AI Drafter 
TaxTMI 
TaxTMI 
2019 (10) TMI 59
X X X X Extracts X X X X
X X X X Extracts X X X X
.... (hereinafter referred to as 'Corporate Debtor') stands rejected in terms of the order dated 11th January, 2019 passed by the Adjudicating Authority (National Company Law Tribunal), Kolkata Bench, Kolkata on the ground that the Corporate Debtor discharged the obligation as per the terms of the guarantee and therefore there was no debt due from the Corporate Debtor. Aggrieved thereof, the Financial Creditor has impugned the aforesaid order of rejection of his application through the medium of instant appeal assailing the impugned order, inter-alia on the grounds that the Adjudicating Authority erred in holding that the inflation of assets valuation is equal to the infusion of additional equity and that the additional equity of Rs. 125 Crore had to be brought in by the Promoter in the form of cash/equity. 2. For appreciating the grounds raised in this appeal it is apt to refer to the controversy involved at the bottom of the case. The Corporate Debtor, standing as a Corporate Guarantor for 'Visa Steel Limited' (in short 'VSL'/ 'Borrower Company') in whose favour loan and various credit facilities were granted by the Financial Creditor, executed 'Deed of Guarantee' and 'Letter of G....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nfusion of equity by way of unsecured loans/ preference share capital or by fresh share through the structured investments of investor by merging/ demerging of some of the business divisions of the Borrower Company. However, according to Appellant, the condition of bringing the additional equity of Rs. 125 Crores over and above the Promoter's contribution of Rs. 325 Crores was not fulfilled by the Borrower Company as per the CDR Package of 2012. CDREG approval for business reorganisation of the Borrower Company was made in the year 2014, in pursuance whereof, the Borrower Company executed and arranged execution of financial documents including corporate guarantee furnished by Respondent Company. In terms of letter of approval dated 31st December, 2014, the Borrower Company's steel business had to be demerged into a separate company i.e. 'Visa Special Steel Limited' (VSSL) through a scheme of arrangement. One of the subsidiaries of Borrower Company 'Visa Bao Limited' (VBL), which is a joint venture company, was to be merged with the Borrower Company i.e. Visa Steel Limited (VSL). Admittedly, the Promoters of Borrower Company had infused Rs. 325 Crores in terms of CDR Package of 2012....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rporate Guarantors for the same default of the Borrower Company stands admitted before Adjudicating Authority, (National Company Law Tribunal), Kolkata Bench. In which such Corporate Guarantor (Corporate Debtor) has been ordered to be liquidated vide order dated 31st August, 2018. The Appellant issued letter dated 13th December, 2017 demanding from the Respondent Company the outstanding debt of Rs. 977,61,86,875.84 and as the demand in terms of aforesaid letter was not met, the Appellant filed CP (IB) No. 23/KB/2018 before the Adjudicating Authority leading to passing of order of rejection of application under Section 7 impugned in this appeal. 6. On behalf of Appellant it is contended that on plain interpretation of the CDR approval, it is amply clear that the additional equity funds of Rs. 125 Crore over and above Rs. 325 Crore had to be infused in the similar form as Rs. 325 Crore were infused at the outset i.e. as Cash. Learned counsel for Appellant further submits that the Borrower Company, in terms of the initial arrangement of CDR Package, was to be demerged into two entities i.e. VSL which deals in Ferro-chrome business, while VSSL deals in steel business and the Borrowe....
X X X X Extracts X X X X
X X X X Extracts X X X X
....erence is made to initial contribution of Rs. 325 Crores by the Promoters as 'equity funds' but while dealing with additional equity of Rs. 125 Crores, it does not use the expression 'additional equity funds'. It is submitted that the letters of undertaking relied upon by the Appellant have been executed by the 'Promoters' and not in the capacity as a 'Corporate Guarantor'. It is further pointed out that the Deed of Guarantee refers to only 'additional equity' and there is no reference to 'funds or cash infusion'. Reference is made to letter dated 13th September, 2013 issued by the Borrower Company to Appellant for merger of VBL into VSL wherein no reference is made to infusion of additional equity of Rs. 125 Crores. It is further submitted that the said letter does not say that inviting strategic investors will be the way in which the obligation of the Guarantor will be fulfilled or the additional equity of Rs. 125 Crore had to be by way of cash infusion alone. It is further submitted that even otherwise with coming in of Bao Steel (China's largest Government owned steel manufacturer) as a Strategic Investor in VSL, consequent to the merger, it fair value post-merger would exceed ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ted by the provision engrafted in Section 7 of I&B Code, which reads as under: "7. Initiation of corporate insolvency resolution process by financial creditor.-(1) A financial creditor either by itself or jointly with other financial creditors may file an application for initiating corporate insolvency resolution process against a corporate debtor before the Adjudicating Authority when a default has occurred. Explanation.-For the purposes of this sub-section, a default includes a default in respect of a financial debt owed not only to the applicant financial creditor but to any other financial creditor of the corporate debtor. (2) The financial creditor shall make an application under sub-section (1) in such form and manner and accompanied with such fee as may be prescribed. (3) The financial creditor shall, along with the application furnish- (a) record of the default recorded with the information utility or such other record or evidence of default as may be specified; - (b) the name of the resolution professional proposed to act as an interim resolution professional; and (c) any other information as may be specified b....
X X X X Extracts X X X X
X X X X Extracts X X X X
....equired therein. Form 1 is a detailed form in 5 parts, which requires particulars of the applicant in Part I, particulars of the corporate debtor in Part II, particulars of the proposed interim resolution professional in part III, particulars of the financial debt in part IV and documents, records and evidence of default in part V. Under Rule 4(3), the applicant is to dispatch a copy of the application filed with the adjudicating authority by registered post or speed post to the registered office of the corporate debtor. The speed, within which the adjudicating authority is to ascertain the existence of a default from the records of the information utility or on the basis of evidence furnished by the financial creditor, is important. This it must do within 14 days of the receipt of the application. It is at the stage of Section 7(5), where the adjudicating authority is to be satisfied that a default has occurred, that the corporate debtor is entitled to point out that a default has not occurred in the sense that the "debt", which may also include a disputed claim, is not due. A debt may not be due if it is not payable in law or in fact. The moment the adjudicating authority is sati....
X X X X Extracts X X X X
X X X X Extracts X X X X
....to ascertain the existence of a default. This is to be done on the basis of record of information utility or evidence produced by the Financial Creditor. The Adjudicating Authority must be satisfied as regards occurrence of default. The Corporate Debtor is entitled to show that the debt is not payable in law or in fact and there is no default. If the Adjudicating Authority is satisfied that a default has occurred and the application is complete, will pass order admitting the application. In the event of the application being incomplete, the Adjudicating Authority will put the Financial Creditor on notice to remove the defect within 7 days. 10. After wading through record, we find that the factum of Appellant - Financial Creditor alongwith other lenders having extended credit facilities to the Borrower Company (VSL) and referring of the VSL to the CDR Forum for efficient restructuring of its corporate debt materializing in a CDR Package in terms of letter of approval dated 27th September, 2012 is not in controversy. It is also not disputed that as one of the conditions of the CDR Package the Promoter of VSL contributed Rs. 325 Crores as its contribution besides being required to ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....y VBL with VSL. The question arising for consideration is whether the liability under the 'Deed of Corporate Guarantee' stands discharged in view of the merger of VBL and VSL as according to Respondent upon the merger of assets and liabilities of VBL with VSL's assets an amount of Rs. 5705 Crores was infused as per the fair value of assets of VBL in terms of the Assets Valuation Report prepared by SLI Financial Services Limited thereby satisfying the condition of bringing in of additional equity of Rs. 125 Crores in the form of assets valuation. 11. Learned counsel for the Appellant vehemently stressed that the Guarantee did not stand discharged as the additional equity to be infused had to be in the form of 'cash infusion'. We have fathomed through the Convenience Compilation filed by the Appellant to appreciate the arguments advanced on this score. The CDR package as approved by the Empowered Group, in clause (viii), provides that the Promoters will infuse additional equity funds of Rs. 325 Crore under the debt restructuring package. It further provides that such infusion of equity may be brought in the form of unsecured loan/ preference shares or by issuing fresh shares or by....
X X X X Extracts X X X X
X X X X Extracts X X X X
..... 125 Crores. So far as the Appellant's contention as regards infusion of additional equity in the form of valuation of assets from 'Visa Bao' worth only Rs. 31.95 Crores is concerned, such valuation being only determinative of the share exchange ratio has no bearing on infusion of additional equity which depends on financial statements as per the sanctioned scheme which admittedly exceeds Rs. 125 Crores (pages 111, 121, 122 & 142 of the CC). It is amply clear that the Appellant has not been able to establish that additional equity of Rs. 125 Crore in addition to initial contribution of Rs. 325 Crores by the Promoters was to be by way of cash infusion only and that the Guarantor had failed to discharge its obligation, its liability being co-extensive with that of the Borrower Company. 12. There is force in the contention put forward on behalf of Respondent that the 'Deed of Guarantee' in question has to be interpreted independently and that the expression 'additional equity' not having been defined under the 'Deed of Guarantee' has to be understood in the context of the legislative intent manifested in Schedule III of the Companies Act, 2013 where, in the balance sheet format un....
X X X X Extracts X X X X
X X X X Extracts X X X X
....justifiably pleaded that there was no debt payable in law or in fact as the condition of additional equity of Rs. 125 Crores had been fulfilled and the obligation stood discharged. There being no debt payable in law or in fact, question of default does not at all arise. The conclusions drawn by the Adjudicating Authority leading to rejection of the application under Section 7 of the I&B Code cannot be termed erroneous. On consideration of the material on record we find no sufficient reasons to adopt a view different than the one taken by the Adjudicating Authority as such view and finding based on appreciation of the relevant material placed before it is the only probable view warranted in the circumstances of the case. We are accordingly of the view that the impugned order does not warrant interference in this appeal. That apart the initiation of Corporate Insolvency Resolution Process against 'Visa International Limited' (another Corporate Guarantor) by the Appellant in regard to the same debt would preclude the Appellant from initiating CIRP against the Respondent herein i.e. 'Visa Infrastructure Limited'. 13. For what has been stated hereinabove, the appeal being devoid of m....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... restructuring of the corporate debt. The Corporate Debt Restructuring Group in its meeting dated 26th September, 2012 approved restructuring of the existing financial assistance/debt to the VSL. According to appellant, the promoter of the borrower company contributed Rs. 325 crores as the promoters contribution and the promoter was to bring in additional equity of Rs. 125 crores. VSL executed various documents and also furnished the Corporate Guarantee of Respondent Company which is also a promoter of borrower company. Respondent company also agreed to create negative lien on the Respondent's property situated at Visa House, Alipor Road, Kolkata to secure the structured debt. The terms of CDR package provided for infusion of equity by way of unsecured loans/preference share capital or by fresh share through the structured investments of investor by merging/demerging of some of the business divisions of the Borrower Company. As per appellant, the condition of brining the additional equity of Rs. 125 over and above the promoter's contribution was not fulfilled by the Borrower company as per the CDR Package of 2012. The Borrower company demerged it steel business into a separate comp....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Paper Book) rejected the LSI report through balance sheet engineering instead of infusion of funds by cash flow as per Corporate Guarantee and Common Loan Agreement), Therefore, the appellant vide letter dated 13th December, 2017 (Page 142-144 of Volume I of Paper Book) issued recall notice upon the Respondents. Thereafter the appellant filed application under Section 7 of I&B Code against the Corporate Debtor for initiation of Corporate Insolvency Resolution Process against the Corporate Debtor before the Adjudicating Authority, NCLT, Kolkata. 6. Reply was filed by the Corporate Debtor. After hearing the arguments advanced on both sides, the Adjudicating Authority observed the following two points for consideration:- i) Whether the Corporate Debtor committed default in making the payment of the amount mentioned in the demand notice in terms of the guarantee executed by the Corporate Debtor? ii) Whether the debt to be repaid/obligation to be performed as per the terms of guarantee executed by the Corporate Debtor has been discharged as alleged by the Corporate Debtor? 7. The Adjudicating Authority, NCLT, Kolkata took both the points together for convenience ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....8. Being aggrieved by the said impugned order dated 11th January, 2019 passed by the Adjudicating Authority, NCLT, Kolkata in CP(IB) No.23.KB/2018, the appellant has preferred the instant appeal under Section 61 of the Insolvency & Bankruptcy Code, 2016 seeking the following relief:- i) Set aside the impugned order dated 11.01.2019 passed by the NCLT Kolkata in CP(IB) No.23/KB/2018. ii) Direction be given to initiate the Corporate Insolvency Resolution Process (CIRP) against the Respondents Company. iii) Pass any other such order as this Hon'ble Appellate Authority may deem fit in the intent of justice, equity and good conscience. 9. Notice was issued to Respondent who appeared and filed their reply. Rejoinder was filed by the appellant. After completing the pleadings, the matter was heard. 10. Arguments were advanced by both the parties at length. After hearing the parties and perusing the record the following two points that arises for determination are:- i) Whether the debt to be repaid/obligation to be performed as per the terms of the guarantee executed by the corporate debtor has been discharged as alleged by the Corporate Debtor? ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e of Borrower company and M/s Baosteel Resources Co Ltd (Baosteel) China in which the Borrower company holds 65% stake and the rest 35% stake in Vis Bao Ltd is held by the China company. Learned counsel for the appellant argued that the aforesaid merger cannot be carried out without being preceded by a demerger of VSL and in the same letter the appellant was requested for obtaining necessary approval from CDR Empowered Group for merger of VBL into VSL for the purpose of inviting the Strategic Investors. Learned counsel for the appellant further argued that vide letter and undertaking both dated 23.3.2013 (Page 494 of Appeal) the promoters and guarantors agreed that "I/We shall infuse further funds in the Borrower in the form of unsecured loan/Preference Shares or by issuing fresh shares through QIP/FPO/PE/Strategic Investment etc or by merging/demerging some business division of the borrower into separate Companies/SPV's through scheme/slump sale and inviting strategic investor for meeting any cash flow shortage to meet the repayment obligations of the Borrower to the Lender and/or to meet interest payment due by the Borrower of the ; if required by CDR EG:" (Page 490, 494, 498 and....
X X X X Extracts X X X X
X X X X Extracts X X X X
....akrishnan & Ors AIR 2018 SC 3876 of Hon'ble Apex Court. 14. Learned counsel for the appellant further argued that in the instant case the equity was limited only to the sum of Rs. 31.593 Crores and further argued that the Annual Financial Statement 2016-17 of Borrower Company, the net Asset Value of Visa Bao Ltd has been high exaggerated by Visa Steel Ltd. At last learned counsel for the Appellant argued that the it is clear that there was no infusion of funds amounting to Rs. 125 crores by the merger of Visa Bao Ltd with Visa Steel Ltd. Therefore, the Corporate Debtor is not discharged from the corporate guarantee executed by it. Lastly learned counsel prayed that the appeal may be allowed and the application filed by the appellant under Section 7 of the I&B Code be admitted. 15. Argued were advanced by the Respondents and he argued that the appeal filed by the appellant is liable to be rejected. Learned counsel for the Respondent argued that the letter issued by CDR Cell to SBI (Pages 1771 & 1772 of Appeal Paper Book) refer to the initial contribution of Rs. 325 crores by the Promoters and stressed that here expression used as "equity funds". Learned counsel for the Respond....
X X X X Extracts X X X X
X X X X Extracts X X X X
....8th December, 2017 (Page 2247 and 2248 of appeal). 18. At last learned counsel for the Respondent argued that even if there was debt payable by the Respondent, the CIRP having been admitted against Visa International Ltd for the same debt another Corporate Guarantor cannot be proceeded with and the learned counsel for Respondent has placed reliance upon this Appellate Tribunal Judgement namely Dr. Vishnu Kumar Agarwal Vs Piramal Enterprises Ltd dated 9.1.2019 in Company Appeals No.346 and 347 of 2018. Learned counsel for the Respondent prayed that the appeal filed by the appellant may be dismissed with costs. 19. I have heard the parties and perused the record. It is not disputed that the Borrower company availed credit facilities from the appellant and corporate guarantee was given by the Corporate Debtor. The fact is confirmed by the Corporate Debtor itself vide its own letter dated 25th October, 2017 (Page 2240 of Appeal) that the Corporate Debtor had given the corporate guarantee. 20. The next issue before my consideration is that whether the infusion of Rs. 125 crores in VISA Steel Ltd is to be met in cash or assets etc. As per CDR letter to SBI at page 1774 of Appeal....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... as per Share Exchange Ratio (Page 2734 of Appeal) 5789500 shares of Visa Steel were allotted to BRCL, who was holding 35% stake in Visa Bao Ltd. and value of these shares in Visa Steel was Rs. 11,05,19, 500/- as on 31.3.2015. Learned counsel for the appellant argued that merger of Visa Bao Ltd with Visa Steel Ltd has led to an infusion of Rs. 31.593 crores which is far less than Rs. 125 crores as approved in the CDR. Learned counsel for the appellant further argued that in the Annual Financial Statement of 2016-17, the net asset value of Visa Bao Ltd has been highly exaggerated by Visa Steel Ltd. Learned counsel for the appellant argued that additional equity has not been infused but the new valuation has been done by LSI Financial Services Ltd. Learned counsel for the appellant further argued that no additional equity in cash or kind has been infused except merger of Visa Bao Ltd which has net asset value of 31.593 crores, therefore, the new valuation conducted by Borrower Company is nothing but a book entry. Learned counsel for the appellant argued therefore, there is debt and default and the Learned NCLT have committed an error in not admitting the application under Section 7 o....
X X X X Extracts X X X X
X X X X Extracts X X X X
....btained fairness opinion on scheme of amalgamation of Visa Bao Ltd with Visa Steel Ltd from M/s Intelligent Money Managers Pvt Ltd who have confirmed the scheme of amalgamation is fair and reasonable to the equity shareholders of the Visa Steel Ltd. Therefore, it can safely be taken that net asset value of the company are taken at Rs. 31.593 cores. Only this much assets has been infused in the Borrower company. Further in this net assets of Rs. 31.593, 65% stake is held by the Borrower company itself and 35% stake is held by Bao Steel (China). Therefore, only 35% share of net assets of Visa Bao Ltd has been merged in the Borrower company amounting to Rs. 11.052 crores which is less than additional equity of Rs. 125 crores. However, the borrower has claimed that in keeping with the scheme of amalgamation the borrower company has accounted for the difference between the fair value of net assets of VBL (so acquired) and face value of equity shares issued being Rs. 4601.46 million as capital reserve and reflected under the heading "other equities" thus meeting out its obligation of bringing Rs. 125 crores as per CDR. However, I have noted that this mechanism has not been envisaged i....