Drip Capital Inc. Vs. Concord Creations (India) P. Ltd. - The ‘Adjudicating Authority’ at the time of determination as to whether to admit or reject an application u/s 7 of the ‘I&B’ Code is not to take into account the reasons for the Corporate Debtor’s default.

NCLAT (08.11.2021) In Drip Capital Inc. Vs. Concord Creations (India) P. Ltd. [Company Appeal (AT)(CH) (Ins.) No. 167 of 2021] held that;

• It is relevantly pointed out that the ‘Adjudicating Authority’ is not a ‘Court of Law’ and that ‘CIRP’ is not a litigation. As a matter of fact, if the ‘Adjudicating Authority’ is subjectively satisfied as to the existence of default and arrive at a conclusion that the application is a complete one and further that no disciplinary proceedings are pending against the proposed ‘Resolution Professional’ it is incumbent upon it to admit the application. In reality, no other ‘yardstick’ is required to look into any other requirement for admission of the application.

• It cannot be gainsaid that an initiation of CIRP does not amount to recovery proceedings and that the ‘Adjudicating Authority’ at the time of determination as to whether to admit or reject an application u/s 7 of the ‘I&B’ Code is not to take into account the reasons for the Corporate Debtor’s default.

• that the ‘Adjudicating Authority’ in the impugned order had observed that the Respondent was not an ‘Insolvent Company’ and that it was of the considered view that Respondent should be given some more time to repay the debt etc. had directed the Respondent / Corporate Debtor to repay the balance debt or the amount as settled with the Appellant within a period of six months failing which the Appellant / Petitioner would be at liberty to file a fresh petition for admission, which in the considered opinion of this Tribunal is in negation of the principles laid down at paragraph 30 of the judgement of the Hon’ble Supreme Court in Innovative Industries Ltd. Vs. ICICI Bank (2018) 1 SCC page 407.

 

Excerpts of the order;

# 2. The ‘Adjudicating Authority’ (‘National Company Law Tribunal’), Bengaluru Bench while passing the impugned order dated 28.05.2021 in C.P.(IB) No. 61/BB/2020 (Filed by the Appellant / Petitioner / Financial Creditor) at paragraph 5 to 10 had observed the following: –

• “5. we have perused the Receivables Purchase Factoring Agreement dated 12.12.2018, Irrevocable undertaking for recourse on Corporate Debtor, dated 12.12.2018.

• 6. On perusal of the Demand Promissory Note dated 12.12.2018 granted by the Corporate Debtor in favour of the Petitioner, it is established that the Respondent admits to the financial debt of USD 400000 or rupee equivalent along with interest from such date of demand at aggregate rate of (5.7 + 4.0) % per annum or such other rate, and at such rest (monthly or otherwise).

• 7. At this point it is relevant to note that the Hon’ble Supreme Court in the case of Mobilox Innovations Private Limited v. Kirusa Software Private Limited has inter alia held that the I & B Code, 2016 is not intended to be a substitute to a recovery forum and cannot be used to jeopardise the financial health, or an otherwise solvent company by pushing it into insolvency. It is also pertinent to mention that the Hon’ble Supreme Court in the case of K.Kishan v. Vijay Nirman Company Private Limited clarified that the Petitioners cannot use IBC either prematurely or for extraneous considerations or as substitute for debt enforcement procedures.

• XXXXX

• 10. In light of the above grim economic scenario and the fact that the Respondent is not an insolvent company, we are of the considered view that the Respondent should be given some more time to repay the debt. Considering the amount involved, its financial status and the present economic scenario, despite the argument of the Petitioner that it is a fit case for admission, we are of the view that it would be fair to allow the Respondent some more time. The Code cannot be used to jeopardise the financial health of an otherwise solvent company by pushing it into insolvency, which would be against the objects of the Code.”

 

and disposed of the petition without costs by directing the Respondent/Corporate Debtor to repay the balance date or the amount as settled with the petitioner within a period of six months failing which the petitioner would be at liberty to file a fresh petition for admission.

 

Appellant’s Submissions

# 3. Challenging the impugned order dated 28.05.2021 in C.P.(IB) No. 61/BB/2020 passed by the ‘Adjudicating Authority’ (‘National Company Law Tribunal’), Bengaluru Bench, the Learned Counsel for the Appellant contends that the impugned order is invalid and an illegal one because of the fact that the ‘Adjudicating Authority’ after accepting the fact that there was a ‘debt’ due and payable to the Appellant / Financial Creditor by the Respondent / Corporate Debtor, by virtue of the reason that the said debt was defaulted by the Respondent / Corporate Debtor, had no basis to defer the initiation of CIRP’ against it.

 

# 4. According to the Learned Counsel for the Appellant, the ‘Adjudicating Authority’ had no jurisdiction to evaluate the financial health of the ‘Corporate Debtor’ for the purpose of admitting ‘Corporate Insolvency Resolution Process’ against the ‘Corporate Debtor’. Furthermore, ‘inability to pay the debt’ is also not a consideration i.e. mandatory for initiating ‘CIRP’ against the ‘Corporate Debtor’.

 

# 5. The Learned Counsel for the Appellant comes out with a stand that the Respondent / Corporate Debtor had entered its ‘appearance’ but had not filed the ‘Reply’ and also not filed the ‘objections’. Added further, the application was based on the default committed by the ‘Corporate Debtor’ in 2019 and that the Appellant / Petitioner’s application under Section 7 of the I&B Code, 2016 was filed prior to the onset of COVID Pandemic.

 

# 6. The Learned Counsel for the Appellant contends that the ‘Adjudicating Authority’ had committed an error in making an observation in the impugned order to the effect that the application u/s 7 of the Code filed by the Appellant / Petitioner was one for recovery. In fact, the Appellant / Financial Creditor / Petitioner is interested in the revival of the Company that can take care of all the claims and run the business.

 

# 7. It is represented on behalf of the Appellant that the ‘Adjudicating Authority’ in the absence of necessary pleadings by the ‘Corporate Debtor’, had assumed the defenses that could have been taken by the ‘Corporate Debtor’.

 

Claim

# 8. Section 3(6) of the ‘I&B’ Code, 2016 defines claim meaning (a) a right to payment, whether or not such right is reduced to judgement, fixed, disputed, undisputed, legal, equitable, secured or unsecured (B) right to remedy for breach of contract under any law for the time being in force, if such breach gives rise to a right to payment, whether or not such right is reduced to judgement, fixed, matured, unmatured, disputed, undisputed, secured or unsecured.

 

Corporate Debtor

# 9. Section 3(8) of the Code defined Corporate Debtor’ meaning a Corporate Person who owes a debt to any person.

 

Creditor

# 10. Section 3(10) of the Code defines ‘Creditor’ meaning any person to whom a debt is owed and includes a financial creditor, an operational creditor, a secured creditor, an unsecured creditor and a decree-holder;

 

Debt

# 11. Section 3(11) of the Code defines ‘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;

 

Default

# 12. Section 3(12) of the Code defines ‘Default’ means non-payment of debt when whole or any part or instalment of the amount of debt has become due and payable and is not paid by the debtor or the corporate debtor, as the case may be.

 

Circumstances for Admission of Application

# 13. It is relevantly pointed out that the ‘Adjudicating Authority’ is not a ‘Court of Law’ and that ‘CIRP’ is not a litigation. As a matter of fact, if the ‘Adjudicating Authority’ is subjectively satisfied as to the existence of default and arrive at a conclusion that the application is a complete one and further that no disciplinary proceedings are pending against the proposed ‘Resolution Professional’ it is incumbent upon it to admit the application. In reality, no other ‘yardstick’ is required to look into any other requirement for admission of the application.

 

# 14. It cannot be gainsaid that an initiation of CIRP does not amount to recovery proceedings and that the ‘Adjudicating Authority’ at the time of determination as to whether to admit or reject an application u/s 7 of the ‘I&B’ Code is not to take into account the reasons for the Corporate Debtor’s default.

 

Appraisal

# 22. It comes to be known that the Appellant / Financial Creditor on 14.10.2019 issued a Letter of Demand to the Corporate Debtor by exercising recourse on the Corporate Debtor, in terms of the ‘Receivables Purchasing Agreement’ read with duly executed undertaking in respect of repayment of the unpaid aggregate ‘Outstanding Receivables’ / Financial Debt. However, even after repeated reminders issued to the Corporate Debtor, in regard to the non-payment of Invoices on repayment due date, the Corporate Debtor had failed to reply to the Demand Notice or repay the Financial Debt.

 

# 23. The Learned Counsel for the Appellant / Financial Creditor/ Applicant points out that since the Corporate Debtor had defaulted in its payment obligations to the Financial Creditor and is in default of its admitted liability to pay as per the terms of ‘Receivables Purchasing Agreement’ read with Undertaking and the Demand, the ‘CIRP’ be initiated against it in accordance with Section 7 of the ‘I&B’ Code, 2016.

 

# 24. It is quite evident from the ‘Notice of Default cum Demand’ dated 14.10.2019 addressed to the Respondent by the authorised signatory of the Appellant ‘Outstanding Receivables’ on the due date of USD 37,585.00 together with interests, default interest, overdue fees and all other charges were claimed till the date of actual payment, to be paid by the Respondent / Concord Creations (India) Pvt. Ltd. within three days from the date of this letter.

 

# 25. In the instant case, because of the fact that the advances made by the Appellant / Financial Creditor to the Corporate Debtor was supported by the ‘Irrevocable Undertaking for Recourse’ and as such, it is within its ambit to demand the repayment from the ‘Corporate Debtor’ etc. Added further, it cannot be forgotten that the invoices purchased and assigned to the Appellant / Financial Creditor/Petitioner were with ‘Recourse’ and that the said advances will squarely come within the definition of Section 5(8)(e) of the ‘I&B’ Code, 2016 which reads as under: –

• Section 5(8) “financial debt’ means a debt alongwith interest, if any, which is  disbursed against the consideration for the time value of money and includes—–

• Xx xx xx

• (e) receivables sold or discounted other than any receivables sold on non-recourse basis;

 

# 26. Before the ‘Adjudicating Authority’ the Respondent / Corporate Debtor had entered appearance but had not filed its Reply to the application in CP No.(IB) 61/BB/2020. In this connection, on behalf of the Appellant / Financial Creditor / Applicant it is pointed out before this Tribunal that during the pendency of Section 7 Application before the Adjudicating Authority, the Appellant / Financial Creditor / Applicant had agreed for one time settlement to receive only the principal sum / debt of USD 36,532/- by 10.03.2020 and further that this settlement was not honored by the Corporate Debtor, thereby the Appellant / Financial Creditor was constrained to pursue the Section 7 Application before the ‘Adjudicating Authority’.

 

# 27. As regards the non-payment of invoices on repayment due date’, inspite of repeated reminders, the Corporate Debtor had failed to reply to the ‘Demand Notice’ or repay the ‘Financial Debt’. Also that in the instant case, the Corporate Debtor is in default of its admitted liability to pay as per the terms of ‘Receivables Purchase Agreement’.

 

## 28. As far as the present case is concerned, at paragraph 8 of the impugned order, dated 28.05.2021 in CP No.(IB)61/BB/2020 the Adjudicating Authority had interalia observed that the Respondent Company had net revenue from operations of Rs. 19.31 crore which had increased over the last three years and showed a growth rate of 46% over last year and further it had a net profit of Rs. 77 lakhs and improving and positive return to equity ratio. Further, the Adjudicating Authority’ had observed that prima facie the Respondent Company had sufficient income and assets to repay its debt and could not be termed as ‘Insolvent.’

 

# 29. It is to be pointed out that the ‘Adjudicating Authority’ in the impugned order had observed that the Respondent was not an ‘Insolvent Company’ and that it was of the considered view that Respondent should be given some more time to repay the debt etc. had directed the Respondent / Corporate Debtor to repay the balance debt or the amount as settled with the Appellant within a period of six months failing which the Appellant / Petitioner would be at liberty to file a fresh petition for admission, which in the considered opinion of this Tribunal is in negation of the principles laid down at paragraph 30 of the judgement of the Hon’ble Supreme Court in Innovative Industries Ltd. Vs. ICICI Bank (2018) 1 SCC page 407. Therefore, this Tribunal holds that the Adjudicating Authority had exceeded its jurisdiction by taking the defense of the Corporate Debtor, especially in the absence of any ‘Reply’ or objections projected by the Corporate Debtor. Consequently, this Tribunal interferes with the impugned order, since it suffers from patent legal infirmities. The instant Appeal succeeds.

 

Conclusion

In fine the Company Appeal (AT)(CH) (Ins.) No. 167 of 2021 is allowed. Resultantly, the impugned order dated 28.05.2021 passed by the Adjudicating Authority (National Company Law Tribunal) Bengaluru Bench in CP.(IB) 61/BB/2020 is hereby set aside. No costs. The Adjudicating Authority is directed by this Tribunal to restore CP.(IB) 61/BB/2020 to its file, ‘Admit’ the same and to proceed further in accordance with Law.

 

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