Utsav Securities Private Limited vs Sunworld Luxury Suites Private Limited

Abni Ranjan Kumar Sinha, J

The present application is filed on behalf of the applicant under Section 7 of the Insolvency and Bankruptcy Code, 2016 ("Code") for initiation of the CIRP against the Corporate Debtor.

The applicant is an RBI registered Non-Banking Financial Company (NBFC), which is engaged in the business of granting loans and financing facilities. In the month of October 2016, the Corporate Debtor approached the Applicant for seeking certain unsecured loans and after verifying the financial health of the Corporate Debtor, the applicant agreed to advance a loan to the Corporate Debtor. On 25.10.2016. the Applicant disbursed the unsecured loan of INR 60,00,000/- to the Corporate Debtor ("Loan") on specific terms that the Loan shall be advanced at the interest rate of 10 % per annum and that the said loan shall be repayable on demand by the applicant. The said loan was advanced by the applicant to the Corporate Debtor via normal banking channels.

It is further submitted that despite specific understanding that the interest payment shall be on time, the Corporate Debtor has manifestly failed to pay interest over the Loan. It is worthy to note that though the Corporate Debtor manifestly failed to pay the overdue interest on the Loan, but cleverly deducted TDS under Section 194A of the Income Tax Act for the Financial Year 2016-17 on the self-claimed interest accrued on the Loan. However, the commensurate interest payments have not been made to the Applicant. Importantly, one (1) TDS payments were booked by the Corporate Debtor on 30.10.2017 for payment of interest on the Loan, thereby acknowledging the existence of Loan and liability to pay the same.

As of 31.03.2019, a total financial debt of INR-73,83,501/- consisting of outstanding principal loan amount of alongwith outstanding interest payments calculated till 31.03.2019. Despite repeated requests and reminders, no payments either towards the outstanding principal loan amount or outstanding interest has been paid by the Corporate Debtor.

The applicant, through counsel, sent a written Demand Notice dated 10.05.2019 to the registered office address of the Corporate Debtor recalling the financial facility and called upon it to refund the monies paid by the Applicant with the interest rate @ 10 % per annum on compounding basis within a period of 7 days from the date of receipt of the said notice. The Demand Notice sent at the registered office of the Corporate Debtor was successfully delivered on 13.05.2019.

Despite receipt of Notice, the Corporate Debtor failed to refund the monies advanced by the Applicant alongwith interest and vested the Applicant with the right to file the present application seeking CIRP of the Corporate Debtor.

Registered office of the Corporate Debtor is in Delhi and it is working for gains in Delhi. Thus, this Tribunal has the territorial jurisdiction to adjudicate the present application.

In response to the summons, the Corporate Debtor appeared and filed the reply.

Facts of the reply in short are that the management of the petitioner company is facing the investigation in a Huge Hwala Estate and this fact has been concealed by the petitioner. Further, the application filed by the applicant is barred by limitation and on this, he placed reliance upon a decision of the Hon'ble Apex Court in the case of B.K. Educational Services Pvt. Ltd. V/s Parag Gupta and Others. Further, the applicant is not the Financial Creditor in terms of the IBC and on this, he placed reliance upon a decision of the Hon'ble NCLAT in Company Appeal (AT) (Insolvency No. 7 of 2017) in the case of Nikhil Mehta & Sons V/s AMR Infrastructure Ltd. Further, the applicant failed to produce on record any evidence to suggest that they disbursed the money against the consideration for the time value of the money. Further, there is no document to show that the Corporate Debtor borrowed the money as an unsecured loan. Therefore, the amount which the applicant claims does not come under the definition of financial debt, further, the claim of the applicant of Rs. 73,83,501/- is based on concocted facts and figures. Further, without admitting that the unsecured loan is being taken by the Corporate Debtor is against the interest does not come under the definition of financial debt because merely grant of interest for second period cannot be the ground to hold that the debt come within the meaning of financial debt and in this regard, they placed reliance upon decision of Hon'ble NCLAT in Company Appeal (AT) (Insolvency No. 57 of 2018) in the case of Sanjay Kewalramani Vs. Sunil Parmanand Kewalramani & Ors. Further, the applicant has failed to produce any agreement/documents on record which shows that the Corporate Debtor has taken the amount as an unsecured loan for a certain period or value. Further, it is denied the alleged amount was advanced at the interest rate of 10 per cent per annum and the alleged loan was repayable on demand by the applicant. Further, it is denied that the Corporate Debtor has deducted TDS under Section 194A of the IT Act for the financial year 2016-17 on the self-claim interest approved on the loan. Further, it is also denied that the request and reminders were sent by the applicant for the payment of the said amount because no reminder letters are enclosed by the applicant. Further, the Corporate Debtor didn't receive any demand notice.

We have heard the Ld. Counsel appeared for the applicant as well as Corporate Debtor and perused the averments made in the application, reply and the documents enclosed with the application as well as the additional documents filed by the applicant.

At this juncture, we would like to refer the definition of Financial Debt given in Section 5(8) of the IBC which is quoted below:-

5(8) "financial debt" means a debt alongwith 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 receivables 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;

(g) any derivative transaction entered into 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.

Mere plain reading of the provision shows that in order to establish, the amount given by a person to another person comes under the definition of financial debt, that person is to establish that the amount is given against the payment of interest., and for the reasons mentioned in Section 5(8) clause (a) to (i). If we shall consider the case of the Financial Creditor in the light of aforesaid definition, whether the debt comes under the definition of Section 5(8) or not? Then, we find that the Financial Creditor has failed to satisfy us that the amount he paid to the Corporate Debtor was against the payment of interest.

So, on the basis of aforesaid discussions, we are unable to accept the contention of the Financial Creditor that the money which has been paid to Corporate Debtor comes under the definition of "Financial Debt".

At this juncture, we would also like to refer Section 18 of the Limitation Act which is quoted below:-

Effect of acknowledgment in writing.--

(1) Where, before the expiration of the prescribed period for a suit of application in respect of any property or right, an acknowledgment of liability in respect of such property or right has been made in writing signed by the party against whom such property or right is claimed, or by any person through whom he derives his title or liability, a fresh period of limitation shall be computed from the time when the acknowledgment was so signed.

(2) Where the writing containing the acknowledgment is undated, oral evidence may be given of the time when it was signed; but subject to the provisions of the Indian Evidence Act, 1872 (1 of 1872), oral evidence of its contents shall not be received.

Explanation.--For the purposes of this section,--

(a) an acknowledgment may be sufficient though it omits to specify the exact nature of the property or right, or avers that the time for payment, delivery, performance or enjoyment has not yet come or is accompanied by a refusal to pay, deliver, perform or permit to enjoy, or is coupled with a claim to set-off, or is addressed to a person other than a person entitled to the property or right;

(h) the word "signed" means signed either personally or by an agent duly authorised in this behalf; and

(c) an application for the execution of a decree or order shall not be deemed to be an application in respect of any property or right,

At this Juncture, we would also like to refer the relevant part of Hon'ble Supreme Court's judgment in B.K. Educational Services Private Limited v. Parag Gupta and Associates Civil Appeal No. 23988 of 2017, the Hon'ble Supreme Court analysed the limitation period with respect to applications under Section 7 and Section 9 of the Insolvency and Bankruptcy Code, 2016 and observed:

"27. It is thus clear that since the Limitation Act is applicable to applications filed, under Sections 7 and 9 of the Code from the inception of the Code, Article 137 of the Limitation Act gets attracted. "The right to sue", therefore, accrues when a default occurs. If the default has occurred over three years prior to the date of filing of the application, the application would be barred under Article 137 of the Limitation Act, save and except in those cases where, in the facts of the case, Section 5 of the Limitation Act may be applied to condone the delay in filing such application."

At this juncture, we would also quote Article 137 of the Limitation Act:-

(sic)iption of suitPeriod of limitationfrom which period begins to run137. Any other application for which no period of limitation is provided elsewhere in this Division. 3 yearsWhen the right to apply accruesNow in light of the decision and provision, this Adjudicating Authority would like to consider the case in hand as whether the present application filed by the Financial Creditor is within the time prescribed under Article 137 of Limitation Act and whether the Financial Creditor has filed the application after three years.

From the perusal of the aforesaid provisions, we find that in order to claim the exemption under the acknowledgment of debt, the person is required to establish that acknowledgement was made before the expiry of prescribed period for filing the suit or application.

On perusal of the averment made in the application and the reply, we find that the case of the applicant is that the company, on 25.10.2016 disbursed an unsecured loan of Rs. 60,00,000/- to the Corporate Debtor at the interest rate of 10 per cent per annum and the said amount was credited in the account of the Corporate Debtor through RTGS and in support of that the applicant placed reliance upon Annexure-3 page 24 of the paper book which is the statement of account of the applicant and further, claim of the applicant is that the Corporate Debtor has deducted the TDS of Rs. 2,597/- on 31.03.2017 which is against the interest amount which the Corporate Debtor claim to be paid to the applicant but no such amount was paid. Whereas the case of the Corporate Debtor is that the amount which the applicant claims is paid to the Corporate Debtor is not a financial debt and on the basis of the TDS or interest paid it cannot be treated as financial debt.

In the background of these facts, when we have gone through the case in hand, then we find that vide order dated 05.07.2019, the applicant was directed to produce the documents of loan agreement and the resolution passed by the Corporate Debtor for availing the loan but we find that the same order has not been complied by the applicant. Therefore, at this juncture, we would like to refer Section 179 as well as Section 186 of the Companies Act, 2013 which relates to the case in hand and the relevant provision of the said Section is quoted below:-

"179. Powers of Board

(1) The Board of Directors of a company shall be entitled to exercise all such powers, and. to do all such acts and things, as the company is authorised to exercise and do:

Provided that in exercising such power or doing such act or thing, the Board shall be subject to the provisions contained in that behalf in this Act, or in the memorandum or articles, or in any regulations not inconsistent therewith and duly made thereunder, including regulations made by the company in general meeting:

Provided further that the Board shall not exercise any power or do any act or thing which is directed or required, whether under this Act or by the memorandum or articles of the company or otherwise, to be exercised or done by the company in general meeting.

(2) No regulation made by the company in general meeting shall invalidate any prior act of the Board which would have been valid if that regulation had not been made.

(3) The Board of Directors of a company shall exercise the following powers on behalf of the company by means of resolutions passed at meetings of the Board, namely:--

(a) to make calls on shareholders in respect of money unpaid on their shares;

(b) to authorise buy-back of securities under section 68;

(c) to issue securities, including debentures, whether in or outside India;

(d) to borrow monies;

(e) to invest the funds of the company;

(f) to grant loans or give guarantee or provide security in respect of loans;

(g) to approve financial statement and the Board's report;

(h) to diversify the business of the company;

(i) to approve amalgamation, merger or reconstruction;

(j) to take over a company or acquire a controlling or substantial stake in another company;

(k) any other matter which may be prescribed:

Provided that the Board may, by a resolution passed, at a meeting, delegate to any committee of directors, the managing director, the manager or any other principal officer of the company or in the case of a branch office of the company, the principal officer of the branch office, the powers specified in clauses (d) to (f) on such conditions as it may specify:

Provided further that the acceptance by a banking company in the ordinary course of its business of deposits of money from the public repayable on demand or otherwise and withdrawable by cheque, draft, order or otherwise, or the placing of monies on deposit by a banking company with another banking company on such conditions as the Board may prescribe, shall not be deemed to be a borrowing of monies or, as the case may be, a. making of loans by a banking company within the meaning of this section.

Explanation I.--Nothing in clause (d) shall apply to borrowings by a banking company from other banking companies or from the Reserve Bank of India, the State

Bank of India or any other banks established by or under any Act.

Explanation II.--In respect of dealings between a company and. its bankers, the exercise by the company of the power specified, in clause (d) shall mean the arrangement made by the company with its bankers for the borrowing of money by way of overdraft or cash credit or otherwise and not the actual day-to-day operation on overdraft, cash credit or other accounts by means of which the arrangement so made is actually availed of.

(4) Nothing in this section shall be deemed to affect the light of the company in general meeting to impose restrictions and conditions on the exercise by the Board of any of the powers specified in this section."

"186. Loan and investment by company

(1) Without prejudice to the provisions contained in this Act, a company shall unless otherwise prescribed, make investment through not more than two layers of investment companies:

Provided that the provisions of this subsection shall not affect,--

(i) a company from acquiring any other company incorporated in a country outside India if such other company has investment subsidiaries beyond two layers as per the laws of such country;

(ii) a subsidiary company from having any investment subsidiary for the purposes of meeting the requirements under any law or under any rule or regulation framed under any law for the time being in force.

(2) No company shall directly or indirectly --

(a) give any loan to any person or other body corporate; (b) give any guarantee or provide security in connection with a loan to any other body corporate or person; and (c) acquire by way of subscription, purchase or otherwise, the securities of any other body corporate, exceeding sixty per cent, of its paid-up share capital, free reserves and securities premium account or one hundred per cent, of its free reserves and securities premium account, whichever is more.

(3) Where the giving of any loan or guarantee or providing any security or the acquisition under sub-section (2) exceeds the limits specified in that sub-section, prior approval by means of a special resolution passed at a general meeting shall be necessary.

(4) The company shall disclose to the members in the financial statement the full particulars of the loans given, investment made or guarantee given or security provided and the purpose for which the loan or guarantee or security is proposed to be utilised by the recipient of the loan or guarantee or security.

(5) No investment shall be made or loan or guarantee or security given by the company unless the resolution sanctioning it is passed at a meeting of the Board with the consent of all the directors present at the meeting and the prior approval of the public financial institution concerned where any term loan is subsisting, is obtained: Provided that prior approval of a public financial institution shall not be required where the aggregate of the loans and investments so far made, the amount for which guarantee or security so far provided to or in all other bodies corporate, along with the investments, loans, guarantee or security proposed to be made or given does not exceed the limit as specified, in subsection (2), and there is no default in repayment of loan instalments or payment of interest thereon as per the terms and conditions of such loan to the public financial institution.

(6) No company, which is registered under section 12 of the Securities and Exchange Board of India Act, 1992 and covered under such class or classes of companies as may be prescribed, shall take inter-corporate loan or deposits exceeding the prescribed limit and such company shall furnish in its financial statement the details of the loan or deposits.

(7) No loan shall be given under this section at a rate of interest lower than the prevailing yield of one year, three year, five year or ten year Government Security closest to the tenor of the loan.

(8) No company which is in default in the repayment of any deposits accepted, before or after the commencement of this Act or in payment of interest thereon, shall give any loan or give any guarantee or provide any security or make an acquisition till such default is subsisting.

(9) Every company giving loan or giving a guarantee or providing security or making an acquisition under this section shall keep a. register which shall contain such particulars and shall he maintained in such manner as may be prescribed.

(10) The register referred to in sub-section (9) shall be kept at the registered office of the company and --

(a) shall be open to inspection at such office; and

(b) extracts may be taken therefrom by any member, and copies thereof may be furnished to any member of the company on payment of such fees as may be prescribed.

(11) Nothing contained, in this section, except sub-section (1), shall apply--

(a) to a loan made, guarantee given or security provided by a banking company or an insurance company or a. housing finance company in the ordinary course of its business or a company engaged in the business of financing of companies or of providing infrastructural facilities;

(b) to any acquisition--

(i) made by a non-banking financial company registered under Chapter MB of the Reserve Bank of India. Act, 1934 and whose principal business is acquisition of securities: Provided that exemption to non-banking financial company shall be in respect of its investment and lending activities;

(ii) made by a company whose principal business is the acquisition of securities;

(iii) of shares allotted in pursuance of clause (a) of subsection (1) of section 62.

(12) The Central Government may make rules for the purposes of this section.

(13) If a company contravenes the provisions of this section, the company shall be punishable with fine which shall not be less than twenty-five thousand rupees but which may extend to five lakh rupees and every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to two years and with fine which shall not be less than twenty-five thousand rupees but which may extend to one lakh rupees.

Explanation.--For the purposes of this section,--

(a) the expression "investment company" means a company whose principal business is the acquisition of shares, debentures or other securities;

(b) the expression "infrastructure facilities" means the facilities specified in Schedule VI."

In the light of the aforesaid provisions, when we shall consider the case of applicant then we find that the applicant has not enclosed the resolution passed by the Corporate Debtor company as required under Section 179 as well as under Section 186. In other words, the applicant has neither enclosed the resolution passed by the Board of Director of the Corporate Debtor company nor enclosed the resolution passed by the Board of Director of his company by which the company was authorized to disburse the loan although the opportunity was given to the applicant to produce the same. We also notice that there is no written agreement.

At this juncture, we would like to refer the decisions upon which the applicant placed reliance and the same are as follows:

i. Nanak Builders and Investors Pvt. Ltd. Vs. Vinod Kumar Alag AIR 1991

ii. Appeal No (s) 6197 of 2000 Alka Bose Vs. Parmatma Devi & Ors. (Civil)

iii. 2013 RFA No. 1163 of 2002 c/w RFA No. 1164 of 2002 Karnataka High Court in the matter of SV Narayanaswamy Vs. Savithramma

iv. VR Polyfab (P) Ltd. Vs. Sadbhav Entreprise (P) Ltd. 2018 by NCLT Bench Ahmedabad.

We have gone through the decisions upon which the Ld. Counsel appearing for the applicant placed reliance and on careful consideration of same, we find that the decisions upon which the applicant placed reliance, all of them are in respect of the specific performance of the contract, whereas the present application is filed under Section 7 of IBC and the facts of all that decisions upon which the applicant placed reliance are different from the facts of the case in hand. Therefore, we are of the considered view the decisions upon which applicants placed reliance, those decisions will not help the applicant to substantiate its claim that even if no board resolution is passed which authorised the applicant to grant loan or in the absence of Board resolution which authorised the Corporate debtor to take loan, as required under the provisions referred above, the applicant is entitled to claim that the amount which he claims come under the definition of loan. As we have already referred to the relevant provisions of the Companies Act to show that under those provisions, the lender and borrowers, both are required to file the Board resolutions by which the lender was authorized to give the loan and the borrower was authorized to receive the loan. Under such circumstances, the decisions upon which the applicant placed reliance in our considered view are not applicable.

In order to file an application under Section 7, the applicant is required to establish that the applicant is the Financial Creditor, the amount which he has paid is a financial debt and there is a default in payment of the financial debt.

At this juncture, we would like to refer to the submissions made on behalf of the Ld. Counsel appearing for the applicant that the 26AS of the Income Tax statement of the applicant shows that the Corporate Debtor has deducted TDS on 31.03.2017 therefore, that is the acknowledgment of the debt. At this juncture, we would like to refer to the decision of the Hon'ble Delhi High Court in the matter of Utility Powertech Limited Vs. Amit Traders, RFA No. 515/2015 decided on 15th May, 2018 which is based upon the judgment of the Supreme Court in the matter of Commissioner of Income Tax v. Gujarat Fluoro Chemicals (2012) 13 SCC 731 and the Hon'ble Bombay High Court in the matter of S.P. Brothers v. Biren Ramesh Kadakla (2009) 1 Bom CR 453 in which the Hon'ble Delhi High Court held that:

"19. On the issue of TDS deduction, the Trial Court may have erred as the settled position is that deduction of TDS does not constitute an admission of liability. The Trial Court may be wrong in holding that the TDS certificate by itself constitutes an admission of liability. This is not so, inasmuch as the TDS can be deducted even on the expectation of estimated liability. Independently of the TDS certificate, the liability of the Defendant is quite clear. The Supreme Court in Commissioner of Income Tax v. Gujarat Fluoro Chemicals (2012) 13 SCC 731 categorically held that "both advance tax as well as TDS are based on estimation of income by the assessee." The Bombay High Court as well, in S.P. Brothers v. Biren Ramesh Kadakla (2009) 1 Bom CR 453 has held that "the issuance of TDS certificates does not amount to an acknowledgement of defendant within the meaning of Section 25 of the Indian Evidence Act.......The TDS certificate is primarily to acknowledge the deduction of tax at source." The judgment dated. 27th November, 2012 in Bigdot Advertising & Communications Pvt. Ltd. v. Union of India [CS(OS) No. 226/2000] was dealing with the question of the person who is liable once the TDS certificate is issued. It is not a precedent on the proposition that if a TDS certificate is issued, it amounts to admission of liability. In light of this, though the deduction of TDS by itself cannot be sufficient to impose liability, but on a totality of facts it is clear that the defendant is liable."

When we shall consider the submissions of the applicant in the light of above decisions then we are of the considered view that the issuance of TDS certificate does not amount to an acknowledgement of debt by the Corporate Debtor.

So far the ground taken by the Ld. Counsel appearing for the Corporate Debtor that the application is barred by limitation is concerned, since we have already held that the applicant is not a Financial Creditor and the amount given by the applicant is not a Financial Debt therefore, it is needless to consider the plea of limitation.

At this juncture, we would also like to refer to Section 7(5) of the IBC and the same is quoted below.

"7. Initiation of corporate insolvency resolution process by financial creditor-

(5) Where the Adjudicating Authority is satisfied that--

(a) a. default has occurred, and the application under subsection (2) is complete, and there is no disciplinary proceedings pending against the proposed resolution professional, it may, by order, admit such application; or

(b) default has not occurred or the application under subsection (2) is incomplete or any disciplinary proceeding is pending against the proposed resolution professional, it may, by order, reject such application:

Provided that the Adjudicating Authority shall, before rejecting the application under clause (b) of sub-section (5), give a notice to the applicant to rectify the defect in his application within seven days of receipt of such notice from the Adjudicating Authority.

In the light of aforesaid provision when we shall consider the case in hand then we find that the applicant has failed to convince us that the amount which he has paid comes under the definition of Financial Debt and the applicant is the Financial Creditor therefore, the present application is not maintainable. Accordingly, we hereby reject the prayer of the applicant to initiate the CIRP against the Corporate Debtor. Hence the present application stands dismissed. Registry to send a copy of this order to the both parties.