National Company Law Appellate Tribunal
Saratvam Creators vs Sudhir Constructions Infraspace ... on 26 September, 2024
Author: Ashok Bhushan
Bench: Ashok Bhushan
NATIONAL COMPANY LAW APPELLATE TRIBUNAL,
PRINCIPAL BENCH, NEW DELHI
Company Appeal (AT) (Insolvency) No.1664 of 2024
(Arising out of Order dated 02.08.2024 passed by the Adjudicating Authority
(National Company Law Tribunal), Mumbai Bench, Court-V in I.A. No.2142 of 2023
in CP(IB) No.951/MB/2022)
IN THE MATTER OF:
Saratvam Creators ... Appellant
Versus
Sudhir Construction Infrapase Pvt. Ltd. & Ors. ... Respondents
Present:
For Appellant : Mr. Ramji Srinivasan, Sr. Advocate with Mr.
Gautam Singh, Mr. Shubhendu Anand, Ms.
Namrata Sarogi and Mr. Akshat Kaushik,
Advocates.
For Respondents : Mr. Kunal Kanungo, Mr. Mukesh Jain, Mr. Aush
Rajani and Mr. Muktesh Punaniya, Advocates for
R-1.
Mr. Abhijeet Sinha, Mr. Anuj Tiwari, Mr.
Chaitanya Nikte, Ms. Monika, Mr. Aditya Shukla,
Ms. Heena Kochar, Advocates for R-6.
Mr. Piyush M Dwivedi, Advocate for R-4.
JUDGMENT
ASHOK BHUSHAN, J.
This Appeal by the Appellant, who claimed to be Financial Creditor of the Corporate Debtor has been filed challenging the order dated 02.08.2024 passed by National Company Law Tribunal, Mumbai Bench, Court-V in IA No.2142 of 2023 (filed by Bank of Maharashtra) (Respondent No.6 herein), Company Appeal (AT) (Insolvency) No.1664 of 2024 1 where by the impugned order, the Adjudicating Authority has allowed IA No.2142 of 2023 and directed the RP to reconstitute the Committee of Creditors ("CoC") after excluding the Appellant and other unsecured Financial Creditors. The Appellant aggrieved by the order dated 02.08.2024 has filed this Appeal.
2. Brief facts of the case necessary to be noticed for deciding the Appeal are:
(i) The Corporate Debtor - Sudhir Construction Infraspace Pvt. Ltd.
was extended Financial Facilities by the Bank of Maharashtra in the year 2018. Cash Credit Limit, Term Loan and the Encashment of Bank Guarantees were extended by Bank of Maharashtra. The Corporate Debtor could not service the Facilities, hence, the account was declared as NPA on 31.12.2019.
(ii) The Corporate Debtor was awarded a Hybrid Annuity Model Road Project ("HAM Project") by the Public Works Department ("PWD") in the year 2018. The Corporate Debtor formed a SPV for the purposes of execution of HAM Project namely - M/s Sudhir Constructions Infraspace (Shegaon Palkhi Road) Private Limited ("SPV"). A Concession Agreement was executed between SPV and PWD on 03.01.2019 to carry out the work within 24 months. The Corporate Debtor faced difficulties in executing the Project. The Company Appeal (AT) (Insolvency) No.1664 of 2024 2 Corporate Debtor efforts to find out the entities to carry out the Project failed twice.
(iii) On 18.06.2022, the SPV of the Corporate Debtor M/s Sudhir Constructions Infraspace (Shegaon Palkhi Road) Private Limited entered into an Agreement with M/s Saratvam Creators (Appellant herein) to execute the work on back-to-back basis. The Appellant agreed to execute the work on back-to-back basis on mutually agreed condition as mentioned in the Agreement.
(iv) In the year 2022, the Bank of Maharashtra filed Application under Section 7 against the Corporate Debtor for initiation of CIRP. The advance copy of Section 7 Application was served on the Corporate Debtor on 04.07.2022, on which Application CP (IB) No.52 of 2023 was registered.
(v) After service of the copy of Section 7 Application by Bank of Maharashtra, the Appellant entered into a Loan Agreement with SPV and Corporate Debtor dated 05.08.2022. The SPV was the borrower and the Appellant as lender. A separate Deed of Guarantee-cum-Indemnity was executed by the Corporate Debtor. The lender agreed to lend an amount of Rs.195 crores to the borrower. Guarantor/ Indemnifier has undertaken guarantee/ indemnity to make good of loss along with interest, if the borrower fails to repay the amount of loan.
Company Appeal (AT) (Insolvency) No.1664 of 2024 3
(vi) On an Application filed under Section 7 by a Financial Creditor one Mr. Mahesh Bapuraoji Nage for a principal amount of Rs.1.25 crores, CIRP against the Corporate Debtor commenced on 03.03.2023. In pursuance of the publication issued by the RP, the Bank of Maharashtra on 16.03.2023 duly submitted its claim on Form-C, claiming as a secured creditor. Total principal and interest was claimed as Rs.165,70,10,986/-. The Appellant also filed its claim on 24.03.2023 as unsecured Financial Creditor for principal amount of Rs.195/- crores and interest of Rs.28,11,699/-. Certain other unsecured Financial Creditors also filed their claims before the IRP.
(vii) The RP after collating the claims issued Notice dated 29.03.2023 for holding the first meeting of the CoC on 03.04.2023. Notice of the meeting was sent to the Bank of Maharashtra, Appellant and other unsecured Financial Creditor. The first meeting of the CoC was held on 03.04.2023. In the minutes of the first meeting, the RP took note of constitution of Committee and gave amount of admitted claims of Bank of Maharashtra, the Appellant and other unsecured Financial Creditors. Apart from Bank of Maharashtra, there were other unsecured Financial Creditors, whose claims were shown to be admitted. Vote share ratio of Bank of Company Appeal (AT) (Insolvency) No.1664 of 2024 4 Maharashtra was 32.28% and the vote share of the Appellant was 39.16%.
(viii) Copy of the minutes was circulated by the RP to the Members of the CoC. The Bank of Maharashtra after receiving the minutes of the meeting, objected to the minutes. The detailed objection dated 10.04.2023 was sent by Bank of Maharashtra to the RP, pleading that claims of unsecured creditors admitted by RP is untenable. It was pleaded that CoC has been formed on the basis of erroneous and fictitious claims, which are not valid in law. It was stated that RP without proper and genuine documents, has constituted the CoC. It was stated that to protect the interest of the Corporate and secured Financial Creditors, the Bank of Maharashtra prayed that minutes be recalled and CoC be reconstituted. The RP proceeded to hold the 2nd meeting of the CoC on 21.04.2023 with the same members of the CoC as was earlier constituted. The RP has also filed Report before the Adjudicating Authority regarding constitution of the CoC and detail of claims received. The Bank of Maharashtra also called upon the RP to share the relevant financial documents on the basis of which the claims of the Appellant and other unsecured Financial Creditors have been admitted, which was not shared by the RP. The RP in support of its decision to admit the claim of Company Appeal (AT) (Insolvency) No.1664 of 2024 5 Appellant and other unsecured Financial Creditors, relied on two legal opinions, which were shared.
(ix) The Bank of Maharashtra filed an Application - IA No.2142 of 2023, praying for directing the RP to reconstitute the CoC by excluding third parties, including the Appellant. The Bank of Maharashtra also prayed that a forensic auditor be also appointed to audit the claims of various third parties, to verify whether they fall under the category of preferential, undervalued, extortionate and fraudulent transaction. The Application filed by the Bank of Maharashtra was opposed by learned Counsel for the IRP/RP, Appellant and other unsecured Financial Creditors. The Adjudicating Authority after hearing the parties, by the impugned order allowed prayers (a) and (b) of the Application. Aggrieved by which order this Appeal has been filed.
3. We have heard Shri Ramji Srinivasan, learned Senior Counsel appearing for the Appellant; Shri Abhijeet Sinha, learned Senior Counsel appearing for the Bank of Maharashtra; and Shri Mukesh Jain, learned Counsel appearing for the RP.
4. When the Appeal was heard, learned Counsel appearing for Bank of Maharashtra, on whose Application the impugned order was passed has appeared and sought liberty to file an additional affidavit. The Bank of Maharashtra has filed an additional affidavit to support its contentions. The Company Appeal (AT) (Insolvency) No.1664 of 2024 6 RP has also appeared through Counsel. The contesting Respondents having already appeared, no notices were issued to other Respondents in this Appeal. Liberty was granted to the parties to file written submissions. The Appellant, Bank of Maharashtra - Respondent No.6 have filed their written submissions. The written submission has also been filed by Respondent No.7 - suspended Director.
5. Shri Ramji Srinivasan, learned Senior Counsel appearing for the Appellant challenging the order of the Adjudicating Authority contends that Adjudicating Authority committed error in ousting the Appellant from CoC and directing for reconstitution of the CoC. It is submitted that Adjudicating Authority committed error in holding that Appellant is a 'related party' unsecured Financial Creditor, whereas, the Appellant was not covered by any clauses of Section 5, sub-section (24) of the IBC. It is submitted that findings of the Adjudicating Authority that Appellant is a related party is unsustainable. It is submitted that the Appellant has proved that it was unsecured Financial Creditor by virtue of Loan Agreement and Deed of Guarantee-cum-Indemnity dated 05.08.2022. The Corporate Debtor having executed the Deed of Guarantee-cum-Indemnity Agreement in favor of the lender, i.e. Appellant, ingredients of financial debts were proved. It is submitted that Adjudicating Authority committed error in returning a finding that there was no privity of contract between the Appellant and the Corporate Debtor. The finding of Adjudicating Authority that Loan Agreement and Deed Company Appeal (AT) (Insolvency) No.1664 of 2024 7 of Guarantee-cum-Indemnity Agreement dated 05.08.2022 was executed with ulterior motive were unfounded. Further, the Adjudicating Authority committed error in directing for forensic audit for finding out as to whether there is preferential transaction between the Corporate Debtor and the Appellant. When the Adjudicating Authority has directed for forensic audit, which was to be completed within 60 days, there was no occasion for direction to reconstitute the CoC at this stage. In the impugned order, several errors have been committed by the Adjudicating Authority. The Adjudicating Authority has accepted the contention of Bank of Maharashtra that Loan Agreement and Deed of Guarantee-cum-Indemnity came into existence after Section 7 Application was served on the Corporate Debtor on 04.07.2022, whereas it failed to appreciate that approval from PWD came only on 18.07.2022 and only thereafter, Loan Agreement and Deed of Guarantee-cum- Indemnity could have been executed. The observation of the Adjudicating Authority that Loan Agreement and Deed of Guarantee-cum-Indemnity were with the ulterior motive of reducing the percentage of Bank of Maharashtra are erroneous. The finding of Adjudicating Authority regarding insufficient stamp on the Deed of Guarantee-cum-Indemnity is also erroneous. The Deed of Guarantee-cum-Indemnity is as per the provisions of Maharashtra Stamp Act, 1958 and was required to be stamped with Rs.500/- as per Article 35 of the Maharashtra Stamp Act, which stamping was there in the Deed of Guarantee-cum-Indemnity. The Adjudicating Authority committed error in Company Appeal (AT) (Insolvency) No.1664 of 2024 8 holding that claim admitted by RP is inflated claim. The Adjudicating Authority held that actual disbursement was only INR 19,71,24,699/-, however, the Adjudicating Authority overlooked the fact that claim was filed on the basis of Deed of Guarantee-cum-Indemnity, which was for an amount of Rs.195 crores. The Adjudicating Authority held that Financial Creditor can be treated only to the extent of amount disbursed against the consideration of time value of money and the Appellant having not disbursed any money to the Corporate Debtor, but to SPV is not a Financial Creditor, whereas, the Appellant is unsecured Financial Creditor, on account of Deed of Guarantee- cum-Indemnity. The case of the Appellant was fully covered by Section 5 (8)
(i). The Adjudicating Authority relying on the Agreement dated 18.06.2022 has held the Appellant as Operational Creditor, whereas Agreement dated 18.06.2022 was separate and distinct and was entered for executing the HAM Project on back-to-back basis, whereas there was separate and distinct Loan Agreement and Deed of Guarantee-cum-Indemnity was entered and the claim was filed by the Appellant on the basis of Deed of Guarantee-cum-Indemnity. The fact that the Appellant was Operational Creditor under separate Agreement, does not by any stretch of imagination disentitles the Appellant for claiming its right under Deed of Guarantee-cum-Indemnity. Shri Ramji Srinivasan submits that disbursement of the whole loan money is not a sine qua non to qualify as a Financial Creditor. Learned Counsel for the Appellant has referred to Section 5, sub-section (8), sub-clause (i) to support his Company Appeal (AT) (Insolvency) No.1664 of 2024 9 submission that Appellant is a Financial Creditor. It is further submitted that in any case, the Appellant must be regarded as a Secured Creditor. The learned Counsel for the Appellant has referred to Agreement dated 05.08.2022 Clauses 5 and 6, which deals with 'Security' and 'Guarantee/ Indemnity'. The learned Counsel for the Appellant in support of his submission has relied on judgment of Hon'ble Supreme Court in Paschimanchal Vidyut Vitran Nigam Ltd. v Raman Ispat Pvt. Ltd. & Ors. (2023) 10 SCC 60.
6. Shri Abhijeet Sinha, learned Senior Counsel appearing for the Bank of Maharashtra refuting the submissions of learned Counsel for the Appellant submits that entire claim of the Appellant is not only malafide claim, but is based on documents, which were prepared by the Corporate Debtor and the Appellant after Section 7 Application was served on the Corporate Debtor on 04.07.2022 by the Bank of Maharashtra. The object of Corporate Debtor was only to somehow create documents in favour of entities claiming to have unsecured Financial Creditors of the Corporate Debtor, to reduce the vote share of the Bank of Maharashtra in the CoC. It is submitted that bare perusal of the claim submitted by Appellant in Form-C, indicate that what was claimed by the Appellant was that "the Appellant is committed to disburse the total amount of loan, i.e. amount of Rs.195/- crores". It is admitted fact that only disbursement, which is claimed in Form-C was Rs.19,43,13,000/-. The RP without looking into the claim Form and other relevant materials, callously with malafide intention admitted the claim for Rs.195,28,11,699/-. When the Company Appeal (AT) (Insolvency) No.1664 of 2024 10 amount of Rs.195/- crores was not even disbursed by the Appellant, which is the case of the Appellant itself, there was no occasion for admitting any claim of the Appellant in the CIRP of the Corporate Debtor, who according to the Appellant was only guarantor and gave only guarantee. The liability of guarantor can never be more than that of a principal borrower. From the facts brought on the record, it is clear that no amount was disbursed by the Appellant to the Corporate Debtor and amount disbursed, if any, was to the SPV and the amount disbursed to the SPV was returned in favour of the Appellant, which is apparent from the details of the Escrow Account brought on record before the Adjudicating Authority. When the Appellant received back the entire amount, which is claimed by the Appellant as disbursement to the SPV, the RP committed serious error in admitting the claim of the Appellant. The Appellant has entered into Agreement dated 18.06.2022 to carry out the Project of SPV on back-to-back basis and the Appellant was only an Operational Creditor and EPC Contractor, which is mentioned in the Agreement itself. The PWD, who has awarded the contract has also recognized the Appellant as EPC Contractor and has issued letters to release payments to the EPC Contractor. The documents alleging financial debt of the Appellant were all created with malafide intention and were all manufactured subsequent to receipt of Notice under Section 7. The CIRP against the Corporate Debtor commenced on debt of Rs.1.25 crores on an Application filed under Section 7 by a friendly unsecured Financial Creditor, which was Company Appeal (AT) (Insolvency) No.1664 of 2024 11 admitted without any opposition by the Corporate Debtor. The Bank of Maharashtra filed detailed objection on 10.04.2023 and gave all relevant pleading to show that the claim could not have been admitted. It is further pleaded that account of Corporate Debtor was declared as NPA on 31.12.2019 and after the account of Corporate Debtor having been declared NPA, it could not legally execute any Deed of Guarantee-cum-Indemnity. Further, as per the term of the sanctioned Facilities by the Bank of Maharashtra, no liability can be taken by the Corporate Debtor, without obtaining a no objection from Bank of Maharashtra. At no point of time, the Corporate Debtor obtained no objection from Bank of Maharashtra for entering into Deed of Guarantee-cum- Indemnity. The Escrow Account, which was maintained in the Bank of Maharashtra itself indicate that between August 2022 to January 2023 against total amount credit was Rs.10,95,00,000/- and an amount of Rs.19,73,11,473/- has been paid to the Appellant. Thus, even if, Rs.19 crores was disbursed to SPV, it was actually received back by the Appellant.
7. In the written submission, which has been filed by Respondent No.7 - suspended Director, it is stated Respondent No.7 was heard by NCLT in IA No.2142 of 2023. In the written submission Respondent No.7 pleaded that Loan Agreement dated 05.08.2022 entered with the Appellant while exercising the best business judgment in relation to Project (Shegaon Palkhi Marg). Respondent No.7 also contended that NCLT recorded factually incorrect findings. Under the HAM Projects, it is a nationwide common practice that as Company Appeal (AT) (Insolvency) No.1664 of 2024 12 per tender condition provide by PWD, that the financial partner & executor brings in the upfront money and then execute the entire project. Respondent No.7 in support of his submission relied on three judgments, which shall be noticed hereinafter.
8. We have considered the submissions of learned Counsel for the parties and have perused the record.
9. In pursuance of the CIRP commenced against the Corporate Debtor on 03.03.2023, publication was issued by the RP and claims were filed by the Bank of Maharashtra, Appellant and other unsecured Financial Creditors. The claim of Bank of Maharashtra as secured Financial Creditor was admitted for an amount of Rs. 160,95,10,987/- with regard to which there is no dispute. The Bank of Maharashtra has raised objection regarding admission of claim of the Appellant and other unsecured Financial Creditor, after it came to know the minutes of the first CoC, which was circulated by the RP. Along with additional affidavit, which has been filed by the Bank of Maharashtra, notice and agenda of the first CoC meeting held on 03.04.2023 as well as the minutes of the meting has been brought on the record, which were part of IA No.2142 of 2023 filed by the Bank of Maharashtra. Report of IRP, which was submitted under Section 18, has also been brought on record. Clause (b) of the Report, which give details of the claims submitted and admitted of the creditors is as follows:
Company Appeal (AT) (Insolvency) No.1664 of 2024 13 "b) Receive and collate all the claims submitted by creditors to him, pursuant to the public announcement made under sections 13 and 15;
Pursuant to the receipt of the CIRP commencement Order on 03.03.2023 IRP made Public Announcement in requisite FORM A in Economic Times (Nagpur Edition, English publication) and Loksatta (Nagpur Edition, Marathi publication) on 06.03.2023 for calling of claims from the creditors of the CD in compliance with Section 13(1)(b), 13(2) and 15 of the Code and Reg 6 of IBBI (CIRP).
As per Reg 6(2) of IBBI (CIRP), Reg. 2016, the last date for submission of claims was fixed as 17th March 2023. Thereafter, IRP has received the below claims from various creditors as summarized below:
*Claims of the Financial Creditors:
Sr. Name of Creditor Amount Claim Claim under
No. Claimed (Rs.) Admitted (Rs.) Verification
(Rs.)*
A. SECURED FINANCIAL
CREDITORS
1 Bank of Maharashtra 165,70,10,987 160,95,10,987 4,75,00,000
B. UNSECURED
FINANCIAL CREDITORS
2 Saratvam Creator 195,28,11,699 195,28,11,699 0
3 Spondere Structures 75,68,67,721 75,68,67,721 0
4 Sanguine Engineering 60,24,48,287 60,24,48,287 0
Services
5 Mahhesh Bapuraoji 3,57,51,974 3,57,51,974 0
Nage
6 Anil Tukaram Savarkar 2,88,64,861 2,88,64,861 0
7 Go Ahead Infra Private 10,11,05,600 0 10,11,05,600
Limited
8 Supreme Infra Products 20,56,23,808 0 20,56,23,808
(Proprietor - Suresh
Beoraoji Doifode)
9 Gurudeo Fabrication 11,66,47,699 0 11,66,47,699
Pvt. Ltd. (Formerly
known as L7 Fabrication
Pvt. Ltd.)
10 Areon Multi Projects Pvt. 7,24,74,638 0 7,24,74,638
Ltd.
Company Appeal (AT) (Insolvency) No.1664 of 2024 14
11 Moonland Realty 1,45,83,471 0 1,45,83,471
Developers Pvt. Ltd.
12 Vardhman Associates 6,10,049 0 6,10,049
Karta Paras Jain HUF
13 Climb Up Infra Pvt. Ltd. 77,41,62,572 0 77,41,62,572
TOTAL 6,31,89,63,366 491,62,55,529 133,27,07837
...."
10. The Report further under the heading "Constitute a committee of creditors", mention as follows:
"b) Constitute a committee of creditors:
As per Section 21(1) & 18(1)(c) of the IBC, 2016 and Regulation 17(1) of IBBI (CIRP), 2016, it is the duty of IRP to constitute a Committee of Creditors (CoC) and submit its report certifying the constitution of CoC to the Adjudicating Authority. In response to the public notice under Form A dated 6th March 2023, the IRP has received thirteen (13) claims under financial creditor category. According, the IRP has constituted the CoC on 27th March 2023 comprising of Six (6) Financial Creditors.
Sr. Name Amount Claim Claim Voting
No. Claimed (Rs.) Admitted (Rs.) under (%)
Verification
(Rs.)*
A. SECURED
FINANCIAL
CREDITORS
1 Bank of 1,65,70,10,987 1,65,70,10,987 4,75,00,000 32.28%
Maharashtra
B. UNSECURED
FINANCIAL
CREDITORS
2 Saratvam Creator 1,95,28,11,699 1,95,28,11,699 0 39.16%
3 Spondere 75,68,67,721 75,68,67,721 0 15.18%
Structures
4 Sanguine 60,24,48,287 60,24,48,287 0 12.08%
Engineering
Services
5 Mahhesh Bapuraoji 3,57,51,974 3,57,51,974 0 0.72%
Nage
6 Anil Tukaram 2,88,64,861 2,88,64,861 0 0.58%
Savarkar
TOTAL 5,03,37,55,529 4,98,62,55,529 4,75,00,000 100%
Company Appeal (AT) (Insolvency) No.1664 of 2024 15
11. The above part of the Report makes it clear that claim of the Appellant was submitted for Rs.195,28,11,699/-, which claim was admitted in toto of Rs.195,28,11,699/- and the CoC was constituted by the IRP, in which the Bank of Maharashtra, a secured creditor was given 32.28% vote share, whereas, the Appellant was given 39.15% vote share. The challenge in the IA No.2142 of 2023 filed by the Bank of Maharashtra was to the admission of the claim of Appellant and other unsecured Financial Creditor and their inclusion in the CoC. The application filed by the Bank of Maharashtra was a detailed Application, making various pleadings and grounds. The prayers made in the Application IA No.2142 of 2023 are as follows:
"(a) That this Hon'ble Tribunal be pleased to examine the contents of the present Application and after examining the same, be pleased to direct the Resolution Professional to reconstitute the CoC and thereby exclude various 3rd parties as mentioned in the Paragraph 6 as members of CoC;
(b) That this Hon'ble Tribunal be pleased to examine the contents of the present Application and after examining the same, be pleased to appoint a third party unbiased forensic transaction to audit the claims of various 3rd parties mentioned in Paragraph 6 of the IA and verify whether they fall under the category of preferential, undervalued, extortionate and fraudulent transactions and hit by provisions of IBC 2016 and the report should be placed on record of this Hon'ble Tribunal;
(c) That this Hon'ble Tribunal be pleased to examine the contents of the present Application and after examining the same, be pleased to direct the Resolution Professional to produce on record the documents on the basis of which the claims of 3rd parties as Company Appeal (AT) (Insolvency) No.1664 of 2024 16 mentioned in Paragraph 6 have been admitted along with copies of Form C submitted by the said 3rd parties;
(d) That this Hon'ble Tribunal be pleased to examine the contents of the present Application and after examining the same be pleased to issue appropriate directions to the Resolution Professional tp give appropriate explanation for its failure to identify the transactions of the Corporate Debtor with various 3rd parties as mentioned in Paragraph 6 as preferential, undervalued, fraudulent and extortionate transactions hit by the various provisions of IBC 2016;
(e) That this Hon'ble Tribunal be pleased to examine the contents of the present Application and after examining the same be pleased to direct the Resolution Professional to take appropriate steps to avoid the transactions on basis of which various 3rd parties have made claims before the Resolution Professional and till such decision not to allow the said 3rd parties as mentioned in Paragraph 6 from attending the COC;
(f) That this Hon'ble Tribunal be pleased to examine the contents of the present Application and after examining the same be pleased to declare the Deed of Guarantee dated 05/08/2023, 09/08/2023 and 16/08/2023 executed by and between the Corporate Debtor and various 3rd parties as preferential, undervalued, extortionate and fraudulent transaction hit by various provisions of IBC 2016;
(g) Pending the hearing and final disposal of the present Application, this Hon'ble Tribunal be pleased to stay the further process of CIRP of the Corporate Debtor;
(h) Pending the hearing and final disposal of the present Application, this Hon'ble Tribunal be pleased to restrain the Resolution Professional to conduct any further meetings of COC and Company Appeal (AT) (Insolvency) No.1664 of 2024 17 allowing the 3rd parties as mentioned in Paragraph 6 to attend the same;
(i) Interim and ad-interim in terms of prayer clause (a) to (h) kindly be granted;
(j) Any other such order/ directions as this Hon'ble Tribunal may deem fit and proper in the facts and circumstances of the case."
12. Before we proceed further, it is relevant to notice certain findings, which have been returned by the Adjudicating Authority in the impugned order while allowing IA No.2142 of 2023. It is necessary to extract various reasons given by the Adjudicating Authority for allowing the Application. We need to briefly notice the various reasons given by the Adjudicating Authority in the impugned order. While noticing the reasons, we shall be extracting the various findings as reflected in the order, which are contained in paragraphs 71, 72, 73, 75, 76, 78 and 81. The reasons given by Adjudicating Authority are as follows:
(i) "71. ... It is pertinent to take note that the advance copy of the CP 52 of 2023 was served upon the Corporate Debtor. It is after the service of this advance copy, the Respondent CD got into action and all these Loan Agreement and Deed of Guarantees cum Indemnity Agreement came into existence. The CP was served upon the CD on 4th July 2022. The execution of Deed of Guarantees cum Indemnity Agreement with R2 to R4 are dated 5.08.2022, 9.08.2022, and 16.08.2022 respectively. It deserves to be appreciated that all these documents were executed after the service of the petition upon the CD. This material fact itself is sufficient to cast doubt on intent of executing these documents and also intent of the CD. The RP relying upon these Deed of Company Appeal (AT) (Insolvency) No.1664 of 2024 18 Guarantees cum Indemnity Agreement have admitted the claims of the R2 to R4 as Unsecured Financial Creditors. It is observed that not only did these documents come into existence after the advance service of CP No. 52 of 2023 to the CD, but these documents were also executed against the loan agreement/ sanction letter with the Applicant Bank and without their prior consent. ..."
(ii) "71. ...Additionally, this Tribunal cannot overlook the fact that the CD, was declared an NPA on 31.12.2019, and it could not legally execute any Deed of Guarantees cum Indemnity Agreement. This act on the part of the CD is not only inappropriate but also irregular conduct..."
(iii) "71. ... This Tribunal is constrained to state that the RP in this case has failed to conduct himself in a fair and unbiased manner...."
In paragraph 73, following findings have been returned:
(iv) "73. ...Here it is important to take note that Respondent No.2's claim is admitted of Rs.1,95,28,11,699/- against the actual disbursement of nearly Rs.19,71,24,699/-. The fact of actual disbursement is of merely Rs. 19 crores is not disputed by either of the Respondents and or the RP and it is evident from the FORM C'..."
In paragraph 75 following findings have been returned:
(v) "75. Thus in the present case there is no disbursement of money by the SPVs/Private Respondent to the CD. The SPVs are not someone who are associated with the CD from the beginning rather they have been associated with the CD only after the contract having been assigned to the CD. Thus in view of the above stated judgement of the Hon'ble Supreme Court, these SPVs cannot be treated as Unsecured Financial Creditors of the Company Appeal (AT) (Insolvency) No.1664 of 2024 19 CD. In fact, the amounts have been disbursed by the Contractors to the Respondent SPVs. Thus it is evident that there is no privity of contract between the R2 to R4 with CD. In fact, the amounts so invested/ disbursed by the contractors of the Respondents SPVs (R2 to R4) have already been received back by the said Contracts/Creditors in circular flow of money."
In paragraph 76, following findings have been returned:
(vi) "76. It is a common trade practice that the PWD contributes 60% towards the project cost while the SPVs contributes 40% in the Escrow Account. As per the Escrow Account maintained by the Applicant Bank, against total amount of Rs.10,95,000/- credited from the period between August, 2022 till January 2023, an amount of Rs.19,73,11,473/- has been paid to R2 from the escrow account maintained by the Applicant Bank. Thus, 19 crores which is disbursed is actually received back by the Respondent No.2"
In paragraph 77, following findings have been returned:
(vii) "77. ....It deserves appreciation that the said Respondents have referred themselves (in documents executed between CD and R2 to R4) as Contractors. The Contractors by no means can be referred to as Financial Creditors but Operational Creditors. The MOU/ Agreement dated 18.06.2022 executed between CD and R2 to R4 clearly refer and define R2 to R4 as "EPC Contractor".
The relevant paras are reproduced as under For R2 AND M/S. SARATVAM CREATORS (M/s. SC) a Partnership Firm registered under the provision of the Indian Partnership Act 1932 having its registered office at Audumber App., Plot No. 57, Surendra Nagar, Nagpur, Maharashtra- 440015 Company Appeal (AT) (Insolvency) No.1664 of 2024 20 Hereinafter referred to as EPC Contractor on the SECOND PART which expression shall mean and include the firm, all its Present and Future Partners their heir successors legal representative executors administrative and assignees as of the other Party.
For R3
AND M/S. SPONDERE STRUCTURES (M/s. SS) a
Partnership Firm registered under the provision of the Indian Partnership Act 1932 having its registered office at Flat No. Saisurbhi Apartments, Hill Top Layout, Ambazari, Shankar Nagar, Nagpur, Maharashtra440015 Hereinafter referred to as EPC Contractor on the SECOND PART which expression shall mean and include the firm, all its Present and Future Partners their heir successors legal representative executors administrative and assignees as of the other Party.
Thus on the perusal of the above clauses it is established that R2 to R4 comes within the ambit of Operational Creditors and not unsecured Financial Creditors. Hence R2 to R4 be treated as Operational Creditors."
In paragraph 79, following findings have been returned:
(viii) "79. Further the Tribunal finds merit in the applicant's concerns regarding the R2 to R4 being related parties to CD. It is to be noted that M/s. Saratvam Creators has 3 partners namely Mr. Anand Deshmukh, Mr. Vilas Rathod, and Mr. Anil Sawarkar.
These alleged Partners are related Party. Mr. Anil Sawarkar is related to the Corporate Debtor since the year 2018. He stood as "Guarantor" for the loans availed by CD from "Pusad Urban Cooperative Bank Limited" at Nagpur. As, the CD defaulted in Company Appeal (AT) (Insolvency) No.1664 of 2024 21 repayment of its loans, the applicant Bank addressed a Notice dated 02/07/2021 to Corporate Debtor and marked the same to Mr. Anil Sawarkar. Further, even the Auction Notice issued by the applicant Bank clearly mentions the name of Mr. Anil Sawarkar as the Guarantor and related to CD. In addition, as per the submissions of the Applicant Bank that apart from other financial transactions/dealings between the CD and Mr. Anil Sawarkar, he has also provided certain collaterals for the loans availed by CD in the ordinary course of business. Thus, there is a deep entanglement between R2 and the CD. Thus they are related to each other. Mr. Anand Deshmukh is in fact, the Electrical Contractor of CD for its various Projects like Metro Project, HAM Project, etc. and monies have been received by him from time to time from the Escrow Account of the CD maintained by the Applicant Bank for the works carried out by him as a Contractor for the CD."
13. The above are the reasons, which have been noted by the Adjudicating Authority for allowing prayer (a) and (b) of the Application.
14. The first submission, which was advanced by the learned Counsel for the Appellant is that findings of the Adjudicating Authority on the record to hold the Appellant as 'related party' are not sustainable, since from the facts and findings as returned in paragraph 79 of the judgment, the ingredients of Section 5, sub-section (24) are not met. Shri Ramji Srinivasan submits that as per the law laid down by the Hon'ble Supreme Court in Phoenix ARC (P) Ltd. vs. Spade Financial Services Ltd. - (2021) 3 SCC 475, the related party has to be in praesenti only in order to attract the bar of becoming Member of the CoC. The three findings in paragraph 79 of the impugned order, it is Company Appeal (AT) (Insolvency) No.1664 of 2024 22 submitted that the Adjudicating Authority has recorded the Appellant as a related party (i) being a 'guarantor'; (ii) being a 'Electrical Contractor' for other project; and (iii) having received money by it from time to time from the Escrow Account of the Corporate Debtor. It is submitted that the above factors are totally alien to the concept of 'related party' and would not constitute any such relationship as understood in law. We have perused the findings recorded by the Adjudicating Authority in paragraph 79, the Adjudicating Authority in the impugned order has not spelt as to under which sub-clause of Section 5, sub- section (24), the Appellant is covered and can be held to be a 'related party'. The Adjudicating Authority's observation that Mr. Anil Sawarkar is related to the Corporate Debtor since the year 2018 and stood 'Guarantor' for the loan availed by the Corporate Debtor from Pusad Urban Co-operative Bank Limited at Nagpur, cannot be held to be a sufficient finding covering the Appellant within the definition of related party. It is relevant to notice that Adjudicating Authority by the impugned order has also directed for transaction audit report. We, thus, are of the view that sufficient finding not being returned by the Adjudicating Authority, holding the Appellant as 'related party', we need to proceed to consider the Appeal on the premise that Appellant is not a 'related party'. However, after transaction audit report is received, there shall be liberty to the parties to file fresh Application before the Adjudicating Authority on the basis of materials brought on record with transaction audit report regarding related party issue. We only clarify that our disapproval at Company Appeal (AT) (Insolvency) No.1664 of 2024 23 this stage of the finding of the Adjudicating Authority with regard to Appellant being a 'related party' shall not come in the way of the Adjudicating Authority to consider afresh the issue of 'related party' after the transaction audit report is received.
15. We have noticed the sequence of events that Corporate Debtor was declared NPA on 31.12.2019 and advance copy of Application was served on Corporate Debtor by the Bank of Maharashtra on 04.07.2022 and all documents pertaining to loan transaction with Appellant and SPV as well as Deed of Deed of Guarantee-cum-Indemnity executed on 05.08.2022. The Loan Agreement dated 05.08.2022 has been brought on record in the Appeal at page 118, where the Appellant is Lender, the SPV - Sudhir Constructions Infraspace (Shegaon Palkhi Road) Pvt. Ltd. is Borrower and Corporate Debtor
- Sudhir Construction Infraspace Pvt. Ltd. mentioned as Guarantor/ Indemnifier. Clause (i), (ii) and (iii) of the Loan Agreement are as follows:
"1. The Borrower has taken up a project named Ham Am-85, Improvement to Roads for Shegaon Palkhi Marg in Akola, Washim And Buldhana District joining to (Shegaon Nagzari Paras Nimkarda Gaigaon Akola Goregaon Mazoad Wadegaon Medshi Bramhanwada Dava Rasiod to Loni & Bibi to Kingaon Jattu) Length 82.00 Km (System No. 79181) (Lumprum Tender) on Hybrid Annuity Basis (hereinafter referred to as the said Project).
2. The Lender hereby has lent and agrees to lend an amount of up to Rs.195.00 Crores (Rupees One Hundred Ninety Five Crores Only) (hereinafter referred to as the "Loan Amount") to the Borrower from time Company Appeal (AT) (Insolvency) No.1664 of 2024 24 to time as and when required, subject to certain mutually decided terms and conditions as contained herein
3. The Guarantor/Indemnifier has undertaken Guarantee and Indemnity to make good the loss of Lender along with the interest if the borrower fails to repay such amount to the Lender."
16. A separate Deed of Guarantee-cum-Indemnity was also entered on the same date, i.e., 05.08.2022 in favour of the Lender.
17. Now, we come to the claim, which was filed by the Appellant before the IRP, which is filed at Annexure A-9 in the Appeal. The claim was submitted in Form-C dated 24.03.2023. Clauses 4, 5 and 6, which are relevant for this case, are as follows:
"4. Total amount of Principal: Rs.195,00,00,000/- (Rupees One Hundred Ninety Five Crores Only) claim (including any interest as at Interest: Rs.28,11,699 (Rupees Twenty the insolvency Eight Lakhs Eleven Thousand Six Hundred commencement Ninety Nine Only).
date) Total Claim: Rs.195,28,11,699/- (Rupees One Hundred Ninety Five Crores Twenty Eight Lakhs Eleven Thousand Six Hundred Ninety Nine Only) The particulars of claim and calculations of interest is attached as "Annexure C".
5. Details of Loan Agreement dated 05.08.2022 -
Annexure A and Guarantee Cum
documents by
Indemnity Dated 05.08.2022 - Annexure
reference to which B.
Company Appeal (AT) (Insolvency) No.1664 of 2024 25
the debt can be
substantiated
6. Details of how and SARATVAM CREATORS, a partnership firm when debt registered under the provisions of the incurred: Indian Partnership Act, 1932 having its registered office at Audumber App. Plot No. 57, Surendra Nagar, Nagpur Maharashtra 440015 has granted and committed to grant loan to the subsidiary of the Corporate Debtor namely Sudhir Constructions Infraspace (Shegaonpalkhi Road) Private Limited having CIN No. U45201MH2018PTC318026 and registered office at Mulik Complex Tenament, 17 No. Wardha Road NAGPUR Nagpur MH 440015.
We, Saratvam Creators are fully committed to disburse the total amount of loan as and when required by the Borrower (aforesaid Subsidiary company) for and upto the completion of project and we are also committed for existing and to the future liabilities of the project, if any.
The Corporate Debtor has given Guarantee-
cum- Indemnity to the SARATVAM CREATORS against the loan granted and agreed to grant to Sudhir Constructions Infraspace (Shegaon palkhi Road) Private Limited. The Loan Agreement is attached as Annexure-A to this Form and The Deed of Company Appeal (AT) (Insolvency) No.1664 of 2024 26 Guarantee-cum-Indemnification is attached as Annexure-B to the Form.
The aforesaid loan is secured by Hypothecation of Receivables of the subsidiary company - Sudhir Constructions Infraspace (Shegaon palkhi Road Private Limited) The Corporate Debtor has given Corporate Guarantee by Guarantee cum Indemnity dated 05.08.2022 at Annexure B above in favor of the Subsidiary as security for the repayment of all loan facilities as mentioned above."
18. Another documents, which is part of claim Form, is Annexure-C, which is calculation of interest, which is as follows:
"Saratvam Creators Annexure-C Calculations of Interest Total Claim Borrower Lender Amount Interest Amount Sudhir Construction Infraspace Pvt. Ltd.
(Shegaon Palkhi Road)
Pvt. Ltd. Saratvam
Creators 1,95,00,00,000 28,11,699 1,95,28,11,699
Total 1,95,00,00,000 28,11,699 1,95,28,11,699
Interest Rate 15%
Calculation of interest
Date 03-03-2023
Company Appeal (AT) (Insolvency) No.1664 of 2024 27
Date Amount no. of days Interest
02-01-2023 1,50,00,000 60 3,69,863
05-01-2023 1,75,00,000 57 4,09,932
16-01-2023 4,70,00,000 46 8,88,493
18-01-2023 3,00,00,000 44 5,42,466
09-02-2023 4,00,00,000 22 3,61,644
14-02-2023 2,90,00,000 17 2,02,603
17-02-2023 25,00,000 14 14,384
20-02-2023 1,50,000 11 678
27-02-2023 1,31,63,000 4 21,638
Total 19,43,13,000 28,11,699"
19. When we look into Annexure-C, amount mentioned as Rs.195 crores and interest mentioned as Rs.28,11,699/- and the calculation of interest is on different amount from 01.01.2023 to 27.02.2023 totaling to Rs.19,43,13,000/-. The chart of calculations of interest which is at Annexure-
C itself indicate that interest is being charged on the amount, which is Rs.19,43,13,000/-, which is claimed to be disbursed on different dates.
Column 6 of the claim form contained following submission:
"6. ....Saratvam Creators are fully committed to disburse the total amount of loan as and when required by the Borrower (aforesaid Subsidiary company) for and upto the completion of project..."
20. At this stage, we may consider the submission of the Appellant that disbursement of the whole loan money is not sine qua non to qualify as a Financial Creditor. The 'claim' is defined in Section 3, sub-section (6), in following words:
Company Appeal (AT) (Insolvency) No.1664 of 2024 28 "3(6) "claim" means -
(a) a right to payment, whether or not such right is reduced to judgment, 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 judgment, fixed, matured, unmatured, disputed, undisputed, secured or unsecured;"
21. Section 5, sub-section (7) defines 'financial creditor' in following words:
"(7) "financial creditor" means any person to whom a financial debt is owed and includes a person to whom such debt has been legally assigned or transferred to;"
22. The Financial Creditor, thus, is a person to whom financial debt is owed. The word 'debt' is defined in Section 3, sub-section (11), which is as follows:
"(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;"
23. Thus, there can be 'financial debt' only when liability or obligation in respect of a claim, which is due from any person. The whole claim of financial debt by the Appellant is on the basis of Deed of Guarantee-cum-indemnity dated 05.08.2022 executed by the Corporate Debtor. Clause 3 of Deed of Guarantee-cum-Indemnity as extracted above contains undertaking of Guarantor to make good the loss of lender, if the borrower fails to repay such amount to lender. Thus, there can be no liability of Guarantor, if principal borrower is not liable. We also need to notice the provisions of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Company Appeal (AT) (Insolvency) No.1664 of 2024 29 Persons) Regulations, 2016 (hereinafter referred to as the "CIRP Regulations"). Regulation 8, which deals with claim by 'financial creditors provides as follows:
"8. Claims by financial creditors.
(1) A person claiming to be a 32[financial creditor, other than a financial creditor belonging to a class of creditors, shall submit claim with proof] to the interim resolution professional in electronic form in Form C of the[Schedule-I ]:
Provided that such person may submit supplementary documents or clarifications in support of the claim before the constitution of the committee.
(2) The existence of debt due to the financial creditor may be proved on the basis of -
(a) the records available with an information utility, if any; or
(b) other relevant documents, including -
(i) a financial contract supported by financial statements as evidence of the debt;
(ii) a record evidencing that the amounts committed by the financial creditor to the corporate debtor under a facility has been drawn by the corporate debtor;
(iii) financial statements showing that the debt has not been 33[paid]; or
(iv) an order of a court or tribunal that has adjudicated upon the non-payment of a debt, if any."
24. When we look into Regulation 8, sub-regulation (2), which provides that existence of debt due to the Financial Creditor may be proved on the basis of
- (a) the records available with an information utility, if any, or (b) other relevant documents, including the record evidencing that the amounts Company Appeal (AT) (Insolvency) No.1664 of 2024 30 committed by the Financial Creditor to the Corporate Debtor under a facility has been drawn by the Corporate Debtor. Further, sub-regulation (b) (i) refers to a financial contract supported by financial statements as evidence of the debt. Thus, financial statements need to be brought on record evidencing that amounts committed by Financial Creditor to the Corporate Debtor under a facility has been drawn by the Corporate Debtor, are the statutory prescription for proving the existence of debt. The debt shall become due only when there is liability or obligation in respect of a claim, which is due from any person. Thus, unless the liability or obligation becomes due on the Corporate Debtor, who is liable to pay the debt to the Appellant, it cannot be said that the amount of Rs.195 crores for which facility was sanctioned has become due without disbursement of Rs.195 crores, so as to enable the RP to admit the claim of Rs.195 crores submitted by the Appellant. We, thus, are not persuaded to accept the submission of the Appellant that disbursement of the whole loan money is not a sine qua non to qualify as a Financial Creditor. The liability of the guarantor has to be the same as of the principal borrower. When Financial Creditor has not disbursed the amount of Rs.195 crores to the principal borrower, we fail to see that how against the guarantor, the claim of Rs.195 crores can be admitted.
25. The above statement clearly indicate that there is no statement that amount of Rs.195 crores have been disbursed, rather the Annexure-C, which is part of Form-C, itself makes it clear that amount disbursed is only Company Appeal (AT) (Insolvency) No.1664 of 2024 31 Rs.19,43,13,000 and Adjudicating Authority in paragraph 73, as extracted above has returned a finding that the "The fact of actual disbursement is of merely of Rs.19 crores is not disputed by either of the Respondents and or the RP and it is evident from the FORM C". When actual disbursement claimed in Form-C by the Appellant was only Rs.19,43,13,000/-, on which interest was also claimed, we fail to see on what basis RP admitted claim of Rs.195,28,11,699/-. The admission of claim of Rs.195,28,11,699/- on the face of it unsustainable and is a callous act on the part of the RP. This, we are observing without entering any other aspect, which has been found by the Adjudicating Authority with regard to claim of the Appellant. On the very face of claim in Form-C, the admission of claim of Rs.195,28,11,699 was unsustainable and Adjudicating Authority has not committed any error in ousting the Appellant from the CoC.
26. We have further noticed that from the Escrow Account, which was maintained with the Bank of Maharashtra, which contained contribution of PWD of 60% and 40% contribution by SPV within the period August 2022 to January 2023, an amount of Rs.19,73,11,473/- has been paid to the Appellant. Whereas amount credited in Escrow Account was only Rs.10,95,00,000/- as per the finding returned in paragraph 76 by the Adjudicating Authority. The details of the Escrow Account was filed by the Bank of Maharashtra before the Adjudicating Authority as part of its Application, which has also been brought on the record along with additional Company Appeal (AT) (Insolvency) No.1664 of 2024 32 affidavit filed by the Bank of Maharashtra. Respondent No.2 has received back more amount than the amount it disbursed to the SPV. The claim of the financial debt of the Appellant raises questions and doubts. The present is a case where disbursement as claimed by the Appellant is not to the Corporate Debtor, but to the SPV and the claim was filed by the Appellant on the basis of Loan Agreement and Deed of Guarantee-cum-Indemnity.
27. The Hon'ble Supreme Court in Anuj Jain IRP for J.P. Infra vs. Axis Bank Ltd. and Ors. - (2020) 8 SCC 401 had occasion to consider nature of financial debt, which need to be proved within the meaning of Section 5, sub- section (8) of the IBC. Various ingredients of the financial debt, which required to be proved for holding a creditor as 'Financial Creditor' has been examined and delineated by the Hon'ble Supreme Court. The Hon'ble Supreme Court in Anuj Jain's case has also referred to and relied earlier judgment of Swiss Ribbons Pvt. Ltd. and anr. vs. Union of India and Ors. - (2019) 4 SCC 17. The relevant paragraph of the judgment in Swiss Ribbons has been quoted by the Hon'ble Supreme Court in Anuj Jain's case. In paragraph 42.1 and 42.2, the Hon'ble Supreme Court in Anuj Jain's case has extracted the relevant declaration of law in Swiss Ribbons's case, which are as follows:
"42.1. The broad features of the expressions used in Sections 5(7) and 5(8) of the Code in defining the terms "financial creditor" and "financial debt" were indicated by this Court in Swiss Ribbons [Swiss Ribbons (P) Ltd. v. Union of India, (2019) 4 SCC 17] in the following : (SCC p. 64, para 42) Company Appeal (AT) (Insolvency) No.1664 of 2024 33 "42. A perusal of the definition of "financial creditor" and "financial debt" makes it clear that a financial debt is a debt together with interest, if any, which is disbursed against the consideration for time value of money. It may further be money that is borrowed or raised in any of the manners prescribed in Section 5(8) or otherwise, as Section 5(8) is an inclusive definition. On the other hand, an "operational debt" would include a claim in respect of the provision of goods or services, including employment, or a debt in respect of payment of dues arising under any law and payable to the Government or any local authority."
42.2. The unique position assigned to a "financial creditor", who plays a crucial role in insolvency resolution process as against the role of other creditors, has been extensively explained by this Court in Swiss Ribbons [Swiss Ribbons (P) Ltd. v. Union of India, (2019) 4 SCC 17] , albeit in the context of its differentiation with the category of "operational creditor", in the following : (SCC pp. 68-69 & 83-84, paras 50-51 & 75) "50. According to us, it is clear that most financial creditors, particularly banks and financial institutions, are secured creditors whereas most operational creditors are unsecured, payments for goods and services as well as payments to workers not being secured by mortgaged documents and the like. The distinction between secured and unsecured creditors is a distinction which has obtained since the earliest of the Companies Acts both in the United Kingdom and in this country. Apart from the above, the nature of loan agreements with financial creditors is different from contracts with operational creditors for supplying goods and services. Financial creditors generally lend finance on a term loan or for working capital that enables the corporate debtor to either set up and/or operate its business. On the other hand, contracts with operational creditors are relatable to supply of goods and services in the operation of business. Financial contracts generally involve large sums of money. By way of contrast, operational contracts have dues whose quantum is generally less. In the running of a business, operational creditors can be many as opposed to financial Company Appeal (AT) (Insolvency) No.1664 of 2024 34 creditors, who lend finance for the set-up or working of business. Also, financial creditors have specified repayment schedules, and defaults entitle financial creditors to recall a loan in totality. Contracts with operational creditors do not have any such stipulations. Also, the forum in which dispute resolution takes place is completely different. Contracts with operational creditors can and do have arbitration clauses where dispute resolution is done privately. Operational debts also tend to be recurring in nature and the possibility of genuine disputes in case of operational debts is much higher when compared to financial debts. A simple example will suffice. Goods that are supplied may be substandard. Services that are provided may be substandard. Goods may not have been supplied at all. All these qua operational debts are matters to be proved in arbitration or in the courts of law. On the other hand, financial debts made to banks and financial institutions are well documented and defaults made are easily verifiable.
51. Most importantly, financial creditors are, from the very beginning, involved with assessing the viability of the corporate debtor. They can, and therefore do, engage in restructuring of the loan as well as reorganisation of the corporate debtor's business when there is financial stress, which are things operational creditors do not and cannot do. Thus, preserving the corporate debtor as a going concern, while ensuring maximum recovery for all creditors being the objective of the Code, financial creditors are clearly different from operational creditors and therefore, there is obviously an intelligible differentia between the two which has a direct relation to the objects sought to be achieved by the Code.
* * *
75. Since the financial creditors are in the business of moneylending, banks and financial institutions are best equipped to assess viability and feasibility of the business of the corporate debtor. Even at the time of granting loans, these banks and financial institutions undertake a detailed market study which includes a techno-economic valuation Company Appeal (AT) (Insolvency) No.1664 of 2024 35 report, evaluation of business, financial projection, etc. Since this detailed study has already been undertaken before sanctioning a loan, and since financial creditors have trained employees to assess viability and feasibility, they are in a good position to evaluate the contents of a resolution plan. On the other hand, operational creditors, who provide goods and services, are involved only in recovering amounts that are paid for such goods and services, and are typically unable to assess viability and feasibility of business. The BLRC Report, already quoted above, makes this abundantly clear."
(emphasis supplied)"
28. In paragraph 42.3 of Anuj Jain's case the Hon'ble Supreme Court noticed the important features as was highlighted in the Swiss Ribbons that the Financial Creditor is, from the very beginning, involved in assessing the viability of the Corporate Debtor who can, and indeed, engage in restructuring of the loan as well as reorganization of the Corporate Debtor's business where there is financial stress. It was held that Financial Creditor is not only about in terrorem clauses for repayment of dues, it has the unique parental and nursing roles too. In paragraph 42.3, following was held:
"42.3. The enunciation aforementioned illuminates the reasons as to why at all a financial creditor is conferred with a major, rather pivotal, role in the processes contemplated by Part II of the Code. It is the financial creditor who lends finance on a term loan or for working capital that enables the corporate debtor to set up and/or operate its business; and who has specified repayment schedules with default consequences. The most important feature, as this Court has said, is that a financial creditor is, from the very beginning, involved in assessing the viability of the corporate debtor who can, and indeed, engage in restructuring of the loan as well as reorganisation of the corporate debtor's business when there is financial stress. Hence, a financial creditor is not Company Appeal (AT) (Insolvency) No.1664 of 2024 36 only about in terrorem clauses for repayment of dues; it has the unique parental and nursing roles too. In short, the financial creditor is the one whose stakes are intrinsically interwoven with the well-being of the corporate debtor."
29. Further, the Hon'ble Supreme Court in paragraph 50, reiterated the enunciation as made by Hon'ble Supreme Court in Swiss Ribbons. In paragraph 50, following observation was made:
"50. A conjoint reading of the statutory provisions with the enunciation of this Court in Swiss Ribbons [Swiss Ribbons (P) Ltd. v. Union of India, (2019) 4 SCC 17] , leaves nothing to doubt that in the scheme of the IBC, what is intended by the expression "financial creditor" is a person who has direct engagement in the functioning of the corporate debtor; who is involved right from the beginning while assessing the viability of the corporate debtor; who would engage in restructuring of the loan as well as in reorganisation of the corporate debtor's business when there is financial stress. In other words, the financial creditor, by its own direct involvement in a functional existence of corporate debtor, acquires unique position, who could be entrusted with the task of ensuring the sustenance and growth of the corporate debtor, akin to that of a guardian. In the context of insolvency resolution process, this class of stakeholders, namely, financial creditors, is entrusted by the legislature with such a role that it would look forward to ensure that the corporate debtor is rejuvenated and gets back to its wheels with reasonable capacity of repaying its debts and to attend on its other obligations. Protection of the rights of all other stakeholders, including other creditors, would obviously be concomitant of such resurgence of the corporate debtor."
30. One of the submission, which has been advanced by learned Counsel for the Appellant that in any view of the matter, the Appellant is a 'secured creditor'. The learned Counsel for the Appellant has relied on Clauses 5 and 6 of the Agreement dated 05.08.2024, which are as follows:
Company Appeal (AT) (Insolvency) No.1664 of 2024 37 "5. SECURITY This loan shall be secured by way of fire and exclusive charge by way for Hypothecation on the Borrower's entire present and future receivables of any kind from the said Project, to the extent along with applicable interest and default interest as defined in the agreement.
6. GUARANTEE / INDEMNITY:
6.1 The Guarantor / Indemnifier unconditionally and irrevocably agree and undertakes to repay the amount granted by the Lender to the Borrower as and when demanded by Lender without any delay, demur or objection. ....(see the whole provision)
31. The learned Counsel for the Appellant in support of his submission has also relied on judgment of the Hon'ble Supreme Court in Paschimanchal Vidyut Vitran Nigam Ltd. (supra). In the above case, Paschimanchal Vidyut Vitran Nigam Ltd. ("PVVNL") has got assets of Corporate Debtor attached by District Magistrate and Tahsildar against the outstanding electricity dues of the PVVNL. In the liquidation proceedings, the Liquidator filed an Application seeking a direction to the District Magistrate and Tahsildar to release the property from attachment, to enable its sale and after realization of value for distributing the proceeds in accordance with the provisions of the IBC. The Application was allowed by the NCLT and Appeal filed by PVVNL before this Tribunal was also dismissed. Challenging the aforesaid order, the Appeal was filed in the Hon'ble Supreme Court and the Hon'ble Supreme Court in paragraph 1 and 2 of the judgment noticed following:
"1. The appellant Paschimanchal Vidyut Vitran Nigam Ltd. (hereinafter "PVVNL") is aggrieved by an order [Paschimanchal Vidyut Vitran Nigam Company Appeal (AT) (Insolvency) No.1664 of 2024 38 Ltd. v. Raman Ispat (P) Ltd., 2019 SCC OnLine NCLAT 883] of the National Company Law Appellate Tribunal (hereinafter "NCLAT") which rejected its appeal against an order [Raman Ispat (P) Ltd. v. Paschimanchal Vidyut Vitran Nigam Ltd., 2018 SCC OnLine NCLT 25732] of the National Company Law Tribunal, Allahabad (hereinafter "NCLT"/"adjudicating authority"), which allowed an application directing the District Magistrate and Tahsildar, Muzaffarnagar to immediately release property (which was previously attached at the request of the appellant) in favour of the liquidator of the respondent Raman Ispat Pvt. Ltd. (hereinafter "corporate debtor") for enabling its sale, and after realisation of its value, for distributing the proceeds in accordance with the provisions of the Insolvency and Bankruptcy Code, 2016 (hereinafter "IBC"/"Code").
2. The parties had entered into an agreement on 11-2-2010 for supply of electricity. Clause 5 of the agreement provided that:
"The outstanding dues will be a charge on the assets of the company. Before sale is made, the outstanding dues will be cleared and, (in) the alternative the deed to agreements/sale will specifically mention the outstanding dues and the method of its payment.""
32. In the above case there was categorical finding by NCLT and NCLAT that PVVNL was a 'secured creditor'. Whereas in the present case, the issue that the Appellant is a 'secured creditor' does not appear to have neither raised nor gone into by the Adjudicating Authority. We, thus, are of the view that ends of justice will be served in giving liberty to the Appellant to file a fresh Application seeking its claim to be recognized as a 'secured creditor'.
33. Looking to the facts and sequence of event, the Adjudicating Authority has rightly directed for forensic transaction auditor to look into the Company Appeal (AT) (Insolvency) No.1664 of 2024 39 transactions, which were claimed by the Appellant on the basis of Loan Agreement and Deed of Guarantee-cum-Indemnity dated 05.08.2022.
34. We have already noticed that in the claim Form, which was filed by the Appellant before the RP, disbursement was claimed for an amount of Rs.19,43,13,000/-. We have already noticed above that from the Escrow Account, maintained by the Bank of Maharashtra, the Appellant received the amount of Rs.19,73,11,473/-. As noted above, the initial Agreement between the Appellant and the SPV dated 18.06.2022 was as EPC Contractor, where as EPC Contractor the Appellant had to carry out the contract and he was also obliged to arrange for finances. It was only subsequently on 05.08.2022, the Loan Agreement was entered by the Appellant, SPV and the Corporate Debtor. In view of the fact that Adjudicating Authority has directed for transaction audit report, we are of the view that after receipt of the transaction audit report, the Appellant be given liberty to file a fresh Application for its claim as secured creditor/ Financial Creditor, which Application need to be considered afresh on the basis of materials, which may come on record in transaction audit report. The transaction audit report, definitely will throw considerable light on the nature of transaction, which is claimed to be entered on 05.08.2022 by the Corporate Debtor, SPV and the lender - Appellant.
35. We may also notice few cases, which have been relied by Respondent No.7 in is written submissions. The first case relied by Respondent No.7 is judgment of United States Court of Appeals for the Ninth Circuit in Cliffford Company Appeal (AT) (Insolvency) No.1664 of 2024 40 Tindall and Ors. Vs. First Solar Incorporated and Ors. (2018) SCC OnLine US CA 9C 123. The above Appeal was filed by Plaintiff for dismissal of their shareholder derivative action under Federal Rule of Civil Procedure 23.1. We fail to see that how the said judgment has any relevance in the present case arising out of insolvency proceedings, which is covered by the IBC and Regulations framed thereunder.
36. The second case relied by Respondent No.7 is judgment of Hon'ble Supreme Court of Canada in Douglas Kerr, S. Grace Kerr vs. Danier Leather Inc., (2007) SCC OnLine Can SC 44. The question, which was raised in the said case, has been noticed in paragraph 1 of the judgment, which is as follows:
"1. This appeal raises questions about the continuous disclosure obligations of an issuer seeking to sell its shares to the public by a prospectus governed by the Ontario Securities Act, R.S.O. 1990, c. S.5. Purchasers under a prospectus are given a statutory right of action if the prospectus or any amendment contains a misrepresentation against the issuer and officers of the issuer who signed the prospectus."
37. We fail to see that how the said case has any relevance in the present case.
38. The third case relied by learned Counsel for Respondent No.7 is judgment of Bombay High Court in (2014) 4(5) Mh. L.J. in royal Power turnkey Implements Pvt. Ltd. vs. Maharashtra Industrial Development Company Appeal (AT) (Insolvency) No.1664 of 2024 41 Corporation, Mumbai. The above was a case where writ petition was filed by a Company praying for quashing and setting aside the Tender Notice published by Maharashtra Industrial Development Corporation, Mumbai. Paragraph 2 of the judgment, notices as follows:
"2. By the instant petition, the petitioner, which is a private limited Company, is praying for quashing and setting aside the tender notice No. 31/2013-14, published by the respondent No. 1 - Maharashtra Industrial Development Corporation, Mumbai (For short, "the MIDC"), and for declaring that the action of the respondent No. 1 in inviting fresh tenders for the work which was already tendered by it, is contrary to the principles of natural justice and fair play."
39. We again fail to see any relevance of the said judgment in the facts of the present case.
40. Learned Counsel for the Bank of Maharashtra has also relied on Sanction Letter dated 04.04.2018, filed along with the Additional Affidavit, under which the Corporate Debtor was obliged to obtain NOC from the Bank for creating any charge or an encumbrance over its undertaking. The Deed of Guarantee-cum-Indemnity dated 05.08.2022 was executed by the Corporate Debtor without taking any no-objection from the Bank. Further there is no contemporaneous letter of Corporate Debtor of even informing the Bank of the Deed of Guarantee-cum-Indemnity dated 05.08.2022.
41. In view of foregoing discussions and our conclusions, we do not find any ground to interfere with the impugned order passed in the present Appeal. However, in view of the fact that Adjudicating Authority has directed for Company Appeal (AT) (Insolvency) No.1664 of 2024 42 transaction audit report, which report was to be received within 60 days, in the facts of present case, we are of the view that ends of justice will be served in giving liberty to both the parties to file fresh Application with regard to:
(A) Whether any material comes in the light of transaction audit report on the basis of which Appellant can be held to be 'related party'?
(B) Whether on the basis of transaction audit report, there is any ground by the Appellant to claim itself as Financial Creditor/ secured creditor?
42. We, thus, dispose of this Appeal in following manner:
(1) The order dated 02.08.2024 passed by National Company Law Tribunal in IA No.2142 of 2023 is not interfered with.
(2) On the basis of transaction audit report, it shall be open for the parties to make fresh Application before the Adjudicating Authority with regard to status of the Appellant as 'related party'.
(3) On the basis of transaction audit report, specially with regard to Agreements dated 05.08.2022, the Appellant will be at liberty to file fresh Application to accept his claim as Financial Creditor/ secured creditor.
Company Appeal (AT) (Insolvency) No.1664 of 2024 43
43. We further clarify that while considering the Applications, with regard to which liberty has been granted as above, the observations made by Adjudicating Authority in order dated 02.08.2024, shall not come in the way of fresh consideration. The parties shall bear their own costs.
[Justice Ashok Bhushan] Chairperson [Mr. Barun Mitra] Member (Technical) [Arun Baroka] Member (Technical) NEW DELHI 26th September, 2024 Ashwani Company Appeal (AT) (Insolvency) No.1664 of 2024 44