2022 (9) TMI 395 - AT - Insolvency and Bankruptcy

Appeal allowed, impugned order set aside. Adjudicating Authority directed to decide Section 7 application.

White Stock Limited Versus Prajay Holdings Private Limited

The appeal was allowed, setting aside the impugned order. The Adjudicating Authority was directed to make appropriate decisions on the Section 7 ... Initiation of CIRP - debt due of which default was committed by the Corporate Debtor entitling the Financial Creditor to file an Application under Section 7 of the I & B Code, 2016 or not - petitions made under Section 241 & 242 of the ‘Companies Act, 2013’, can be equated with Application filed under Section 7 of the I & B Code, 2016? - reference of Application proceedings under Section 7 of I & B Code, 2016 for mediation under Section 442 of the ‘Companies Act, 2013’. Whether there was a debt due of which default was committed by the Corporate Debtor entitling the Financial Creditor to file an Application under Section 7 of the I & B Code, 2016? - HELD THAT:- The Financial Creditor alleged that no payment was made by the Corporate Debtor and therefore the Financial Creditor filed petition under Section 7 of the I & B Code, 2016 and Rule 4 of the I & B Code, 2016 (Application to Adjudicating Authority Rules, 2016). In the said application, total outstanding default amount on the date of filing the application was shown as Rs. 274,26,60,573.71/- and documents evidencing financial debts were annexed in the said application and relevant date of default was also indicated. The Financial Creditor further mentioned that audited financial statements of the Corporate Debtor including FY ending 31.03.2019 consistently acknowledge liability of amount payable. The financial arrangement made between the Financial Creditor and the Corporate Debtor clearly falls in definition of Debt, Financial Debt and Default. Therefore, the Financial Creditor had right to move an Application filed under Section 7 of the I & B Code, 2016. As a result of the Respondent company defaulting in the payment of these coupons (interest) to the Appellant, the Appellant instituted CIRP against the Respondent under Section 7 of the I & B Code, 2016. It is settled law that role of the Adjudicating Authority has been clearly elaborated under I & B Code, 2016. The Adjudicating Authority is required to admit the Petition under Section 7(5)(a) of the I & B Code, 2016 where the Debt is due and was not paid. Alternatively, the Adjudicating Authority under Section 7(5)(b) can reject the Petition if there was no Debt. This is to be done within 14 days from the receipt of Petition under Section 7 based on records made available. There was Debt of more than 1 crore which was admittedly not paid resulting into Default and thereby meeting the requirement of Section 7 of I & B Code, 2016. The Adjudicating Authority should have taken into consideration and taken decision on admissibility or otherwise of Petition filed before the Adjudicating Authority in petition, as per law rather than referring for Mediation to IAMCH was done in Section 241 Application. The Adjudicating Authority had referred to Application filed under Section 422 of the Companies Act, 2013. Whether, petitions made under Section 241 of the ‘Companies Act, 2013’ can be equated with Application filed under Section 7 of the I & B Code, 2016? - HELD THAT:- It is clear that Section 241 of the Companies Act, 2013 is entirely for different purpose which entitles aggrieved party due to oppression and mismanagement to file Application before the Tribunal and the Tribunal power are prescribed under Section 242 of the Companies Act, 2013. Whereas, Section 7 of the I & B Code, 2016 is purely regarding initiation of CIRP for default of debt of more than Rs. 1 crore by the Corporate Debtor and the power to the Tribunal (Adjudicating Authority) has been defined in Section 7(5) - The purpose of Section 241 of the Companies Act, 2013 cannot be equated with Section 7 of the I & B Code, 2016. Similarly, the powers of the Tribunal under Section 242 of the Companies Act, 2013 w.r.t oppression and mismanagement are quite comprehensive in comparison to Section 7 which grants limited powers to the Adjudicating Authority of either acceptance or rejection of the claims made by the Financial Creditor’ based on details of claims along with evidence produced by him. The Adjudicating Authority erred in tagging the Application filed under Section 7 of I & B Code, 2016 with Application filed under Section 241 of the Companies Act, 2013 and referring for mediation to IAMCH. The act of Adjudicating Authority to refer the Application under Section 7 of I & B Code, 2016 for mediation was beyond jurisdiction of Adjudicating Authority as granted under I & B Code, 2016. Whether, Adjudicating Authority can refer Application proceedings under Section 7 of I & B Code, 2016 for mediation under Section 442 of the Companies Act, 2013? - HELD THAT:- The Adjudicating Authority had referred the Parties in Section 7 Application of I & B Code, 2016 proceedings, for Mediation under Section 442 of the Companies Act, 2013. As a matter of fact, this Tribunal had already noted that power of the Adjudicating Authority, (National Company Law Tribunal), under Section 442 of the Companies Act, 2013 is limited to the proceedings under the Companies Act, 2013, but not in the matter related to I & B Code, 2016. Hence, this Tribunal, without any hesitation, holds that the impugned order dated 13.05.2022, in petition, passed by the Adjudicating Authority, (National Company Law Tribunal, Hyderabad Bench), is not inconformity with the I & B Code, 2016, and the same is clearly unsustainable in Law, and sets aside the same in furtherance of substantial cause of justice. Appeal allowed. Issues Involved:1. Condonation of delay in filing the appeal.2. Debt due and default by the Corporate Debtor.3. Equating petitions under Section 241 & 242 of the Companies Act, 2013 with applications under Section 7 of the I & B Code, 2016.4. Authority of the Adjudicating Authority to refer Section 7 applications under the I & B Code, 2016 for mediation under Section 442 of the Companies Act, 2013.Detailed Analysis:Issue 1: Condonation of DelayThe appellant sought condonation of a 10-day delay in filing the appeal against the order dated 15.05.2022. The delay was attributed to the time taken to obtain a certified copy of the order and the appellant being a foreign entity. The delay was condoned in accordance with the Proviso to Section 61(2) of the I & B Code, 2016.Issue 2: Debt Due and Default by the Corporate DebtorThe financial arrangement between the Financial Creditor and the Corporate Debtor involved investments through an Investment Agreement and a Sale and Purchase Agreement. The Financial Creditor invested Rs. 197 Crore and held 22% equity shareholding. The Corporate Debtor defaulted on coupon payments at 10% and 11% per annum on the CCDs. The Financial Creditor filed CP (IB) No. 17/7/HDB/2021 under Section 7 of the I & B Code, 2016, citing a default amount of Rs. 274.26 crore. The Adjudicating Authority should have decided on the admissibility of the petition based on the evidence of debt and default, but instead referred the matter for mediation.Issue 3: Equating Petitions under Section 241 & 242 of the Companies Act, 2013 with Applications under Section 7 of the I & B Code, 2016Section 241 & 242 of the Companies Act, 2013 deals with oppression and mismanagement, while Section 7 of the I & B Code, 2016 pertains to the initiation of CIRP due to default in debt repayment. The powers and purposes of these sections are distinct and cannot be equated. The Adjudicating Authority erred in tagging the Section 7 application with the Section 241 petition and referring it for mediation.Issue 4: Authority to Refer Section 7 Applications for MediationThe Adjudicating Authority referred the Section 7 application for mediation under Section 442 of the Companies Act, 2013. However, the power to refer matters for mediation under Section 442 is limited to proceedings under the Companies Act, 2013, and does not extend to matters under the I & B Code, 2016. The Adjudicating Authority's action was beyond its jurisdiction as per the I & B Code, 2016. The Tribunal noted that mediation is not a remedy provided under Section 7 of the I & B Code, 2016.ConclusionThe appeal was allowed, and the impugned order dated 13.05.2022 was set aside. The Adjudicating Authority was directed to pass suitable orders on the Section 7 application in accordance with the law. The connected pending Interlocutory Applications were closed.