The National Company Law Appellate Tribunal (NCLAT), Chennai Bench comprising Justice M. Venugopal, Judicial Member and Kanthi Narahari, Technical Member was hearing an Appeal of the CoC against the State Government of Karnataka and held that the claim of the 1st Respondent herein was belated and cannot be considered and the finding of the Adjudicating Authority in directing the RP to place the claim in Form-C before CoC per se illegal and unsustainable.
The Present Appeal was filed against the common order dated 28.05.2021 passed by the Adjudicating Authority, whereby the Adjudicating Authority passed a direction that the claim filed by the Respondent/ State of Karnataka in Form-C, shall be put up by the RP to the CoC for its consideration.
Facts:
The Senior Counsel for the Appellant submitted that the Corporate Debtor approached the 1st Respondent i.e. State of Karnataka on 28.12.2011 availing concessions under the special incentives and concession scheme. The Respondent on 05.06.2012 sanctioned the proposal by granting several incentives and concessions. On 23.06.2013 the 1st Respondent issued a loan eligibility certificate to the unit for a sum of Rs.226.87 crores to the Corporate Debtor as interest-free loan subject to the terms and conditions contained in the loan eligibility certificate dated 26.06.2013. The incentives and concessions granted to the Corporate Debtor were entered into an agreement dated 05.08.2013 between the Respondent No.1 and the Corporate Debtor. Respondent No.1 released interest-free loan to the Corporate Debtor against the submission of a bank guarantee as security from 2014-2017. The Union Bank of India issued a bank guarantee on 19.06.2014 for an amount of Rs.2,75,00,000/- which was due to expire on 18.06.2019.
Appellant’s Submission:
The Senior Counsel for the Appellant submitted that the CIRP was initiated against the Corporate Debtor vide order dated 26.10.2018 and the RP issued a public announcement inviting claims in Form-A from the general public. On the basis of claims received, the RP constituted the CoC comprising Oriental Bank of Commerce, UBI and Bank of Baroda. It was pertinent to note that no claim was received by the RP from the 1st Respondent. The bank guarantee given by the UBI to the 1st Respondent expired on 19.08.2019 and the RP requested Respondent No.1 to return the bank guarantee issued by the UBI as the same had expired. The 19th CoC was held on 11.02.2020 wherein it was decided to place the resolution plan submitted by Mohammed Enterprises (Tanzania) Limited (METL) to e-vote. Through e-voting conducted from 13.02.2020 to 06.03.2020, the resolution plan of METL was approved by all the members of CoC.
It was submitted that Respondent No.1 was aware of the insolvency proceedings and averred in the I.A. No. 85 of 2021 filed by them. The Respondent was concerned only about the expired bank guarantee and it requested UBI to renew the expired bank guarantee and continue to send reminder letters for renewal of the expired bank guarantee without acknowledging the insolvency proceedings or even attempting to file a claim with the RP. The Respondent failed to file a claim before the RP despite the public announcement issued on 28.11.2018 and thereafter they filed a writ petition in December 2020 before the High Court of Karnataka for reconstitution of CoC after considering its claim and also sought interim relief to stay all the proceedings in respect to CIRP and the High Court disposed of the said writ petition vide order dated 04.03.2021. Pursuant to the directions, the Respondent filed an I.A. No. 85 of 2021 before the Adjudicating Authority, seeking relief as prayed therein.
It was submitted that each creditor is required to submit its claim with documentary evidence to the RP and the Respondent failed to file a claim within the time hence they stopped seeking admission of its claim. Further, the claim of the Respondent cannot be admitted as a financial debt as the arrangement of the agreement entered into between the parties does not stand the test of being a financial debt under the Code. The IBC does not envisage automatic admission of claim merely because it was reflected in the financial statements of the Corporate Debtor. The Resolution Professional cannot automatically admit a claim. However, the claimant is required to file a claim form as prescribed under the CIRP Regulations and cannot be dispensed with in any manner.
Senior Counsel further submitted that the finding of the Adjudicating Authority dispensing with the mandatory requirement of filing a claim because the debt was clearly disclosed in audited financial statements of the Corporate Debtor, was legally untenable. Such a finding should be rejected in toto as the same was against the basic tenets of the code and would lay down a completely wrong precedent leading to failure of the Code in near future. The Senior Counsel emphasized the duties prescribed to be performed by the RP under Sections 18 and 21 of the I& B Code, 2016.
In view of the reasons stated above the Senior Counsel prayed the Appellate Tribunal to allow the Appeal by setting aside the impugned order passed in I.A. No. 85 of 2021.
Respondent’s Submissions:
The 1st Respondent filed its reply and denied the averments made by the Appellant. It was stated in the reply that the Adjudicating Authority vide its order dated 28.05.2021 directed that the claim of this Respondent was to be put by RP before the CoC and also to consider reconstituting the CoC.
It was also averred that the Adjudicating Authority determined the issues in the order that the claim of the Respondent should have been considered by the RP based on the books of accounts of the Corporate Debtor and whether the claim of the Respondent amounts to financial debt. It was stated that the loan facility extended by the Respondent to the Corporate Debtor, the Corporate Debtor had provided a bank guarantee to the extent of Rs.20,80,44,296/- and under the loan agreement entered into between the Corporate Debtor and the Respondent, the Corporate Debtor was obligated to renew the bank guarantee. However, the Corporate Debtor failed to renew the bank guarantee. It was also stated that the concession was extended to the Corporate Debtor against the 5 bank guarantees as detailed in para 5 of the reply affidavit. It was stated that the bank guarantee with respect to Rs. 2,75,00,000/- had expired on 18.06.2019 and the same was not renewed by the Corporate Debtor. The other bank guarantees amounting to a sum of Rs.11.47 crores have been encashed by the 1st Respondent to date and the liability of the Corporate Debtor stands for the remaining amount with interest and penal interest.
It was stated that this Respondent was a financial creditor and the Adjudicating Authority upon considering the loan agreement entered into by the Corporate Debtor as correctly categorised the concession extended under the said agreement by this Respondent as a loan to repay on the lapse of 10 years from the date of commencement of commercial production. The books of accounts of the Corporate Debtor reflected the loan as financial debt. It was stated that the appellant has not made out any case and prayed this Bench to dismiss the appeal.
Appellate Tribunal’s Analysis:
The argument of the Respondents was that the loan agreement dated 05.08.2013 entered between the 1st Respondent and the Corporate Debtor, the Corporate Debtor termed as borrower in the loan agreement and have a relationship of borrower lender and was obligated to repay the loan at the end of 10 years. The transaction between the parties would amount to a disbursal. However, the Appellant contended that the benefits and concessions granted to the Corporate Debtor were in the nature of incentives provided by the 1st Respondent herein and they were not in the nature of the loan given in consideration of time value of money.
Admittedly, the Corporate Debtor availed a special scheme/ incentive from the 1st Respondent and there was no actual disbursement of money. The said fact was not denied by the 1st Respondent herein. The loan was interest-free and towards unpaid Value Added Tax for a period of 10 years which was a benefit issued by the Respondent as a promotion policy of the State Government. From the government order, it was seen that there was no actual disbursement of money that has made to the Corporate Debtor. Further, there is no enhancement of money after a particular time period. It was pertinent to note that the policy/ scheme was to enhance/ boost industrial production by providing some monetary incentive/ concession and not to earn interest and the interest payment in case of default in repayment was purely in the nature of a penalty. It was reiterated that there was no actual disbursement of money. While so, the contention of the Appellant is that since there was no interest factor as per the definition of financial debt, the claim of the 1st Respondent cannot be considered as financial debt. The said issue has been decided by the Supreme Court in the matter of Orator Marketing v. Samtex Design Pvt. Ltd., REED 2021 SC 07562, para 22 & 31.
The Appellate Tribunal noted in view of the judgment of the Supreme Court that even if the money borrowed does not carry any interest and includes interest-free loan advanced to finance the business operations of a corporate body, would amount to financial debt within the meaning of Section 5(8) of the Code. Therefore, the stand of the Appellant that there was no interest component for the claim made by the 1st Respondent was negatived.
In view of similar facts and by relying upon the aforesaid decision of the Supreme Court in Phoenix ARC Pvt. Ltd. v. Spade Financial Services Limited & Ors, REED 2021 SC 02501, the Appellate Tribunal held that the claim of the 1st Respondent did not come under the definition of financial debt, accordingly, the observation made by the Adjudicating Authority in this regard was answered in negative.
Utmost the claim of the 1st Respondent being in respect of the liability of the Corporate Debtor to repay the Value Added Tax, which the Corporate Debtor has collected but not paid to the 1st Respondent, may be in the nature of operation debt as defined under Section 5(21) of the Code.
It was apt to note that various decisions of the Appellate Tribunal held that the statutory dues such as income tax, sales tax, value added tax and various other taxes fall within the definition of operational debt under Section 5(21) of the Code.
It was an admitted fact that the I.A. No.85 of 2021 was filed by the 1st Respondent herein, more than 2 years after initiation of CIRP and almost one year after approval of the plan by the CoC. Further, it was an admitted fact that the 1st Respondent had not filed any claim in the proper format within the time prescribed before the RP. The Adjudicating Authority vide order dated 26.10.2018 initiated CIRP against the Corporate Debtor and the RP published a public announcement and invited claims from all creditors in the month of November 2018. The paper advertisement had been enclosed in Annexure A-7 page 204. In spite of said advertisement in the newspaper, the 1st Respondent failed to file its claim before the RP nor filed any application before the Adjudicating Authority during the CIRP proceedings. The RP collated and verified the claims received by it and on the basis of same, the CoC was constituted in December 2018. After deliberations on the plans of the Prospective Resolution Applicants, the CoC approved one of the plans and the CIRP has been completed. One of the contentions of the Appellant is that a Joint Director of the 1st Respondent visited the Corporate Debtor in the month of February 2020 and he was aware of the CIR Process against the Corporate Debtor, however, chose not to take any action with regard to their claim either before the RP or before the Adjudicating Authority. The 1st Respondent approached the Adjudicating Authority belatedly.
In view of various judgments of the Appellate Tribunal the 1st Respondent did not filed the claim before the RP during the CIRP period therefore, there was no question of considering the same by the CoC at such a belated stage. The Supreme Court in Ghanashyam Mishra & Sons Pvt. Ltd. v. Edelweiss Asset Reconstruction Company, REED 2021 SC 04534, Civil Appeal No. 8129 of 2019 para 71 & 95, held that the resolution plan approved by the Adjudicating Authority shall also be binding on the Central Government, any state government or any local authority to whom a debt is owed in respect of payment of dues arising under any law for the time being enforce, such as authorities to whom statutory dues are owed, including tax authorities. However, in the present case, an application for approval of plan being I.A. No.161 of 2020 was pending before the Adjudicating Authority and the Adjudicating Authority vide the aforesaid impugned order dated 28.05.2021 disposed of the said I.A. and against the same an appeal is also pending before this Tribunal in which the matter was heard and reserved for orders.
It was apt to note that one of the most crucial principles is time is the essence in any resolution process within which the process has to be completed in a time-bound manner as contemplated under the Code. The Supreme Court in the landmark judgment of M/s Innoventive Industries Ltd. v. ICICI Bank & Anr., REED 2017 SC 08563, paras 12, 16 & 31 held that “it can be seen that time is time of the essence in seeing whether the corporate body can be put back on its feet, so as to stave off liquidation”.
Therefore, the Appellate Tribunal found that the claim of the 1st Respondent herein was belated and cannot be considered and the finding of the Adjudicating Authority in directing the RP to place the claim in Form-C before CoC per se illegal and unsustainable accordingly, the point was answered against the 1st Respondent.
The next point for consideration is whether the RP has the power to admit the claims suo motu?
The code prescribes the duties to be performed by the Interim Resolution Professional and the Resolution Professional, as per Section 18 and Section 25 of the I & B Code, 2016. The IBBI (Insolvency Resolution Process for Corporate Persons) Regulations 2016, prescribes the procedure to be adopted/followed. As per Chapter IV Regulation 7 of the Regulations, the Claims by the Operational Creditor are to be submitted with proof to the Interim Resolution Professional in Form-B and as per Regulation 8 of the Regulations, the Financial Creditors shall submit the Claims to the Interim Resolution Professional in Form-C. After receipt of the Claims, the Interim Resolution Professional shall verify the Claims in accordance with Regulation 13 and the Interim Resolution Professional, maintained a List of Creditors, containing Names of Creditors along with the Amount claimed by them, the amount of their Claims admitted and the Security Interest, if any, in respect of such Claims. There is no such provision that the Interim Resolution Professional, shall admit the Claim without filing a Claim Form either in Form-B or in Form-C. Therefore, the Appellate Tribunal, was of the considered view, that the Interim Resolution Professional, suo motu cannot admit the Claims without there being a Claim by the Claimants viz. Operational Creditors, Financial Creditors and Claims by other Creditors. Every Claim shall be submitted by the Claimant with proof and the issue is answered accordingly.
Having discussed the issues in detail, the Appellate Tribunal comes to a resultant conclusion that the order passed by the Adjudicating Authority in I.A. No. 85 of 2021 was per se, an illegal and an unjustifiable and impugned order, passed by Adjudicating Authority was set aside. Consequently, the instant Appeal succeeded.
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