2024 (11) TMI 1515 - AT - IBC

Appeal dismissed; Section 7 petition admitted and CIRP initiated; 27.04.2017 loan genuine; Sections 241-242 reliefs do not bar rights

Entegra Limited Niranjan Versus Shree Maheshwar Hydel Power Corporation Ltd. And Power Finance Corporation Ltd., Delhi

The NCLAT (LB) dismissed the appeal and upheld the NCLT orders admitting the Section 7 petition and directing initiation of CIRP against the corporate ... Initiation of proceedings u/s 7 or u/s 10 of IBC - initiation of Corporate Insolvency Resolution Process (CIRP) - existence of debt and default which entitled the Respondent No. 2 to initiate Section 7 application under the Code or not - debt and default was within the period of limitation or not - invocation of pledge shares and partial conversion of debt into equity by the Respondent No. 2 - fabrication of additional loan agreement - Section 241 and 242 Companies Act, 2013 application filed by the Appellant who got reliefs from NCLT/ NCLAT and the Hon’ble Supreme Court of India has any bearing on present Section 7 application or not. Whether there was a debt and default which entitled the Respondent No. 2 to initiate Section 7 application under the Code and whether such debt and default was within the period of limitation? - HELD THAT:- The contention that disbursement of debt of Rs. 384.59 Crores was made under additional loan agreement dated 27.04.2017, whereas for Section 7 application was filed on 16.02.2018 which is within the limitation period. As regard the previous loan agreements, the same have been acknowledged from time to time in the various documents and Balance Sheets. One Chart along with brief compilation of relevant documents on record was presented and handed over and the Appellant during the course of hearing in present appeal on 19.09.2024. The same has also been filed in Written Submissions by the Respondent No. 2. This also confirm the same - there was a debt and default on part of the Respondent No. 1 which entitled the Respondent No. 2 to initiate Section 7 application of the Code and the same was not barred by limitation. Whether, the Lenders especially the Respondent No. 2 who was the Financial Creditor and also allegedly in control of the Respondent No. 1 since, 2005 to 2018, could have initiated present Section 7 application or should have initiated application under Section 10 of the Code? - Whether the invocation of pledge shares and partial conversion of debt into equity by the Respondent No. 2 has adverse impact in the present appeal? - Whether, the Lenders especially the Respondent No. 2 assumed the role of owners in addition to role of the Lenders after invocation of pledged shares and partial conversion of debts into equity or the Lenders were involved in management with limited roles to protect their loan advanced to the Respondent No. 1? - HELD THAT:- The Lenders despite might be in alleged control of Respondent No. 1 for intervening period have independent rights to file Section 7 application under the Code and as such there was no need or reason or occasion for the Respondent No. 2 to initiate application under Section 10 of the Code - although the Respondent No. 2 might has become the shareholder of Respondent No. 1 for intervening period due to partial conversion of debt into equity and due to invocation of pledged shares, (which were returned back to the Appellant based on judgement of judicial fora as already discussed earlier), the Respondent No. 2 does not lose his right to initiate Section 7 application - the invocation of pledge share and partial conversion of debt into equity by Respondent No. 2 has no adverse impact in the present appeal. Whether, the additional loan agreement dated 27.04.2017 was fabricated or forced upon the Respondent No. 1 to initiate Section 7 application by the Respondent No. 2 and whether the Recall Notice dated 17.01.2018 was legal or not? - HELD THAT:- The additional loan agreement dated 27.04.2017 was a genuine intent of Respondent No. 2 to help the Respondent No. 1 to survive and sustain and by no way it can be treated as fabricated or forced upon the Respondent No. 1. It is noted that this additional loan agreement was supported by Promoters of the Respondent No. 1 Mukul Kasliwal in the board meeting dated 02.03.2017, as recorded in the minutes of meeting that 'Shri Mukul Kasliwal specifically requested the Board to record that, the sanctioning of additional loan to complete the project is a welcome step apart from all the issues and concerns going on between the Lenders and Promoters and Lenders will receive support from the promoters as well in view to complete the project' - this issue goes in favour of the Respondent No. 2. Whether, Section 241 and 242 Companies Act, 2013 application filed by the Appellant who got reliefs from NCLT/ NCLAT and the Hon’ble Supreme Court of India has any bearing on present Section 7 application? - HELD THAT:- This Appellate Tribunal has given direction to GoI and GoMP to find way forward and HLC was constituted giving three scenarios - It is already noted that Scenario I failed due to non infusion of Rs. 600 Crores as equity by the Promoters and non infusion of Rs. 1100 Cr as additional funds by Promoters. The Scenario II of HLC, happened in the present case envisaged that government undertaking shall take over the majority equity holding in the Respondent No. 1 and accordingly the Lenders of Respondent No. 1, including the Respondent No. 2 had to invoke the pledged shares and also convert the partial subordinate loan into equity. These invocation were held not in accordance with law and nowhere judicial fora held that the Respondent No. 2 do not have any right to initiate Section 7 application under the Code. Incidentally, it is noted that the GoMP has filed the affidavit before the Adjudicating Authority that they do not find any hope for the project and only logical course of action could be resolution of the Corporate Debtor i.e. Respondent No. 1 - it is not found that Section 241 & 242 application which came in favour of the Appellant has any adverse bearing under Section 7 application filed by the Respondent No. 2 and consequently in the present appeal. The Adjudicating Authority i.e., both Member (Judicial) of Ahmedabad and Kolkata Bench have correctly passed the Impugned Order admitting Section 7 application of the Respondent No. 2 and ordering initiation of the CIRP against the Respondent No. 1. Appeal dismissed. ISSUES PRESENTED AND CONSIDERED 1. Whether there existed a 'debt' and 'default' entitling the Financial Creditor to file an application under Section 7 of the Code, and whether such claim was barred by limitation. 2. Whether a Financial Creditor who had, by invocation of pledged shares and partial conversion of debt into equity, assumed shareholding or exercised control/intervention in the Corporate Debtor could maintain a Section 7 application (versus being required to file under Section 10 or be treated as a 'corporate applicant'). 3. Whether the Additional Loan Agreement dated 27.04.2017 and the Loan Recall Notice dated 17.01.2018 were fabricated/illegal or otherwise invalid, and whether the Section 7 petition amounted to malicious or fraudulent initiation under Section 65 of the Code. 4. Whether prior proceedings under Sections 241-242 of the Companies Act (and consequent orders declaring certain acts of lenders procedurally invalid) had any bearing on maintainability/admission of the Section 7 application. 5. Whether the Appellant/promoter and a strategic investor had locus to intervene on behalf of the Corporate Debtor in the insolvency proceedings. ISSUE-WISE DETAILED ANALYSIS - Issue 1: Existence of debt/default and limitation Legal framework: Section 7 of the Code permits a Financial Creditor to initiate CIRP where there is a financial debt and default; limitation principles and documentary proof/annexures are considered to establish amount and date(s) of default. Precedent treatment: The Tribunal applied the settled standard that the Adjudicating Authority's role is limited to ascertaining existence of debt and default on the face of the application and documents, consistent with Supreme Court and Appellate Tribunal precedents emphasizing a narrow inquiry at admission stage. Interpretation and reasoning: The record contained multiple loan agreements (1998-2017), disbursement records (including disbursal of Rs. 384.59 crore under the 2017 Additional Loan Agreement), loan recall notice (17.01.2018), demand letters and admitted acknowledgements of debt in corporate balance sheets and board minutes (notably FY 2013-14 and 2016-17). The Judicial Members found these materials collectively established debt and default totalling the claimed amount and held the Section 7 petition filed on 16.02.2018 was within limitation as it related to disbursements/acknowledgements occurring within the prescribed period. The Technical Member's contrary factual narrative (that recall was premature and the creditor engineered default) was rejected as being speculative and not grounded in the narrow statutory test for admission. Ratio vs. Obiter: Ratio - admission was correct because documentary records and admitted entries established debt and default within limitation. Obiter - commentary by the Technical Member about policy, moral blame or 'need for another chance' was not treated as determinative of legal admissibility. Conclusion: There was a debt and default that entitled the Financial Creditor to file under Section 7, and the petition was not barred by limitation. ISSUE-WISE DETAILED ANALYSIS - Issue 2: Status of lender-shareholder/control and maintainability of Section 7 (Section 7 v. Section 10) Legal framework: Definitions of 'financial creditor' and 'corporate applicant' govern who may file under Section 7 or Section 10; invocation of pledge and conversion rights create questions about whether a creditor becomes a shareholder and thereby loses status to file as a financial creditor. Precedent treatment: The Tribunal relied on its own prior decisions (and subsequent treatment in the adjudicatory hierarchy) which establish that invocation/transfer of pledged shares or partial conversion into equity does not ipso facto deprive a creditor of status as a financial creditor for purposes of Section 7; prior inconsistent Appellate Tribunal rulings and their treatment by higher courts were noted and the Tribunal followed the precedent that allows Financial Creditors to maintain Section 7 despite such events. Interpretation and reasoning: The factual matrix showed lender involvement in governance measures pursuant to consensual amendments and HLC/State/central processes; however, the right to file under Section 7 is independent and not automatically lost because a creditor acquired shareholding or exercised lender-nominee roles. The Tribunal distinguished mere involvement in management to protect security from an assumption that the creditor had become a 'corporate applicant.' It also noted that invocation/conversion was effected as security remedy under financing documents and that subsequent judicial orders had in any event reversed/annulled certain conversions; moreover, even where shares were transferred to trustees, that did not extinguish the underlying claim or the creditor's right to seek insolvency resolution. Ratio vs. Obiter: Ratio - invocation of pledge/partial conversion does not per se deprive the creditor of the right to initiate CIRP under Section 7; the creditor was not required to file under Section 10. Obiter - policy observations regarding propriety of lenders' conduct when acting as de facto managers. Conclusion: The Financial Creditor retained the right to file and have its Section 7 application considered; acquisition of shareholding or limited management involvement did not mandate proceeding under Section 10 nor bar Section 7 admission. ISSUE-WISE DETAILED ANALYSIS - Issue 3: Validity of Additional Loan Agreement and Loan Recall Notice; Section 65 (malicious/fraudulent initiation) Legal framework: Validity of loan documentation is assessed under ordinary contract/company law; recall notices/demands are regular commercial instruments; Section 65 bars malicious or fraudulent initiation of insolvency proceedings to pressurize or for ulterior motives. Precedent treatment: The Adjudicating Authority and Tribunal applied established principles that allegations of mala fides must be substantiated with evidence showing absence of debt/default or fabrication; mere assertion of bad intent is insufficient at admission stage absent cogent proof. Interpretation and reasoning: The Additional Loan Agreement (27.04.2017) was executed with board support and contained acknowledgements of pre-existing liabilities; a part disbursement took place and repayment obligations (including interest instalments due in July/Oct/Jan) were not met. The Loan Recall Notice set out the factual grounds and demanded payment; the Judicial Member analysed successive affidavits, board minutes, and public filings and concluded there was no fabrication - the Additional Loan Agreement was a bona fide revival measure and the recall notice legitimately invoked remedies for non-payment. The Technical Member's view that recall was premature or engineered was rejected for failing to engage the statutory threshold for Section 65. The Tribunal held that Section 65 requires clear proof of malicious intent to initiate CIRP, which was not made out on the record presented. Ratio vs. Obiter: Ratio - Additional Loan Agreement and Loan Recall Notice were valid and the Section 7 petition was not a malicious or fraudulent act under Section 65. Obiter - critical remarks in the Technical Member's analysis about equitable considerations and alternative solutions were not adopted as legal findings overturning admission. Conclusion: The Additional Loan Agreement was genuine; the Recall Notice was legally valid; Section 65 did not apply to defeat admission of the Section 7 petition on the available record. ISSUE-WISE DETAILED ANALYSIS - Issue 4: Impact of prior Sections 241-242 proceedings and related orders Legal framework: Orders under Sections 241-242 address oppression/mismanagement and procedural compliance under the Companies Act; effect of such orders on insolvency proceedings depends on whether they negate existence of debt/default or otherwise oust jurisdiction/rights under the Code. Precedent treatment: The Tribunal recognized that findings under company law about procedural irregularities in conversion/invocation may affect specific transactions but do not automatically preclude a creditor from invoking insolvency remedies where debt/default remains established. Interpretation and reasoning: Prior judicial findings declared the mechanics of invocation/conversion procedurally irregular and led to reversal/return of shares to the promoter; however, those orders did not hold that the loans or amounts disbursed were sham or that the creditor had no claim. The Tribunal found that the 241-242 proceedings did not extinguish the Financial Creditor's right to seek CIRP, and that government/stakeholder interventions recommending insolvency as a route to resolve a stalled project supported, rather than negated, maintainability. Ratio vs. Obiter: Ratio - procedural invalidity of specific investor-share transfers under company law did not negate the creditor's right to file or the existence of debt/default for Section 7 purposes. Obiter - observations about promoters' capacity and public-interest dimensions were noted but not treated as determinative legal bar. Conclusion: Prior 241-242 findings had no adverse legal bearing that would vitiate the Section 7 admission; they did not negate debt/default or creditor rights under the Code. ISSUE-WISE DETAILED ANALYSIS - Issue 5: Locus of promoter/strategic investor to intervene Legal framework: Intervention in insolvency proceedings is governed by the Code and the Adjudicating Authority's power to permit applications by stakeholders having appropriate interest; locus to intervene requires demonstration of legal interest or standing. Precedent treatment: The Tribunal examined intervention applications on record and the split NCLT orders reflected differing views on locus; the ultimate reference and decision addressed admissibility consistent with statutory parameters. Interpretation and reasoning: The Appellant/promoter sought to intervene and press substantive defences. The Tribunal noted that intervention applications were considered by the Adjudicating Authority and disposed of in the impugned order; the main admission decision turned on creditors' documentary showing of debt/default and maintainability of Section 7, not on denying promoter a platform to be heard. The record showed repeated filings by the Corporate Debtor and promoter; the Judicial Member took those replies and public filings into account when assessing debt/default and recall notice validity. Ratio vs. Obiter: Ratio - intervention rights of promoters/strategic investors depend on statutory entitlement and were addressed by the Adjudicating Authority; intervention did not preclude admission when statutory tests for Section 7 were met. Obiter - procedural observations about multiplicity and timing of affidavits were recorded. Conclusion: The promoter/strategic investor's locus to intervene was considered and dealt with, but intervention did not defeat admission where the statutory requirements for Section 7 were satisfied. FINAL CONCLUSION (LEGAL HOLDING) The Adjudicating Authority correctly admitted the Section 7 petition: documentary records, board minutes and public filings established debt and default within limitation; invocation/conversion/events of lender involvement did not strip the Financial Creditor of the right to file under Section 7; the Additional Loan Agreement and Loan Recall Notice were bona fide and not demonstrably malicious under Section 65; prior company-law orders concerning procedural irregularities in share invocation did not extinguish the underlying debt or prevent insolvency initiation. The appeal challenging admission was therefore rejected as devoid of merit.