Shinhan Bank v. M/s Sungil India Pvt Ltd & Anr.

DR. DEEPTI MUKESH, MEMBER (JUDICIAL)

1. The present application is filed by one of members of COC, Shinham Bank who is holding 14.96% voting rights and has challenged the status of all other COC members as financial creditors, being the individuals, who claim to be financial creditors on the basis of their lending of money to the Corporate Debtor as unsecured loans.

2. The applicant Shinhan Bank has prayed for the following reliefs:

a) Pass orders setting aside the whole debt of the Respondent No. 1 (Corporate Debtor) created on account of the extortionate and illegal credit transactions entered into by Respondent Nos. 3-11

b) Pass appropriate directions to the Resolution Professional of Respondent No.1 (Corporate Debtor) to remove the names of the Respondent Nos. 3-11 from the List of Financial Creditors.

c) Pass a consequential declaration that the Committee of Creditors Meetings on 13.06.2018, 29.08.2018, 12.09.2018 and 29.09.2018 and the resolutions therein are non-est null and void.

3. The Respondents herein are as follows: RP is Respondent no. 2 and Respondents No.3 to 11 are : M/s Sungil India Pvt Ltd., Anamika Singh, Anand Dubey HUF, Madhulika Chahal, Dushyant Rana, Pervinder Yadav, Shri Bhagwan, Ankit Yadav, Rajendra Singh and Pankaj Pahuja, private persons who claim to have given unsecured loans to Corporate Debtor during the year 2016-2017, each respectively lending different amounts which is termed as Deposit under the Companies Act, 2013 by RP. The reply of Respondent No. 3-11 also filed and claim that said money was advanced in form of loan with Corporate Debtor.

4. The applicant claims that the transactions between the Corporate Debtor and Respondents no.3-11 of lending/advancing money, by a private person, who is not a member of company, after the Companies Act, 2013 coming into vogue, has to be and can only be nomenclature as deposit/loan as defined under Section 73 of the Companies Act, 2013. In order to understand the word deposit and whether it is exhaustive, it is pertinent to read the definition of deposit as defined under Section 2(31) of the Companies Act, 2013. Section 2(31) reads as follows: Deposit includes any receipt of money by way of deposit or loan or in any other form by a company, but it does not include such categories of amount as may be prescribed in consultation with the Reserve Bank of India.

5. As per the applicants arguments Section 73 clearly bars the company to accept any money from private persons unless as provided therein. Admittedly the Corporate Debtor has not accepted any money from respondents no.3 to 11 in compliance of Section 73, hence such contracts are void as per Section 23 and Section 24 of the Indian Contract Act and thus unenforceable in law thereby the Respondents no.3-11 even though have advanced money and as per account of Corporate Debtor, interest is also paid for certain period but the said transactions are void in eyes of law and based on that the Respondents no.3-11 cannot claim the status of Financial Creditor as defined under Insolvency and Bankruptcy Code. They may prove their claim and right to recover, but they are not Financial Creditors and cannot become members of Committee of Creditors.

6. The applicant has further stated that Corporate Debtor and Respondents are related parties and hence the loan is advanced at such huge/ exorbitant rate of interest which is termed Extortionate Transaction as defined under Section 50 of Insolvency and bankruptcy Code and the same cannot be considered for the purpose of considering them as Financial Creditors.

7. The Respondents have filed reply vehemently opposing the application and prayed for confirming status of Respondent 3-

11 as financial creditors as admitted by RP.

8. In the reply filed by the Respondent no. 2 the Resolution Professional, it is submitted that the claims of the Respondent Nos.3 to 11 have been filed with the IRP before the 1st CoC meeting. The claims of Respondent No. 3 to 11 were not immediately admitted for want of certain clarifications and explanation. The claims subsequently were admitted during CoC meeting and accordingly, CoC was re-constituted.

9. It is further argued by Resolution Professional that the Applicant has never questioned the admission of the claims of Respondent Nos. 3 to 11 until the 5th CoC meeting, therefore the entire process of the Applicant is only an afterthought and is directed towards some vested motive. Further, the conduct of the Applicant can be seen from his stand in CoC wherein he has opposed each and every agenda item of the essential nature including charges for engaging Security Guards for protection of assets and also other charges as Publication Cost of Expression of Interest, Appointment of Forensic Auditor, E- voting costs, Appointment of valuers for the asset valuation of Corporate Debtor etc. and all were opposed by the Applicant on unprincipled and baseless reasons.

10. It is further argued by Respondents that Section 76A deals with the alleged non- compliance of Section 73 and provides for refund of money to be made. Thus, even if funds are accepted in contravention of Section 73 of the Act, the same should be refunded back as a natural corollary. Further provisions of Section 73& 76 are merely directory and not mandatory. Company can borrow from anyone and money borrowed cannot be construed as a deposits unless the company itself wants to make it deposit by following the procedure laid down in Section

73. Even if the deposits are accepted in contravention of Section 73, it is a violation on the part of the Company and default has to be borne by the Company through its Directors and/or Ex- Directors. For the act of any contravention of law by the company (Corporate Debtor herein) the lender cannot be punished.

11. In the reply filed by the Respondent No. 3-11, it is submitted that the Corporate Debtor was in need of money and finding no financial assistance from any financial institution due to its poor credit rating had no other option but to borrow from the answering respondent and the answering respondents, knowing the director of the Corporate Debtor chose to advance the loan as per the mutually agreed terms. The answering respondent having advanced short-term loan to the Corporate Debtor for the purpose of running the company, could not be penalized for fault or any compliance default if committed by the Corporate Debtor.

12. It is denied that the amounts even if inappropriately advanced by the Respondent nos. 3-11 do not fall within the accepted legal manner of monies that can be accepted by any private company under the Companies Act, 2013.

13. It is further denied that the communications between the answering respondent and the Corporate Debtor do not clearly establish the conditions of the said loan. The claim of the answering respondent categorically enumerates, in their letters/ correspondences while advancing money, the conditions on which the short -term loan had been advanced by the answering respondent to the Corporate Debtor, further the same could easily be verified by a perusal of the financial statements of the Corporate Debtor and the forensic audit.

14. It is further denied by the respondents that the agreement between the answering respondent and Corporate Debtor is a void agreement and is not for a lawful consideration. It is submitted that Corporate Debtor took a short-term loan from the answering respondent and the answering respondent could not be penalized for the conduct of Corporate Debtor. Further, the Corporate Debtor had duly issued a cheque in discharge of its financial obligation for an interest due ,on such advance ,for period and as such.

15. Further it is strongly denied that the Respondents nos. 3-11 had been inducted as financial creditors illegally. The fact remains that the answering respondent is a financial creditor and the same could be gauged by a bare perusal of the documents submitted by the answering respondent with the RP as well as the confirmation of said claims reflected in the Forensic audit of Corporate Debtor.

16. It is an admitted fact that the Respondent no.3 to Respondent no. 11 have claimed certain amounts on the basis of the loan of amount extended to the Corporate Debtor during the period 2016-2017 and as per the report certifying the Reconstitution of the Committee of Creditors of Corporate Debtor, Respondent no. 2, Resolution Professional has admitted such amounts in following manner: Name of the Financial Creditors Amount Claimed by the Financial Creditors (Amount in Rs.) Amount Admitted (Amount in Rs.) % of Voting Rights

1. Shinhan Bank (Applicant) 33,45,753 33,45,753 14.96%

2. Anamika Singh (Resp. No.3) 1,36,12,500/- 75,00,000/- 33.55%

3. Anand Dubey (Resp. No.4) 39,94,500/- 30,00,000/- 13.42%

4 Madhulika Chahal (Resp. No.5) 13,33,200/- 10,00,000/- 4.47%

5 Dushyant Rana (Resp. No. 6) 13,33,200/- 10,00,000/- 4.47%

6 Pervinder Yadav (Resp. No. 7) 9,32,000/- 5,00,000/- 2.23%

7 Shri Bhagwan (Resp. No. 8) 35,46,000/- 16,50,000/- 7.38%

8 Ankit Yadav (Resp. No. 9) 15,60,000/- 10,00,000/- 4.47%

9 Rajendra Singh (Resp. No. 10) 22,20,000/- 15,00,000/- 6.71%

10 Pankaj Pahuja (Resp. No.11) 28,32,000/- 20,00,000/- 8.30%

17. It is further denied by the Respondents that in the absence of any specific loan agreement, the loan could not be substantiated on the basis of communications between the Corporate Debtor. The transfer of the loan amount from the account of the Respondents to the account of the Corporate Debtor is an admitted fact and the same would find mention in the balance sheet of the Corporate Debtor, as well as in the forensic audit of the Corporate Debtor. Moreover, the communications exchanged between the parties constitutes a binding agreement between the Corporate Debtor and the Respondent no.3 to Respondent No.11.

18. Further it is stated that the address of the Respondent no.3 was the erstwhile registered address of the Corporate Debtor but back in September 2017, the Respondent No.3 has refused the Corporate Debtor to continue the use of its address and change the same in the ROC records. Using the premises as registered office for some purpose does not make persons as related parties.

19. It is further denied by the respondents that the Directors of Corporate Debtor and the Respondent nos. 3-11 have connived with each other to enter into an illegal agreement which is in contravention of law and therefore void as per Sections 23 and

24 of the Indian Contract Act, 1872. Here it is submitted that the Corporate Debtor has been submitting its audit reports and balance sheets at the end of every financial year, with the applicant who is a financial institution being bank of Corporate Debtor however, the applicant never raised the said issue with the Corporate Debtor at any earlier point of time.

20. Lastly, it is submitted that transactions between respondent nos. 3-11 and the Corporate Debtor does not fall within the definition of Extortionate credit transactions as under Regulation 5 of the IBBI Regulations 2016. The answering respondent has demanded interest as per the rate agreed between the answering respondent and the Corporate Debtor.

21. After hearing the Ld. Counsels for applicant and Respondents

3 to 11, the matter was fixed for hearing of Respondent 2 i.e. RP, specifically at their request on 23.04.2019. On the said date RP further sought adjournment which was declined, hence liberty was sought and granted to file written submissions by RP, and further to all parties, if desired.

22. The main issue which is to be decided is: a. Whether the respondents No. 3 to 11, the members of CoC as on date are Financial Creditors as defined under Section 5 (7) while considering the money advanced by them, and/or, will fall under the category of Financial Debt under Section 5(8)(a). For convenience Section 5(8)(a) is reproduced hereunder: - (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; The money advanced by the respondent Nos. 3 to 11 since is not in pursuance of any loan agreement/ document but merely a letter by lender for advance to the Corporate Debtor, it is important to consider that whether the sum advanced can fall under the category of deposit/loan to the Corporate Debtor which is governed by Section 73 to 76 of the Companies Act, 2013 or whether money advanced is not deposit but an unsecured loan/ short term loan to the Corporate Debtor based on the agreement between the parties which is supported by a letter and correspondences between the Corporate Debtor and Respondents Nos.3 to 11, fixing the rate of interest, to be paid thereon. The Corporate Debtor has paid interest against the said advanced loan for a certain period and thereafter has defaulted, reveals that the said terms of advance of money was agreed and accepted by parties. To examine whether this advance is in the form of deposit then Section 73(1) read with Section 2(c) of Companies (Acceptance of Deposit) Rules, 2014 has to be considered. The same are reproduced herein: - Section 2 (c) of Companies (Acceptance of Deposit) Rules, 2014: Deposit includes any receipt of money by way of deposit or loan or in any other form, by a company, but does not include

(i) any amount received from the Central Government or a State Government, or any amount received from any other source whose repayment is guaranteed by the Central Government or a State Government, or any amount received from a local authority, or any amount received from a statutory authority constituted under an Act of Parliament or a State Legislature ;

(ii) any amount received from foreign Governments, foreign or international banks, multilateral financial institutions (including, but not limited to, International Finance Corporation, Asian Development Bank, Commonwealth Development Corporation and International Bank for Industrial and Financial Reconstruction), foreign Governments owned development financial institutions, foreign export credit agencies, foreign collaborators, foreign bodies corporate and foreign citizens, foreign authorities or persons resident outside India subject to the provisions of Foreign Exchange Management Act, 1999 (42 of 1999) and rules and regulations made there under;

(iii) any amount received as a loan or facility from any banking company or from the State Bank of India or any of its subsidiary banks or from a banking institution notified by the Central Government under section 51 of the Banking Regulation Act, 1949 (10 of 1949), or a corresponding new bank as defined in clause (d) of section 2 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 (5 of 1970) or in clause (b) of section (2) of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980 (40 of 1980) , or from a co- operative bank as defined in clause (b-ii) of section 2 of the Reserve Bank of India Act, 1934 (2 of 1934) ;

(iv) any amount received as a loan or financial assistance from Public Financial Institutions notified by the Central Government in this behalf in consultation with the Reserve Bank of India or any regional financial institutions or Insurance Companies or Scheduled Banks as defined in the Reserve Bank of India Act, 1934 (2 of 1934);

(v) any amount received against issue of commercial paper or any other instruments issued in accordance with the guidelines or notification issued by the Reserve Bank of India;

(vi) any amount received by a company from any other company;

(vii) any amount received and held pursuant to an offer made in accordance with the provisions of the Act towards subscription to any securities, including share application money or advance towards allotment of securities pending allotment, so long as such amount is appropriated only against the amount due on allotment of the securities applied for; Explanation.- For the purposes of this sub-clause, it is hereby clarified that (a) Without prejudice to any other liability or action, if the securities for which application money or advance for such securities was received cannot be allotted within sixty days from the date of receipt of the application money or advance for such securities and such application money or advance is not refunded to the subscribers within fifteen days from the date of completion of sixty days, such amount shall be treated as a deposit under these rules. (b) any adjustment of the amount for any other purpose shall not be treated as refund.

(viii) any amount received from a person who, at the time of the receipt of the amount, was a director of the company: Provided that the director from whom money is received, furnishes to the company at the time of giving the money, a declaration in writing to the effect that the amount is not being given out of funds acquired by him by borrowing or accepting loans or deposits from others;

(ix) any amount raised by the issue of bonds or debentures secured by a first charge or a charge ranking pari passu with the first charge on any assets referred to in Schedule III of the Act excluding intangible assets of the company or bonds or debentures compulsorily convertible into shares of the company within five years: Provided that if such bonds or debentures are secured by the charge of any assets referred to in Schedule III of the Act, excluding intangible assets, the amount of such bonds or debentures shall not exceed the market value of such assets as assessed by a registered valuer;

(x) any amount received from an employee of the company not exceeding his annual salary under a contract of employment with the company in the nature of non-interest bearing security deposit;

(xi) any non-interest bearing amount received or held in trust;

(xii) any amount received in the course of, or for the purposes of, the business of the company,- (a) as an advance for the supply of goods or provision of services accounted for in any manner whatsoever provided that such advance is appropriated against supply of goods or provision of services within a period of three hundred and sixty-five days from the date of acceptance of such advance: Provided that in case of any advance which is subject matter of any legal proceedings before any court of law, the said time limit of three hundred and sixty-five days shall not apply: (b) as advance, accounted for in any manner whatsoever, received in connection with consideration for property under an agreement or arrangement , provided that such advance is adjusted against the property in accordance with the terms of agreement or arrangement; (c) as security deposit for the performance of the contract for supply of goods or provision of services; (d) as advance received under long term projects for supply of capital goods except those covered under item (b) above: Provided that if the amount received under items (a), (b) and (d) above becomes refundable (with or without interest) due to the reasons that the company accepting the money does not have necessary permission or approval, wherever required, to deal in the goods or properties or services for which the money is taken, then the amount received shall be deemed to be a deposit under these rules: Explanation. - For the purposes of this sub-clause the amount referred to in the first proviso shall be deemed to be deposits on the expiry of fifteen days from the date they become due for refund.

(xiii) any amount brought in by the promoters of the company by way of unsecured loan in pursuance of the stipulation of any lending financial institution or a bank subject to fulfillment of the following conditions, namely:- (a) the loan is brought in pursuance of the stipulation imposed by the lending institutions on the promoters to contribute such finance; (b) the loan is provided by the promoters themselves or by their relatives or by both; and (c) the exemption under this sub-clause shall be available only till the loans of financial institution or bank are repaid and not thereafter;

(xiv) any amount accepted by a Nidhi company in accordance with the rules made under section 406 of the Act. Explanation. - For the purposes of this clause, any amount. - (a) received by the company, whether in the form of instalments or otherwise, from a person with promise or offer to give returns, in cash or in kind, on completion of the period specified in the promise or offer, or earlier, accounted for in any manner whatsoever, or (b) any additional contributions, over and above the amount under item (a) above, made by the company as part of such promise or offer, shall be treated as a deposit; Section 73(1) of the Companies Act, 2013: - Prohibition on acceptance of deposits from public: - (1) On and after the commencement of this Act, no company shall invite, accept or renew deposits under this Act from the public except a manner provided under this chapter.

23. On perusal of Section 73(1) of the Companies Act, 2013 read with Rule 2(c) of Companies (Acceptance of Deposit) Rules and after analysing the transactions between the Corporate Debtor and Respondents No. 3 to 11, it can be said that the said advance of money was accepted by Corporate Debtor as loan. Section 73(2) will not apply since none of the respondents no. 3-11 are members of Corporate debtor advancing such money.

24. Considering that the said money advanced by the respondents to the Corporate Debtor is not deposit but loan, the question arises as to what kind of debt can it be categorised into. Certainly, this is not an Operational debt as there is no transaction for goods or services, the money is plainly advanced for the business purpose of the Corporate Debtor having clause of Interest though much higher as compared to market or other prevailing rates in normal parlance or business dealings.

25. It needs to be discussed whether the money advanced by the Respondents no. 3-11 is Financial Debt as defined in Section 5(8), Honble NCLAT has clarified the principles in respect of claimant being Financial Creditor in the judgment of Sanjay Kewalramani vs. Sunil Parmanand Kewalramani & Ors. Company Appeal (AT) (Insolvency No. 57 of 2018): -

12. There is nothing on the record to suggest that Respondents had given the loan in favour of the Corporate Debtor which can be termed to be disbursement of an amount for consideration for the time value of money as required under Section 5(8). Merely grant of loan and admission of taking loan will ipso facto not treat the Respondents as Financial Creditors, till they show that it complies with the substantive definition or any one or other clause of Section 5(8).

13. Mere fact that the company paid interest @ 12% per month, during certain period cannot be the ground to hold that the debt comes within the meaning of Financial Debt to treat the Respondents as Financial Creditors.

26. Moreover, if such advance is considered as loan with term of interest then carrying the rate of interest which is exorbitant and nowhere near business standards as prevailing in the market shall attract Section 50 of the IBC Code which deals with the Extortionate Credit Transactions. Generally, in private loans maximum 24% p.a. is the rate of interest accepted by the parties but in the present transaction, the accepted and the agreed rate of interest is 65% in cases of loans given by all respondents no.3-11 which leads us to consider these transactions as Extortionate Credit transaction. Section 50 of the I& B Code is reproduced below:

50. (1) Where the corporate debtor has been a party to an extortionate credit transaction involving the receipt of financial or operational debt during the period within two years preceding the insolvency commencement date, the liquidator or the resolution professional as the case may be, may make an application for avoidance of such transaction to the Adjudicating Authority if the terms of such transaction required exorbitant payments to be made by the corporate debtor.

50. (2) The Board may specify the circumstances in which a transactions which shall be covered under sub-section (1). Explanation.For the purpose of this section, it is clarified that any debt extended by any person providing financial services which is in compliance with any law for the time being in force in relation to such debt shall in no event be considered as an extortionate credit transaction. The Section clearly means that if the Corporate Debtor is involved in any extortionate credit transaction which involves the receipt of any money, the RP has to consider the same and avoid such transaction. Such an exercise is neither discussed nor considered by RP.

27. As a sequel to above discussions, Application is allowed thereby Respondents no. 3-11 are declared as not falling under category of Financial Creditors but may be unsecured creditors who may avail other remedies to recover their debt. Further it is ordered that the COC meetings held on 13.06.18, 29.08.18, 12.09.18 and 29.09.18 are non-est and resolutions passed if any therein such meetings stands nullified.

28. The RP is directed to reconstitute the COC and hold the meeting to proceed with CIRP and to take all further steps promptly.

29. Let the copy of the order be made available to all the parties concerned and be also sent to IBBI for record and further directions.

30. With above observations application is disposed of. Sd/- Sd/- (PRADEEP R. SETHI) (DR. DEEPTI MUKESH) MEMBER (T) MEMBER (J)