Kalpataru Properties Pvt. Ltd Vs. Srigopal Choudhary, Resolution Professional for Shree Ram Urban Infrastructure Limited - Property in question cannot be considered as an asset of the Corporate Debtor where the court of competent Jurisdiction has directed to transfer the title in favour of the Applicant.

 NCLT Mumbai-1 (08.10.2021) In Kalpataru Properties Pvt. Ltd  Vs. Srigopal Choudhary, Resolution Professional for Shree Ram Urban Infrastructure Limited  [IA No. 1921 of 20211n C.P. (IB) No. 494/MB/2019 ] held that; 

• This also reflects that the Corporate Debtor was only an occupier of the property in question and not the owner, in other words, the Decreed property is in the possession of the Corporate Debtor but held in Custodia Legis viz in the custody of the Court and presently held in trust of the Applicant i.e., in a constructive trust from the time of the execution of Agreement to sell, till the such time the delivery of the Decreed property in favour of the Applicant. Hence, the Decreed property stands excluded from the estate of the corporate Debtor. This analysis on the trust is based upon Explanation (a) to Section 18 of the Code.

• Property in question cannot be considered as an asset of the Corporate Debtor where the court of competent Jurisdiction has directed to transfer the title in favour of the Applicant.

• the bar under Section 14(1)(a) shall not be applicable here and the moratorium enforced shall nowhere come in way of the Applicant for executing the Arbitral award. Since the property in question has already been declared that it is not the asset of the Corporate Debtor, therefore, any proceeding which does not concern the asset of the Corporate Debtor can be continued against the Corporate Debtor. 

Excerpts of the order;

# 1. The present Application is filed by the Applicant who is a Private Limited Company engaged in the business of acquiring, constructing, developing, and marketing immovable properties. 

 

# 2. The brief facts leading to the Application are as below: 

a. A Memorandum of Understanding (MOU) dated 28.06.2004 and an Addendum thereto dated 10.12.2004 (together the Agreement) was executed between the Applicant, the Corporate Debtor (Shree Ram Urban Infrastructure Limited) and Vijay Infrastructure Technologies Pvt. Ltd. (VIT, a sister concern of the Corporate Debtor) for inter alia the sale, transfer, assignment and conveyance of the Property bearing C.S. Nos. 289 (Part), 1548 (Part), 1549(Part) and 1550, now bearing new Cadastral Survey No. 1/289, identified as Plot No. 5A of Lower Parel Division admeasuring 20,955.40 sq. mts. along with three 12 metre wide accesses (The Decreed Property). 

 

b. It is submitted that in 2004, the Applicant paid a sum of Rs. 30,00,00,000/- (Rupees Thirty Crores only) to the Corporate Debtor towards the sale consideration for transfer of the Decreed Property. However, in 2005, the Corporate Debtor sought to resile from the Agreement and did not complete the sale transaction pursuant to which the Applicant referred the dispute to Arbitration for inter alia specific performance of the said Agreement and the transfer of the Decreed Property with all rights under the said Agreement to the Applicant. 

 

c. It is submitted that between 2005 to 2016, numerous protective orders were passed by the Hon'ble Bombay High Court in favour of the Applicant whilst the Arbitration Proceedings were pending. On 29.08.2016 an Award was passed by the Arbitral Tribunal in favour of the Applicant and the Corporate Debtor and VIT were ordered and directed to specifically perform the said Agreement. The Corporate Debtor was further directed to sell, transfer and assign the Decreed Property and convey the title over the Decreed Property to the Applicant. The Corporate Debtor was also directed to hand over physical and actual peaceful possession of the Decreed Property to the Applicant by executing the Deed of Conveyance to the Applicant. 

 

d. The Corporate Debtor challenged the said award under Section 34 of the Arbitration and Conciliation Act, 1996. The Learned Single Judge of the Hon'ble Bombay High Court vide Order and Judgment dated 14 & 17 July, 2017 dismissed the Section 34 Petition of the Corporate Debtor and upheld the award dated 29.08.2016. 

 

e. It is submitted that on 05.10.2016, Action Barter Pvt. Ltd., a creditor of the Corporate Debtor had filed a Company Petition No. 1066 of 2015 before the Hon'ble Bombay High Court seeking appointment of a Provisional Liquidator and consequent winding up of the Corporate Debtor. On 24.08.2017, the Hon'ble Bombay High Court appointed Official Liquidator of the Hon'ble Bombay High Court as the Provisional Liquidator of the Corporate Debtor. Official Liquidator of the Hon'ble Bombay High Court is Respondent No. 2 (R2) in the present Application. 

 

g. It is submitted that the Corporate Debtor challenged the Order and Judgment dated 14 & 17 July, 2017 of the Ld. Single Judge of the Hon'ble Bombay High Court in an Appeal filed under Section 37 of the Arbitration and Conciliation Act, 1996 before the Hon'ble Bombay High Court bearing Commercial Appeal No. 152 of 2017. The said Appeal under Section 37 was dismissed by the Division Bench of the Hon'ble Bombay High Court on 11.10.2018 upholding the Ld. Single Judge's Order and Judgment and the Award. 

 

h. Thereafter, on 12.10.2018, the Applicant through its Advocates addressed a letter to the Corporate Debtor through the Provisional Liquidator calling upon the Corporate Debtor to comply with the Award and also offered to pay balance sale consideration of Rs. 5,30,00,000/- on execution of the conveyance and other required documents. 

 

i. The Provisional Liquidator on behalf of the Corporate Debtor on 30.04.2019 filed a Special Leave Petition (SLP) (C) No. 012495 of 2020 before the Hon'ble Supreme Court challenging the Division Bench order of the Hon'ble Bombay High Court dated 11.10.2018. 

 

L. It is further submitted that on 08.10.2020, the Hon'ble Supreme Court granted leave to R1 to be brought on record in place of R2 as the Petitioner in the said SLP. The Hon'ble Supreme Court on 16.10.2020 dismissed the SLPs including the said SLP of R1 filed on behalf of the Corporate Debtor, VIT and the erstwhile Director of the Corporate Debtor. 

 

m. The Applicant submits that thus all the challenges to the said Award/Decree for specific performance have failed and been rejected upto the Hon'ble Supreme Court of India 

 

n. The Hon'ble Bombay High Court on 17.12.2020 passed an order in IA No. 243 OF 2021 filed by the Applicant in the Execution Application and held as below: 

• “5...it is not in dispute that the Applicant has an Award in its favour in relation to the said property and which is put in execution. The challenge to the said Award has failed all the way upto the Supreme Court. The challenge to Award having failed and the same now becoming final, it is absolutely necessary and in the interest of all parties... that the said property is adequately protected". 

 

0. Further, the Applicant vide its letters dated 24.05.2021 and 22.06.2021 brought to the attention of the Ri, the Applicant's right to the Decreed Property and that the Ri was under an obligation to specifically perform the Decree. In response thereto, R1 vide his email dated 23.06.2021 informed that the relevant facts with respect to the Decreed Property had been put before the Committee of Creditors (CoC), that the Decreed Property would not form part of the Corporate Insolvency Resolution Process (CIRP) and also acknowledged that the amount of Rs. 75,30,00,000/ (Rupees Seventy-Five Crore Thirty Lakh Only) was the entitlement of the Corporate Debtor in relation to the Decreed Property. The Ri further stated that the Applicant's offer to pay the balance consideration on execution of the Conveyance Documents and transfer of possession would be beneficial to the CIRP and the creditors of the Corporate Debtor and part of such balance consideration could be utilised to reimburse R2 whereupon the custody of all the assets would be available from the R2 and the Decreed Property will be handed over to the Applicant. 

 

p. On 19.07.2021, R2 filed the Official Liquidator's report No. 42 of 2021 inter alia stating that the portion of the boundary wall at the Decreed Property had collapsed and that the immediate remedial measures were required to be taken. As R1 & R2 expressed their lack of requisite funds to protect the Decreed Property, on 28.07.2021, the Hon'ble Bombay High Court passed an order in the said OL's Report No. 42 of 2021, accepting the offer of the Applicant to take necessary steps to secure the Decreed Property. 

 

q. The Applicant thus submits that; accordingly, it has been directed to inter alia bear the expenses of taking remedial actions towards the collapsed wall at the Decreed Property. 

 

# 3. The Applicant is thus before us seeking the following prayers: 

a. This Hon'ble Tribunal be pleased to direct and authorise Respondent No. 1 to do all such acts and deeds as may be necessary in order to execute the Conveyance Deed and other required documents on behalf of the Corporate Debtor to transfer, convey and assign the Decreed Property to the applicant against payment of the balance consideration in the manner set out below and to hand over possession of the Decreed Property to the Applicant in view of the Order of the Hon'ble Supreme Court dated 16 October 2020 upholding the Award dated 29 August 2016 passed in favour of the Applicant on such payment in the following manner viz: 

• (i) the sum of Rs. 1,30,53,674/ - (Rupees One Crore Thirty Lakh Fifty-Three Thousand Six Hundred and Seventy-Four only) or such other amounts as are payable to Respondent No. 2 directly against reimbursement of expenses from the common pool as per the Orders dated 28 November 2019, 23 January 2020 and 28 July, 2021 and 

• (ii) the balance sum to Respondent No. 1; 

 

b. In the alternative to prayer (a) above, this Hon'ble Tribunal direct and authorize Respondent No. 1 herein to join in the execution of the conveyance deed and other required documents to sell, transfer, convey and assign the Decreed Property to the Applicant in the pending Execution Application No. 134 of 2017 in the Hon'ble Bombay High Court including authorising the Respondent No. 1 to execute and sign the said documents or consent to the said documents bei9ng executed and signed on behalf of the Corporate Debtor by an officer appointed by the Hon'ble Bombay High Court in those proceedings, against payment of the balance consideration of Rs. 75,30,00,000/- (Rupees Seventy-Five Crores Thirty Lakhs Only) to Respondent No. 1 in the manner set out in Prayer (a) above viz (i) the sum of Rs. 1,30,53,674/- (Rupees One Crore Thirty Lakh Fifty Three Thousand Six Hundred and Seventy Four Only) or such other amounts as are payable to respondent No. 2 directly against reimbursement of expenses from the common pool as per the Orders dated 28 November 2019, 23 January 2020 and 28 July, 2021 and (ii) the balance sum to Respondent No. 1; 

 

c. This Hon'ble Tribunal be pleased to direct and authorize Respondent No. 1 jointly with the Applicant to apply to the Hon'ble Bombay High Court for orders and directions in the said I.A. No. 243 of 2021 or by fresh application, including to direct Respondent No. 2 to comply with the orders of the Hon'ble Bombay High Court by removal of construction materials, equipment, sheds, porta cabins etc. lying on the Decreed Property and directions to remove the obstruction on the Applicant's sight of way on one of the three 12 metre wide accesses to the Decreed Property: 

 

d. For ad interim and interim reliefs in terms of prayers (a), (b) and (c) above; 

 

e. For such further orders and directions as the circumstances may warrant in the interest of justice. 

 

# R1 has filed Reply to the Application and has stated as below: - 

i. Section 14 of the Code while prohibiting sale of assets and continuation of execution proceedings during the CIRP, on a purposive construction ought not to mean that the corporate debtor should be denied valuable funds that belong to it and can become available to it by completing a pending transaction pursuant to 'Decree Award upheld by Hon'ble Supreme Court. The completion of such a transaction would inevitably result in, far from a depletion of the corporate debtor's assets, a valuable cash infusion into the CIRP process of the corporate debtor which is required urgently right from the beginning of the CIR process. 

 

ii. In the present case, the CIR process of the Corporate Debtor is starved of finance, and none of the members of the CoC despite of repeated requests over the last 23 months, have come forward to infuse the funds necessary for the RP to execute the CIRP process of the Corporate Debtor. The RP does not even have the funds to pay the Official Liquidator (OL) in terms of the Bombay High Court order dated 28.11.2019. 

 

iii. One of the paramount functions of the RP is to keep the Corporate Debtor as a going concern, by enabling it to conduct its business in the normal course. In present case business of Corporate Debtor is Real Estate. However, on account of the moratorium already imposed under section 14, the RP had informed the Applicant that it would be appropriate that the Tribunal be approached for the requisite permission to convey the Subject Property and receive the balance consideration of Rs. 75.30 crores which is the entitlement of the Corporate Debtor. The execution of a formal conveyance by the Corporate Debtor in favour of the Applicant would accrue the Corporate Debtor valuable balance sale consideration of Rs. 75.30 crores, which would make the CIRP possible to proceed and conclude as a going concern. 

 

ORDER 

# 5. After hearing the submissions of both the parties, perusing the documents placed on record and written submissions of the parties, this Bench has observed that; 

The relationship between the Applicant and the Corporate Debtor commenced upon the execution of the MoU dated 28.06.2004 and an Addendum thereto dated 10.12.2004 for the sale, transfer, assignment, and conveyance of the Decreed Property. The failure of the Corporate Debtor to perform its part of the said Agreement, the Arbitral Tribunal passed an Award in favour of the Applicant. Undisputedly, such Award has been upheld at all the stages till the Apex Court. That the Respondent No.1 RP has opposed the prayer of the Applicant on the ground that vide order 06.11.2019 the CIR Process has been initiated in respect of the Corporate Debtor and as a consequence of that the moratorium under Section 14 has come into force. Further the Section 14(1)(b) of IBC, 2016 prohibits transfer or sale of assets during the CIRP and Section 14(1)(a) prohibits the continuation of proceedings against the Corporate Debtor. 

 

# 6. Therefore the issue which emerges for our consideration is that "whether the RP can be directed to Execute the conveyance deed in respect of property in question as prayed by the Applicant or the RP can be directed to join in the execution of the conveyance deed and other required documents to sell, transfer, convey and assign the decreed property to the applicant in the pending Execution Application No. 134 of 2017 before the Hon'ble High Court of Bombay in spite of enforcement of moratorium?" 

 

# 7. To decide the aforesaid issue, it is necessary to visit the contents of Section 14(1)(a) and (b) of IBC 2016. The contents of the same are reproduced below - 

• "14. Moratorium. - (1) Subject to provisions of sub-sections (2) and (3), on the insolvency commencement date, the Adjudicating Authority shall by order declare moratorium for prohibiting all of the following, namely: - 

• (a)the institution of suits or continuation of pending suits or proceedings against the corporate debtor including execution of any judgement, decree or order in any court of law, tribunal, arbitration panel or other authority; 

• (b)transferring, encumbering, alienating or disposing off by the corporate debtor any of its assets or any legal right or beneficial interest therein; 

• (d)..."         Emphasises Supplied) 

 

# 8. From the aforesaid it is observed that Section 14(1)(b) creates an impediment from transferring, alienating, encumbering only towards the 'asset' of the Corporate Debtor. In order to examine that whether such bar is applicable in the present case or not, it is necessary to examine that whether the property in Question is the 'asset' of the Corporate Debtor? 

 

# 9. In order to examine the real ownership of the asset/ property in question, it is necessary to visit towards the contents of the Arbitration Award dated 28.06.2004 passed by the Ld. Arbitrator which was upheld by the Hon'ble Apex Court. The contents of the operative portion of the Arbitration Award is reproduced hereunder: 

• ".....the Respondents are directed to take all necessary steps to sell, transfer and assigned the property in dispute and convey the title to the claimant over the said property on terms agreed between the parties and execute all deeds and documents and to do all acts and perform all obligations by doing requisite acts, deeds and things as may be necessary and hand over the physical and actual peaceful possession of the property to the claimant by executing deed of conveyance to the claimant on terms agreed between the parties award dated 28.06.2004. 

 

# 10. It is to be noted that the Apex Court had dismissed all the SLPs after it was appraised of the Order of Admission of the Petition under Section 7 of IBC and the appointment of IRP there by leaving no manner of any doubt that the Award and Decree of Specific Performance against the Corporate Debtor was final, complete, indefeasible and the rights of the parties are crystallized wherein the Applicant is entitled to only Balance Sale Consideration of Rs 75.30 Crores. Further, directions were passed to handover the physical possession of the Decreed property to the Applicants. This also reflects that the Corporate Debtor was only an occupier of the property in question and not the owner, in other words, the Decreed property is in the possession of the Corporate Debtor but held in Custodia Legis viz in the custody of the Court and presently held in trust of the Applicant i.e., in a constructive trust from the time of the execution of Agreement to sell, till the such time the delivery of the Decreed property in favour of the Applicant. Hence, the Decreed property stands excluded from the estate of the corporate Debtor. This analysis on the trust is based upon Explanation (a) to Section 18 of the Code. 

 

# 11. Therefore, in our view the Property in question cannot be considered as an asset of the Corporate Debtor where the court of competent Jurisdiction has directed to transfer the title in favour of the Applicant. Here, it is worthwhile referring to the Judgement of this Tribunal in the matter of M/s Schweitzer Systemtek India Private Limited vs Phoenix ARC Private Limited T.C.P no. 1059/2017 dated 03.07.2017 wherein the following was observed on the applicability of moratorium, which was further upheld by the Hon'ble NCLAT in the matter of Alpha & Omega Diagnostics (India) Private Limited Vs Asset Reconstruction Company of India Ltd. & Ors dated 31.07.2017 The relevant extracts of the Judgement of this Tribunal are reproduced below: 

• *8.1 On careful reading I have noticed that the term "its" is significant. The plain language of the Section is that on the commencement of the Insolvency process the Moratorium' shall be declared for prohibiting any action to recover or enforce any security interest created by the Corporate Debtor in respect of "its" property. Relevant section which needs in-depth examination is Section 14 (1) (c) of The Code. There are recognised canons of interpretation. Language of the Statute should be read as it existed. This is a trite law that no word can be added or substituted or deleted from the enacted Code duly legislated. Every word is to be read and interpreted as it exists in the statute with the natural meaning attached to the word. Rather in this Section the language is so simple that there is no scope even to supply casus omissus'. I hasten to add that the doctrine of Noscitur a Sociis' is somewhat applicable that the associated words take their meaning from one another so that common sense meaning coupled together in their cognate sense be interpreted. As a result, "its" denotes the property owned by the Corporate Debtor. The property not owned by the Corporate Debtor do not fall within the ambits of the Moratorium. Even Section 10 is confined to the Book of the Accounts of the Corporate Debtor, due to the reason that Section 10(3) has specified that the Corporate Applicant shall furnish its" Books of Accounts. This Berch has no legislative authority to expand the meaning of the term "its" even under the umbrella of 'Ejusdem generis !" 

 

# 12. Hence, Section 14(1)(b) is not applicable on the property which are not the assets of the Corporate Debtor. Further the same property cannot be included as an estate of the Corporate Debtor by the RP. 

 

# 13. That when we visit Section 14(1)(a) of IBC, 2016 we observe that although there is a bar on continuation of proceedings against the Corporate Debtor, including the execution proceedings. However, when we see the real intent of enforcing the moratorium, we observe that the same is introduced with the intention to preserve the assets of the Corporate Debtor. The moratorium cannot be used as a shield by the Corporate Debtor to make its illegal acts as legal. 

 

# 14. Therefore, in our view the bar under Section 14(1)(a) shall not be applicable here and the moratorium enforced shall nowhere come in way of the Applicant for executing the Arbitral award. Since the property in question has already been declared that it is not the asset of the Corporate Debtor, therefore, any proceeding which does not concern the asset of the Corporate Debtor can be continued against the Corporate Debtor. 

 

# 15. Since, the execution proceeding is already sub-judice before the Hon'ble High Court of Bombay and this Adjudicating Authority has already held that the moratorium shall not come in between the proceedings which does not relate to the Assets of the Corporate Debtor. 

 

# 16. We also pay attention to Section 29 of the Code read with Regulation 36 of the Insolvency and Bankruptcy Board of India (Insolvency and Regulation Process of Corporate Persons) Regulations 2016, wherein the RP is bound to disclose in the proposed Information Memorandum, the details of all the material litigations and ongoing proceedings of the Corporate Debtor. This means, disclosure would have to be made relating to the Award in favour of the Applicants and the Decree of Specific Performance to receive Rs 75.30 Crores from the Applicant with regard to the Decreed property in the aforesaid memorandum. Further, any delay in receipt of Balance Sale Consideration will not be in the interest of the Corporate Debtor. 

 

# 17. Coming to the issue of Vijay Infrastructure Technologies Pvt. Ltd (VIT), it must be remembered that VIT is a group/sister company of the Corporate Debtor. IA no. 2107 of 2021 filed by the VIT that seeks intervention is a futile attempt by the Ex-Directors of the Corporate Debtor to obstruct these proceedings. All challenges to the Arbitral Award have been rejected right upto the Apex Court. The attempt on the part of the Ex-Directors to intervene in the proceedings, had been rejected the Bombay High Court. Infact, the High Court had held that VIT has not right. Hence, this Tribunal need not even bother to look into the claims of VIT. 

 

# 18.Therefore, having convinced with the arguments on the part of the Applicant, as we hereby allow the prayer (b) and (c) sought by the applicant. 

• - prayer (b) 

• This Tribunal direct and authorize Respondent No. 1 herein to join in the execution of the conveyance deed and other required documents to sell, transfer, convey and assign the Decreed Property to the Applicant in the pending Execution Application No. 134 of 2017 in the Hon'ble Bombay High Court including authorising the Respondent No. 1 to execute and sign the said documents or consent to the said documents being executed and signed on behalf of the Corporate Debtor by an officer appointed by the Hon'ble Bombay High Court in those proceedings, against payment of the balance consideration of Rs. 75,30,00,000/- (Rupees Seventy-Five Crores Thirty Lakhs Only) to Respondent No. 1 in the manner set out in Prayer (a) above viz (i) the sum of Rs. 1,30,53,674/ (Rupees One Crore Thirty Lakh Fifty Three Thousand Six Hundred and Seventy Four Only) or such other amounts as are payable to Respondent No. 2 directly against reimbursement of expenses from the common pool as per the Orders dated 28 November 2019, 23 January 2020 and 28 July, 2021 and (ii) the balance sum to Respondent No. 1; 

• - prayer (c) 

• This Tribunal hereby direct and authorize Respondent No. 1 jointly with the Applicant to apply to the Hon'ble Bombay High Court for orders and directions in the said I.A. No. 243 of 2021 or by fresh application, including to direct Respondent No. 2 to comply with the orders of the Hon'ble Bombay High Court by removal of construction materials, equipment, sheds, porta cabins etc. lying on the Decreed Property and directions to remove the obstruction on the Applicant's sight of way on one of the three 12 metre wide accesses to the Decreed Property: 

 

Hence, this order with the aforesaid directions. Accordingly, IA- 1921/2021 is hereby disposed of. 

 

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Vistara ITCL (India) Ltd. & Ors. Vs. Dinkar Venkatasubramanian & Ors. - There can be no dispute with the preposition of law that creation of pledge of shares by the Corporate Debtor does not tantamount to a guarantee or indemnity.

NCLAT (24.08.2020) In Vistara ITCL (India) Ltd. & Ors. Vs. Dinkar Venkatasubramanian & Ors. [Company Appeal (AT) (Insolvency) No. 703 of 2020] held that; 

• There can be no dispute with the preposition of law that creation of pledge of shares by the Corporate Debtor does not tantamount to a guarantee or indemnity. The creation of pledge of shares by the Corporate Debtor is said to be in regard to the money lent to WLD and BRASSCO. 

• The Appellants not having advanced any money to the Corporate Debtor as a financial debt would not be coming within the purview of financial creditor of the Corporate Debtor. 

• The debt along with interest disbursed against time value of money constitute the basic ingredients of the financial debt as defined in I&B Code and since the same is lacking as regards any transaction between the Appellant and the Corporate Debtor, pledge of shares would not fall within the concept of guarantee and indemnity so as to bring it within the meaning of financial debt.

Excerpts of the order;

24.08.2020 Appellants – ‘M/s. Vistara (ITCL) Ltd. and Ors.’are aggrieved of dismissal of their I.A. 62 of 2020 in CP (IB) No. 42/Chd./Hry./2017 at the hands of Adjudicating Authority (National Company Law Tribunal), Chandigarh Bench, Chandigarh. The application in question had been filed against the Resolution Professional and the Committee of Creditors of the Corporate Debtor – ‘M/s. Amtek Auto Limited’ under Section 60(5) of the I&B Code on 11th February, 2020 praying for a direction in the name of Resolution Professional to include the Appellant No. 1 in the Committee of Creditors as a secured financial creditor and extend all benefits of a secured financial creditor to it. On consideration of the matter, the Adjudicating Authority, while approving the resolution plan of resolution applicant – ‘Duccan Value Investor’ (DVI), dismissed I.A. No. 62 of 2020 in terms of the same order which has been impugned in this appeal.

 

# 2. A glance at the impugned order would bring it to for that I.A. No. 62 of 2020 came to be dismissed as the Adjudicating Authority was of the opinion that the Appellants have not lent any money to the Corporate Debtor and they cannot be treated as the Financial Creditor of the Corporate Debtor. The Adjudicating Authority noted that the claim of the Appellants as secured financial creditor was rejected by the Resolution Professional in 2017 which had not been challenged. It also noticed the Appellants contention that the decision in regard to rejection of Appellant’s claim as Financial Creditor had not been challenged by the Appellants under the conception that their interests would be protected under LHG resolution plan. Such contention, being repugnant to reason, has been overruled.

 

# 3. Appellants feel aggrieved, as according to them, they had represented to the Resolution Professional to preserve the pledge of shares in favour of Appellant No. 1. It is submitted that the resolution plan submitted by ‘Liberty House Group’ (LHGfor short) in the year 2017 protected and preserved the pledge created in favour of Appellant No. 1 by the Corporate Debtor. Subsequently, the resolution plan recognizing Appellant No.1’s security came to be approved by the Committee of Creditors with overwhelming majority and the Committee of Creditors acknowledged the pledge in favour of the Appellant No. 1 while voting in favour of LHG’s resolution plan. However, LHG did not fulfil its commitment. Committee of Creditors came to be reconstituted under orders of Adjudicating Authority, for consideration of the DVI’s plan. Subsequently, Committee of Creditors filed an appeal before this Appellate Tribunal assailing the order of the Adjudicating Authority rejecting prayer of Resolution Professional to issue fresh invitation for resolution plans. Liquidation order came to be passed by this Appellate Tribunal which was assailed before the Hon’ble Apex Court. On 2nd December, 2019 Hon’ble Apex Court directed the Resolution Professional to invite fresh bids within 30 days. According to the Appellants, the Appellant No. 1 made the representation to Resolution Professional to preserve the pledge which was reiterated on 10th January, 2020. Since the pledge in favour Appellant No. 1 was not mentioned in the information-memorandum as conveyed by the Resolution Professional, Appellants filed I.A. No. 62 of 2020 which came to be rejected along with approval of the resolution plan of DVI in terms of the common order impugned in this appeal to the extent of rejection of I.A. No. 62 of 2020.

 

# 4. After hearing learned counsel for the parties, we find that Appellant No. 1’s claim in purported capacity of ‘Secured Financial Creditor’ has been rejected way back in the year 2017 and decision in this regard has not been called in question. It is not open to Appellants to raise the same issue in 2020 by filing I.A. No. 62 of 2020. The queer explanation emanating from the Appellants that rejection of its claim as Financial Creditor went un-assailed under the bona fide belief that the interest of Appellant’s would be taken care of under the ‘Liberty House Group’ Resolution Plan is repugnant to reason and cannot provide a lawful excuse for filing of I.A. No. 62 of 2020 under Section 60(5) of the ‘I&B Code’ after a lapse of about three years. Such explanation deserves to be noticed only for being rejecting. This is apart from the fact that the Appellants have not lent any money directly to the Corporate Debtor and the Corporate Debtor did not owe any financial debt to the Appellants except that the pledge of shares was to be executed. There can be no dispute with the preposition of law that creation of pledge of shares by the Corporate Debtor does not tantamount to a guarantee or indemnity. The creation of pledge of shares by the Corporate Debtor is said to be in regard to the money lent to WLD and BRASSCO. The Appellants not having advanced any money to the Corporate Debtor as a financial debt would not be coming within the purview of financial creditor of the Corporate Debtor. The debt along with interest disbursed against time value of money constitute the basic ingredients of the financial debt as defined in I&B Code and since the same is lacking as regards any transaction between the Appellant and the Corporate Debtor, pledge of shares would not fall within the concept of guarantee and indemnity so as to bring it within the meaning of financial debt.

 

We find no merit in this appeal which is dismissed at the very threshold stage.

 

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Union of India Vs. Ibrahim Uddin & Anr - No evidence is permissible to be taken on record in absence of the pleadings in that respect. The court cannot travel beyond the pleadings.

Supreme Court (17.07.2012) In Union of India Vs. Ibrahim Uddin & Anr [Civil Appeal No.. 1374 of 2008] held that; 

• that relief not founded on the pleadings cannot be granted. A decision of a case cannot be based on grounds outside the pleadings of the parties. 

• No evidence is permissible to be taken on record in absence of the pleadings in that respect. 

• No party can be permitted to travel beyond its pleading and that all necessary and material facts should be pleaded by the party in support of the case set up by it. 

• It was further held that where the evidence was not in the line of the pleadings, the said evidence cannot be looked into or relied upon.

• The court cannot travel beyond the pleadings as no party can lead the evidence on an issue/point not raised in the pleadings and in case, such evidence has been adduced or a finding of fact has been recorded by the Court, it is just to be ignored.

Excerpts of the order;

# 62. This Court while dealing with an issue in Kalyan Singh Chouhan v. C.P. Joshi, AIR 2011 SC 1127, after placing reliance on a very large number of its earlier judgments including Messrs. Trojan & Co. v. RM.N.N. Nagappa Chettiar, AIR 1953 SC 235; Om Prakash Gupta v. Ranbir B. Goyal, AIR 2002 SC 665; Ishwar Dutt v. Land Acquisition Collector & Anr., AIR 2005 SC 3165; and State of Maharashtra v. M/s. Hindustan Construction Company Ltd., AIR 2010 SC 1299, held that relief not founded on the pleadings cannot be granted. A decision of a case cannot be based on grounds outside the pleadings of the parties. No evidence is permissible to be taken on record in absence of the pleadings in that respect. No party can be permitted to travel beyond its pleading and that all necessary and material facts should be pleaded by the party in support of the case set up by it. It was further held that where the evidence was not in the line of the pleadings, the said evidence cannot be looked into or relied upon.

 

# 69 (vii) The court cannot travel beyond the pleadings as no party can lead the evidence on an issue/point not raised in the pleadings and in case, such evidence has been adduced or a finding of fact has been recorded by the Court, it is just to be ignored. Though it may be a different case where in spite of specific pleadings, a particular issue is not framed and parties having full knowledge of the issue in controversy lead the evidence and the court records a finding on it. 

 

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Pradeep Kumar Sekar Vs. Solar Semiconductor Energy Systems (India) Private Limited & Anr. - ‘Lease Finance Assistance’ is ‘Financial Debt’ as per section 5(8) of the Code, 2016

NCLAT (19.04.2021) In Pradeep Kumar Sekar Vs. Solar Semiconductor Energy Systems (India) Private Limited & Anr. [Company Appeal (AT)(CH)(Ins) No. 02/2021] held that; 

• the fact that the Second Respondent/Financial Creditor had invested a sum of Rs.1,07,76,815.35 paise under the ‘Lease Agreement’ dated 03.04.2017, in and by which a repayment schedule was mentioned as lease rental for a period of 36 months and at the end of the lease, the ‘Asset’ will be purchased by the First Respondent/Corporate Debtor at a value of Rs.21,65,190/- which was received by the Second Respondent/Financial Creditor as Security Deposit comes to an inevitable and inescapable conclusion that the disbursal of amounts to the manufacturer ‘Interio Architecture’ comes within the requirement of ‘time value for money

• it is to be pointed out by this ‘Tribunal’ that the ‘Lease Agreement’ dated 03.04.2017 entered into between the Second Respondent/Financial Creditor and the First Respondent/Corporate Debtor clearly envisages that the ‘Lessor’ (Second Respondent) had offered to provide ‘Lease Finance Assistance’ to the ‘Lessee’ (First Respondent/Corporate Debtor) in respect of Furniture and Fixture (‘Asset’)

• especially in the teeth of ‘Lease Agreement dated 03.04.2017’ that the (‘Lessor’/Second Respondent) had offered to provide ‘Lease Finance Assistance’ to the ‘Lessee’/First Respondent, this Tribunal without any haziness holds that the ‘Lease’ in the instant case, is a ‘Financial Lease’ and comes to an irresistible conclusion that there is ‘Financial Debt’ as per section 5(8) of the Code, 2016

Excerpts of the order;

# 2. The ‘Adjudicating Authority’ (National Company Law Tribunal, Hyderabad Bench) while passing the impugned order on 19.03.2020 at paragraph 16 had observed the following:

“In the present case, this Adjudicating Authority is satisfied with the submissions put forth by the Petitioner/Financial Creditor regarding existence of ‘financial debt’ and occurrence of ‘default’. Further, the Financial Creditor has fulfilled all the requirements as contemplated under IB Code in the present Company Petition and has also proposed the name of IRP after obtaining his written consent in Form-2” and consequently admitted the petition by ordering the commencement of ‘CIRP Process etc’.,

 

# 43. In the Application filed by the Second Respondent/Financial Creditor (under Form-1) to initiate ‘CIRP’ (under Section 7 of the Code r/w Rule 4 of the Insolvency & Bankruptcy Application to Adjudicating Authority) Rules, 2016 in Part-IV - Particulars of Financial Debt’ in Serial No.1, it was mentioned that the total amount of debt granted was Rs.1,07,76,815/- and it was mentioned as (i) Rs.64,95,569/- on 5th April 2017, (ii) Rs.42,81,245/- on 28th November 2017. Apart from this, the Second Respondent/Financial Creditor had mentioned that the First Respondent/Corporate Debtor entered into a ‘Lease Agreement’ with the Applicant Company to avail financial assistance of Rs.1,07,76,815/- (Rupees One Crore Seven Lakh Seventy Six Thousand Eight Hundred and Fifteen only) to carry out interior work on 3rd April 2017.

 

# 44. The Second Respondent /Financial Creditor had claimed a default sum of Rs.1,16,98,242.60/-(Rupees One Crore Sixteen Lakhs Ninety Eight Thousand Two Hundred and Forty Two and Paise Sixty only) and that the said amount was not paid by the ‘Corporate Debtor’(First Respondent) as per the running statement of accounts maintained by the Second Respondent/Applicant Company in the name of First Respondent/Corporate Debtor.

 

# 45. The stand of the ‘Appellant’ is that there is no indication in the ‘Lease Agreement’ dated 03.04.2017 that the said agreement is deemed as a ‘Financial or Capital Lease’ and that the Second Respondent/Financial Creditor had not pleaded the factual issue as to whether or not the ‘Lease Agreement’ is a ‘Finance or Capital Lease’ under ‘Indian Accounting Standards’.

 

# 46. It comes to be known that the Second Respondent/Financial Creditor had disbursed a sum of Rs.64,95,569/- on 5.4.2017 and Rs.42,8,245/- on 28.11.2017 to the First Respondent/Corporate Debtor’s architects ‘M/s Interio and Architecture, Bangalore’. According to the Second Respondent, the First Respondent/Corporate Debtor was irregular in repaying the monthly ‘Rentals’ from February 2018 and totally stopped making the payments and further that the First Respondent/Corporate Debtor had admitted its liability in response to the requests made for the payment made by the Second Respondent. In short, the First Respondent/Corporate Debtor, time and again, had admitted its liability and requested for more time.

 

# 47. In this connection, this ‘Tribunal pertinently points out that the Second Respondent/Financial Creditor had issued a ‘Demand Notice’ dated 27.07.2018 addressed to the First Respondent/Corporate Debtor’ and its ‘Managing Director’ stating among other things that the Second Respondent had provided ‘Lease Financial Assistance’ of Rupees One Crore Seventy Seven Lakhs Six Thousand Eight Hundred and Fifteen, in aggregate to the First Respondent/Corporate Debtor in respect of Furniture and Fixture (‘Assets’) as detailed in the ‘Lease Agreement’ dated 3.4.2017 and further that as per Clause 2.3(b) of the said ‘Lease Agreement’, they were supposed to pay the stipulated lease rentals regularly and punctually without any abatements and deductions except (statutory deduction). But they have grossly neglected to pay the gross rentals during the ‘Lease Tenure’, thereby causing an event of default under the said ‘Lease Agreement’.

 

# 48. Besides the above, the ‘Demand Notice’ dated 27.7.2018 of the Second Respondent addressed to the First Respondent and Another proceeds to mention that the post dated cheques against the lease rentals (PDC’s) and Security Cheque issued by them to the Second Respondent towards discharging of their liability to repay the lease amount/total acquisition cost taken from the Second Respondent (as contained in the said agreement) was also dishonoured for want of insufficient funds in their Bank Account and as such miserably failed to honour the commitment under the said agreements. Moreover, in spite of the Second Respondent’s repeated requests and ‘Demand Notice’ dated 26.6.2018, the promises made through their emails addressed to the Second Respondent/Financial Creditor, for clearing the dues they had failed to discharge their liabilities under the said agreement and had violated the terms of the agreement.

 

# 49. In short, in the Demand Notice dated 27.7.2018 issued by the Second Respondent addressed to the First Respondent/Corporate Debtor and Another, it was mentioned that the default was committed by the First Respondent/Corporate Debtor repeatedly and as per terms of the agreement, a sum of Rs.9,481,209/- being the total due was legally due and payable by it to the Second Respondent as on date of the notice dated 27.7.2018. Therefore, the Second Respondent/Financial Creditor without prejudice to its rights under law had called by the First Respondent/Corporate Debtor and Another to pay a sum of Rs.94,81,209/- only within 14 days from the receipt of the ‘Demand Notice’ by any one of them or both of them, failing which the First Respondent/Corporate Debtor and Another were informed that the Second Respondent/financial Creditor would be constrained to proceed against them as per Law, including, but not limited to initiate ‘Insolvency Proceedings’ under the Insolvency & Bankruptcy Code against the First Respondent/Corporate Debtor.

 

# 50. For the Demand Notice of the Second Respondent/Financial Creditor, the First Respondent/Corporate Debtor through an Advocate on 10.8.2018 had stated that it had not issued ‘Post Dated Cheques’ against the lease rentals and security cheques to the Second Respondent and that the Second Respondent had collected blank cheques, but those cheques were given by the First Respondent/Corporate Debtor not towards discharging of any liability to repay the lease amount or liability from it. In short, an averment was made in the First Respondent/Corporate Debtor’s Lawyer Notice dated 10.8.2018 to the effect that the First Respondent/Corporate Debtor, had not executed/issued any cheques to the Second Respondent for the purposes of repayments of the lease amount. Notwithstanding the above, the reply notice of the First Respondent/Corporate Debtor’s Advocate dated 10.8.2018, it was mentioned that the First Respondent/Corporate Debtor had not executed any agreement at any point of time for any amount as claimed by the Second Respondent. Further, the Second Respondent had not released the emptier amount and hence the claim made in the notice of the Second Respondent/Financial Creditor is totally against Law and therefore the payment of alleged amount does not arise etc.

 

# 51. It appears that on 28.11.2017, the First Respondent/Corporate Debtor, had confirmed that it would buy back the asset at Rs.2165190 plus taxes after the lease period.

 

# 52. Although, a plea is taken on behalf of the ‘Appellant’ that in the instant case, the ‘disbursal’ is against the supply of the ‘Assets’ and against the usage of the ‘Assets’ (Furniture & Fixture) and not against the ‘time value for money’ and that the primary ingredients of Section 5(8) of the Code are not satisfied, this ‘Tribunal’ bearing in mind the meaning of ‘Time Value’ that it is ‘the price associated with length of time that an investor must wait until investment matures or related income is earned’ (vide Black’s Law Dictionary) and also considered the fact that the Second Respondent/Financial Creditor had invested a sum of Rs.1,07,76,815.35 paise under the ‘Lease Agreement’ dated 03.04.2017, in and by which a repayment schedule was mentioned as lease rental for a period of 36 months and at the end of the lease, the ‘Asset’ will be purchased by the First Respondent/Corporate Debtor at a value of Rs.21,65,190/- which was received by the Second Respondent/Financial Creditor as Security Deposit comes to an inevitable and inescapable conclusion that the disbursal of amounts to the manufacturer ‘Interio Architecture’ comes within the requirement of ‘time value for money’ and the contra plea projected on the side of the ‘Appellant’ is not acceded to, by this Tribunal.

 

# 53. In so far as the contention of the ‘Appellant’ that the Second Respondent/Financial Creditor had not pleaded in the Section 7 of the Application that the ‘Lease Agreement’ dated 03.04.2017, is a ‘Financial Lease Agreement’ satisfying the requirements of Section 5(8)(d) of the ‘Insolvency & Bankruptcy Code’, it is to be pointed out by this ‘Tribunal’ that the ‘Lease Agreement’ dated 03.04.2017 entered into between the Second Respondent/Financial Creditor and the First Respondent/Corporate Debtor clearly envisages that the ‘Lessor’ (Second Respondent) had offered to provide ‘Lease Finance Assistance’ to the ‘Lessee’ (First Respondent/Corporate Debtor) in respect of Furniture and Fixture (‘Asset’) and which the ‘Lessee’ (First Respondent/Corporate Debtor) was desirous to take for its business purposes on lease basis from the ‘Lessor’ (Second Respondent) on the basis of offer made. And also that, in Part IV of the Application ‘ Particulars of Financial Debt’ it is mentioned that the Corporate Debtor had entered in to a “Lease Agreement’ with the applicant company to avail financial assistance of Rs. 1, 07, 76, 815/- to carry out interior work on 03.04.2017 and further that, the amount of default was mentioned as Rs. 1, 16, 98, 242. 60 which was not paid by the Corporate Debtor, as per the computation and statement of accounts annexed along with the application. Therefore, it cannot be said that the Second Respondent/ Financial Creditor had not pleaded in the application about the ‘Financial Lease’ in the strictest sense of the term. Suffice it for this Tribunal to point out that requisite averments as required to the application under section 7 of the Code were furnished by the Second Respondent/Financial Creditor. Hence, the contra contention advanced on behalf of the Appellant is not accepted by this Tribunal.

 

# 54. It is to be pointed out that in the Rejoinder of the Appellant (filed to the Reply of the Second Respondent/Financial Creditor/Applicant) in paragraph 5 (1), it is mentioned that ‘there is neither a Financial Service provided by the Second Respondent as per section 2(16) of the I B Code, nor a ‘Financial Product’ as per section 2(15) of the I B Code, 2016, but an ordinary lease of furniture and fixtures to the First Respondent Company that are fully owned by the Second Respondent, therefore, the Second Respondent is not a ‘Financial Service Provider’ under section 2(17) of the I B Code, 2016.

 

# 55. Section 3(14) (a to d) of the Code defines “Financial Institution’.(including a financial institution as defined in section 45 -I of the Reserve Bank of India Act, 1934 (2 of 1934). Section 50 of the I & B Code, 2016 provides a carve out to a ‘Financial Service Provider’ for its credit facility to be regarded as ‘extortionate’. Likewise, section 167 of the I & B Code, 2016 provides that any debt extended by a person regulated for the provision of ‘Financial Services’ shall not be considered as an ‘extortionate credit transaction’.

 

# 56. As matter of fact, the definition of Corporate Person in section 2(7) of the I & B Code, 2016 excludes any ‘Financial Service Provider’.

 

# 57. It is not out of place for this Tribunal to make a relevant mention that the procedure envisaged under section 8 of the Code, 2016 differs from the procedure applicable to the “Financial Creditors’ as ‘Operational Debts’ like the trade debts, salary or wage claims etc tend to be small amounts as compared to ‘Financial Debts’.

 

# 58. Be that as it may, in the light of the detailed qualitative and quantitative discussions mentioned supra, and keeping in mind the contentions advanced on either side, especially in the teeth of ‘Lease Agreement dated 03.04.2017’ that the (‘Lessor’/Second Respondent) had offered to provide ‘Lease Finance Assistance’ to the ‘Lessee’/First Respondent, this Tribunal without any haziness holds that the ‘Lease’ in the instant case, is a ‘Financial Lease’ and comes to an irresistible conclusion that there is ‘Financial Debt’ as per section 5(8) of the Code, 2016 and the default being committed by the First Respondent/Corporate Debtor in terms of the ingredients of section 3(12) of the Code, 2016. Further, that the ‘debt’ in question as per section 3(11) of the Code, 2016 cannot be termed as an ‘Operational Debt’ as per section 5(21) of the Code, 2016. Also that, it cannot be forgotten that the Second Respondent/Financial Creditor had not issued the demand notice in such form and manner as prescribed by the I & B Code. Looking at from any angle, the impugned order of the Adjudicating Authority dated 19.03.2020 (National Company Law Tribunal, Hyderabad Bench) in admitting the section 7 application of I & B Code, 2016 (filed by the Second Respondent/Financial Creditor) is free from any legal flaws. Resultantly the Appeal fails.

 

RESULT:

In fine, the instant Comp App (AT) (CH) (Ins) No. 2/2021 is dismissed, but without costs. I A No. 06/2021 & 07/2021 are closed.

 

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