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K.P. Jayaram And Anr. v. Radha Exports (India) Pvt. Ltd. .
Structured Summary of the Opinion — Company Appeal (AT) (Insolvency) No. 224 of 2019
Factual and Procedural Background
On 02.09.2019 Mr. K.P. Jayaram and Mrs. Shoba Jayaram (Appellants) filed an application under Section 7 of the Insolvency and Bankruptcy Code, 2016 (I&B Code) against M/s. Radha Exports (India) Private Limited (Corporate Debtor). The Adjudicating Authority (National Company Law Tribunal), Division Bench, Chennai rejected that application by an order dated 19th December, 2018 on the grounds that the claim was barred by limitation and that no financial debt existed.
The Appellants contended before the appellate forum that they are financial creditors and that the debt is not barred by limitation. The Corporate Debtor relied on a “Correlation Statement” asserting that certain payments had been made by the predecessor concern (Radha Exports, proprietary concern) to various payees (including Customs, Chennai and an individual, Mr. Kulasekaran) which, it was argued, discharged the claimed liability.
Procedurally, the Appellants had earlier issued a legal notice on 19th November, 2012 and filed a winding up petition (Company Petition No. 335 of 2013) on 15th February, 2013. That winding up petition was transferred to the NCLT and subsequently dismissed on 4th October, 2017 because Section 433 of the Companies Act, 2013 was deleted, with liberty to the Appellants to file afresh. Thereafter, a Demand Notice under the I&B Code was issued on 7th December, 2017; the Corporate Debtor replied on 14th December, 2017. An application earlier filed in CP/77/IB/CB/2018 was allowed to be withdrawn on 12th April, 2018 with liberty to file afresh, and the present Section 7 application in Form 1 was filed on 25th April, 2018.
Records also show that the Assistant Commissioner of Income Tax, by letter dated 26th June, 2012, referred to the balance sheet of Radha Exports (India) Private Limited indicating that Smt. Shobha Jayaram (2nd Appellant) had advanced a loan of Rs. 90,00,000 to the proprietary concern which was shown as converted into Share Application Money after incorporation. The company later sought rectification from the Income Tax authority on 10th October, 2012.
Legal Issues Presented
- Whether the Appellants' claim is barred by limitation.
- Whether the Appellants can be characterised as Financial Creditors under the I&B Code (Section 5(7)/5(8)), in respect of the amounts alleged to have been disbursed.
- Whether the Adjudicating Authority erred in rejecting the Section 7 application on the grounds that no financial debt existed and that the claim was time-barred.
- Whether, given the factual matrix (including prior winding up proceedings and the Income Tax remand), the Section 7 application was maintainable and should have been admitted to initiate the Corporate Insolvency Resolution Process (CIRP).
Arguments of the Parties
Appellants' Arguments
- The Appellants asserted they are Financial Creditors.
- They argued that the debt is not barred by limitation, pointing to their prior proceedings (legal notice, winding up petition) and subsequent actions under the I&B Code.
- The Appellants relied on records, including the Income Tax office correspondence, indicating a loan amounting to Rs. 90,00,000 advanced by the 2nd Appellant which was treated as Share Application Money after incorporation but no shares were issued.
Corporate Debtor's Arguments
- The Corporate Debtor placed reliance on a Correlation Statement asserting that payments had been made by the proprietary concern in favour of various payees (including Customs, Chennai and an individual, Mr. Kulasekaran) that, it was claimed, discharged the debt purportedly owed to the Appellants.
- On that basis the Corporate Debtor contended there was no financial debt existing and that the claim was barred by limitation.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| M/s. Innoventive Industries Ltd. v. ICICI Bank & Anr., (2018) 1 SCC 407 | Explanation of the statutory scheme under the I&B Code relevant to Section 7: definition of "default" (Section 3(12)), "debt" (Section 3(11)) and "claim" (Section 3(6)); distinctions between financial and operational creditors (Sections 5(7), 5(8), 5(21)); procedural requirements under Section 7 and the Rules (Form 1, Rule 4); the adjudicating authority's duty to ascertain default within 14 days and to admit an application if satisfied of default unless the debt is not payable in law or fact. | The court relied on the principles set out in Innoventive to explain when an adjudicating authority must admit a Section 7 application and how a corporate debtor may contend that a debt is not due (because not payable in law or fact). The Innoventive framework was used to assess whether the Adjudicating Authority should have admitted the Appellants' Section 7 application. |
Court's Reasoning and Analysis
The court analysed the matter in several steps:
-
It examined the Correlation Statement relied upon by the Corporate Debtor and rejected the submission that the total amount claimed by the Appellants had been paid. Two primary reasons were given:
- Certain payments shown in the Correlation Statement were made to Customs, Chennai (Rs. 53,05,000) and to one Mr. Kulasekaran (Rs. 1,75,000). The payments relevant to the alleged financial creditors were disputed by those creditors, and the Corporate Debtor did not satisfactorily correlate why payments were made to Mr. Kulasekaran or show that such payments extinguished the Appellants' claim.
- If the Corporate Debtor's contention that the total amount had been paid were accepted, it would be inconsistent with the Corporate Debtor's prior plea before the Adjudicating Authority that the amount was not payable in law because it was barred by limitation. That inconsistency undercut the Corporate Debtor's assertion that the debt had been discharged by payments.
- The court applied the Supreme Court's exposition in Innoventive regarding Section 7: when there is a debt and default, normally the Adjudicating Authority is obliged to admit a Section 7 application unless the Corporate Debtor, with evidence, can show the debt is not payable in law or fact. The court treated Innoventive as instructive for the standards and process an adjudicating authority must follow.
- The court reviewed the procedural history and documentary record (including the Income Tax office correspondence indicating a Rs. 90,00,000 loan by Smt. Shobha Jayaram which was treated as Share Application Money but where no shares were issued). The court regarded the Appellants' earlier winding up steps and the sequence of events (withdrawal with liberty to refile, subsequent filing under Section 7) as relevant to the limitation question and to the maintainability of the Section 7 application.
- On the question of whether the Appellants are financial creditors, the court noted that the Assistant Commissioner of Income Tax’s record showed that Rs. 90,00,000 was disbursed by the 2nd Appellant for consideration of the time value of money and subsequently treated as Share Application Money. Because no shares were issued despite the Demand Notice, the court concluded that a financial debt exists in favour of the Appellants (particularly the 2nd Appellant).
- The court concluded that the Adjudicating Authority erred in finding that the Appellants were not financial creditors and in rejecting the Section 7 application as barred by limitation. It found that the Appellants' claim was not barred by limitation given the prior proceedings and the procedural posture that led the Appellants to invoke the I&B Code.
- Consequently, the court set aside the impugned NCLT order dated 19th December, 2018 and remitted the matter to the Adjudicating Authority with the direction to admit the Section 7 application after giving notice to the Corporate Debtor, so that the Corporate Debtor may have an opportunity to settle the claim prior to admission of the application and initiation of the Corporate Insolvency Resolution Process (CIRP).
Holding and Implications
Core Ruling: The appeal was allowed; the impugned order dated 19th December, 2018 of the Adjudicating Authority was set aside and the case was remitted to the Adjudicating Authority, Chennai with a direction to admit the Section 7 application after notice to the Corporate Debtor.
Direct consequences and practical implications stated in the opinion:
- The Adjudicating Authority is directed to admit the Section 7 application after giving notice to the Corporate Debtor so as to enable the Corporate Debtor to settle the claim prior to admission and initiation of the CIRP against M/s. Radha Exports (India) Private Limited.
- The court found that the Appellants are financial creditors (particularly noting the position of the 2nd Appellant) and that there is a default by the Corporate Debtor in respect of the relevant financial debt.
- No costs were awarded (the opinion states "No costs").
The opinion does not elaborate broader law-making implications beyond the immediate directions and the application of the principles from Innoventive; the decision primarily results in setting aside the Adjudicating Authority's order and remitting the matter for admission of the Section 7 application.
02.09.2019 Mr. K.P. Jayaram and Mrs. Shoba Jayaram filed application under Section 7 of the Insolvency and Bankruptcy Code, 2016 (I&B Code for short) against M/s. Radha Exports (India) Private Limited- (Corporate Debtor). The Adjudicating Authority (National Company Law Tribunal), Division Bench, Chennai, by impugned order dated 19th December, 2018 rejected the application on the ground that it is barred by limitation and no financial debt is in existence.
2. Learned counsel appearing on behalf of the Appellants while referring to the records has taken plea that the Appellants are the Financial Creditors and debt is not barred by limitation.
3. Reliance has been placed on Correlation Statement made by the Respondent- (Corporate Debtor), which are as follows: Company Appeal (AT) (Insolvency) No. 224 of 2019 CORRELATION STATEMENT
I. Statement of payments made by Radha Exports (Proprietary Concern) to the Appellants (Sl. Nos. 1 to 5 of Annexure R/4 at Page-11 of the Additional Counter Statement dated 13.06.2019. Sl. No. Date Issuer Bank Ch. No./D D No. Name Amount(Rs.) Entry in Bank Account Correlati on Page No. in Addition al Reply Stateme nt dated 14.08.20
1. 01.10.2003 Canara Bank A/c. No. 1801 on behalf of 1st Appellants Customs Under Invoice Case 586096 Chennai Customs-DD 5,305,000/- YS PO on Chennai
2. 12.12.2003 American Express Bank A/C. No. 510260271 696401 K.P. Jayaram 1,660,000/- Normal Inward Clearing
3. 15.03.2004 Canara Bank A/c. No. 1801 795921 [DD. No. 165394] DD favour Kulasekara n request of 1st Appellant 1,75,000/- DD Kulasekaran
4. 14.02.2004 American Express Bank A/c. No. 510260271 696420 K.P. Jayaram 2,00,000/- Normal Inward Clearing
5. 18.03.2004 American Express Bank A/c. No. 510260271 696468 K.P. Jayaram 7,00,000/- Normal Inward Clearing Total-A 80,40,000
4. However, we are not inclined to accept such submission as made on behalf of the Corporate Debtor that the total amount has been paid because of the two reasons:
(i) The Correlation Statement shows certain amounts paid in favour of the Customs, Chennai amounting to Rs.53,05,000/- and in favour of one Mr. Kulasekaran amounting to Rs. 1,75,000/-. The Company Appeal (AT) (Insolvency) No. 224 of 2019 payments were for Financial Creditors is disputed by counsel for them. It has not been co-related as to why amount has been paid to Mr. Kulasekaran.
(ii) If the argument is accepted that total amount has been paid then there was no occasion for the Respondent to take plea before the Adjudicating Authority that the amount was not payable in law, it being barred by limitation.
5. In the case of M/S. Innoventive Industries Ltd. v. Icici Bank & Anr. S. (2018) 1 SCC 407, the Honble Supreme Court while dealing with the provisions of Section 7 observed and held as follows:
27. The scheme of the Code is to ensure that when a default takes place, in the sense that a debt becomes due and is not paid, the insolvency resolution process begins. Default is defined in Section 3(12) in very wide terms as meaning non- payment of a debt once it becomes due and payable, which includes non-payment of even part thereof or an instalment amount. For the meaning of debt, we have to go to Section 3(11), which in turn tells us that a debt means a liability of obligation in respect of a claim and for the meaning of claim, we have to go back to Section Company Appeal (AT) (Insolvency) No. 224 of 2019 3(6) which defines claim to mean a right to payment even if it is disputed. The Code gets triggered the moment default is of rupees one lakh or more (Section 4). The corporate insolvency resolution process may be triggered by the corporate debtor itself or a financial creditor or operational creditor. A distinction is made by the Code between debts owed to financial creditors and operational creditors. A financial creditor has been defined under Section 5(7) as a person to whom a financial debt is owed and a financial debt is defined in Section 5(8) to mean a debt which is disbursed against consideration for the time value of money. As opposed to this, an operational creditor means a person to whom an operational debt is owed and an operational debt under Section 5(21) means a claim in respect of provision of goods or services.
28. When it comes to a financial creditor triggering the process, Section 7 becomes relevant. Under the explanation to Section 7(1), a default is in respect of a financial debt owed to any financial creditor of the corporate debtor- it Company Appeal (AT) (Insolvency) No. 224 of 2019 need not be a debt owed to the applicant financial creditor. Under Section 7(2), an application is to be made under sub-section (1) in such form and manner as is prescribed, which takes us to the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016. Under Rule 4, the application is made by a financial creditor in Form 1 accompanied by documents and records required therein. Form 1 is a detailed form in 5 parts, which requires particulars of the applicant in Part I, particulars of the corporate debtor in Part II, particulars of the proposed interim resolution professional in part III, particulars of the financial debt in part IV and documents, records and evidence of default in part V. Under Rule 4(3), the applicant is to dispatch a copy of the application filed with the adjudicating authority by registered post or speed post to the registered office of the corporate debtor. The speed, within which the adjudicating authority is to ascertain the existence of a default from the records of the information utility or on the basis of evidence furnished by the financial creditor, is important. This it must do within 14 Company Appeal (AT) (Insolvency) No. 224 of 2019 days of the receipt of the application. It is at the stage of Section 7(5), where the adjudicating authority is to be satisfied that a default has occurred, that the corporate debtor is entitled to point out that a default has not occurred in the sense that the debt, which may also include a disputed claim, is not due. A debt may not be due if it is not payable in law or in fact. The moment the adjudicating authority is satisfied that a default has occurred, the application must be admitted unless it is incomplete, in which case it may give notice to the applicant to rectify the defect within 7 days of receipt of a notice from the adjudicating authority. Under sub-section (7), the adjudicating authority shall then communicate the order passed to the financial creditor and corporate debtor within 7 days of admission or rejection of such application, as the case may be.
6. If there is a debt and default, normally the Adjudicating Authority is bound to admit the application provided the Corporate Debtor with evidence takes plea that it is not payable in law or in fact.
7. The next question arises for consideration is whether the amount payable to the Appellant is barred by limitation and, if that be so, it is Company Appeal (AT) (Insolvency) No. 224 of 2019 always open to the Corporate Debtor to suggest that the amount is not payable in law.
8. From the records, it appears that the matter relating to the Income Tax pending with the Office of the Assistant Commissioner of the Income Tax, Chennai, whereby letter dated 26th June, 2012, the Assistant Commissioner of Income Tax referred to the Balance Sheet of M/s. Radha Exports (India) Private Limited showing therein the name of Smt. Shobha Jayaram (2nd Appellant) and stated that on verification it found that a sum of Rs. 90,00,000/- for loan advanced by Smt. Shobha Jayaram to the proprietary concern M/s. Radha Exports transferred as Share Application Money after the incorporation of M/s. Radha Exports (India) Private Limited..
9. After the Remand Report by the Assistant Commissioner of Income Tax dated 26th June, 2012, on 10th October, 2012, the Radha Exports (India) Private Limited written to the Commissioner of Income Tax seeking for rectification of mistake apparent from record.
10. The Appellants- Mr. K.P. Jayaram and Mrs. Shoba Jayaram issued Legal Notice on 19th November, 2012 for proceedings against the Corporate Debtor under Sections 433 and 434 of the Companies Act, 1956 and finally filed Company Petition No. 335 of 2013 against the Corporate Debtor on 15th February, 2013 for winding up. The said winding up petition was transferred by the Honble High Court of Madras to the National Company Law Tribunal, Chennai in terms of Section 434 Company Appeal (AT) (Insolvency) No. 224 of 2019 of the Companies Act, 2013 and the said petition for winding up was dismissed as Section 433 of the Companies Act, 2013 was deleted on 4th October, 2017 with liberty to the Appellants to file afresh, if so advised.
11. It was in this background, Demand Notice was issued by the Appellants to the Corporate Debtor on 7th December, 2017 under the I&B Code to which the Corporate Debtor replied on 14th December, 2017. The matter was again moved before the Adjudicating Authority which by impugned order dated 12th April, 2018 passed in CP/77/IB/CB/2018 allowed to withdraw the application with liberty to the Appellants to file afresh application. It is only thereafter application under Section 7 was filed in Form 1 on 25th April, 2018.
12. From the aforesaid facts, it is clear that the claim of the Appellants is not barred by limitation as at appropriate stage, the Appellants moved application under Section 433 (e) of the Companies Act, 2013 for winding up of the Company. In view of the amendments made, I&B Code was given effect and Section 433 having been deleted from the Companies Act, 2013, the Appellants had no other option but to move an application under the provisions of the I&B Code.
13. The next question for consideration is whether the Appellants can claim to be the Financial Creditors. Admittedly, the amount as shown by the Assistant Commissioner of Income Tax amounting to Rs. 90,00,000/- shows that the amount is disbursed by the 2nd Appellant- Smt. Shoba Jayaram for consideration of time value of money and it is Company Appeal (AT) (Insolvency) No. 224 of 2019 subsequently converted as Share Application Money of the Corporate Debtor. However, no share was issued by the Corporate Debtor in spite of the Demand Notice.
14. In that view of the matter, the Appellants not being the Operational Creditors, there was no occasion for them to issue Demand Notice under Section 8(1) and for the said reason, if the Adjudicating Authority allowed them to withdraw the application under Section 9 of the I&B Code to enable the Appellants to file application under Section 7, we hold that subsequent application was maintainable, as we find that financial debt is payable to the Appellants, particularly the 2nd Appellant as there is a default and the Corporate Debtor has failed to make out a case that it is barred by limitation and is not payable in law, we hold that this was a fit case for Adjudicating Authority to admit the application under Section 7 and initiate Corporate Insolvency Resolution Process against M/s. Radha Exports (India) Private Limited.
15. The Adjudicating Authority having failed to notice the aforesaid fact while wrongly erred that the Appellants are not Financial Creditors, we set aside the impugned order dated 19th December, 2018 and remit the case to the Adjudicating Authority, Chennai with direction to admit the application after notice to the Corporate Debtor so as to enable the Corporate Debtor to settle the claim prior to the admission of application under Section 7 of the I&B Code. Company Appeal (AT) (Insolvency) No. 224 of 2019 The appeal is allowed with aforesaid observations and direction. No costs. (Justice S.J. Mukhopadhaya) Chairperson (Justice A.I.S. Cheema) Member(Judicial) (Kanthi Narahari) Member(Technical) Ar/g
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