The National Company Law Appellate Tribunal (NCLAT), Chennai Bench comprising Justice M. Venugopal, Judicial Member and Naresh Salecha, Technical Member was hearing an Appeal on Wednesday and held that The act of Adjudicating Authority to refer the Application under Section 7 of I & B Code, 2016 for mediation was beyond the jurisdiction of Adjudicating Authority as granted under I & B Code, 2016.
The Present Appeal was filed against the impugned order dated 13.05.2022 passed by the National Company Law Tribunal, Hyderabad, whereby, the main Company Petition was referred, for mediation to `International Arbitration & Mediation Centre’, Hyderabad (IAMCH) preferably to be taken up along with the ongoing mediation in CP No. 468/241/HDB/2018, which were referred earlier by the Adjudicating Authority vide Order dated 24.12.2021. Aggrieved by the reference to IAMCH, instead of considering the Application filed under Section 7 of the Insolvency & Bankruptcy Code, 2016, the Appellant filed the Present Appeal before the Appellate Tribunal.
Facts:
The Appellant was a Financial Creditor and operated as Special Purpose Vehicle established in Cyprus and was beneficially owned by State General Reserve Fund. The Respondent was a Corporate Debtor engaged in the business of Construction and Real Estate Development Activities.
Mr. Vijay Sen Reddy Dantapalli was one of the promoters of Corporate Debtor and was earlier Chairman & Managing Director of the said Corporate Debtor. Mr. Vijay Sen Reddy Dantapalli Ex- CMD allegedly persuaded Financial creditors for making investments in a Corporate Debtor for the development of project ‘Virgin Country’. By way of the Investment Agreement dated 03.08.2011, the Financial Creditor made an investment in the Corporate Debtor company.
The project was to be completed within a period of seven years from the start of construction after getting all due approvals i.e., by 19.02.2019. As per ‘WIA’, the `Financial Creditor’ was entitled to receive coupon payments at 11% per annum commencing from 03.11.2011, during the development period. Furthermore, at the expiry of the development period, all or any portion of the Outstanding Principal Amounts that were not re-paid, was to be converted into Shares, based on a Conversion Price.
Around February, 2015 Financial Creditor came to know about the adverse financial position of the Corporate Debtor. In the meantime, Financial Creditor on its own appointed PWC to conduct an Independent Audit and PWC, despite not getting any corporation from the Corporate Debtor, gave its report, according to which, many irregularities were pointed out, including payment of Rs. 64.8 crore, which was unexplained and unauthorised, use of funds for meeting expenses not connected with projects, the interest on Debentures (coupon payment) from November, 2012 to 31.03.2017 amounting to Rs. 59.24 Crore has not been paid by the Corporate Debtor to the Financial Creditor and so on.
The Financial Creditor had earlier filed a CP under Section 241 & 242 of the Companies Act, 2013 against the Corporate Debtor (i.e. Respondent), before the Adjudicating Authority. The AA vide order dated 24.12.2021 in the Company Petitions filed under Section 241 of the Companies Act, 2013, in the CP, filed by the Financial Creditor against the Corporate Debtor, referred the matter for mediation to IAMCH. The Financial Creditor also filed Company Petition under Section 7 of the I & B Code, 2016. However, the Adjudicating Authority vide its impugned order dated 13.05.2022 referred the Section 7 Application of the I & B Code, 2016 also for mediation to IAMCH. Aggrieved by this reference for Mediation, the present Appeal was filed before the Appellate Tribunal.
Appellant’s Submission:
The Counsel for the Appellant stated that the grievances of the Financial Creditor in the Section 241 Petition were, inter alia, the exclusion of the Appellant from the governance of the Respondent company, non-service of notices of Board/ Shareholders Meetings upon the Appellant and its Nominee Director and siphoning off of funds to the parent company of the Corporate Debtor, etc.
The Counsel stated that the Corporate Debtor had defaulted in the payment agreed upon coupons (interest) @ 11% and @ 10% to the Financial Creditor due to this, the Financial Creditor initiated the CIRP against the Corporate Debtor under `Section 7 of the I & B Code, 2016 before the Adjudicating Authority in C.P. The amount in default at this stage, was Rs. 274.26 crore i.e. Principal, along with Unpaid Accrued Interest/ Coupons with respect to CCDs held by the Financial Creditor. Through the ‘impugned order’ dated 24.12.2021, Adjudicating Authority referred the proceedings under Section 241 Petition for mediation before ‘IAMCH’.
The Learned Counsel laid emphasises that this `Mediation Proceedings of company affairs have no bearing on the Insolvency Petition. The Counsel further argued that despite the Appellant’s vehemently opposing the reference of the Section 7 Application for `Mediation’, the Adjudicating Authority passed an order dated 13.05.2022, directing the Appellant and Respondent herein, for `Mediation’ in the Insolvency Petition proceedings under Section 7 of the I & B Code, 2016. Being aggrieved, the Financial Creditor challenged the impugned order dated 13.05.2022 in the present Appeal. The Learned Counsel for the Appellant alleged that the Adjudicating Authority has failed to appreciate the difference between the proceedings initiated by the Financial Creditor against the Corporate Debtor under Sections 241 and 242 of the Companies Act, 2013 vis-a-vis Section 7 of the I & B Code, 2016.
Learned Counsel further alleged that while the issues and reliefs sought by the Financial Creditor in Section 241 Petition under the Companies Act, 2013, were with respect to the return of funds siphoned off by the Corporate Debtor, the Financial Creditor’s participation in Corporate Debtor’s management, etc., the reliefs sought in the Insolvency Petition are with respect to the Financial Debt’, due to the Financial Creditor, with respect to the Principal Amount invested and unpaid interest accrued, on the Coupons, payable on the CCDs, held by the Financial Creditor with the Corporate Debtor which was due and not paid, thus, the Default, took place in terms of Section 7 of I & B Code. The Adjudicating Authority failed to appreciate this difference and had wrongly recorded that there was a nexus between the amounts claimed as Financial Debt in the Insolvency Petition and that in the Section 241 Petition.
The Learned Counsel stated that I & B Code, 2016 being a complete code in itself, does not provide for an Adjudicating Authority to undertake any other course of action, except two choices available under Section 7(5) of the I & B Code, 2016. The Learned Counsel submitted that as per settled law, the only options available to the Adjudicating Authority while adjudicating a petition under Section 7 of the I & B Code, 2016 are: (a) to admit the petition under Section 7(5)(a) of the I & B Code, 2016 where there is a debt due and remains unpaid and default occurred. or (b) to reject the petition under Section 7(5)(b), where there is no debt.
The Learned Counsel for the Appellant vehemently opposed the action of the Adjudicating Authority for referring the Petition for Mediation. The Learned Counsel stated that the Learned Counsel appearing for the Financial Creditor opposed Mediation and insisted upon the Hearing and Disposal of Section 7 of the I & B Code, 2016 application. Despite such opposition, the Adjudicating Authority was perforced to refer the matter to Mediation against the wishes of the Financial Creditor. The Learned Counsel while winding up his argument, has made a fervent plea to set aside the impugned order dated 13.05.2022, passed by the Adjudicating Authority and to allow the present Appeal, in the interest of justice.
Respondent’s Submissions:
The Learned Counsel for the Respondent argued that the Appellant has treated it as if it involves only a pure question of law w.r.t. Tribunal’s power to encourage parties under Section 7 of the I & B Code, 2016, to settle the dispute through `Mediation’. The Learned Counsel submitted that as per the settled law, timelines specified under Section 7 of the I & B Code are a directory and not mandatory.
The Counsel for the Respondent submitted that the Appellant had moved a Company Petition and the Adjudicating Authority vide impugned order dated 24.12.2021 referred the case to IAMCH for Mediation, admittedly, with the consent of both sides. In the said impugned order, the Adjudicating Authority had given full background and clear reasons for referring the case for `Mediation’ to `IAMCH’. The Learned Counsel pleaded that the Appellant being a Shareholder with 22% Equity cannot come to the Adjudicating Authority for initiating the CIRP against the Corporate Debtor. The Learned Counsel stated that CCD were liable to be converted into Equity Shares and if the Appellant is aggrieved by any failure to convert the CCDs into Equity Shares, he may seek Arbitration or Resolution of a dispute as per Agreement and cannot proceed under I & B Code, 2016.
The Learned Counsel assailed the Appeal and stated that the Appellant failed to establish that it suffers from any legal grievance and also that the impugned order was not the final order disposing of the Section 7 Application. The Learned Counsel concluded his pleadings by stating that the Appeal deserves to be dismissed with costs.
Court’s Analysis:
Based on the Appeal, and averments made by both the Learned Counsels, the Appellate Authority considered the following issues that needed to be decided:
Whether there was a debt due of which default was committed by the Corporate Debtor entitling the Financial Creditor to file an Application under Section 7 of the Code, 2016.
Whether, petitions made under Section 241 & 242 of the Companies Act, 2013, can be equated with Applications filed under Section 7 of the Code, 2016.
Whether, the Adjudicating Authority can refer Application proceedings under Section 7 of the Code, 2016 for mediation under Section 442 of the Companies Act, 2013.
The Appellate Authority noted that the financial arrangement made between the Financial Creditor and the Corporate Debtor clearly falls under the definition of Debt, Financial Debt and Default. Therefore, the Financial Creditor had the right to move an Application filed under Section 7 of the I & B Code, 2016.
The Adjudicating Authority in the impugned order dated 13.05.2022, instead of accepting or rejecting the Application after establishing facts that Debt was due, remained unpaid and Default took place, preferred to refer the Application under Section 7 of the I & B Code to IAMCH for Mediation.
Admittedly, the Corporate Debtor has not brought anything on record refuting that Debt was not due or was paid and no Default took place. The Adjudicating Authority in the impugned order has also not refuted the claim of the Financial Creditor. The Appellate Tribunal also noted that in the various agreements, the coupon rate (interest) was pre-specified @ 11% and 10% which were required to be paid. Due to default on payments, which obviously is more than Rs. 1 crore to satisfy the threshold limit as stipulated in I & B Code, 2016, there was suitable cause for initiating `CIRP’ proceeding against the Corporate Debtor under Section 7 of the I & B Code, 2016. As a result of the Respondent company defaulting in the payment of these coupons (interest) to the Appellant, the Appellant instituted `CIRP’ against the Respondent under Section 7 of the I & B Code, 2016. It is settled law that role of the Adjudicating Authority has been clearly elaborated under I & B Code, 2016. The Adjudicating Authority is required to admit the Petition under Section 7(5)(a) of the I & B Code, 2016 where the Debt is due and was not paid. Alternatively, the Adjudicating Authority under Section 7(5)(b) can reject the Petition if there was no Debt. This is to be done within 14 days from the receipt of the Petition under Section 7 based on records made available.
There are several judgments of the Supreme Court of India including E.S Krishnamurthy v. Bharath Hi-Tech Builders (P) Ltd., REED 2021 SC 12544, where the role of the Adjudicating Authority under Section 7 of I & B Code, 2016, has been limited. The Appellate Authority found that prima-facie there was Debt of more than 1 crore which was admittedly not paid resulting in Default and thereby meeting the requirement of Section 7 of I & B Code, 2016. The Adjudicating Authority should have taken into consideration and taken the decision on admissibility or otherwise of Petition filed before the AA in CP, as per law rather than referring for `Mediation’ to `IAMCH’ was done in Section 241 Application. The Adjudicating Authority had referred to the Application filed under Section 422 of the Companies Act, 2013.
The Appellate Authority noted that Section 241 of the Companies Act, 2013 is entirely for a different purpose which entitles aggrieved party due to oppression and mismanagement to file an Application before the Tribunal and the Tribunal's power is prescribed under Section 242 of the Companies Act, 2013. Whereas, Section 7 of the I & B Code, 2016 is pure regarding initiation of CIRP for default of debt of more than Rs. 1 crore by the Corporate Debtor and the power to the NCLT has been defined in Section 7(5).
The purpose of Section 241 of the Companies Act, 2013 cannot be equated with Section 7 of the I & B Code, 2016. Similarly, the powers of the Tribunal under Section 242 of the Companies Act, 2013 w.r.t oppression and mismanagement are quite comprehensive in comparison to Section 7 which grants limited powers to the Adjudicating Authority of either acceptance or rejection of the claims made by the Financial Creditor based on details of claims along with evidence produced by him. As such the petitions made under Section 241 of the ‘Companies Act, 2013’ cannot be equated with Applications filed under Section 7 of the I & B Code, 2016 and the `Adjudicating Authority’ is required to treat these petitions on a separate footing as per law and take decision accordingly.
The Appellate Authority, therefore, found that Adjudicating Authority erred in tagging the Application filed under Section 7 of I & B Code, 2016 with Application filed under Section 241 of the Companies Act, 2013 and referring for mediation to IAMCH. The act of Adjudicating Authority to refer the Application under Section 7 of I & B Code, 2016 for mediation was beyond the jurisdiction of Adjudicating Authority as granted under I & B Code, 2016. The Appellate Tribunal did not find in this case any scope which allowed discretion to Adjudicate Authority as per ratio grant in Vidarbha Industries Power Limited, REED 2022 SC 07529.
Further, the Appellate Authority observed that as per the decision in Sodexo India Services Pvt. Ltd. v. Chemizol Additives Pvt. Ltd., REED 2021 NCLAT Del 02542, under Section 442 cannot refer the parties to arbitration or mediation for the proceedings pending under the Code. Once the Default is established, the Adjudicating Authority does not have the power to refer the Parties to an `Arbitration’, since it becomes an in-rem insolvency proceeding.
The Adjudicating Authority had referred the Parties in Section 7 Application of I & B Code, 2016 proceedings, for Mediation under Section 442 of the Companies Act, 2013. As a matter of fact, the Appellate Tribunal had already noted that the power of the Adjudicating Authority, under Section 442 of the Companies Act, 2013 is limited to the proceedings under the Companies Act, 2013, but not in the matter related to I & B Code, 2016. Hence, the Appellate Tribunal, held that the impugned order dated 13.05.2022, in main C.P. (IB) No. 17/7/HDB/2021, passed by the Adjudicating Authority, was not in conformity with the I & B Code, 2016, and the same was clearly unsustainable in Law, and had been set aside the same. The Appeal was allowed.
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