2022 (1) TMI 161 - AT - Insolvency and Bankruptcy

Tribunal overturns Authority decision, directs application restoration

The Tribunal allowed the appeal, setting aside the Adjudicating Authority's decision to dismiss the application. It directed the Authority to restore the ... Maintainability of application - initiation of CIRP - Financial Debt or Operational Debt - existence of ‘Default’ or not - HELD THAT:- In the present case, it is brought to the forefront that the ‘Appellant’ had issued the declaration under the proviso to, Rule 2(c) of the Rules. There is no gainsaying of the fact that the ingredients of Sections 73 & 76 are not meant to protect the Company to whom the sum is given - In the present case, it is to be pointed out that at no point of time the Respondent/Company sought to avoid the ‘Loan Transaction’ with the ‘Appellant’. As a matter of fact, the Respondent and its Officers had confirmed their obligations to repay the ‘Loan’ to the ‘Appellant’. As such, the plea of ‘Voidability’ of the ‘Loan Transaction’ is not available to the Respondent/ Company, in the considered opinion of this ‘Tribunal’. In the present case, the Second transfer ₹ 1.60 crores was made to the Respondent/Company on 18.01.2017 and the said transfer was effected from the Appellant’s personal Bank Account to the Current Account of the Respondent/Company. In fact, the first Transfer of ₹ 2.50 Crores, was made on 01.12.2016 to the Respondent/Company and these were recorded in the Minutes of the Board of Director’s on 22.03.2017 and 06.04.2017 respectively. The contra views arrived at by the ‘Adjudicating Authority’ that the ‘Loan’ was not a ‘Financial Debt’, as the amounts were not ‘money borrowed’ by the ‘Corporate Debtor’ and that the borrowing may not constitute a ‘Financial Debt’ that could be enforced as per the I & B Code, 2016 though the ‘Borrowing’ may be reflected in the ‘Balance Sheet’ as pointed out by the ‘Petitioner (Appellant)’ etc; are legally ‘invalid’ and ‘untenable’ - Application allowed. Issues Involved:1. Condonation of Delay2. Admission of Additional Documents3. Financial Debt and Default4. Adjudicating Authority's Decision5. Appellant's Contentions6. Respondent's Pleas7. Legal Definitions and InterpretationsIssue-Wise Detailed Analysis:1. Condonation of Delay:The Applicant/Appellant sought to condone a 15-day delay in filing the appeal, citing personal reasons such as attending to her pregnant daughter and socio-religious events. The Tribunal accepted these reasons, finding the delay neither 'wilful' nor 'wanton' and allowed the condonation in the interest of justice.2. Admission of Additional Documents:The Appellant filed an application to bring additional documents on record, arguing that these were essential for the proper adjudication of the appeal. The Tribunal acknowledged the importance of these documents, especially given the findings of 'misrepresentation,' 'misappropriation,' and fabrication of documents by the Adjudicating Authority. The Tribunal allowed the application to secure the ends of justice.3. Financial Debt and Default:The core issue was whether the amounts advanced by the Appellant to the Respondent Company constituted a 'financial debt' under the Insolvency and Bankruptcy Code (IBC). The Adjudicating Authority had earlier dismissed the application, stating that the amounts were given without any formal agreement or prior approval and were intended for operational expenses, thus not qualifying as a 'financial debt.' The Appellant contended that the amounts were loans recorded in the minutes of the Board meetings and reflected in the company's balance sheet, thus constituting a financial debt.4. Adjudicating Authority's Decision:The Adjudicating Authority dismissed the Appellant's application, concluding that the amounts advanced did not constitute a 'financial debt' as defined under the IBC. It observed that the transactions lacked formal agreements and were not borrowed by the Corporate Debtor in a manner that could be enforced under the IBC. The Authority also noted that the proceedings under the IBC are summary in nature and not meant for debt recovery but for initiating Corporate Insolvency Resolution Process (CIRP) for justified reasons.5. Appellant's Contentions:The Appellant challenged the dismissal, arguing that the amounts advanced were loans, as evidenced by Board meeting minutes and balance sheets. The Appellant cited various legal precedents to support the argument that loans advanced by directors to improve a company's financial health qualify as financial debt. The Appellant also pointed out that the Respondent had acknowledged the debt and sought more time for repayment, further substantiating the claim of financial debt.6. Respondent's Pleas:The Respondent argued that the demand notice issued by the Appellant initially indicated the debt as an operational debt, not a financial debt. The Respondent also contended that the Appellant, being a director with significant control over the company, had advanced the amounts without formal Board approval, thus failing to meet the statutory requirements for borrowing under the Companies Act. The Respondent further argued that the Appellant's actions were motivated by personal vendetta following her resignation from the company.7. Legal Definitions and Interpretations:The Tribunal examined various definitions under the IBC, including 'debt,' 'default,' 'financial creditor,' and 'financial debt.' It noted that financial debt includes any debt disbursed against the consideration for the time value of money. The Tribunal emphasized that the proceedings under the IBC are summary in nature and aimed at resolving insolvency rather than adjudicating disputes.Assessment:The Tribunal found that the Appellant had established the existence of financial debt and default, as required under Section 7 of the IBC. It noted that the amounts advanced were recorded in the company's financial statements and acknowledged by the Respondent. The Tribunal concluded that the Adjudicating Authority's decision to dismiss the application was legally untenable.Conclusion:The Tribunal set aside the Adjudicating Authority's order and directed it to restore the application, admit the petition, and proceed further in accordance with the law. The appeal was allowed, and no costs were awarded.