HELD THAT: - The MoU characterized the payment as an 'investment', provided an assured return of 25% per annum, and conferred a buy-back option at the end of 24 months (or earlier on issuance of LTC), including an earmarked unit and lien-like protection. Applying the test in Pioneer Urban Land and Infrastructure Ltd., such assured high returns and the buy-back arrangement indicate that the allottee sought to secure a financial benefit akin to financing (commercial effect of borrowing) and to benefit from a 'lucrative Agreement'. The Tribunal held that these features rendered the allottee a speculative investor who sought the advantage of the arrangement rather than a genuine purchaser; on these facts the insolvency proceedings under Section 7 could be opposed on the ground that the petition was triggered by a speculative investor. [Paras 11, 17, 18]The allottee was held to have entered into a lucrative arrangement and to be a speculative investor; the Section 7 admission could not stand on that basis.Corporate Insolvency Resolution Process - moratorium - The Admission Order under Section 7 was set aside and the Corporate Debtor released from insolvency rigours; incidental directions were given regarding IRP fees and corporate management. - HELD THAT: - Having found (i) valid service and (ii) that the allottee was a speculative investor entitled to be treated as seeking benefit from a lucrative agreement, the Tribunal exercised its appellate jurisdiction to set aside the Adjudicating Authority's admission order under Section 7 and lift the moratorium. The Corporate Debtor was restored to the control of its board to function independently. Taking the case-specific facts into account, the Tribunal directed that the Interim Resolution Professional's fees be borne by the Corporate Debtor and observed that the parties had indicated settlement willingness regarding return of principal. [Paras 18, 20]The Section 7 admission was set aside; the Corporate Debtor was released from the rigours of insolvency and directed to function under its Board, with IRP fees to be borne by the Corporate Debtor.Final Conclusion: The appeal is allowed: service was valid but on the facts the allottee was found to have entered into a lucrative, speculative-investor arrangement, and the National Company Law Tribunal's order admitting the Section 7 petition and imposing moratorium is set aside; the Corporate Debtor is released to function through its board and the IRP's fees are to be borne by the Corporate Debtor. Issues Involved:1. Service of Notice2. Speculative Investor Allegation3. Financial Debt Classification4. Settlement AgreementDetailed Analysis:1. Service of Notice:The primary issue addressed was whether the service of notice was properly effected on the Corporate Debtor. The Adjudicating Authority noted that a Demand Notice dated 01.02.2019 was sent via Speed Post and email. The postal service returned the envelope with the endorsement 'the Addressee refuses to accept,' and the email did not bounce back. The Corporate Debtor's argument that the email was not received was deemed untenable. The Tribunal confirmed that the service of notice complied with Rule 38 of NCLT Rules, 2016, which allows service by post or email and does not necessarily require a company seal on hand-delivered notices.2. Speculative Investor Allegation:The Corporate Debtor argued that the Financial Creditor was a speculative investor, invoking the ratio of the Supreme Court in 'Pioneer Urban Land and Infrastructure Ltd. vs. Union of India'. The MoU between the parties included terms that suggested the transaction was an investment rather than a genuine purchase of a flat. Clauses 2(a), (c), (d), (f), and (g) of the MoU indicated an assured return of 25% per annum and a buy-back option, which are characteristics of a speculative investment. The Tribunal held that the Allottee sought to benefit from a 'lucrative Agreement' and was therefore a speculative investor, aligning with the Supreme Court's decision in 'Pioneer Urban Land and Infrastructure Ltd.'.3. Financial Debt Classification:The Tribunal examined whether the transaction qualified as a 'Financial Debt' under Section 5(8) of the Insolvency and Bankruptcy Code, 2016. The definition includes any amount raised under a transaction having the commercial effect of a borrowing. The Tribunal referenced the Supreme Court's interpretation in 'Pioneer Urban Land and Infrastructure Ltd.', which clarified that money disbursed against the consideration for time value of money qualifies as financial debt. The Tribunal concluded that the transaction in question did not meet this criterion, as it was more of an investment with assured returns rather than a genuine financial debt.4. Settlement Agreement:The Corporate Debtor contended that a Settlement Agreement was entered into with the Financial Creditor's son, involving post-dated cheques amounting to Rs. 25 Lakhs. The Financial Creditor denied any such agreement. Despite this, the Tribunal noted that the Corporate Debtor was willing to settle the matter by returning the principal amount, as per the terms of the Settlement Agreement.Conclusion:The Tribunal set aside the Order of Admission under Section 7 of the Insolvency and Bankruptcy Code, 2016. It released the Corporate Debtor from all proceedings and allowed it to function independently through its Board of Directors. The IRP fees were directed to be borne by the Corporate Debtor. The appeal was allowed, and the Impugned Order was set aside with the aforementioned directions.