TaxTMI 
TaxTMI 
2022 (12) TMI 144
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....s) 316 of 2022 and CA (AT) (CH) (Ins) 312 of 2022, have been projected against the 'Impugned Order' dated 30.05.2022, passed by the 'Adjudicating Authority' ('National Company Law Tribunal', Bengaluru Bench, Bengaluru) in IA No. 06 of 2022 in CP (IB) No. 144/BB/2017 and IA No. 166 of 2021 in CP (IB) No. 144/BB/2017. 2. The 'Adjudicating Authority' ('National Company Law Tribunal', Bengaluru Bench, Bengaluru) while passing the 'Impugned Order' in IA No. 06 of 2022 in CP (IB) No. 144/BB/2017 dated 30.05.2022, had observed the following: "In the circumstances and for the aforesaid reasons, the 'Revised Plan' dated 10.12.2021 ('Resolution Plan') as approved by the 'CoC' and submitted by 'M/s Sri Kauvery Medical Care (India) Limited' (annexed to the Application as Annexure-A16) is here by approved. The 'Resolution Plan' so approved shall be binding on the 'Corporate Debtor' and its employees, members, creditors, including the 'Central Government', any 'State Government' or any local authority to whom a debt in respect of the payment of dues arising under any law for the time being in force such as authorities to whom statutory dues are owed, guarantors and other stakeholders....
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....Multi Speciality Hospitals', through which they sought to invest in to M/s Yashomati Hospitals Private Limited (in short 'Corporate Debtor') which was undergoing 'Financial Difficulty'. The majority 'Shareholder' and the 'Chairman' are residents of Russia who met with the 'Appellants' in Germany and an 'Agreement' (in brief the 'Term Sheet') was agreed between them. As per the 'Term Sheet', the 'Appellants' would invest upto Rs. 25 Crore in the 'Corporate Debtor' and would receive proportional 'Shareholding' of Rs.1 Crore for 1% of the 'Shareholding'. 7. According to the Appellants, Rs.17,74,66,098/- was invested in 'Corporate Debtor' to 'pay off the dues of the 'Corporate Debtor', including Bank Loans, Unpaid Employee Dues, to 'install' new equipment and to clear various other Dues. The 'Corporate Debtor' was 'not in operation' for years, before the 'Appellants', took over and invested money, to revive the 'Corporate Debtor'. 8. In 'Breach of Agreement', as per 'Term Sheet', after investment made by the 'Appellant', the 'Corporate Debtor' had failed to issue 'Shares' in the 'Corporate Debtor'. 9. The Appellants, however took over the Day-to-Day business of the 'Corporate ....
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....issing 'Application No. 166 of 2021', upholding the contentions of the 'Resolution Professional' that the 'Appellants' are 'Related Parties' and not 'Financial Creditors' of the 'Yashomati Hospitals Private Limited' ("Corporate Debtor"). 14. The Learned Counsel for the Appellant submitted that the 'Appellants' had disbursed huge amounts, to the extent of Rs.17.74 Crore (excluding any interest thereof) to the 'Corporate Debtor' which was utilized for paying the debts, running the operations, etc. of the 'Corporate Debtor'. 15. The Learned Counsel for the 'Appellant' assailed action of the 'Respondent No.1' to keep away the 'Appellant' as 'Stakeholder' of the 'CIRP' and extinguish the Appellant's Claim of such huge amounts, when the 'Claim' of the 'Sole Financial Creditor' in the 'Committee of Creditors' is only around Rs.23 Crore. 16. The Learned Counsel for the Appellant pointed out that the 'Corporate Debtor' admitted disbursement of funds but claims were denial on the ground that the amounts were only for 'Equity', when admittedly, no shares were 'Transferred', 'Allotted' or the 'Appellants' were recognized as 'Equity Holders'. 17. The Learned Counsel for the Appellan....
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....g spent for the 'Corporate Debtor' but are only challenging the character of the investment. 22. The Learned Counsel for the Appellant submitted that the Impugned Order is ex facie contrary to the facts on record and should be set aside and the Appellants are to be declared as 'Financial Creditors' of the 'Corporate Debtor'. The 'impugned order' correctly holds that the Appellants have invested a sum of Rs.17,74,66,098/- being the amount expended for any on behalf of the 'Corporate Debtor' but wrongly held that the same cannot be classified as Financial Debt and consequently the Appellants are not 'Financial Creditors'. 23. The Learned Counsel for the Appellant stated that even having paid an amount of over Rs. 17crores, the 'Appellants' have been left out of the 'Corporate Insolvency Resolution Process'. The Learned Counsel for the Appellant submitted that in 2017 a Term Sheet was executed between the Appellants and the Promoters of the Corporate Debtor, that clearly spell out that the Corporate Debtor required funds and the Appellants were ready to fund the Company by paying debts and operational creditors etc., which in fact is nothing but a financial transaction. If the A....
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.... offer or invitation under this section shall allot its securities within sixty days from the date of receipt of the application money for such securities and if the company is not able to allot the securities within that period, it shall repay the application money to the subscribers within fifteen days from the expiry of sixty days and if the company fails to repay the application money within the aforesaid period, it shall be liable to repay that money with interest at the rate of twelve per cent. Per annum from the expiry of the sixtieth day: Provided that monies received on application under this section shall be kept in a separate bank account in a scheduled bank and shall not be utilized for any purpose other than- (a) For adjustment against allotment of securities; of (b) For the repayment of monies where the company is unable to allot securities." "Para 18 To understand the nature of transaction involving a Share Application Money it is necessary to see how Section 42(6) of the Act and the Companies (Acceptance of Deposits) Rules, 2014 treat the Share Application Money. The relevant parts of the Act and the Deposit Rules have been reprod....
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....vency and Bankruptcy Code, 2016. Accordingly, in that case a Section 7 Application was held to be maintainable. 29. The Learned Counsel for the Appellant explained the next issue on which the 'Appellants' claims has been rejected is the ground that the Appellants had not submitted the relevant documents to support the claim. The Learned Counsel for the Appellant submitted this to be contrary to the records as submitted in the 'Claim Forms' where the relevant documents had been attached. 30. The Learned Counsel for the Appellant once again submitted that whether compliance is made by the 'Corporate Debtor' or not, cannot saddle the Appellants for such non-compliance when in fact monies have been expended by the Appellants for the 'Corporate Debtor'. 31. The Learned Counsel for the Appellant also pleaded Reliance on the case of MRF Ltd. v. Manohar Parrikar [(2010) 11 SCC 374] against there cords being improperly maintained and the 'Board Resolutions' of the Corporate Debtor not being updated for which the 'Appellants' cannot be faulted with. The doctrine of indoor management as expounded in the above-mentioned judgment protects the Appellants from the burden of ensuring whet....
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....n was found to have been such as to put the plaintiffs on inquiry. To this effect Lord Justice Sargant held:- "Cases where the question has been as to the exact formalities observed when the seal of a company has been affixed, such as Royal British Bank v. Turquand, 6 E. & B. 327, or the County of Gloucester Blank v. Rudry Merthyr, &c., Co., [1895] 1 Ch 629, are quite distinguishable from the present case. In re Fireproof Doors, Ltd., sup., tends rather against than in favour of the plaintiffs, since if a single director has as towards third parties the authority now contended for, the whole of the elaborate investigation of the facts in that case was entirely unnecessary. Perhaps the nearest approach to the present case is to be found in Biggerstaff v. Rowlatt's Wharf, [1896] 2 Ch. 93. But there the agent whose authority was relied on had been acting to the knowledge of the company as a managing director, and the act done was one within the ordinary ambit of the powers of a managing director in the transaction of the company's affairs. It is, I think, clear that the transaction there would not have been supported had it not been in this ordinary course or....
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....nix Arc Pvt. Ltd. vs. Spade Financial Services, [(2021) 3 SCC 475] is the date on which the relationship of being a related party is tested. "Para-103. Thus, it has been clarified that the exclusion under the first proviso to Section 21(2) is related not to the debt itself but to the relationship existing between a related party financial creditor and the corporate debtor. As such, the financial creditor who in praesenti is not a related party, would not be debarred from being a member of the CoC. However, in case where the related party financial creditor divests itself of its shareholding or ceases to become a related party in a business capacity with the sole intention of participating the CoC and sabotage the CIRP, by diluting the vote share of other creditors or otherwise, it would be in keeping with the object and purpose of the first proviso to Section 21(2), to consider the former related party creditor, as one debarred under the first proviso. Para-104. Hence, while the default rule under the first proviso to Section 21(2) is that only those financial creditors that are related parties in praesenti would be debarred from the CoC, those related party finan....
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....ated as 'Financial Creditors' and be paid in accordance with all the other financial creditors i.e., 100% of the amount claimed. Respondent's Submissions: 37. The Learned Counsel for the Respondents gave facts of the case and stated that the present Appeal is filed challenging the order of the 'Adjudicating Authority' upholding the action of the 1st Respondent in treating the Appellants as related parties. 38. The Learned Counsel for the Respondents brought out that the originally, the Appellants had lodged claim with the then 'Interim Resolution Professional' claiming various amounts as 'Financial Creditor', and the then 'Interim Resolution Professional' did not either admit or reject the claim of the 'Appellants' and but treated the 'Appellant' as related party. This was challenged in I.A.166/2021 and the 'Adjudicating Authority' dismissed the claims of the 'Appellant'. 39. This Respondent as 'Resolution Professional' after taking charge vide letter dated 09.09.2021 communicated the decision of not admitting the claim for the following reasons:- (a) Proof of claim is not establishing the financial debt; (b) No approval by the Board of Directors of th....
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....pacity of a 'Personal Guarantor' and not on behalf of the 'Corporate Debtor' and the consideration for whatever the appellants have done was the transfer of shares by the 'Promoter Director' as such and without any consideration from the 'Corporate Debtor'. 47. The Learned Counsel for the Respondent said that the CIRP process commenced on 16.03.2021 and admittedly there were disputes between the 'Appellant' and the 'Promoter Director' even before the commencement of the 'Corporate Insolvency Resolution Process' and nothing prevented the Appellant from working out the remedies known to law . 48. The Learned Counsel for the Respondent concluded with a request that the appeal is to be dismissed on the following grounds: a. The non-admission of claim by this Respondent vide its letter dated 09.09.2021 has not been challenged in the manner known to law and hence attained finality. b. The term sheet is not signed by the Corporate Debtor c. Pending disputes between the Promoters and the Appellant which could only be settled by the Disputes Resolution Mechanism set out in the "Term Sheet". d. Even as per the claims filed by the Appellant as a finan....
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....force, if such breach gives rise to a right to payment, whether or not such right is reduced to judgment, fixed, matured, unmatured, disputed, undisputed, secured or unsecured;" (e) The 'Financial Creditor' and 'Financial Debt' is also defined under Section 5(7) & Section 5(8) of the I & B Code, 2016, which as under:- "(7) "financial creditor" means any person to whom a financial debt is owed and includes a person to whom such debt has been legally assigned or transferred to; (8) "financial debt" means a debt alongwith interest, if any, which is disbursed against the consideration for the time value of money and includes- (a) money borrowed against the payment of interest; (b) any amount raised by acceptance under any acceptance credit facility or its de-materialised equivalent; (c) any amount raised pursuant to any note purchase facility or the issue of bonds, notes, debentures, loan stock or any similar instrument; (d) the amount of any liability in respect of any lease or hire purchase contract which is deemed as a finance or capital lease under the Indian Accounting Standards or such other accounting standards as may be p....
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....reas, an operational debt as defined under section 5(21) of I & B Code, 2016 signifies a claim in respect of the provisions of goods or services. (h) At this juncture, it may be worthwhile to refer to pronounce judgment on this issue to determine whether investment made by the Appellants fall in the definition of 'debt' and if so, whether this is 'financial debt' or 'operational debt or any other debt. The Hon'ble Supreme Court of India in case Phoenix Arc Pvt. Ltd. vs Ketulbhai Ramubhai Patel on 3 February, 2021 reported in (2021) 2 SCC 799gave its verdict defining in following paragraphs. "Para 5 - Aggrieved by the judgment of the Adjudicating Authority, the appeal was filed by the appellant before the Appellate Tribunal. The Appellate Tribunal held that pledge of shares in question do not amount to "disbursement of any amount against the consideration for the time value of money" and it do not fall within sub-clause (f) of sub-section (8) of Section 5 as suggested by the learned counsel for the appellant. The Appellate Authority finding no merit in the appeal, dismissed the appeal. Aggrieved by the judgment of the Appellate Tribunal, the appellant has filed the present ....
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....of whose default the guarantee is given is called the "principal debtor", and the person to whom the guarantee is given is called the "creditor". A guarantee may be either oral or written." Para 29 - (a) to (i) of Section 5(8) would be falling within the ambit of 'financial debt' only if it carries the essential elements stated in the principal Clause or at least has the features which could be traced to such essential elements in the principal clause. In yet other words, the essential element of disbursal, and that too against the consideration for time value of money, needs to be found in the genesis of any debt before it may be treated as 'financial debt' within the meaning of Section 5(8) of the Code. This debt may be of any nature but a part of it is always required to be carrying, or corresponding to, or at least having some traces of disbursal against consideration for the time value of money. Para 32-We may notice that the Appellate Tribunal has dealt with Section 5(8)(f) while rejecting the claim of the appellant as to be the financial creditor. It appears that the submission based on Section 5(8) (i) was not addressed before the Appellate....
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....ired to allot shares to appellants to extent of 25% of share capital. The Appellants were also entitled to nominate two directors to board of directors and the Appellant No. 2 was supposed to be nominated as the 'Chief Executive Officer' of the 'Corporate Debtor'. (k) Considering the facts of the case, provision in I & B Code, 2016 and abovementioned cited judgements, we are not in position to treat the money brought it as 'Financial Debt'. The basic element of the 'Financial Debt' that such disbursement should be for consideration of 'Time Value of Money' is not directly evident here. Admittedly, the Appellants have brought in more than Rs. 17 Crore, however it will not automatically fall in the definition of debt and more so of 'financial debt' in relation to the 'Corporate Debtor'. Since it cannot be classified as financial debts, the Appellants cannot be treated as financial creditor. (l) Therefore, the Resolution Professional's reason as discussed above to not include claims of the Appellants in the Resolution Plan as 'Financial Debt' and also due to the fact that the Appellant being related party which has been confirmed by the 'Adjudicating Authority' in the impugned o....
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.... a director and holds along with relatives, more than two percent. of its paid-up share capital; (f) anybody corporate whose board of directors, managing director or manager, in the ordinary course of business, acts on the advice, directions or instructions of a director, partner or manager of the corporate debtor; (g) any limited liability partnership or a partnership firm whose partners or employees in the ordinary course of business, acts on the advice, directions, or instructions of a director, partner, or manager of the corporate debtor; (h) any person on whose advice, directions or instructions, a director, partner or manager of the corporate debtor is accustomed to act; (i) a body corporate which is a holding, subsidiary or an associate company of the corporate debtor, or a subsidiary of a holding company to which the corporate debtor is a subsidiary; (j) any person who controls more than twenty percent. of voting rights in the corporate debtor on account of ownership or a voting agreement; (k) any person in whom the corporate debtor controls more than twenty percent. of voting rights on account of ownership or a voting a....
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....itation made under clause (h) of sub-section (2) of section 25;] Section 25, provide for 'Duties of Resolution Professional': "(1) It shall be the duty of the resolution professional to preserve and protect the assets of the corporate debtor, including the continued business operations of the corporate debtor. (2) For the purposes of sub-section (1), the resolution professional shall undertake the following actions, namely: - (a) take immediate custody and control of all the assets of the corporate debtor, including the business records of the corporate debtor; (b) represent and act on behalf of the corporate debtor with third parties, exercise rights for the benefit of the corporate debtor in judicial, quasi-judicial or arbitration proceedings; (c) raise interim finances subject to the approval of the committee of creditors under section 28; (d) appoint accountants, legal or other professionals in the manner as specified by Board; (e) maintain an updated list of claims; (f) convene and attend all meetings of the committee of creditors (g) prepare the information memorandum in accordance with sectio....
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....o may or may not approve it. The fact that the Resolution Professional is also to confirm that a resolution plan does not contravene any of the provisions of law for the time-being in force, including Section 29A of the Code, only means that his prima facie opinion is to be given to the Committee of Creditors that a law has or has not been contravened. Section 30(2)(e) does not empower the Resolution Professional to "decide" whether the resolution plan does or does not contravene the provisions of law". (e) Hon'ble Supreme Court in Ebix Singapore Private Limited vs. Committee of Creditors of Educomp Solutions Limited and Another-2021 SCC OnLine SC 707- "Para132- While the above observations were made in the context of a scheme that has been sanctioned by the Court, the Resolution Plan even prior to the approval of the Adjudicating Authority is binding inter se the CoC and the successful Resolution Applicant. The Resolution Plan cannot be construed purely as a 'contract' governed by the Contract Act, in the period intervening its acceptance by the CoC and the approval of the Adjudicating Authority. Even at that stage, its binding effects are produced by the I....