2022 (2) TMI 363 - AT - Insolvency and Bankruptcy

Tribunal reclassifies MOU as financial loan, triggers insolvency process under

BDH Industries Limited, (Ms. Nikita Phatak – Company Secretary) Versus Mars Remedies Private Limited, (Mr. Mahmadyusuf Karbhari Abdulla, Director)

The tribunal determined that the Memorandum of Understanding (MOU) between the parties constituted a business arrangement, not a loan agreement. However, ... Maintainability of application - initiation of CIRP - Corporate Debtor failed to make repayment of its dues - Financial creditors - existence of debt and dispute or not - HELD THAT:- It is clear that the BDH Industries as financial creditor had sought repayment of the full financial debt given to the Corporate Debtor Mars Remedies Private Limited (MRPL). The section 7 application submitted to the Adjudicating Authority (attached at pp. 115-120 of Appeal paperbook Vol. I). clearly states the above mentioned demand notices. However, the amounts mentioned in the Demand Notices Part-IV of section 7 application are different. We are not concerned with the exact amount of debt at the stage of admission of section 7 application. It would suffice for the purpose of admission of section 7 application, if the debt is above threshold value of ₹ 1 lakh. Therefore, we find that the debt is in excess of ₹ 1 lakh of threshold value and also in default. Hence the debt owed to the Financial Creditor by the Corporate Debtor is above the threshold value and payable in default and it satisfies the definition under section 3(12) of the IBC regarding default - It is considered sufficient for admission of a section 7 application that the Applicant/Petitioner is able to establish the existence of a ‘Debt’ and the Corporate Debtor’s default, and if the ‘Application’ is complete in all aspects. This debt is in default and payable to the Appellant, and hence section 7 application ought to have been admitted - Appeal allowed. Issues Involved:1. Nature of the Memorandum of Understanding (MOU) between Appellant and Respondent.2. Classification of the amount provided by Appellant to Respondent as a financial loan.3. Determination of default on the debt.4. Admissibility of the Section 7 application under the Insolvency and Bankruptcy Code (IBC).Issue-wise Detailed Analysis:1. Nature of the Memorandum of Understanding (MOU) between Appellant and Respondent:The core issue was whether the MOU dated 7.12.2011 constituted a loan agreement or a business arrangement. The MOU detailed that Mars Remedies Private Limited (MRPL) would procure export orders in the name of BDH Industries, and BDH Industries would provide funds for raw materials and manufacturing. The tribunal concluded that the MOU was a business arrangement, not a loan agreement, as it lacked terms typical of a loan, such as disbursement schedules, repayment terms, and interest rates. The MOU outlined responsibilities for manufacturing, packaging, and payment schedules, indicating a collaborative business effort rather than a financial loan.2. Classification of the amount provided by Appellant to Respondent as a financial loan:Despite the MOU being a business arrangement, the tribunal examined whether the funds provided by BDH Industries to MRPL were a financial loan. The tribunal referred to a letter dated 27.11.2011 from MRPL to BDH Industries requesting financial assistance, which guaranteed repayment through asset lien and personal guarantees. Subsequent communications, including extensions for repayment and interest calculations, supported the argument that the funds were indeed a loan. The tribunal found that these documents collectively constituted proof of a loan, thus classifying BDH Industries as a financial creditor and the funds as a financial debt under Section 5(8) of the IBC.3. Determination of default on the debt:The tribunal assessed whether the financial debt was in default. BDH Industries had issued multiple demand notices to MRPL for repayment, which MRPL failed to satisfy. The tribunal noted that the debt exceeded the threshold value of Rs. 1 lakh and was in default, thereby satisfying the criteria under Section 3(12) of the IBC. The tribunal emphasized that the exact amount of debt was not crucial for the admission of the Section 7 application, as long as it met the threshold requirement.4. Admissibility of the Section 7 application under the Insolvency and Bankruptcy Code (IBC):The tribunal referenced previous judgments to assert that an explicit loan agreement is not mandatory for admitting a Section 7 application. The existence of debt and default, supported by documents like the balance sheet and acknowledgment letters, was sufficient. The tribunal concluded that BDH Industries had adequately demonstrated the existence of a financial debt and MRPL's default, fulfilling the requirements for admitting the Section 7 application. The tribunal directed the Adjudicating Authority to initiate the Corporate Insolvency Resolution Process (CIRP) against MRPL within fifteen days.Conclusion:The tribunal set aside the Impugned Order of the Adjudicating Authority dated 24.6.2020, recognizing BDH Industries as a financial creditor and the funds provided as a financial debt in default. The tribunal ordered the initiation of CIRP against MRPL, ensuring compliance with the IBC provisions. No costs were imposed.