TaxTMI 
TaxTMI 
TaxTMI 
2025 (12) TMI 323
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....n 7 of the Code by JM Financial Credit Solutions Limited (Financial Creditor) and Respondent No.1 herein, against Hem Infrastructure and Property Developers Pvt. Ltd.,(Corporate Debtor) thereby initiating the Corporate Insolvency Resolution Process (CIRP) and appointing Mr. Rajesh Jhunjhunwala as the Interim Resolution Professional (IRP). The Appellant, being a shareholder of the Corporate Debtor, has approached this Appellate Tribunal on the grounds that the order of admission suffers from grave factual and procedural errors; that no legally enforceable financial debt or valid guarantee existed; and the Adjudicating Authority failed to consider the commercial futility of initiating CIRP against a non-operational Special Purpose Vehicle (SPV) incapable of resolution under the Code. Mr. Rajesh Jhunjhunwala, IRP is the Respondent No.2 in this appeal. 2. The brief facts of the case are given below: (i) This appeal arises out of the order dated 14.07.2025 passed by the NCLT, Mumbai Bench-V, in C.P. (IB) No. 90 of 2024, whereby the petition under Section 7 of the Code filed by JM Financial Credit Solutions Ltd. (Respondent No.1) against Hem Infrastructure and Property Develo....
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....es executed by the CD. (ix) The Corporate Debtor filed Interlocutory Application (IA) No. 2071 of 2024 dated 29.04.2024 before the Adjudicating Authority, objecting to the maintainability of the petition on the ground that it was incomplete and defective for want of foundational documents, and prayed for dismissal of the petition. Corporate Debtor also filed reply to the company petition on 30.04.2024, denying the existence of any financial debt, disputing the validity of the alleged guarantees, and highlighting the absence of commercial purpose behind initiating CIRP against a dormant SPV. (x) The Adjudicating Authority, by order dated 06.06.2024, dismissed the aforesaid IA, but allowed liberty to the Corporate Debtor to raise all its objections during final arguments. (xi) Respondent No.1 subsequently filed an Additional Affidavit dated 18.11.2024 before the NCLT, complete set of copies of the loan and guarantee documents. The Corporate Debtor objected to this belated filing through a Reply dated 19.04.2025, asserting that the documents were inadmissible, unreliable, and could not cure the original incompleteness of the petition. (xii) During t....
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....06.09.2006. This AOP was formed by four entities, including the Corporate Debtor, which holds a 35.5% share in the distributable income of the AOP. The Corporate Debtor served only as a guarantor to the facilities availed by the AOP. It is, therefore, incorrect to treat the CD as the principal borrower for the purpose of Section 7 proceedings under the IBC. 6. Ld. Counsel further submitted that the Respondent has objected to the maintainability of the Appeal on the ground that the Appellant is only a "shareholder." However, the Appellant has filed the present submissions to clarify that its status, rights, and control over the CD are such that it qualifies as an aggrieved person entitled to maintain the present Appeal. 7. It is the submission of the Appellant that the reliance placed by the Respondent on the judgment of this Appellate Tribunal in 'Park Energy Pvt. Ltd. v. State Bank of India, Company Appeal (AT) (Insolvency) No. 62 of 2023', is wholly misconceived and inapplicable to the present case. In the Park Energy case this Tribunal barred a "mere shareholder" i.e., a person who only participates in the profits of a company, without any control or operational involvemen....
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....f of the Appellant is also a Director of the Corporate Debtor, and thus, in the alternative, could have maintained this Appeal in that capacity as well, should this Appellant Tribunal so permit. 12. The Appellant States that under settled jurisprudence, a preference shareholder, whose investment carries the commercial effect of borrowing qualifies as a financial creditor within the meaning of Section 5(8) of the IBC. This Tribunal has held in 'Sanjay D. Kakade v. HDFC Ventures Trustee Company Ltd., Company Appeal (AT) (Insolvency) No. 481 of 2023' that preference shares, under certain contractual terms, have the nature of a financial debt. In that case, this Tribunal examined the Amended and Restated Share Subscription-cum-Shareholders Agreement dated 14.05.2008 and held that such instruments, requiring the company and promoters to repurchase the shares at a price ensuring an internal rate of return (IRR) of 15% per annum compounded annually or fair market value, whichever is higher, have the commercial effect of borrowing. 13. Ld. Counsel states that applying the ratio of Sanjay Kakde (supra), the Appellant's Redeemable Optionally Convertible Preference Shares in the present....
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.... dated 14 July 2025, passed by the NCLT, Mumbai Bench, in CP No. 90 of 2024, whereby the Company Petition filed by the Financial Creditor was admitted under Section 7 of the Code, initiating the CIRP against the said Corporate Debtor. 18. Ld. Counsel submits that the Appellant itself has unequivocally admitted throughout its pleadings that it has filed the appeal "being a shareholder of the Corporate Debtor." References to this effect appear in paragraphs 1.1, 1.4, and F(iv) of the Appeal Memo (pages 34, 35, and 63). Furthermore, in paragraph 2A of the Stay I.A. (page 27), the Appellant has stated on oath that it "has no independent business, revenue, employees, or assets and functions solely as a passive investor." The Appellant also repeatedly describes the Corporate Debtor as a passive conduit for AOP participation [para-E(i) and E(i)(c), pages 59-60 of the Appeal]. Therefore, two undisputed facts emerge, firstly the Appellant has approached this Tribunal purely in its capacity as a shareholder of the Corporate Debtor; and secondly, that it plays no role whatsoever in the management or affairs of the Corporate Debtor. 19. Ld. Counsel on behalf of the Financial Creditor, su....
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....lvency) No. 481 of 2023', which held that shareholders holding convertible preference shares with assured returns could, in limited circumstances, be treated as financial creditors. The Counsel submitted that such reliance is wholly misconceived for the following reasons: (i) The Appellant's entire appeal is premised upon its shareholding status. Nowhere in the pleadings is it stated that it is a creditor of the Corporate Debtor. A party cannot alter its foundational case or capacity at the stage of oral submissions. Having consciously approached this Tribunal as a shareholder, the Appellant cannot now introduce a new case of being a financial creditor. (ii) The judgment in Sanjay D. Kakade (supra) concerned a Section 7 application by preference shareholders against the company itself, based on specific contractual guarantees and assured returns under a Share Subscription-cum-Shareholders Agreement (SSSHA). The present matter concerns the maintainability of an appeal under Section 61, not initiation under Section 7. Hence, the factual and legal contexts are entirely different. Moreover, Park Energy (supra), being a larger bench decision, governs the present issue.....
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....rgument is liable to be rejected outright. 25. Summing up, Ld. Counsel states that in the light of the above facts and the settled position of law affirmed in Park Energy (Supra), the present appeal, filed by a mere shareholder of the Corporate Debtor, having no managerial role; no direct financial exposure; and no legally recognized grievance under Section 61 of the IBC, is not maintainable. The attempt to alter capacity from shareholder to creditor, or to claim representational right over the Borrower, is impermissible and contrary to the pleadings and record. Accordingly, the Financial Creditor respectfully prays that the Appeal be dismissed in limine, as not maintainable. Analysis and Findings 26. We have heard learned counsels and perused the pleadings, documents, and authorities relied upon and based on the same, we frame the following two issues for determination: (i) Whether the present Appeal filed under Section 61 of the Code by the Appellant, who claims to be a shareholder and preference shareholder of the Corporate Debtor, is maintainable in law? (ii) Whether the order dated 14.07.2025 passed by the Adjudicating Authority (NCLT, Mumbai) admitt....
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.... JM Financial Credit Solutions Ltd., has strongly opposed the maintainability of this appeal. It submits that under Section 61(1) of the IBC, only a "person aggrieved" by an order of the Adjudicating Authority may prefer an appeal before this Appellate Tribunal. A person becomes "aggrieved" only when the impugned order causes a direct legal injury to their rights, and not merely because it affects them financially or commercially. 32. The Respondent points out that the Appellant's own pleadings and affidavits in the Appeal describe it as a shareholder of the Corporate Debtor and a passive investor with no independent business, assets, or employees. The Appellant has clearly stated that it functions solely as an investment vehicle. Thus, by its own admission, the Appellant has no managerial or operational role in the Corporate Debtor's affairs. 33. Relying on the authoritative three-member Bench judgment of this Tribunal in Park Energy Pvt. Ltd. v. State Bank of India (supra), the Respondent submits that shareholders, whether minority or majority, cannot file or maintain an appeal under Section 61 against an order admitting insolvency proceedings. The larger Bench in Park Ener....
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....would defeat the object of the IBC, which emphasizes speedy resolution and finality of proceedings. If shareholders were permitted to intervene or appeal, it would lead to multiple litigations and delays, contrary to the Code's objectives. 38. Once the Corporate Debtor is admitted into CIRP, Section 17 of the IBC automatically transfers the management and control of the company to the Interim Resolution Professional (IRP). The Board of Directors, and consequently all shareholders, lose their authority over the affairs of the company. The IRP/RP is the protector of the interests of the shareholders in such a situation. Thus, even if the Appellant had prior administrative control, that control ceased upon admission. The mere fact of holding 51% shares or being a "majority owner" does not confer a separate or superior locus under Section 61. The Appellant's attempt to distinguish Park Energy (supra) on the basis of being a majority shareholder or holding preference shares cannot succeed. 39. Regarding the control of Appellant on Corporate Debtor, the submission of the appellant in the stay application I.A. No. 5448/2025 in para 2A is relevant and the same is extracted below: ....
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....e entitled to participate in the proceeds of winding up before the commencement of this Act. Explanation. - For the purposes of this section, - (i) equity share capital, with reference to any company limited by shares, means all share capital which is not preference share capital; (ii) preference share capital, with reference to any company limited by shares, means that part of the issued share capital of the company which carries or would carry a preferential right with respect to (a) payment of dividend, either as a fixed amount or an amount calculated at a fixed rate, which may either be free of or subject to income-tax; and (b) repayment, in the case of a winding up or repayment of capital, of the amount of the share capital paid-up or deemed to have been paid-up, whether or not, there is a preferential right to the payment of any fixed premium or premium on any fixed scale, specified in the memorandum or articles of the company; (iii) capital shall be deemed to be preference capital, notwithstanding that it is entitled to either or both of the following rights, namely:-- (a) that in respect of dividends, in additio....
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....he Appellant from a shareholder to a creditor. Such an exercise would amount to altering the very foundation of the appeal, which is impermissible in law. 45. Even otherwise, the right to appeal under Section 61 is a statutory right, not an equitable one. It must be exercised strictly within the scope of the statute. The IBC restricts appellate jurisdiction to those "persons aggrieved" whose legal rights under the Code are directly affected by the impugned order. A shareholder's financial loss or dilution of value does not constitute such a right; it is merely a consequence of the insolvency process, which affects all investors uniformly. 46. Therefore, the Appellant, being a shareholder or a preference shareholder without any contractual debt rights, does not fall within the category of "person aggrieved" under Section 61. It's interests are adequately represented through the Resolution Professional and the mechanisms provided under the IBC. Allowing such appeals by shareholders would undermine the purpose of the Code by introducing multiplicity and delay. 47. Based on the discussion above, we observe the following: (i) The Appellant has filed the present appeal ....
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....e Corporate Debtor's involvement was limited to providing a corporate guarantee for the credit facilities extended to the AOP. It is submitted that such a guarantee, without an independent disbursal of debt to the Corporate Debtor itself, cannot give rise to a financial debt within the meaning of Section 5(8) of the IBC. Therefore, initiation of CIRP against the Corporate Debtor, when the primary default was by the AOP, is claimed to be legally untenable. 51. Additionally, it is argued that the Adjudicating Authority failed to appreciate that the AOP was a functioning entity having assets of its own, and that the Financial Creditor could have proceeded against it directly. According to the Appellant, the Financial Creditor's selective invocation of guarantee and initiation of CIRP against the Corporate Debtor, without exhausting remedies against the AOP, demonstrates mala fides and an attempt to strategically gain control over valuable real estate held by the Corporate Debtor. 52. The Appellant has also attempted to suggest that the NCLT failed to consider whether there existed any pre-existing dispute regarding the quantum of default or the enforceability of the guarantee, w....
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.... order by questioning the commercial wisdom of the Financial Creditor's decision to proceed against the guarantor. The Respondent therefore submits that the NCLT's order, being based on correct appreciation of debt, default, and guarantee, calls for no interference by this Tribunal. 57. We have carefully perused the impugned order dated 14.07.2025. The scope of inquiry at the stage of admission under Section 7 of the IBC is limited, the Adjudicating Authority is required to ascertain only (a) the existence of a financial debt, and (b) occurrence of a default. If both are proved on record, admission is mandatory; no equitable discretion lies to reject a petition on other grounds. This position has been repeatedly emphasized by the Hon'ble Supreme Court in 'Innoventive Industries Ltd. v. ICICI Bank [(2018) 1 SCC 407]' and 'E.S. Krishnamurthy v. Bharath Hi-Tech Builders Pvt. Ltd. [(2022) 3 SCC 161]'. 58. In the present case, it is undisputed that JM Financial Credit Solutions Ltd. extended certain financial facilities to M/s Hem Bhattad (AOP), and that the Corporate Debtor stood as a corporate guarantor for those facilities. The guarantee deed is not denied. Upon default by the ....