2026 (2) TMI 609 - AT - IBC

Section 7 petition maintainability against a Financial Service Provider denied, while limitation and pledge issues favored the creditor.

A Section 7 petition was held not maintainable because the corporate debtor qualified as a financial service provider in relation to the underlying ... Maintainability of Section 7 petition against a financial service provider - limitation under Article 137 of the Limitation Act in Section 7 proceedings - relinquishment of rights by enforcement of security versus preservation of claim - effect of a settlement agreement on existence and enforceability of an antecedent financial debt - relevance of a 'deep and complex' dispute in a Section 7 petition - HELD THAT:- It is the case of the Appellant that the settlement agreement dated 01.07.2017 does not extinguish or waive the original debt and at best is a repayment arrangement thereby implying that the breach of settlement agreement revives the original cause of action. The Appellant also relies on clause 3.7 in the settlement agreement, which imposes a continuing obligation to repay the outstanding debt. It claims that since no payments have been made either under the loan agreement or under the settlement agreement despite express acknowledgment of liability obligation. Basis the provisions under the Code that “(5) Where the Adjudicating Authority is satisfied that--(a) a default has occurred and the application under sub-section (2) is complete, and there is no disciplinary proceedings pending against the proposed resolution professional, it may, by order, admit such application” and settled judicial precedents, we could conclude that this is a fit case of admission of debt and default. To add strength to the arguments of the Appellant we find that in the related case under the same settlement agreement, on the petition of the FC against Perpetual, which is also one of the parties in the settlement agreement, NCLT Mumbai Bench passed admission order in Religare Finvest Limited against perpetual for defaulting. Adjudicating Authority has gone into the background and finds that loan claimed by the Financial Creditor is subsumed into the settlement agreement dated 01.07.2017 and it is not a stand-alone liability. The terms of settlement are all encompassing on its various terms. Therefore, the question of debt and default in a subsisting agreement which is alive even as of today would not partake the character of debt. It has come to a conclusion that it is a recovery process agreement, the question of default as pleaded by the petitioner does not arise. There is a fundamental question of the maintainability of the Section 7 petition. The Corporate Debtor had also provided a detailed account of the genesis of the debt, which is available on the material placed on record and at the relevant time its status as NBFC. Briefly speaking it was pointed out by the Respondent that the Financial Creditor had unconditionally and irrecoverably sold, transferred and assigned the loans granted to certain borrowers to the Respondent - SSCPL and Perpetual. Respondent claims that the loans granted to certain borrowers were sold to SSCPL as per the settlement agreement dated 01.07.2017. It also claims that the loans sold out turned out to be the related party’s transaction and a funds siphoning scheme adopted by the Financial Creditor. Upon unearthing the alleged fraud, multiple litigations ensued between the parties and which culminated into a suit before Hon’ble Bombay High Court Eleos Finvestia Acquisition Trust and in the above suit a settlement was arrived at and hence settlement agreement dated 01.07.2017 was entered into and enforced. We find that the petition itself is not maintainable as the Respondent, being a NBFC, is a Financial Service Provider (FSP) and the impugned transactions had taken place when the Respondent was NBFC. Moreover, there are deep and complicated transactions which are disputed. Furthermore, both parties willingly entered into such transactions, despite being fully aware that it is for purchase of share of ABG Shipyards. Furthermore, Respondent was being controlled by FC and it willingly entered into such transactions. We find both parties were colluding with each other and therefore we are not convinced to allow the admission of Section 7 petition. We also note that Section 7 petition against cannot be filed against Corporate Debtor being a Financial Service Provider. Accordingly, the appeal filed by FC is not maintainable and is liable to be dismissed. Apart from non- maintainability there are other counts also – noted by us herein earlier, which don’t allow admission of Section 7 petition. Thus, we find sufficient grounds to dismiss the Appeal and accordingly the Appeal is dismissed. Issues: (i) Whether the Section 7 petition was maintainable against the Corporate Debtor given its status as a Financial Service Provider (FSP); (ii) Whether the Section 7 petition was barred by limitation; (iii) Whether the Financial Creditor had relinquished rights by invoking pledge and thereby forfeited claim of debt; (iv) Whether the existence of a settlement agreement or alleged complex dispute precluded admission under Section 7.Issue (i): Whether the Section 7 petition was maintainable against the Corporate Debtor given its status as a Financial Service Provider (FSP).Analysis: The Corporate Debtor was an NBFC at the time of the underlying transactions and thus fell within the definition of 'financial service provider' under the Insolvency and Bankruptcy Code, 2016. The statutory requirements for exclusion from Section 7 proceedings were assessed with reference to the status at the relevant time.Conclusion: The Section 7 petition was not maintainable against the Corporate Debtor because it was a Financial Service Provider at the relevant time. Conclusion is against the Appellant.Issue (ii): Whether the Section 7 petition was barred by limitation.Analysis: The date of default was identified with reference to the termination/recall notice; the petition was filed within the applicable limitation period and the settlement agreement contained acknowledgments relevant to limitation analysis.Conclusion: The limitation objection was rejected and the petition was held to be within time. Conclusion is in favour of the Appellant on limitation.Issue (iii): Whether the Financial Creditor had relinquished rights by invoking the pledge and thereby forfeited the claim of debt.Analysis: Contractual terms were examined to determine whether enforcement of security by invocation of pledge operated as a relinquishment of the underlying claim; the remedies under the loan and sale agreements were found to be cumulative rather than mutually exclusive, and pledged shares were of limited value due to intervening insolvency of underlying issuer.Conclusion: The Financial Creditor did not relinquish its right to claim the outstanding loan and interest. Conclusion is in favour of the Appellant on relinquishment.Issue (iv): Whether the existence of a settlement agreement or an asserted complex dispute precluded admission under Section 7.Analysis: The settlement agreement was examined for its terms (including escrow and continuing-obligation clauses) and for whether it altered the character of the underlying financial debt; statutory treatment of disputes under Section 7 was considered, and the relevance of a complex factual matrix was assessed in context of maintainability when the Corporate Debtor is an FSP.Conclusion: The settlement agreement and existence of complex/disputed transactions did not render the questions academic; however, because the Corporate Debtor was an FSP and Section 7 was thereby not maintainable, these issues were rendered secondary to the maintainability bar. Conclusion is against the Appellant on overall admissibility.Final Conclusion: The appeal is dismissed because the Section 7 petition was not maintainable against a Corporate Debtor that was a Financial Service Provider at the relevant time; ancillary findings on limitation and relinquishment do not alter the dismissal.Ratio Decidendi: A petition under Section 7 of the Insolvency and Bankruptcy Code, 2016 is not maintainable against an entity that qualifies as a 'financial service provider' under Section 3(17) of the Insolvency and Bankruptcy Code, 2016 where that status exists in relation to the underlying transactions.