Bell Finvest (India) Limited Vs Intercon Container & Survey & Commodities Pvt. Ltd. - Can AA reject Section 7 Application on the grounds of “Usurious and Extortionate Penal Interest

NCLAT (29.11.2018) in  Bell Finvest (India) Limited Vs Intercon Container & Survey & Commodities Pvt. Ltd. [Company Appeal (AT) (Insolvency) No. 10 of 2018] considered the issue of whether the AA can entertain or reject an application under section 7 of the Code on the ground of “usurious and extortionate penal interest”. It held: that the provisions of Sections 3 & 4 of the ‘Usurious Loans Act, 1918’ are not applicable to any of the proceedings under Section 7 or 9 of the ‘I&B Code’.

 

Excerpts of the order;

# 20. Learned counsel for the Appellant- ‘Bell Finvest India Limited’- (‘Financial Creditor’) submitted that the ‘Intercon Container & Survey & Commodities Pvt. Ltd.’- (‘Corporate Debtor’) defaulted in making repayment of dues amounting to Rs. 58,55,500/- as on 20th June, 2017, which was the reason for filing application for ‘Corporate Insolvency Resolution Process’ against the ‘Corporate Debtor’.

 

# 21. According to the Appellant, the ‘Corporate Debtor’ approached the Appellant- ‘Financial Creditor’ for allowing loan of Rs. 30,00,000/- by its application dated 17th March, 2016. The loan was sanctioned by the Appellant by their letter dated 19th March, 2016 with the condition that the rate of interest payable would be @24% per annum flat rate payable in advance for the entire tenure. After negotiation rate of interest was discounted to 24% as against the applicable rate of 36% per annum. It is being further conditioned that interest amount of Rs. 4,80,000/- is payable in advance, EMI amount would be Rs. 3,75,000/- per month. The ‘Corporate Debtor’ has to give ‘corporate guarantee’ and the Directors have to give ‘personal guarantee’. This loan amount was to be paid within 8 months from the first day of disbursement. It was also agreed upon that in case, the ‘Corporate Debtor’ defaulted in making payment, an additional interest @ 1% per day over and above the interest rate for defaulted/delayed period on the installment amounts will be charged.

 

# 22. It was submitted that pursuant to the agreement entered by the ‘Corporate Debtor’, and in view of Promissory Notes, Deeds of Guarantees and Warrantees, the Appellant disbursed Rs. 10 Lakhs on 31st March, 2016 and Rs. 15,20,000/- on 31st March, 2016 after remitting Rs. 4,80,000/- towards the advance interest in the loan account of the ‘Corporate Debtor’.

 

# 23. It was alleged that since then not even a single payment was made by the ‘Corporate Debtor’, the Appellant was compelled to issue notice to the ‘Corporate Debtor’ on 11th September, 2016 under Sections 433 and 434 of the Companies Act, 1956, stating that since the ‘Corporate Debtor’ failed to make any of the installments as agreed by the ‘Corporate Debtor’, it is liable to pay additional interest @1% per day on and over the outstanding interest. It is only thereafter petition under Section 7 was filed.

 

# 30. From the ‘I&B Code’, it will be evident that the ‘Corporate Insolvency Resolution Process’ is not a litigation and are not decided by Court of Law. Now, the ‘Adjudicating Authority’ deals with the matter of insolvency, which in its first stage is required to take steps for ‘resolution’ of the ‘Corporate Debtor’. Therefore, the Adjudicating Authority being not a Court of law and as the Adjudicating Authority do not decide a money claim or suit, it cannot exercise any of the power vested under Sections 3 or 4 of the ‘Usurious Loans Act, 1918’.

 

# 31. ‘The Presidency- Towns Insolvency Act, 1909’ having repealed, and there being a bar of jurisdiction under Section 231 of the ‘I&B Code’ as no civil court have jurisdiction in respect of any matter in which the Adjudicating Authority is empowered to decide under the Code, we hold that the provisions of Sections 3 & 4 of the ‘Usurious Loans Act, 1918’ are not applicable to any of the proceeding under Section 7 or 9 of the ‘I&B Code’.

 

# 32. Further, as initiation of ‘Corporate Insolvency Resolution Process’ under Sections 7 or 9 do not amount to recovery proceedings, the question of deciding the claim, which may include the interest by the Adjudicating Authority does not arise for the purpose of triggering the ‘Corporate Insolvency Resolution Process’.

 

# 33. In “Innoventive Industries Limited Vs. ICICI Bank and Another− (2018) 1 SCC 407”, the Hon’ble Supreme Court observed and held as follows:

• “28. When it comes to a financial creditor triggering the process, Section 7 becomes relevant. Under the explanation to Section 7(1), a default is in respect of a financial debt owed to any financial creditor of the corporate debtor- it need not be a debt owed to the applicant financial creditor. Under Section 7(2), an application is to be made under sub-section (1) in such form and manner as is prescribed, which takes us to the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016. Under Rule 4, the application is made by a financial creditor in Form 1 accompanied by documents and records required therein. Form 1 is a detailed form in 5 parts, which requires particulars of the applicant in Part I, particulars of the corporate debtor in Part II, particulars of the proposed interim resolution professional in part III, particulars of the financial debt in part IV and documents, records and evidence of default in part V. Under Rule 4(3), the applicant is to dispatch a copy of the application filed with the adjudicating authority by registered post or speed post to the registered office of the corporate debtor. The speed, within which the adjudicating authority is to ascertain the existence of a default from the records of the information utility or on the basis of evidence furnished by the financial creditor, is important. This it must do within 14 days of the receipt of the application. It is at the stage of Section 7(5), where the adjudicating authority is to be satisfied that a default has occurred, that the corporate debtor is entitled to point out that a default has not occurred in the sense that the “debt”, which may also include a disputed claim, is not due. A debt may not be due if it is not payable in law or in fact. The moment the adjudicating authority is satisfied that a default has occurred, the application must be admitted unless it is incomplete, in which case it may give notice to the applicant to rectify the defect within 7 days of receipt of a notice from the adjudicating authority. Under sub-section (7), the adjudicating authority shall then communicate the order passed to the financial creditor and corporate debtor within 7 days of admission or rejection of such application, as the case may be.”

 

# 34. In the aforesaid background, if the application is complete and the Adjudicating Authority is satisfied that there is a debt due to the ‘Financial Creditor’ and there is a default on the part of the ‘Corporate Debtor’, it has no other option but to admit the application in absence of any other infirmity.

 

-------------------------

Avance Logistics & Trading India Private Limited Vs Bell Finvest (India) Limited - Can AA reject Section 7 Application on the grounds of “Usurious and Extortionate Penal Interest

NCLAT (29.11.2018) in  Avance Logistics & Trading India Private Limited Vs Bell Finvest (India) Limited [Company Appeal (AT) (Insolvency) No. 07 of 2018] considered the issue of whether the AA can entertain or reject an application under section 7 of the Code on the ground of “usurious and extortionate penal interest”. It held: that the provisions of Sections 3 & 4 of the ‘Usurious Loans Act, 1918’ are not applicable to any of the proceedings under Section 7 or 9 of the ‘I&B Code’.

 

Excerpts of the order;

# 14. Learned counsel appearing on behalf of the ‘Corporate Debtor’ took similar plea that the proceedings under Section 7 cannot be initiated in respect to ‘usurious’ and ‘extortionate rate of interest’.

 

# 15. It was also submitted that the contravention of ‘NBFC Fair Practices Code’ prescribed by the Reserve Bank of India under Section 45L of the ‘Reserve Bank of India Act, 1934’ and provisions of Sections 3 and 4 of the ‘Usurious Loans Act, 1918’ stand violated in the present case.

 

# 16. According to learned counsel, the ‘Usurious Loans Act, 1918’ was enacted in the year 1918 whose object was to confer powers to all courts in India and equitable jurisdiction in cases relating to ‘usurious loans’ of money or in kind. It was submitted that the documents were deceitfully obtained by the ‘Financial Creditor’ under the garb of ‘standard documents’.

 

# 17. Reliance has also been placed on Section 2 of the ‘Usurious Loans Act, 1918’ which defines “interest” means rate of interest and includes the return to be made over and above what was actually lent, whether the same is charged or sought to be recovered specifically by way of interest or otherwise.

 

# 18. It was submitted that the charging of interest @ 1% per day for default levied by the ‘Financial Creditor’, even after recovery of interest for the entire tenure of loan at source was not only excessive but substantially unfair, which warrants re-opening of the transactions between the Appellant and the ‘Financial Creditor’.

 

# 19. In the present case, similar plea has been taken by the learned counsel appearing on behalf of ‘Bell Finvest (India) Limited’ and it was intimated that even the principal amount has not been returned by the ‘Corporate Debtor’ and they defaulted in making payment.

 

# 30. From the ‘I&B Code’, it will be evident that the ‘Corporate Insolvency Resolution Process’ is not a litigation and are not decided by Court of Law. Now, the ‘Adjudicating Authority’ deals with the matter of insolvency, which in its first stage is required to take steps for ‘resolution’ of the ‘Corporate Debtor’. Therefore, the Adjudicating Authority being not a Court of law and as the Adjudicating Authority do not decide a money claim or suit, it cannot exercise any of the power vested under Sections 3 or 4 of the ‘Usurious Loans Act, 1918’.

 

# 31. ‘The Presidency- Towns Insolvency Act, 1909’ having repealed, and there being a bar of jurisdiction under Section 231 of the ‘I&B Code’ as no civil court have jurisdiction in respect of any matter in which the Adjudicating Authority is empowered to decide under the Code, we hold that the provisions of Sections 3 & 4 of the ‘Usurious Loans Act, 1918’ are not applicable to any of the proceeding under Section 7 or 9 of the ‘I&B Code’.

 

# 32. Further, as initiation of ‘Corporate Insolvency Resolution Process’ under Sections 7 or 9 do not amount to recovery proceedings, the question of deciding the claim, which may include the interest by the Adjudicating Authority does not arise for the purpose of triggering the ‘Corporate Insolvency Resolution Process’.

 

# 33. In “Innoventive Industries Limited Vs. ICICI Bank and Another− (2018) 1 SCC 407”, the Hon’ble Supreme Court observed and held as follows:

• “28. When it comes to a financial creditor triggering the process, Section 7 becomes relevant. Under the explanation to Section 7(1), a default is in respect of a financial debt owed to any financial creditor of the corporate debtor- it need not be a debt owed to the applicant financial creditor. Under Section 7(2), an application is to be made under sub-section (1) in such form and manner as is prescribed, which takes us to the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016. Under Rule 4, the application is made by a financial creditor in Form 1 accompanied by documents and records required therein. Form 1 is a detailed form in 5 parts, which requires particulars of the applicant in Part I, particulars of the corporate debtor in Part II, particulars of the proposed interim resolution professional in part III, particulars of the financial debt in part IV and documents, records and evidence of default in part V. Under Rule 4(3), the applicant is to dispatch a copy of the application filed with the adjudicating authority by registered post or speed post to the registered office of the corporate debtor. The speed, within which the adjudicating authority is to ascertain the existence of a default from the records of the information utility or on the basis of evidence furnished by the financial creditor, is important. This it must do within 14 days of the receipt of the application. It is at the stage of Section 7(5), where the adjudicating authority is to be satisfied that a default has occurred, that the corporate debtor is entitled to point out that a default has not occurred in the sense that the “debt”, which may also include a disputed claim, is not due. A debt may not be due if it is not payable in law or in fact. The moment the adjudicating authority is satisfied that a default has occurred, the application must be admitted unless it is incomplete, in which case it may give notice to the applicant to rectify the defect within 7 days of receipt of a notice from the adjudicating authority. Under sub-section (7), the adjudicating authority shall then communicate the order passed to the financial creditor and corporate debtor within 7 days of admission or rejection of such application, as the case may be.”

 

# 34. In the aforesaid background, if the application is complete and the Adjudicating Authority is satisfied that there is a debt due to the ‘Financial Creditor’ and there is a default on the part of the ‘Corporate Debtor’, it has no other option but to admit the application in absence of any other infirmity.

 

-------------------------

Naveen Luthra Vs Bell Finvest (India) Ltd. & Anr - Can AA reject Section 7 Application on the ground of “Usurious and Extortionate Penal Interest

NCLAT (29.11.2018) in  Sh. Naveen Luthra Vs Bell Finvest (India) Ltd. & Anr. [Company Appeal (AT) (Insolvency) No. 336 of 2017] considered the issue of whether the AA can entertain or reject an application under section 7 of the Code on the ground of “usurious and extortionate penal interest”. It held: that the provisions of Sections 3 & 4 of the ‘Usurious Loans Act, 1918’ are not applicable to any of the proceedings under Section 7 or 9 of the ‘I&B Code’.

Excerpts of the order;

# 2. ‘M/s. Bell Finvest (India) Limited’- (‘Financial Creditor’) filed application under Section 7 of the Insolvency and Bankruptcy Code, 2016 (‘I&B Code’ for short) for initiation of ‘Corporate Insolvency Resolution Process’ against ‘M/s. Luthra Water Systems Private Limited’- (‘Corporate Debtor’). The said application was admitted by the Adjudicating Authority (National Company Law Tribunal), Mumbai Bench, Mumbai, by impugned order dated 15th November, 2017. One of the Shareholders of the ‘Corporate Debtor’ has challenged the said order in Company Appeal (AT) (Insolvency) No. 336 of 2017 on the ground that the petition under Section 7 of the ‘I&B Code’ is not maintainable with regard to ‘usurious penal interest’ in view of Section 3 of the ‘Usurious Loans Act, 1918’.

 

# 5. The question arises for consideration in these appeals is whether the Adjudicating Authority can entertain or reject an application under Section 7 of the ‘I&B Code’ on the ground of “usurious and extortionate penal interest”?

 

# 6. Learned counsel appearing on behalf of the Appellant submitted that the Adjudicating Authority even though took cognizance of the arbitral proceedings which suggest that a dispute with regard to quantum is pending wrongly admitted the application. Further, according to him, it was the responsibility of the Adjudicating Authority to decide where penal interest claimed by the ‘Financial Creditor’ is hit by ‘Usurious Loans Act,

1918’.

 

# 7. According to the learned counsel for the Appellant, the ‘time value of money’ in the instant case is the flat rate of 10% per annum which stood paid on the date of disbursal of the loan amount and the ‘usurious and extortionate penal interest’ does not give rise to a ‘financial debt’ as defined under Section 5(8) of the ‘I&B Code’. It is stated that an amount of Rs. 1,37,66,400/- was disbursed after deducting flat rate of 10% advance interest which amounted to Rs. 34,41,600/-. Thereafter, the ‘Financial Creditor’ only claimed extortionate penal rates of interest @ 350-400% simple interest per annum which do not fall within the purview of ‘financial debt’ and therefore, the Respondent cannot claim to be a ‘Financial

Creditor’.

 

# 8. It was further submitted that the ‘Resolution Professional’ is mandated under Section 50(1) to apply before the Adjudicating Authority for the setting aside of ‘extortionate credit transactions’ involving receipt of financial debt if the transaction required exorbitant payments of interest to be made by the ‘Corporate Debtor’.

 

# 9. Further, according to learned counsel for the Appellant, the charging of an extortionate interest of 1% per day i.e. 365% per annum, over and above the interest rate, is in the nature of penal interest being grossly unjust and against the public policy.

 

# 10. Reliance was placed on the decision of the Hon’ble Supreme Court in “Central Inland Water Transport Corporation Ltd. & Anr. Vs. Brojo Nath Ganguly & Anr.− AIR 1986 SC 1571”, wherein the Hon’ble Apex Court held that the contracts which are ‘unconscionable and opposed to public policy’ are void in accordance with Section 23 of the Indian Contract

Act.

 

# 11. Learned counsel appearing on behalf of the Respondents referred to Loan Agreement dated 15th October, 2015 entered between the parties for a sum of Rs. 1,72,08,000/- to be paid along with interest at the rate of 10% per annum.

 

# 12. It was submitted that the Appellant cannot take advantage of the ‘Usurious Loans Act, 1918’ for initiation of ‘Corporate Insolvency Resolution Process’ under the ‘I&B Code’.

 

# 13. Reliance has also been placed on the ‘Severability’ Clause 14 of the Loan Agreement dated 15th October, 2015 which reads as follows:- “if one or more rights or provisions set forth inthis Agreement are invalid or unenforceable, it is agreed that the reminder of this Agreement shall be enforceable and to the extent permitted by Law(s), the Parties intentions, as reflected in any such right or provision that is invalid or unenforceable, shall be given effect to.”

 

# 30. From the ‘I&B Code’, it will be evident that the ‘Corporate Insolvency Resolution Process’ is not a litigation and are not decided by Court of Law. Now, the ‘Adjudicating Authority’ deals with the matter of insolvency, which in its first stage is required to take steps for ‘resolution’ of the ‘Corporate Debtor’. Therefore, the Adjudicating Authority being not a Court of law and as the Adjudicating Authority do not decide a money claim or suit, it cannot exercise any of the power vested under Sections 3 or 4 of the ‘Usurious Loans Act, 1918’.

 

# 31. ‘The Presidency- Towns Insolvency Act, 1909’ having repealed, and there being a bar of jurisdiction under Section 231 of the ‘I&B Code’ as no civil court have jurisdiction in respect of any matter in which the Adjudicating Authority is empowered to decide under the Code, we hold that the provisions of Sections 3 & 4 of the ‘Usurious Loans Act, 1918’ are not applicable to any of the proceeding under Section 7 or 9 of the ‘I&B Code’.

 

# 32. Further, as initiation of ‘Corporate Insolvency Resolution Process’ under Sections 7 or 9 do not amount to recovery proceedings, the question of deciding the claim, which may include the interest by the Adjudicating Authority does not arise for the purpose of triggering the ‘Corporate Insolvency Resolution Process’.

 

# 33. In “Innoventive Industries Limited Vs. ICICI Bank and Another− (2018) 1 SCC 407”, the Hon’ble Supreme Court observed and held as follows:

• “28. When it comes to a financial creditor triggering the process, Section 7 becomes relevant. Under the explanation to Section 7(1), a default is in respect of a financial debt owed to any financial creditor of the corporate debtor- it need not be a debt owed to the applicant financial creditor. Under Section 7(2), an application is to be made under sub-section (1) in such form and manner as is prescribed, which takes us to the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016. Under Rule 4, the application is made by a financial creditor in Form 1 accompanied by documents and records required therein. Form 1 is a detailed form in 5 parts, which requires particulars of the applicant in Part I, particulars of the corporate debtor in Part II, particulars of the proposed interim resolution professional in part III, particulars of the financial debt in part IV and documents, records and evidence of default in part V. Under Rule 4(3), the applicant is to dispatch a copy of the application filed with the adjudicating authority by registered post or speed post to the registered office of the corporate debtor. The speed, within which the adjudicating authority is to ascertain the existence of a default from the records of the information utility or on the basis of evidence furnished by the financial creditor, is important. This it must do within 14 days of the receipt of the application. It is at the stage of Section 7(5), where the adjudicating authority is to be satisfied that a default has occurred, that the corporate debtor is entitled to point out that a default has not occurred in the sense that the “debt”, which may also include a disputed claim, is not due. A debt may not be due if it is not payable in law or in fact. The moment the adjudicating authority is satisfied that a default has occurred, the application must be admitted unless it is incomplete, in which case it may give notice to the applicant to rectify the defect within 7 days of receipt of a notice from the adjudicating authority. Under sub-section (7), the adjudicating authority shall then communicate the order passed to the financial creditor and corporate debtor within 7 days of admission or rejection of such application, as the case may be.”

 

# 34. In the aforesaid background, if the application is complete and the Adjudicating Authority is satisfied that there is a debt due to the ‘Financial Creditor’ and there is a default on the part of the ‘Corporate Debtor’, it has no other option but to admit the application in absence of any other infirmity.

 

-------------------------------------------------