Judicial Analysis Court Copy Headnote Facts Arguments Court observation

2024 Supreme(Online)(NCLAT) 1289

NATIONAL COMPANY LAW APPELLATE TRIBUNAL
Arun Baroka, Member (Technical)
H.E. Captain Ammeet K Agarwal Suspended Director of Sangeeta Aviation Services Private Limited – Appellant
Versus
Gannon Dunkerley And Company Limited – Respondent
Company Appeal (AT) (Insolvency) No. 719 of 2021 | I.A. No. 5680 of 2023

Advocates:
For the Appellants/Petitioners: Mr. Dwashish Chauhan, Mr. Paras Mithal
For the Respondents: Mr. Santosh Kumar, Mr. Vaibhav Tyagi

The court ruled that a decree in favour of a Financial Creditor creates a legal right to initiate corporate insolvency proceedings, regardless of the presence of interest, emphasizing the definitions of financial debt under the Code.

Headnote:(A) Insolvency and Bankruptcy Code, 2016 - Section 61 - Challenge to NCLT order allowing CIRP - Appellant contended that Respondent was not a Financial Creditor under Section 5(7) or 5(8) - Decree of Bombay High Court awarded interest at 12% for unpaid dues - Essential elements of a financial debt discussed; necessity of 'disbursal' and 'time value of money' highlighted - Court found Respondent qualifies as Financial Creditor by virtue of decree and its nature of transaction - Appeal dismissed, sustaining the initiation of CIRP against Corporate Debtor. (Paras 6.2, 27, 31)

(B) Financial Debt - Definition under IBC - Court clarified interest is not a precondition for classification - Emphasized that decree holders hold rights to initiate Section 7 proceedings. (Paras 21, 22, 28)

Facts of the case:
Appellant contested the NCLT's acceptance of CIRP application from the Respondent based on claims of financial creditor status unsupported by debt agreement, asserting such a decree does not fulfill the financial debt criteria.

Findings of Court:
The decree from the Bombay High Court established the Respondent as a Financial Creditor, validly allowing CIRP initiation despite procedural anomalies. The essence of financial debt and creditor status under the Code clarified by examining notion of 'disbursal' in context of underlying agreements present.

Issues: The main issue was whether the decree constitutes financial debt and whether the Respondent qualifies as a Financial Creditor under the Code.

Ratio Decidendi: The court ruled that a decree in favour of a creditor creates the right to initiate proceedings under the IBC within three years, irrespective of the stipulation of interest, reinforcing the need for the nature of the financial debt to align with legal definitions provided in the Code.

Result: Appeal dismissed, confirming the NCLT's order.

Table of Content
1. appellant contests the cirp initiation based on inadequate financial creditor status. (Para 1 , 2 , 3)
2. challenges raised concerning procedural defects and the nature of debt. (Para 4 , 5 , 6 , 7)
3. context of the case established by background and parties involved. (Para 8 , 9 , 10)
4. court's ruling surrounding the concept of financial debt and creditor status. (Para 21 , 22 , 23 , 28)
5. conclusion affirming the tribunal's decision on cirp initiation. (Para 31)

JUDGMENT

(Hybrid Mode)

[Per: Arun Baroka, Member (Technical)]

This is an appeal under Section 61 of the Insolvency and Bankruptcy Code, 2016 ("Code") challenging the order dated 10th August, 2021 ("Impugned Order") passed by the Hon’ble National Company Law Tribunal, Mumbai Bench ("NCLT/Adjudicating Authority") in C.P. No. 3073/IBC/MB/2019 ("said Application") filed by the Respondent No.1 under Section 7 of the Code seeking initiation of Corporate Insolvency Resolution Process ("CIRP") against Sangeeta Aviation Services Private Limited ("Corporate Debtor"). The Adjudicating Authority allowed the said Application vide order dated 10th August, 2021, thereby, allowing initiation of CIRP of the Corporate Debtor.

Appellant’s Case

1. The Impugned Order is challenged on the grounds that it is contrary to law and adversely affects the rights of the Corporate Debtor, as Respondent No.1 has wrongfully claimed to be a Financial Creditor under Section 7 of the Code and has misled the Adjudicating Authority.

2. As a background of the Case:

a) Respondent No.1 filed C.P. No. 3073/2019 (Gannon Dunkerley & Co.Ltd. vs. Sangeeta Aviation Services Private Limited) under Section 7 of the Code in July 2019 ("Section 7 Application").

b) Respondent No.1’s claim is based solely on a decree dated January 9, 2019, by the Hon’ble Bombay High Court in Commercial Summary Suit No. 714 of 2018, awarding interest at the rate of 12% per annum as compensation, which is standard in such Recovery Civil Suits.

3. Main grounds for Resisting the Application are as follows:

3.1. D ebt Amount Calculation: The total debt amount claimed includes an interest of Rs. 27,05,753/- based on the order from the Bombay High Court. However, a money suit decree does not necessarily qualify as a financial debt under Sections 5 (7) and 5(8) of the Code. Respondent No.1 does not qualify as a Financial Creditor under Section 5 (7), and the claimed amount does not constitute a financial debt as defined under (8) of the Code.

3.2. Lack of Agreement for the Claimed Amount: The Applicant did not produce any agreement for the claimed amount, which is essential to qualify as a financial debt under Section 5 (8) of the Code.

3.3. Improper Application of Section 55(2): The Application incorrectly referenced Section 55(2) of the Code, which applies only to the Fast Track Insolvency Resolution Process, not to regular CIRP.

3.4. Defective Written Communication: The proposed Interim Resolution Professional (IRP) failed to provide necessary disclosures in accordance with the IBBI (Insolvency Professionals) Regulations, 2016, and incorrectly used Form 5 applicable to Operational Creditors instead of Form 1.

4. Deficiencies in the Transaction:

4.1. Lack of Board Resolution: No board resolution of the Corporate Debtor backed the transaction.

4.2. Absence of Loan Agreement: There was no agreement stipulating loan terms and interest.

4.3. No Stipulation of Repayment Period: No document outlined the repayment period, missing essential elements of a financial debt.

5. Impugned Order’s Legal Unsustainability:

5.1. The order is unsustainable as Respondent No.1 does not meet the criteria of a Financial Creditor and the alleged debt does not qualify as a financial debt under Section 5 (8) of the Code.

5.2. Respondent No.1 relied on bills of exchange and post-dated cheques, which do not establish a financial debt under the Code.

6. Case Laws Cited:

6.1 Earth Gracia Buildcon Pvt. Ltd vs Earth Infrastructure Ltd. (Company Appeal (AT) (Ins.) No. 351

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2024 Supreme(Online)(NCLAT) 1289

The court ruled that a decree in favour of a Financial Creditor creates a legal right to initiate corporate insolvency proceedings, regardless of the presence of interest, emphasizing the definitions of financial debt under the Code.

Cases Referred (1)