UKG Steel Private Limited Vs Erotic Buildcon Private Limited - Legally Enforceable Debt.

NCLT (PB) New Delhi (31.05.2021) in UKG Steel Private Limited  Vs Erotic Buildcon Private Limited [(IB)/1050(PB)/2020] held that, as the loan given by the Petitioner (FC) is beyond the limits provided under the provisions of Section 186 of “The Companies Act,2013”, hence the loan advanced by the Petitioner is not a legally enforceable debt.

• Therefore, the material available on the record suggest that the borrowing given by the Petitioner is contrary to the limit prescribed under Companies Act 2013 which amounts to an ultra vires act committed by the Petitioner. Hence the loan advanced by the Petitioner is not a legally enforceable debt.

 

Excerpts of the order;

# 1. The petitioner company UKG Steel Private Limited (“hereinafter referred as Financial Creditor’) was incorporated under the erstwhile Companies Act, 1956 on 11.06.1998 and had filed this petition as a “Financial Creditor” against M/s Erotic Buildcon Private Limited (“hereinafter referred as Corporate Debtor”) in terms of Section 7 of the Insolvency and Bankruptcy Code, 2016 (the Code) by filing application in Form 1 as prescribed in Rule 4(1) of the Insolvency and Bankruptcy Rules, 2016 (the Rules).

 

# 2. That the Corporate Debtor was incorporated on 15.12.2006, under the erstwhile Companies Act, 1956 with CIN No. U45200DL2006PTC156631. That the registered office is located in Pitampura, New Delhi. Therefore, the same falls within the territorial jurisdiction of this Bench. That the authorised share capital of the corporate debtor is Rs. 1 Crore and the paid-up share capital is Rs. 16 Lakhs.

 

# 3. The Facts of the case briefly stated are that, on perusal of the Company Petition are, that a loan agreement was executed between the parties on 16.03.2019 and pursuant to that the financial creditor had advanced the loan of Rs. 3,76,45,000/- at interest rate of 6.5% per. The respondent had assured and agreed to make the repayment, would be in 8 quarterly instalments starting from 30th June 2019, and operative upto 31st March 2021 i.e till the validity of the Loan Agreement. Further, subject to the renewal with the mutual consent of the parties.

 

# 4. It is submitted by the Financial Creditor, the amount of Rs. 3.76 Crores was disbursed by the Financial Creditor on different dates, in the five consecutive instalments i.e (i) Rs. 46,80,000/- on 16.03.2019. Another (ii) Rs 60 lacs on 18.03.2019, (iii) Rs.1.5 crores on 18.03.2019, (iv) Rs.1 crore on 19.03.2019 and lastly (v) Rs. 64,65,000/- on 19.03.2019. The Bank statement of the Karnataka Bank Limited has been placed on record as (Annexure-I Exhibit D, @ page 60 to 65), by the Petitioner in this context, which is clearly smudged and not a single transaction of the aforementioned dates are visible.

 

# 5. It is further stated that the petitioner sent several requests and, repeated reminders to the respondent, to repay the loan amount as per the terms of the agreement. The respondent had defaulted in repayment of the principal amount and did not make any repayment of the interest and principal amount.

 

# 6. Therefore, the petitioner had sent notice dated 10.07.2019 to the respondent-corporate debtor raising demand of the outstanding amount with interest, the respondent had replied to the notice and expressed its inability to make the due payment, by stating his liquidity concern in the company. Another demand letter dated 07.10.2019 send to the respondent. Thereafter, petitioner had decided to recall the total loan amount including the interest amounting to Rs. 3,91,91,522 vide its letter dated 02.01.2020 stating to take legal action against the respondent, to which the respondent did not reply.

 

# 7. Consequently, the petitioner had sent a last notice dated 25.06.2020 and requested the respondent to make the immediate payment of the debt amount. However, the due amount has not been paid so far. Hence, this petition.

 

# 8. The corporate debtor vide its Reply filed on 03.12.2020 stated about their financial crisis, which occurred to their company, due to which they could not pay the loan instalment timely. Further, had stated that, they have bonafide intention to repay the entire amount and sought some more time to normalise their business operations, after improvement in the prevailing covid situation.

 

# 9. The submissions heard from both the sides. Perused the contents of the petition as well as the reply of the Respondent in the light of the annexed evidence. From perusal of the Bank Statement and Passbook it is observed that ex-facie there is no evidence which reflects that the money was transferred from the Petitioner-financial creditor to the respondent-corporate debtor. The Bank statement annexed by the petitioner have a smudged visibility which gives the negligent impression about the Petitioner, in furtherance of this the Balance sheet no- where shows the disbursal of the principal amount from the petitioner’s account.

 

# 10. That the Corporate Debtor in its reply has not denied the disbursement of loan, on the basis of that if we still presume that the loan was still disbursed, then the question which still remains before us is whether the Financial Creditor, who is neither a Bank/NBFC nor a body corporate recognised by RBI for carrying out financial business, was authorised to give such loan amount or not.

 

# 11. At this juncture we would like to refer Section 186 of Companies Act 2013, which deals with the Inter-Corporate Loans and sets out a limit on a company for disbursing loan to the other entities. The content of Section 186 of Companies Act 2013 is reproduced below-

• 186. Loan and investment by company

• XXXXX

• (2) No company shall directly or indirectly —

• (a) give any loan to any person or other body corporate.

• (b) give any guarantee or provide security in connection with a loan to any other body corporate or person; and

• (c) acquire by way of subscription, purchase or otherwise, the securities of any other body corporate, exceeding sixty per cent. of its paid-up share capital, free reserves and securities premium account or one hundred per cent. of its free reserves and securities premium account, whichever is more.

• (3) Where the giving of any loan or guarantee or providing any security or the acquisition under sub-section (2) exceeds the limits specified in that sub-section, prior approval by means of a special resolution passed at a general meeting shall be necessary.

 

# 12. To calculate whether the Petitioner-financial creditor has given loan in terms of Section 186 of Companies Act 2013 we refer to Page 50 of the Petition, wherein the Balance Sheet of the Financial Creditor has annexed which depicts that the Paid-Up Share Capital of the Petitioner-financial creditor company is of Rs. 97,75,020 and Reserves and Surplus are of Rs 66,58,072. The information of Security Premium Account has not been separately provided in the Balance Sheet. That the aggregate of Paid-Up Share Capital and Reserves and Surplus amounts to Rs. 1,64,33,092 and 60% of that amount is Rs 98,59,855.2. If we compare both the amounts, then we observe that the loan amount disbursed by the Financial Creditor is more than 3 Crore which is much more than 60% of aggregate of Paid-up Share Capital and Reserve and Surplus.

 

# 13. That the Petitioner has neither made the disclosure of such Inter Corporate Loan in its Balance Sheet nor it had produced the Special Resolution passed in the EGM of Shareholders for the purpose of compliance of Section 186(3) of Companies Act 2013. Further, the Loan Agreement does not speak about any such resolution passed by the shareholders.

 

# 14. Therefore, the material available on the record suggest that the borrowing given by the Petitioner is contrary to the limit prescribed under Companies Act 2013 which amounts to an ultra vires act committed by the Petitioner. Hence the loan advanced by the Petitioner is not a legally enforceable debt.

 

Therefore, the bench finds no merit in the petition and the same is hereby dismissed as misconceived.

 

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Blogger’s comments; Following is the definition of “Debt”

 

Insolvency and Bankruptcy Code, 2016.

# Section 3. Definitions. –

(11) “debt” means a liability or obligation in respect of a claim which is due from any person and includes a financial debt and operational debt;

 

# Section 5. Definitions. –

(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;

• XXXXX

 

Supreme Court of India (24.11.1965) in Kesoram Industries & Cotton Mills Ltd. vs Commissioner Of Wealth Tax,(Central) Calcutta. [1966 AIR 1370, 1966 SCR (2) 688] defined debt as under;

• “The problem presented can satisfactorily be solved by answering two questions, namely, (1) what does the expression "debt ,owed" mean ? and (2) when does the liability to pay income-tax and super-tax under the Income- tax Act become a debt owed within the meaning of that expression 

• If we ascertain the meaning of the word "debt", the expression "owed" does not cause any difficulty. The verb "owe" means "to be under an obligation to pay". It does not really add to the meaning of the word "debt". What does the word "debt" mean ? A simple but a clear definition of the word is found in Webb v. Stenton(1) wherein Lindley, L.J., said:

• ".......... a debt is a sum of money which is now payable or will become payable in the future by reason of a present obligation, debitum in praesenti, solvendum in futuro."

 

Now the question is about the enforceability of the debt. On this aspect, observations of the Hon'ble Supreme Court of India are quite significant. Enforceability of a debt has only one dimension, which is Limitation.

 

i). Hon’ble SCI (20.04.1992) Punjab National Bank And Ors vs Surendra Prasad Sinha (Criminal Appeal No. 254 of 1992.) held that;

• "The rules of limitation are not meant to destroy  the rights of the parties.  Section 3 of  the Limitation Act only bars the remedy, but does not destroy the right which the remedy relates to. The right to  the debt continues to exist notwithstanding the remedy is barred by the limitation. Only exception in which the remedy also becomes  barred  by limitation is the right is destroyed.  Though the right to enforce the debt by judicial process  is barred, the right to debt remains. The time barred debt does not cease to exist by reason of S.3. That right can be exercised in any other manner than by means of a suit. The debt is not extinguished, but the remedy to enforce the liability is destroyed.  What S.3. refers only to the remedy but not to the right of the creditors. Such debt continues to subsists so long as it is not paid. It is not obligatory to file a suit to recover the debt."

 

Thus the enforceability of a debt is restricted only by the provisions of S.3 of “The Limitation Act,1963” & enforceability of debt has nothing to do with the lender’s powers to lend the money. Companies Act only defines the powers of the management of the Company to lend the money, violation of which attracts fine on the company as well as on the officials of the company. Companies Act nowhere provides that the money lent by the company beyond the limits specified under section 186 is not recoverable or is not a legally enforceable debt. 

 

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