Mr. Santosh Mate (Prop. Of Mahalaxmi Traders) Vs M/s. Satyam Transformers Pvt. Ltd

H.V. Subba Rao, Member (Judicial)

This Company Petition is filed by Mr. Santosh Mate (Prop. Of Mahalaxmi Traders), (hereinafter called “Financial Creditor”) seeking to initiate Corporate Insolvency Resolution Process (CIRP) against M/s. Satyam Transformers Pvt. Ltd. (hereinafter called “Corporate Debtor”) by invoking the provisions of Section 7 of Insolvency and Bankruptcy Code (hereinafter called the “Code”) read with Rule 6 of Insolvency & Bankruptcy (Application to Adjudicating Authority) Rules, 2016 for resolution of an Financial Debt of Rs. 1,69,00,000/-.

• The submissions of the Financial Creditor are as follows: -

Parties have executed the Loan Agreement dt. 01st April 2019 and accordingly the loan of INR 1.60 Crore was due from CD to FC.

The instant Application is filed U/s 7 of Insolvency & Bankruptcy Code 2016 (IBC) by the Financial Creditor M/s. Mahalaxmi Trading (Prop. Santosh Mate) “Financial Creditor” against M/s. Satyam Transformers Private Limited, a company registered under Companies Act 1956 and hereinafter referred to as Corporate Debtor.

Amount of debt: Financial Debt of INR 1,90,94,910/- alongwith interest at 12% interest for extended period is due from the CD. Actual amount shall be calculated as on the date of actual realization of the debt as per the applicable interest thereon.

Proof of debt: Loan Agreement, Ledger Account Statement Confirmation, Audited Financials, Correspondences between parties for repayment of loan amount.

The Corporate Debtor filed affidavit in reply of Mr. Atul Satyanarayan Chandak, virtually admitting the claim of the applicant. The relevant paras of the affidavit in reply are extracted hereunder for ready reference;

2(B). The Company was under obligation to make the repayment of the dues as per the said loan agreement and the company is willing to make the repayment but the financial condition of the company is not good and therefore the company is facing it very difficult to make the repayment of the loan pending dues.

(C) That the company is not functional for last couple of years and has no revenue and therefore it is not in a position to make the repayment of dues as per the petition being filed before this Hon’ble NCLT Bench.

(D) That the audited financials of the company is annexed herewith as annexure 1 for the reference to show that the company is not in a position to make the repayment of the dues.

(E) That the company need time to make the repayment of the dues of around 3-4 years as the instantly it has nothing to meet the said obligation. Therefore, it is prayed before the Hon’ble Bench that the sufficient time may be given to the company to make the repayment of the said dues.

Heard, Mr. P. S. Thakre, Ld. CS appearing for the alleged Financial Creditor and Mr. Pranav Shah, Counsel appearing for the Corporate Debtor and perused the record. The admitted case of the applicant is that the applicant has supplied goods and services to the Corporate Debtor from 2014 and accordingly the Corporate Debtor was indebted to an amount of Rs.1,69,00,000/-. Since, the Corporate Debtor was not in a position to clear the outstanding “operational debt” due and payable to the applicant, both the parties have entered into a Debt Conversion Cum Agreement dated 01.04.2019 whereunder both parties agreed to convert the “Operational Debt” of the applicant into “Financial Debt” with the following terms and conditions.

Loan: The Borrower and Lender agrees to Convert the debt into loan with interest, an aggregate sum not exceeding INR 1,69,00,000/- (INR One Crore Sixty-Nine Lakhs Only) upon the terms and subject to the conditions set forth herein. The said sum is hereinafter referred to as the “Loan” i.e. the Financial Debt/Unsecured Loan.

Interest: The borrower agrees to pay the lender the interest of 12 percent per annum (“Interest”) on the compounding basis, calculated monthly, from the date of conversion of the loan till the Final Settlement Date. All interest accruing shall accrue from day to day and be calculated on the basis of the actual number of days elapsed and a year of 365 days and shall be recognized on the repayment date. In such a scenario, the interest calculated and notice issued by the lender shall be conclusive evidence and no dispute shall lie against the lender with regards to the calculation.

Date of Loan Conversion: Both the parties have mutually agreed to consider the date of Loan Conversion as 1st day of April, 2019.

Repayment of Loan:

4.1 The loan shall be repayable on or before the expiry of Twenty-Four (24) months from the conversion date, unless otherwise extended at the sole discretion of the lender.

4.2   The dates on which the said interest amount or the loan amount becomes due and payable shall hereinafter be referred to as the “Due Date”.

4.3 No notice, reminder or intimation will be given to the borrowers regarding their obligation in respect of the repayment of loan and interest on the expiry of the due date. It shall be entirely the borrowers’ responsibility to ensure prompt and timely payment of the loan and interest within the due date.

4.4 The delay in repayment of loan and/or the interest shall render the borrower liable to pay an additional interest of two percent (2%) per month on the amount of loan and/or interest thereon. In such event, the borrowers shall also be liable to pay incidental charges and costs to lender.

4.5 The default in repayment of the outstanding loan and the interest thereon on the due date (“Outstanding Loan”) shall result in an event of default (defined herein under) with the attendant consequences of such default.

Costs: The borrower agrees to bear legal fees, stamp duty and expenses incurred in connection with the execution of this agreement.

Terms:

This agreement shall come into force on the effective date and shall continue for a term of Twenty-Four (24) months from the conversion date. The due date to make the repayment of the total amount along with interest shall be on or before 31/03/2021. Any extension thereof, such extension shall be at the sole discretion of the lender.

Therefore, the important issue that arises for consideration in the present case is;

Whether the parties under an agreement can convert an “Operational Debt” into a “Financial Debt” and file Section 7 application on the basis of such agreement?

In order to decide the above issue, it is important to refer to the following definitions of the ‘Financial Creditor’ and ‘Financial Debt’ as defined under Section 5 (7)(8) of the code.

“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;

“Financial Debt” means a debt alonwith interest, if any, which is disbursed against the consideration for the time value of money and includes-

(a) Money borrowed against the payment of interest;

(b) Any amount raised by acceptance under any acceptance credit facility or its de-materialised equivalent’

(c) Any amount raised pursuant to any note purchase facility or the issue of bonds, notes, debentures, loan stock or any similar instrument;

(d) The amount of any liability in respect of any lease or hire purchase contract which is deemed as a finance or capital lease under the Indian Accounting Standards or such other accounting standards as may be prescribed;

(e) Receivables sold or discounted other than any receivable sold on non-recourse basis;

(f) Any amount raised under any other transaction, including any forward sale or purchase agreement, having the commercial effect of a borrowing.

[Explanation. -For the purpose of this sub-clause-

i) any amount raised from an allottee under a real estate project shall be deemed to be an amount having the commercial effect of a borrowing; and

ii) the expressions, ‘allottee’ and ‘real estate project’ shall have the meanings respectively assigned to them in clauses (d) and (zn) of section 2 of the Real Estate (Regulation and Development) Act, 2016 (16 of 2016);]

(g) Any derivative transaction entered in connection with protection against or benefit from fluctuation in any rate or price and for calculating the value of any derivative transaction, only the market value of such transaction shall be taken into account’

(h) Any counter-indemnity obligation in respect of a guarantee, indemnity, bond, documentary letter of credit or any other instrument issued by a bank or financial institution;

(i) The amount of any liability in respect of any of the guarantee or indemnity for any of the items referred to in sub-clauses(a) to (h) of this clause;

Therefore, it is very clear from the above definitions that the above claim of the applicant does not fall under any of the categories of the “Financial Debt” and the Petitioner does not fall under definition of “Financial Creditor” within the meaning of the Code. The Counsel appearing for the applicant could not cite any authoritative pronouncement of Hon’ble Supreme Court or Hon’ble NCLAT to show that such a debt conversion is legally permissible under an agreement between the parties. In the absence of any such authoritative pronouncement of higher forum, this tribunal is unable to accept that the parties under an agreement can convert “Operational Debt” into a “Financial Debt”. If Courts and Tribunals recognise such agreement as valid and permissible it would defeat the very object of the Code and would lead to rewriting the Code. The Conduct, manner coupled with the terms and conditions of the debt conversion agreement clearly raises doubts and suspicion regarding the genuineness of the agreement and therefore the collusion between the parties cannot be ruled out in this case. Therefore, the above Company Petition filed U/s 7 is not maintainable and it ought to have been filed U/s 9 of the Code.

In view of the aforesaid discussion this bench has no hesitation in holding that the above application filed by the applicant is nothing but a misuse and abuse of the process of the tribunal and the Code and the application has to be dismissed on that score alone.

Accordingly, there are no merits in the above Company Petition and the above Company Petition is dismissed.