Gujarat High Court
Talha Sareshwala S/O Yunus Sareshwala vs Parsoli Motors Works Pvt. Ltd. on 20 October, 2020
Author: Ashutosh J. Shastri
Bench: Ashutosh J. Shastri
C/SCA/11985/2020 JUDGMENT
IN THE HIGH COURT OF GUJARAT AT AHMEDABAD
R/SPECIAL CIVIL APPLICATION NO. 11985 of 2020
FOR APPROVAL AND SIGNATURE:
HONOURABLE MR. JUSTICE ASHUTOSH J. SHASTRI
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1 Whether Reporters of Local Papers may be allowed to see the YES
judgment ?
2 To be referred to the Reporter or not ? YES
3 Whether their Lordships wish to see the fair copy of the NO
judgment ?
4 Whether this case involves a substantial question of law as to NO
the interpretation of the Constitution of India or any order made
thereunder ?
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TALHA SARESHWALA S/O YUNUS SARESHWALA
Versus
PARSOLI MOTORS WORKS PVT. LTD.
================================================================
Appearance:
MR NAVIN PAHWA, SENIOR ADVOCATE WITH MR ARJUN R
SHETH(7589) for the Petitioner(s) No. 1
for the Respondent(s) No. 1,2,3,4
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CORAM:HONOURABLE MR. JUSTICE ASHUTOSH J. SHASTRI
Date : 20/10/2020
ORAL JUDGMENT
1. The present petition under Article 226 of the Constitution of India is filed for the purpose of seeking following reliefs:
"a. In the light of the peculiar facts and circumstances of the present case, be pleased to issue writ of certiorari and/ or any other appropriate writ and/or pass any other appropriate order setting aside and quashing the impugned Page 1 of 28 Downloaded on : Tue Oct 20 20:58:34 IST 2020 C/SCA/11985/2020 JUDGMENT orders dt. 4.6.2020 passed by the National Company Law Tribunal, Ahmedabad in CP (IB) No.161 of 2017 and IA No.300 of 2018 in CP (IB) No.161 of 2017;
b. Pending admission, hearing and final disposal of the present writ petition, this Hon'ble Court be pleased to ;
(i) stay the operation and implementation of the impugned orders dt. 4.6.2020 passed by the National Company Law Tribunal, Ahmedabad in CP (IB) No.161 of 2017 and IA No.300 of 2018 in CP (IB) No.161 of 2017.
c. ex-parte ad-interim / interim reliefs in terms of paragraph 105(b) hereinabove; and/or d. any other order(s) that this Hon'ble Court deems fit."
2. The case of the petitioner is that the petitioner is the Promoter, Share Holder and suspended Board of Director of Corporate Debtor. The respondent No.1 is now the Corporate Debtor represented through the Resolution Professional (RP) being Mr.Krishna Chamadia, whereas the respondent No.2 is the manufacturer of BMW vehicles, who had given dealership of BMW Vehicles to the Corporate Debtor in the territory of State of Gujarat from the year 2007 to 2017 and was party respondent in IA No.300 of 2018 (Section 65 Application) filed by CD citing fraudulent / malicious petition. Whereas the respondent No.3 is a group Company of respondent No.2 that had filed the Insolvency Petition being CP (IB) No.161 of 2017 against the Corporate Debtor (CD), whereas the respondent No.4 is the Interim Resolution Professional (IRP) that came to be appointed as IRP of the CD vide impugned order and thereafter, replaced by the said RP.
2.1 The little facts emanating this controversy which are Page 2 of 28 Downloaded on : Tue Oct 20 20:58:34 IST 2020 C/SCA/11985/2020 JUDGMENT projected before the Court are that CD and respondent No.3, who is BMW India Financial Services Private Limited had been entering into dealership agreement for selling BMW vehicles in the State of Gujarat since 2017. It has been asserted on oath by petitioner that from time to time, new agreements were executed / renewal letters were signed to continue the dealership. Each time, the dealership agreement was entered into between respondent No.2 and CD and the same was for duration of only one year with the understanding between CD and respondent No.2 that in the event there was no adverse cause, then respondent No.2 would continue to renew the dealership agreement because dealership agreement requires large capital investment on the part of CD. According to the petitioner, the dealership agreement came to be renewed in the year 2007 to 2013 and CD was given the territory of Gujarat for sale of BMW vehicles and no other dealer in India was given the territory of Gujarat for such sale. The last dealership agreement entered into between CD and respondent No.2 on 14.1.2015 which contains an arbitration clause. Now, this dealership agreement has been entered into by CD with not respondent No.3 but with respondent No.2 which is BMW India Private Limited. According to the petitioner, the last dealership agreement was to expire on 31.12.2017 in view of letter dated 9.1.2017.
2.2 It is the case of the petitioner that simultaneously, there also an execution of Deferred Payment Facility Agreement dated 15.11.2010 between CD and respondent No.3 which is a financial company in the name of BMW India Financial Services Private Limited. The respondent No.3 executed the separate Page 3 of 28 Downloaded on : Tue Oct 20 20:58:34 IST 2020 C/SCA/11985/2020 JUDGMENT agreement in relation to the sale of BMW vehicles by the respondent No.2 to the CD. Two separate agreements came to be executed by respondent No.2, a financial company, with CD being Floorplan Financing Agreement dated 15.11.2010 and Working Capital Demand Credit Facility Agreement dated 28.6.2014. According to the petitioner, these agreements also contained an arbitration clause. That during the year 2014, the respondent No.2 i.e. BMW India Private Limited allowed dealers from outside Gujarat to sell to the customers based in Gujarat and that has created a tremendous amount of loss to CD, because each BMW vehicle has a large ticket size being large amount of revenue in question. As a result of this, the CD raised a grievance before the respondent No.2. In the wake of territory infringement as stated above, there was exchange of correspondence between CD and respondent No.2 during the year 2014-15 in which according to the CD, vide E-mail dated 21.8.2015 the respondent No.2 has admitted that the count of all such BMW vehicles sold by dealers outside Gujarat to the customers based in Gujarat, would be given to CD and as such, an assurance was given to take care of the financial crunch of the CD. According to the petitioner, approximately 600 cars for 4 years i.e. from 2014 to 2017, were sold from outside Gujarat to the customers based in Gujarat which has caused an average ticket size of Rs.45 lakhs amount to revenue approximately Rs.70 crores each year on conservative side. The petitioner has come out with a case that respondent No.2 did not respond to these details till date. Hence, there is a deemed admission. Since the respondent No.2 was profiting out of this kind of sale from outside territory, did not take up the issue seriously and all the time with a dishonest and fraudulent intention the respondent Page 4 of 28 Downloaded on : Tue Oct 20 20:58:34 IST 2020 C/SCA/11985/2020 JUDGMENT No.2 - BMW India Private Limited (not respondent No.3) induced CD to enter into dealership agreement from the year 2014. Huge capital investment was incurred by CD in setting up a new showroom facility at Ahmedabad, in addition to the places at Surat, Rajkot which roughly around Rs.30 crores and this was very much within the knowledge of respondent No.2. It was also within the knowledge of respondent No.2 company that CD effectively made approximately Rs.3 crores as a profit each year. But then conveniently ignored the plight of CD, who is suffering tremendous amount of injury and loss and simply was gaining unfair advantage for sale of BMW vehicles to the customers of Gujarat by hook and by crook. This has resulted into not only series of exchange of correspondence between CD and respondent No.2 but, simultaneously also, resulted into initiation of seeking arbitration since the CD was compelled to file an Arbitration Petition No.204 of 2020 in the High Court of Delhi at New Delhi.
2.3 In parallel, according to the petitioner, with a view to take advantage of this situation, the respondent No.3 i.e. BMW India Financial Services Private Limited filed Section 7 petition under the provision of the Insolvency and Bankrupcy Code, 2016 (for short "IB Code") against CD in and around November, 2017 for the dues of sale of BMW vehicles by respondent No.2 to CD on which financial assistance being provided. According to the petitioner, without placing a single bank statement on record to show that respondent No.3 had made any payment to respondent No.2, the said application is registered as Company Petition (IB) No.161 of 2017 before the Hon'ble National Company Law Tribunal at Ahmedabad. According to the CD, Page 5 of 28 Downloaded on : Tue Oct 20 20:58:34 IST 2020 C/SCA/11985/2020 JUDGMENT said Insolvency Petition had been filed by respondent No.3 in relation to purported claims due in relation to the MBW vehicles sold by respondent No.2 to CD and by asserting this, the CD has stated in this petition that since the management of respondent No.2 and respondent No.3 being part of the same group of companies, the aforesaid events of fraud perpetrated by respondent No.2 towards CD were to the knowledge of respondent No.3 and it is nothing but a collusive and fraudulent proceedings initiated by respondent No.3 against CD. It is further the case of the petitioner that present Insolvency Petition No.161 of 2017 is with an aim to resolve the debts of the CD and CD can be salvaged by filing of a resolution plan by any resolution CD. The CD had no other business other than this dealership of sale of BMW vehicles which was well within the knowledge of both the respondent Nos.2 and respondent No.3 and this move has taken place against CD on account of the further fact that respondent No.2 had issued letter on 7.12.2017 informing CD that it had no intention of renewing dealership agreement and as such, the respondents knew that there was not going to be any resolution plan in place because there was not going to be any dealership agreement subsisting making the present Insolvency Petition malicious and fraudulent in nature. According to the petitioner, BMW group not only did not renew the dealership agreement for the year 2018 at the last minutes but, then filed present petition which could not be for the purpose of resolving the debts because without dealership agreement, since CD has no business. In this eventuality, it seems that CD moved an application raising all these contentions against respondent No.2 and respondent No.3 which was registered as IA No.300 of 2018 along with copies of reply Page 6 of 28 Downloaded on : Tue Oct 20 20:58:34 IST 2020 C/SCA/11985/2020 JUDGMENT and other sets of documents. Prior to this, in and around December, 2017 and January, 2018, the CD had also filed one application as stated above under Section 9 of the Arbitration and Conciliation Act, 1996 which was registered as O.M.P (I) (COMM.) 559 of 2017 against respondent No.2 and respondent No.3. But the said application came to be dismissed on 15.1.2018 and in the light of aforesaid sequence of events, the CD issued notice on 18.7.2018 to respondents invoking arbitration, requesting for the matter to be referred to composite arbitration between CD and respondents. According to the petitioner, by placing reliance upon the principle laid down by the Apex Court in (2013) 1 SCC 64, a request was made to refer the matter to composite arbitration since the transactions in question are intrinsically connected to each other and the agreements are with group companies being respondent Nos.1 and 2, who have ultimately the same owner being BMW AG. The respondent No.1 vide their letters dated 7.8.2018 and 9.8.2018 respectively, had denied referral of disputes to the arbitration. As a result of this, around 6.12.2019, a petition was filed under Section 11 being Arbitration Petition No.204 of 2020 under Arbitration and Conciliation Act, 1996 before the Delhi High Court for seeking to appoint arbitrators in the dispute between the CD and the BMW group. On 2.6.2020, the Delhi High Court has issued noticed to BMW group. By that time, since the process was on before the NCLT, Ahmedabaad, on 4.6.2020 the impugned order came to be passed in the aforesaid Insolvency Petition, wherein inter-alia respondent No.4 came to be appointed as IRP of CD. On 30.6.2020, through E-mail, the CD intimated the IRP of the entire background and had explained as to how it is that corporate debtor had a claim of approximately Page 7 of 28 Downloaded on : Tue Oct 20 20:58:34 IST 2020 C/SCA/11985/2020 JUDGMENT Rs.110 crores against BMW group and in which circumstance, Section 11 petition came to be filed in Delhi High Court which is now listed on 3.7.2020. In view of the impugned order passed by NCLT, in a 2nd E-mail dated 30.6.2020, the suspended management intimated the Interim Resolution Professional also of the proceedings before DRT, Ahmedabad filed by Axis Bank where the BMW group have illegally invoked the bank guarantee in its favour pursuant to which Axis Bank had filed the recovery suit against the corporate debtor in the DRT, Ahmedabad and that such claim of Axis Bank was also disputed and intermingled with the dispute with the BMW group. On 2.7.2020, the advocate of the suspended management who earlier represented the Corporate Debtor before the Delhi High Court, received e- mail from advocate hired by Interim Resolution Professional, and informed that they would appear for Interim Resolution Professional, old advocates could appear for the Corporate Debtor for the hearing dated 30.7.2020 and further appearances would be subject to the instructions of the Interim Resolution Professional.
2.4 According to the petitioner, in July, 2020, when the matter was called out before the Delhi High Court being the arbitration petition seeking appointment of arbitrator, the advocates appearing for the Interim Resolution Professional made a statement before the High Court that after reviewing the relevant information in the present matter, it was the Interim Resolution Professional that would decide whether to pursue the present petition further or not and according to the petitioner, this statement goes to show that Interim Resolution Professional was, in fact, acting at the behest of the BMW group, to whom the Page 8 of 28 Downloaded on : Tue Oct 20 20:58:34 IST 2020 C/SCA/11985/2020 JUDGMENT Interim Resolution Professional has given 88.57% voting share in the Committee of Creditors, who will decide the fate of corporate insolvency resolution process of the CD.
3. Now, it is in this background of fact, by raising several issues and the multiple contentions, the petitioner, who is the promoter, shareholder and suspended Board of Director, has invoked extraordinary jurisdiction of this Court under Article 226 of the Constitution of India and prays for the reliefs which are stated herein-above.
4. Mr.Navin Pahwa, learned Senior Advocate appearing with Mr.Arjun R. Sheth, learned advocate for the petitioner, has argued the matter at length and taken the Court to chronology of events and has raised multiple contentions.
5. Shri Navin Pahwa, learned Senior Advocate has submitted that there were several contentions raised before the NCLT, Ahmedabad but while passing the order impugned in the petition, the same appears to have not been dealt with. In the written objection, a specific contention is raised that in the background of facts, Section 7 application is not maintainable. On the contrary, the same was to be treated as application under Section 9 of the Act and further, the claim which relates to the dispute cannot be treated as a financial debt, it may be at the best an operational debt, because the claim generated out of the transactions related to sell of vehicles and, therefore, though specific contention is raised with regard to this, the NCLT has not dealt with the same.
Page 9 of 28 Downloaded on : Tue Oct 20 20:58:34 IST 2020C/SCA/11985/2020 JUDGMENT 5.1 Shri Navin Pahwa, learned Senior Advocate has further submitted that the order impugned in the petition suffers from the vice of non-application of mind and reflects mechanical exercise of jurisdiction. What was expected to be examined by NCLT was that whether it is the petition under Section 7 of the Act or not and thereto, by a financial creditor. In fact, the respondent Nos.2 and 3 are out of the very same group, they are to be treated as Operational Creditors and not the Financial Creditors. If the order in question is allowed to stand in view of the scheme of Section 7 of the Act, the Committee will be controlled by the respondents since the Interim Resolution Professional has given 88.57% voting share to the respondents in committee of creditors. On the contrary, according to Shri Navin Pahwa, learned Senior Advocate, a substantive claim of Rs.110 crores is long standing against the respondents, for which the process of seeking arbitration was also set in motion. Shri Navin Pahwa, learned Senior Advocate, has submitted that in that proceedings as well, whether to precipitate any further or not or whether to represent or not, was still not clarified which would indicate that the respondents will govern and control the further process. Shri Navin Pahwa, learned Senior Advocate, has further contended that a serious issue is arising in Section 7 application before the NCLT that if the same is to be processed strictly according to Section 7, then CD will be losing right of prosecution and this right of prosecution either of the CD or present petitioner under the scheme since thwarted, is nothing but, violative of fundamental right conferred under Article 14 of the Constitution of India. Since this issue cannot be gone into by NCLT about infringement of fundamental right of the petitioner, it is only the High Court which is an efficacious remedy.
Page 10 of 28 Downloaded on : Tue Oct 20 20:58:34 IST 2020C/SCA/11985/2020 JUDGMENT 5.2 Shri Navin Pahwa, learned Senior Advocate, has further submitted that even otherwise, the order of NCLT was bad in view of the fact that it has not considered the defence that corporate debtor which had a counter claim of sizable amount against the petitioning financial creditor and if this application is to be strictly treated as Section 7 application of IBC, this pre- existing claim / dispute would not be gone into and, therefore, a specific objection has been raised with regard to this peculiarity of circumstance that the application ought to have been treated as Section 9 application and not Section 7 of IBC. Since the claim generates out of and relates to sell of vehicle and as such, it cannot be said to be financial debt but it is an operational debt. Shri Navin Pahwa, learned Senior Advocate, has further submitted that peculiar background of this fact requires that the Tribunal instead of mechanically summarizing the issue, ought to have at length examined the plight of the CD. A systematic collusive effort is being made by respondent No.3 in connivance with respondent No.2, which, if allowed to be operated, will ruin completely the prospects of the CD since huge amount is invested on such business and by referring to various other contentions, an ultimate request is made to set aside the impugned order passed by NCLT dated 4.6.2020.
5.3 To strengthen his submission, Shri Navin Pahwa, learned Senior Advocate, has drawn the attention of this Court to the detailed objections which have been raised by the CD and has submitted that the impugned order suffers from the vice of non- application of mind and thereby, has requested the Court to set aside the impugned order. It has further been contended and Page 11 of 28 Downloaded on : Tue Oct 20 20:58:34 IST 2020 C/SCA/11985/2020 JUDGMENT reiterated that under the scheme of the Act, on the contrary, the concept of 'going concern' should be maintained and preserved and all possible efforts to be made to achieve that concept and if the impugned order is allowed to sustain, this very principle would be defeated. Even the proceedings under Section 7 application, right to prosecute the claim which is fundamental right would not be defeated and to this effect, though pointed out, the Tribunal has not properly appreciated. In sum and substance, Shri Navin Pahwa, learned Senior Advocate, has reiterated that if this order is allowed to be processed any further, huge claim of CD would be defeated and this is the design which is pressed into service by the respondents and as such, the impugned order is requested to be set aside. No other submissions have been made.
6. Before dealing with the submission and considering the request as to whether the prayers sought for deserve to be granted or not, the scheme of the special Statute will have to be looked into by the Court. This Insolvency and Bankruptcy Code, 2016 is the Act to consolidate and amend laws relating to re- organization and insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner for maximization of value of assets of such person, who promote entrepreneurship, availability of credit and balance, the interest of stake holders including alteration in the order of priority of payment of Government dues and to establish an insolvency and bankruptcy board of India and for matters connected therewith and incidental thereto. One of the important objectives of the Code is to bring the insolvency law in India under a single unified umbrella with the object of speeding up insolvency Page 12 of 28 Downloaded on : Tue Oct 20 20:58:34 IST 2020 C/SCA/11985/2020 JUDGMENT process and this has necessitated in view of the circumstance that as per the data available with the World Bank in 2016, insolvency resolution in India took 4.3 years on an average, which was much higher when compared with the other countries and the World Bank's Ease of Doing Business Index, 2015, ranked India as country number 135 out of 190 countries on the ease of resolving insolvency based on various indicia.
7. The scheme of the Code is to ensure that when a default takes place, in the sense that a debt becomes due and is not paid, the insolvency resolution process begins. Default is defined in Section 3(12) in a very wide terms as meaning non-payment of a debt once it becomes due and payable, which includes non- payment of even part thereof or an installment amount. The Code gets triggered the moment default is of Rs.1 lakh or more in view of Section 4 of the Code. The corporate insolvency resolution process may be triggered even by the corporate debtor itself or a Financial Creditor or Operational Creditor. A clear distinction is made by the Code between debt owned to Financial Creditors and Operational Creditors. The Code has further prescribed that when it comes to Financial Creditor, triggering the process under Section 7 becomes relevant under the explanation to Section 7(1), a default is in respect of financial debt owned by any Financial Creditor of the Corporate Debtor, it needs to be a debt owned to the applicant Financial Creditor. A debt may not be due if it is not payable in law or in fact, but the moment the adjudicating authority is satisfied that a debt has occurred, the application must be admitted unless it is incomplete, in which case it may give notice to the applicant to rectify the default within seven days of the receipt of the notice Page 13 of 28 Downloaded on : Tue Oct 20 20:58:34 IST 2020 C/SCA/11985/2020 JUDGMENT from the adjudicating authority.
8. The scheme of Section 7 stands in contrast with the Scheme under Section 8 where an Operational Creditor is on the occurrence of default, who first delivered the demand notice of the unpaid debt to the Operational Debtor in the manner as provided under Section 8(1) of the Code. Under Section 8(2) the Corporate Debtor can within ten days of the receipt of Demand Notice or a copy of the invoice mentioned in Sub-Section (1), bring to the notice of the Operational Creditor the existence of debt or the record of pendency of the suit or arbitration which is pre-existing i.e. before such notice or invoice was received by the Corporate Debtor. The moment there is an existence of such dispute, the Operational Creditor gets out of clutches of the Code. But there is a clear distinction between Section 7 proceedings and Section 8 as indicated above. In case of Corporate debtor who commits a default of financial debt, the adjudicating authority has merely to see the records of information utility or other evidence produced by Financial Creditor to satisfy itself that default has occurred. It is of no matter that the debt is disputed so long as debt is due i.e payable unless interdicted by some law or has not yet become due, in the sense it is payable at some future date. It is only when this is proved to the satisfaction of the adjudicating authority that the adjudicating authority may reject the application and not otherwise. So, reading of Sections 7, 8 and 9 of the Act, it clearly demarcate a difference between two sets of applications. In Section 7 application, a limited summary inquiry appears to have been made by the adjudicating authority unlike Section 8.
Page 14 of 28 Downloaded on : Tue Oct 20 20:58:34 IST 2020C/SCA/11985/2020 JUDGMENT
9. The Code has further prescribed the procedure that as soon as the application is admitted, moratorium in terms of Section 14 of the Code is to be declared by the adjudicating authority and public announcement is made stating inter-alia the last date of submission of claims and the details of the interim resolution professional, who shall be vested in management of Corporate Debtor and be responsible for receiving claims and as such, importantly, this is a major departure from previous legislation on the subject. A moment adjudicating authority approves resolution plan, the moratorium order passed by the authority under Section 14 of the Code shall cease to have effect. The scheme of the Code is to make an attempt by divesting the erstwhile management of its power and vesting it in professional agency to continue the business of Corporate body as a going concern until the Resolution plan is drawn up in which event the management is handed over under the plan, so that the corporate body is able to pay back its debt and get back to its feet. All this is to be done within a period of six months with a maximum extension of another 90 days or else the chopper comes down and the liquidation process begins and so this is the scheme in which a special legislation has come out with a procedure to deal with a situation.
10. In a very recent time, the Apex Court was dealing with the relevant provisions of Insolvency and Bankruptcy Code. In the case of Swiss Ribbons Private Limited & Anr. v. Union of India and Ors., reported in 2019 (4) SCC 17, was confronted with several issues related to the stringent provisions of the Code, in which case, one of the contentions which was put-forth Page 15 of 28 Downloaded on : Tue Oct 20 20:58:34 IST 2020 C/SCA/11985/2020 JUDGMENT before the Apex Court was that there is no real difference between the Financial Creditor and Operational Creditor; there was no intelligible differentia between two types of Creditors regard being had to the object sought to be achieved by the Court, namely, insolvency resolution and if that is not possible then ultimately liquidation. It was inter-alia contended that such classification will not only be discriminatory but also manifestly arbitrary as under Sections 8 and 9 of the Code, Operational Debtor is not only given notice of default but, is entitled to dispute genuineness of the claim whereas in case of Financial Debtor, on the other hand, no notice is given and the Financial Debtor is not entitled to dispute claim of the Financial Creditor and it was further contended that Sections 21 and 24 of the Code are discriminatory and manifestly arbitrary, in that Operational Creditors do not have even a single vote in that committee of Creditors which has very important function to perform in Resolution process of Corporate Debtors.
11. In that context, out of several other contentions, the Apex Court has analyzed entire scheme of the Act and it appears to have opined that one of the main objectives of the Code is to bring Insolvency Law in India under the single unified umbrella with the object of speeding up insolvency process and after considering several decisions, in para 20, it has been observed by the Apex Court that the courts do not substitute their social and economic beliefs for the judgment of legislative bodies, who are elected to pass laws. The Legislative bodies have broad scope to experiment with economic problems and the Apex Court does not sit to, subject the state to an intolerable supervision hostile to the basic principles of our government and wholly beyond the Page 16 of 28 Downloaded on : Tue Oct 20 20:58:34 IST 2020 C/SCA/11985/2020 JUDGMENT protection which the general clause of the Fourteenth Amendment was intended to secure. The Court in the said judgment has also dealt with the classification between Financial Creditor and Operational Creditor found neither discriminatory nor arbitrary nor violative of Article 14 of the Constitution of India and has observed as under :
"Where there is challenge to the constitutional validity of a law enacted by the legislature, the Court must keep in view that there is always a presumption of constitutionality of an enactment, and a clear transgression of constitutional principles must be shown. The fundamental nature and importance of the legislative process needs to be recognised by the Court and due regard and deference must be accorded to the legislative process. The two dimensions of Article 14 in its application to legislation and rendering legislation invalid are now well recognised and these are: (i) discrimination, based on an impermissible or invalid classification, and (ii) excessive delegation of powers; conferment of uncanalised and unguided powers on the executive, whether in the form of delegated legislation or by way of conferment of authority to pass administrative orders--if such conferment is without any guidance, control or checks, it is violative of Article 14 of the Constitution. The Court also needs to be mindful that a legislation does not become unconstitutional merely because there is another view or because another method may be considered to be as good or even more effective, like any issue of social, or even economic policy. It is well settled that the courts do not substitute their views on what the policy is. Another development of the law is that legislation can be struck down as being manifestly arbitrary."
12. It has further analyzed the provision and held that a perusal of the definition of ― financial creditor and ―financial debt makes it clear that a financial debt is a debt together with Page 17 of 28 Downloaded on : Tue Oct 20 20:58:34 IST 2020 C/SCA/11985/2020 JUDGMENT 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. The Apex Court in the said decision has also considered the scheme of Section 7, found to be completely in contrast to the scheme under Section 8 and has observed that at the stage of the Adjudicating Authority's satisfaction under Section 7(5) of the Code, the corporate debtor is served with a copy of the application filed with the Adjudicating Authority and has the opportunity to file a reply before the said authority and be heard by the said authority before an order is made admitting the said application. So far as the counter claim or set off is concerned, a set-off of amounts due from financial creditors is a rarity. Usually, financial debts point only in one way - amounts lent have to be repaid. However, it is not as if a legitimate set-off is not to be considered at all and as such set-off may be considered at the stage of filing of proof of claims during the resolution process by the resolution professional, his decision being subject to challenge before the Adjudicating Authority under Section 60. So, entire mechanism is well examined by the Apex Court and has clearly opined that there is a clear contrast between scheme of Section 7 and Section 8 of the Code.
13. A further relevant fact which is also not possible to be unnoticed is that moment the application of petitioning creditor Page 18 of 28 Downloaded on : Tue Oct 20 20:58:34 IST 2020 C/SCA/11985/2020 JUDGMENT is admitted and once an insolvency professional is appointed to manage the company, the erstwhile directors, who are no longer is management, cannot maintain the appeal on behalf of the company. This issue was taken up by the Apex Court in a decision of Innoventive Industries Limited v. ICICI Bank & Anr., reported in (2018) 1 SCC 407, wherein one of the issues raised before the Apex Court was whether appeals by the directors of a company, who are no longer in management, was maintainable after an Interim Resolution Professional had been appointed and the answer is that once insolvency professional is appointed, such appeal on behalf of the company would not be maintainable at the instance of erstwhile directors, since they are no longer in management.
14. Yet another issue relates to principles of natural justice was also cropped up for consideration before the National Company Law Tribunal, New Delhi in this very case of Innoventive Industries Limited, in which on analysis of the relevant case law, the appellate Tribunal, while dealing with the vires of Section 7 of the Code, has opined that principle of natural justice is inbuilt in the scheme of Section 7 as well and as such, it would be open for the parties to agitate their respective grievances and it would open for the parties to point out that NCLT and NCLAT are bound to follow the principles of natural justice while disposing of the proceedings before them and by observing that, the challenge to the vires to Section 7 of the Code declared to have been failed. So, Section 7 scheme is intra-vires which decision of the Tribunal is not disturbed by the Apex Court in the afore-mentioned decision. It has been further propounded that adjudicating authority is bound to issue a Page 19 of 28 Downloaded on : Tue Oct 20 20:58:34 IST 2020 C/SCA/11985/2020 JUDGMENT limited notice to the corporate debtor before admitting a case for ascertainment of existence of dispute based on material submitted by the corporate debtor and to find out whether the application is complete or there is any defect required to be removed. Adherence to the principles of natural justice would not mean that in every situation, the adjudicating authority is required to offer a reasonable opportunity of hearing to the corporate debtor before passing its order and as such, the satisfaction of adjudicating authority while dealing with Section 7 application is held to be summary adjudication limited to ascertainment of financial debt and the satisfaction to it.
15. Now, in the light of aforesaid scheme of the Code which is a special Legislation and in view of aforesaid observations propounded by the appellate Tribunal as well as by the Apex Court stated above, the case on hand will have to be viewed from the context of submissions made by Shri Navin Pahwa on behalf of the petitioner.
16. Here, in the instant case, the financial creditor, namely, BMW Indian Financial Services Private Limited has presented the petition being Company Petition (IB) No.161 of 2017, in which a clear opportunity of hearing is given to the petitioner and the corporate debtor, as well. The corporate debtor i.e. CD has filed detailed objection raising multiple contentions. But then this opportunity which has been given to the corporate debtor is examined by the Tribunal and on the basis of material, has arrived at following conclusion which needs to be incorporated hereinafter :
Page 20 of 28 Downloaded on : Tue Oct 20 20:58:34 IST 2020C/SCA/11985/2020 JUDGMENT "20. Considering the material, papers filed by the Petitioner, facts mentioned hereinabove and the arguments of both sides, this Adjudicating Authority is satisfied that,
(a) The Corporate Debtor availed Financial Facilities from the Petitioner.
b) Existence of debt is above Rs. One Lac;
(c) Debt is due and defaulted.
d) Default has occurred on various dates starting from 10.04.2016 onwards as per Annexure IV/27 Colly.
(e) Petition has been filed on 13.11.2017 i.e. within the limitation period.
(f) Copy of the Application filed before the Tribunal has been sent to the Corporate Debtor and the application filed by the Petitioner under Section 7 of IBC is found to be complete for the purpose of initiation of Corporate Insolvency Resolution Process against the Corporate- Debtor-Company. Hence, the present IB Petition CP(IB) No. 161 of 2017 is admitted with the following Directions/observations. The date of admission of this petition is 04.06.2020."
17. Simultaneously, the attempt which was made by the petitioner to point out that there is a collusion between respondent Nos.2 and 3 and fraud being committed by respondent No.2, an application was given by corporate debtor being IA No.300 of 2018 appears to be under Section 65 of the Code. But then the adjudicating authority has clearly observed that respondent No.2 is not a party in the original main petition i.e. CP (IB) No.161 of 2017 and as such, there is no locus to be impleaded in the main proceedings. It was also found by the Tribunal being adjudicating authority that numerous communications exchanged with financial creditor in CP (IB) Page 21 of 28 Downloaded on : Tue Oct 20 20:58:34 IST 2020 C/SCA/11985/2020 JUDGMENT No.161 of 2017 and has owned full responsibility for the default committed by the corporate debtor and promised on number of occasions to make payment of the defaulted amount and it was also observed that no one can force any customers of Gujarat to buy from petitioner only and as such, the IA which has been preferred to be clubbed with main petition, came to be rejected. While passing this order, it appears that full details have been examined at length and the conclusion arrived at by the adjudicating authority, namely, the Tribunal after dealing with Floorplan Financing Agreement and its terms and also examined Spare Parts Financing Agreement, the Working Capital Demand Credit Facility Agreement and the entries related to this financial arrangement in the agreements and after examination of detailed facts, a clear opinion is generated by the Tribunal, whereby the main petition is ordered to be admitted which was filed under Section 7 of the IBC. The order appears to be self-explanatory, clearly found to have been passed after detailed examination of material produced before it and after dealing with all contentions which have been raised by the petitioner and the corporate debtor and, therefore, it cannot be said to be perverse in any form. On the contrary, an attempt is made to mix up contractual obligations between CD and respondent No.2 and respondent No.3 which arise out of distinct and separate agreements and between different identity.
18. A further fact is also not possible to be unnoticed in view of analysis of scheme propounded by the Apex Court in the judgments which are mentioned herein-before that pursuant to this order impugned, the adjudicating authority has already appointed Insolvency Professional in this regard and issued Page 22 of 28 Downloaded on : Tue Oct 20 20:58:34 IST 2020 C/SCA/11985/2020 JUDGMENT consequential order while admitting the main petition which reads as under :
"21. This Adjudicating Authority hereby appoints, as proposed, Mr. Anish Niranjan Nanavaty, having Insolvency Professional Registration No.IBBI/IPA-002/IP- NO0272/2017-18/10830, Email ID:anish.nanavaty.irp @gmail.com, Mobile No. 98201 54620, Address: 2A/208, Raheja Classique, New Link Road, Andheri (W), Mumbai 400 053 Maharashtra, India as Interim-Resolution- Professional. The Interim Resolution-Professional is further directed to make public announcement of moratorium in respect of Corporate Debtor Company soon after receipt of an authenticated copy of this order and to act further as per the order/direction issued by this Adjudicating Authority and to follow the provisions Under Section 13 and 14 and other relevant provisions of the Insolvency and Bankruptcy Code.
22. As per the provisions of Section 13 and 14 of the I.B. Code on the date of commencement of insolvency, this Adjudicating Authority declares moratorium with effect from today for prohibiting all of the following, namely:
I. (a) The institution of suits or continuation of pending suits or proceedings against the corporate debtor including execution of any judgement, decree or order in any court of law, tribunal arbitration panel or other authority.
(b) Transferring, encumbering, alienating or disposing of by the corporate debtor any of its assets or any legal right or beneficial interest therein.
c) Any action to foreclose, recover or enforce any security interest created by the corporate debtor in respect of its property including any action under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (54 of 2002):
d) The recovery of any property by an owner or lessor where such property is occupied by or in the possession of the corporate debtor.
II. The supply of essential goods or services to the Page 23 of 28 Downloaded on : Tue Oct 20 20:58:34 IST 2020 C/SCA/11985/2020 JUDGMENT corporate debtor as may be specified shall not be terminated or suspended or interrupted during the moratorium period.
III. The provisions of sub-section (1) shall not apply to
(a) such transactions as may be notified by the Central Government in consultation with any financial sector regulator.
IV. The order of moratorium shall have effect from the date of this order till the completion of the Corporate Insolvency Resolution Process."
19. This order is passed on 4.6.2020, wherein the same appears to have been given effect to, which can be easily seen from even the order passed by the Delhi High Court dated 3.7.2020 passed in Arbitration Petition No.204 of 2020 reflecting on page-401 and as such, in such a peculiar background of fact, when this order in question has been processed further, practically implemented, in such a situation, the petition under Article 226 of the Constitution of India when it presented only on 28.9.2020, this Court is of the opinion that no case is made out by the petitioner, who is one of the Directors, who happened to be the promoter, shareholder and suspended board of director of corporate debtor and as such, no case is made out to exercise extraordinary jurisdiction. Further, this petition whether entertainable at the instance of petitioner of suspended management is also seriously in doubt and mostly not entertainable. So, in considered opinion of this Court, all the submissions and the issues which have been raised by learned Senior Counsel for the petitioner have been clearly answered by settled proposition of law in the decisions delivered by the Apex Court quoted herein-before and as such, this Court is of the opinion that no case is made out to entertain the petition. The Page 24 of 28 Downloaded on : Tue Oct 20 20:58:34 IST 2020 C/SCA/11985/2020 JUDGMENT order in question appears to be not perverse; passed on the basis of all relevant material produced before the Tribunal and after extending full opportunity and in due compliance of principles of natural justice and, therefore, no case is made out to exercise the extraordinary jurisdiction.
20. However, disposal of this petition will not deter the CD to pursue any other legal remedy which may be available. This conclusion is also arrived at on the basis of well defined proposition of law laid down by the Apex Court even on the issue of exercise of extraordinary jurisdiction and the parameters which are prescribed in Para.6 of the said decision of the Apex Court in case of Sameer Suresh Gupta v. Rahul Kumar Agrawal, reported in (2013) 9 SCC 374, this Court is of the opinion that no case is made out to invoke extraordinary jurisdiction. Since the Court has relied upon the aforesaid decision, the relevant observations contained in Para.6 are reproduced hereinafter :
"6. In our view, the impugned order is liable to be set aside because while deciding the writ petition filed by the respondent the learned Single Judge ignored the limitations of the High Court's jurisdiction under Article 227 of the Constitution. The parameters for exercise of power by the High Court under that Article were considered by the two Judge Bench of this Court in Surya Dev Rai v. Ram Chander Rai and Ors., 2003 6 SCC 675. After considering various facets of the issue, the two Judge Bench culled out the following principles:
(1) Amendment by Act No. 46 of 1999 with effect from 01-07-2002 in Section 115 of Code of Civil Procedure cannot and does not affect in any manner the jurisdiction of the High Court under Articles 226 and 227 of the Constitution.Page 25 of 28 Downloaded on : Tue Oct 20 20:58:34 IST 2020
C/SCA/11985/2020 JUDGMENT (2) Interlocutory orders, passed by the courts
subordinate to the High Court, against which remedy of revision has been excluded by the Code of Civil Procedure Amendment Act No. 46 of 1999 are nevertheless open to challenge in, and continue to be subject to, certiorari and supervisory jurisdiction of the High Court.
(3) Certiorari, under Article 226 of the Constitution, is issued for correcting gross errors of jurisdiction, i.e. when a subordinate court is found to have acted (i) without jurisdiction - by assuming jurisdiction where there exists none, or (ii) in excess of its jurisdiction - by overstepping or crossing the limits of jurisdiction, or (iii) acting in flagrant disregard of law or the rules of procedure or acting in violation of principles of natural justice where there is no procedure specified, and thereby occasioning failure of justice.
(4) Supervisory jurisdiction under Article 227 of the Constitution is exercised for keeping the subordinate courts within the bounds of their jurisdiction. When the subordinate Court has assumed a jurisdiction which it does not have or has failed to exercise a jurisdiction which it does have or the jurisdiction though available is being exercised by the Court in a manner not permitted by law and failure of justice or grave injustice has occasioned thereby, the High Court may step in to exercise its supervisory jurisdiction.
(5) Be it a writ of certiorari or the exercise of supervisory jurisdiction, none is available to correct mere errors of fact or of law unless the following requirements are satisfied: (i) the error is manifest and apparent on the face of the proceedings such as when it is based on clear ignorance or utter disregard of the provisions of law, and (ii) a grave injustice or gross failure of justice has occasioned thereby.
(6) A patent error is an error which is self-evident, i.e. which can be perceived or demonstrated without Page 26 of 28 Downloaded on : Tue Oct 20 20:58:34 IST 2020 C/SCA/11985/2020 JUDGMENT involving into any lengthy or complicated argument or a long-drawn process of reasoning. Where two inferences are reasonably possible and the subordinate court has chosen to take one view, the error cannot be called gross or patent.
(7) The power to issue a writ of certiorari and the supervisory jurisdiction are to be exercised sparingly and only in appropriate cases where the judicial conscience of the High Court dictates it to act lest a gross failure of justice or grave injustice should occasion. Care, caution and circumspection need to be exercised, when any of the abovesaid two jurisdictions is sought to be invoked during the pendency of any suit or proceedings in a subordinate court and the error though calling for correction is yet capable of being corrected at the conclusion of the proceedings in an appeal or revision preferred there against and entertaining a petition invoking certiorari or supervisory jurisdiction of High Court would obstruct the smooth flow and/or early disposal of the suit or proceedings. The High Court may feel inclined to intervene where the error is such, as, if not corrected at that very moment, may become incapable of correction at a later stage and refusal to intervene would result in travesty of justice or where such refusal itself would result in prolonging of the lis.
(8) The High Court in exercise of certiorari or supervisory jurisdiction will not covert itself into a Court of Appeal and indulge in re-appreciation or evaluation of evidence or correct errors in drawing inferences or correct errors of mere formal or technical character.
(9) In practice, the parameters for exercising jurisdiction to issue a writ of certiorari and those calling for exercise of supervisory jurisdiction are almost similar and the width of jurisdiction exercised by the High Courts in India unlike English courts has almost obliterated the distinction between the two jurisdictions. While exercising jurisdiction to issue a writ of certiorari Page 27 of 28 Downloaded on : Tue Oct 20 20:58:34 IST 2020 C/SCA/11985/2020 JUDGMENT the High Court may annul or set aside the act, order or proceedings of the subordinate courts but cannot substitute its own decision in place thereof.
In exercise of supervisory jurisdiction the High Court may not only give suitable directions so as to guide the subordinate court as to the manner in which it would act or proceed thereafter or afresh, the High Court may in appropriate cases itself make an order in supersession or substitution of the order of the subordinate court as the court should have made in the facts and circumstances of the case."
21. In view of aforesaid discussion and consideration of relevant submissions, the petition being meritless deserves to be dismissed. Accordingly, the same is dismissed with no order as to costs.
(ASHUTOSH J. SHASTRI, J) NAIR SMITA V. Page 28 of 28 Downloaded on : Tue Oct 20 20:58:34 IST 2020