2025 (3) TMI 390 - AT - IBC

Appeal dismissed as loan claimed as debt was actually equity infusion by related party with malicious intent under Section 7

M/s Santoshi Finlease Private Limited Versus State Bank of India, M/s Mothers Pride Diary India Pvt. Ltd.

NCLAT dismissed the appeal, upholding the rejection of a Section 7 petition filed under the Insolvency and Bankruptcy Code. The tribunal found that the ... Maintainability of section 7 petition - existence of debt and default u/s 7 - Petition was filed with malicious intent or not - whether the penalty of Rs 10,00,000/- imposed on the Appellant is justified or not? Whether the Section 7 Petition was filed with malicious intent or not? - HELD THAT:- Given that the Loan Agreement was valid from 08.07.2019 to 31.10.2019, and during this period, both Kaushal Mittal and Yug Mittal were Directors in both the CD and the Appellant, they were directly responsible for any default by the CD. The filing of the Section 7 Petition by these individuals, while being Directors of the Financial Creditor, was not intended to seek a genuine resolution for the CD but rather to harm its interests, thereby demonstrating malicious intent. The Appellant is a related party to the CD, with common Directors during the relevant period when the alleged debt and default occurred. There are merit in the argument that the Mittal family members, who controlled both entities at the time, orchestrated the Loan Arrangement, making the claim self-serving and legally untenable. The Appellant and its related entities were actively involved in the management of the CD during the transactions in question, reinforcing the case for malice. The Appellant’s Section 7 Petition was filed with ulterior motives. Consequently, there are no infirmity in the findings of the AA, as they are based on the material on record. Existence of debt or not - HELD THAT:- All the amounts shown as amount paid by the Appellant, were paid to acquire stake in CD and appoint the Directors. It is concluded that the amount of Rs 92,00,000/- in question was not a loan but instead infused by the Appellant as an investment in equity to acquire control and Directorship in the CD, and not as a loan or financial debt. And the said investment was not in the nature of a disbursement against time value of money, which is a fundamental criterion for a financial debt. The rejection of the CIRP Application was due to its fraudulent and malicious initiation. While it is unnecessary to examine the existence of financial debt and default, it is done for the sake of completeness to ascertain the true nature of the transactions in this case. Regarding the existence of debt, the Appellant transferred a sum of INR 92,00,000/- (Page 147 of the Appeal) to the CD, as reflected in the Appellant’s account statement - the amounts purportedly paid by the Appellant were, in fact, investments intended to acquire a stake in the CD and secure directorship. Accordingly, the sum of Rs 92,00,000/- was not a loan but an equity infusion aimed at obtaining control over the CD. Moreover, this investment does not satisfy the essential criteria of a financial debt, as it was not a disbursement made against the time value of money. Conclusion - i) The alleged loan from the Financial Creditor (FC)—Appellant Santoshi—was not a genuine loan but rather an arrangement designed to obstruct SBI’s recovery efforts under the SARFAESI Act. Furthermore, in light of the investment term sheet, the transfer of ₹62 lakhs cannot be considered a debt. Therefore, no debt, as defined under the Code, has arisen from this transaction, rendering the present claim untenable and failing to meet the threshold for initiating proceedings under Section 7 of the Insolvency and Bankruptcy Code, 2016. ii) Section 7 petition was filed fraudulently and with malicious intent. iii) Given the facts and circumstances, the imposition of a ₹10,00,000 penalty is justified. Appeal dismissed. ISSUES PRESENTED and CONSIDEREDThe core issues considered in this judgment are:Whether the Section 7 Petition filed by the Appellant was initiated with malicious intent.Whether there existed a financial debt and default justifying the initiation of the Corporate Insolvency Resolution Process (CIRP) under Section 7 of the Insolvency and Bankruptcy Code (IBC).Whether the penalty of Rs 10,00,000/- imposed on the Appellant was justified.ISSUE-WISE DETAILED ANALYSIS1. Malicious Intent in Filing Section 7 PetitionRelevant Legal Framework and Precedents: Section 65 of the IBC addresses the fraudulent or malicious initiation of proceedings, allowing for penalties if a process is initiated with malicious intent.Court's Interpretation and Reasoning: The Tribunal found that the Section 7 Petition was filed with malicious intent. The evidence showed that the Appellant and the Corporate Debtor (CD) shared common directors, indicating a collusion to misuse the insolvency process. The Tribunal noted that the loan agreement was executed during a period when the Mittal family controlled both the Appellant and the CD, suggesting a self-serving transaction.Key Evidence and Findings: The Tribunal highlighted the common directorship between the Appellant and the CD during the relevant period. The loan agreement was signed by individuals from the Mittal family, who were directors in both entities, indicating a Mittal-to-Mittal transaction.Application of Law to Facts: The Tribunal applied Section 65 of the IBC, concluding that the Appellant's actions were not aimed at genuine insolvency resolution but rather at harming the CD's interests.Treatment of Competing Arguments: The Appellant argued that the Adjudicating Authority failed to provide sufficient opportunity to address the issue of collusion. However, the Tribunal found that the Appellant had the opportunity to respond to the Section 65 application filed by SBI.Conclusions: The Tribunal upheld the Adjudicating Authority's finding of malicious intent, justifying the dismissal of the Section 7 Petition.2. Existence of Financial Debt and DefaultRelevant Legal Framework and Precedents: Under Section 7 of the IBC, the existence of a financial debt and default is a prerequisite for initiating CIRP.Court's Interpretation and Reasoning: The Tribunal found that the purported loan was not a genuine financial debt but rather an equity investment aimed at acquiring control over the CD. The Tribunal noted that the alleged loan agreement did not have a clear repayment date, and no recall notice was issued by the Appellant.Key Evidence and Findings: The Tribunal observed that the Appellant transferred Rs 92 lakhs to the CD, which was not a loan but an investment for acquiring a stake in the CD. The Investment Term Sheet indicated that the Mittal family acquired 80% shareholding in the CD.Application of Law to Facts: The Tribunal concluded that the transaction did not meet the criteria of a financial debt, as it was not disbursed against the time value of money.Treatment of Competing Arguments: The Appellant cited precedents supporting the initiation of CIRP when default is established. However, the Tribunal distinguished these cases, noting the absence of debt and default in the present case.Conclusions: The Tribunal determined that no financial debt or default existed, rendering the Section 7 Petition untenable.3. Justification of PenaltyRelevant Legal Framework and Precedents: Section 65 of the IBC allows for penalties for the fraudulent or malicious initiation of proceedings.Court's Interpretation and Reasoning: The Tribunal found the imposition of a Rs 10,00,000 penalty on the Appellant justified, given the malicious intent in filing the Section 7 Petition.Key Evidence and Findings: The Tribunal noted the Appellant's actions aimed at obstructing SBI's recovery efforts under the SARFAESI Act.Application of Law to Facts: The Tribunal held that the penalty was appropriate, considering the Appellant's misuse of the insolvency process.Treatment of Competing Arguments: The Appellant argued that the penalty was unjustified. However, the Tribunal found that the Appellant's actions warranted such a penalty.Conclusions: The Tribunal upheld the penalty, reinforcing the need to deter the misuse of the insolvency process.SIGNIFICANT HOLDINGSPreserve Verbatim Quotes of Crucial Legal Reasoning: 'The Appellant and its related entities were actively involved in the management of the CD during the transactions in question, reinforcing the case for malice.'Core Principles Established: The Tribunal emphasized the importance of ensuring that insolvency proceedings are initiated for legitimate purposes and not for ulterior motives.Final Determinations on Each Issue: The Tribunal dismissed the Section 7 Petition, upheld the penalty imposed on the Appellant, and confirmed that no financial debt or default existed.