Padmaiah Vuppu v. Reliance Capital Aif Trustee Company Pvt. Ltd. And Others, National Company Law Appellate Tribunal, Judgment, Law, casemine.com

Factual and Procedural Background

On 14 October 2019, the Respondent, Reliance Capital AIF Trustee Company Pvt. Ltd., along with another party, filed an application under Section 7 of the Insolvency and Bankruptcy Code, 2016 (I&B Code) for initiation of Corporate Insolvency Resolution Process against M/s Fortuna Projects (India) Private Limited (Corporate Debtor). The National Company Law Tribunal (NCLT), Bengaluru Bench, admitted the application by an order dated 9 August 2019. Subsequently, one of the Directors/Shareholders of the Corporate Debtor preferred the present appeal against this admission. The appeal was filed with a delay of 12 days, which was condoned after hearing the parties.

Legal Issues Presented

Whether the Adjudicating Authority (NCLT) had jurisdiction to admit the Section 7 application despite the appellant's challenge to the validity of the Corporate Guarantee executed by the Corporate Debtor.

Whether a shareholder/director can raise the question of legality and propriety of the Corporate Guarantee in a petition under Section 7 of the I&B Code.

Whether the default in repayment of the financial debt was established to justify admission of the insolvency application under Section 7.

Arguments of the Parties

Appellant's Arguments

The Corporate Guarantee given by the Corporate Debtor was executed by the Managing Director without jurisdiction, as no Board or Special Resolution was passed, thus violating Section 185 of the Companies Act, 2013.

The Corporate Guarantee was allegedly invalid because it was executed without proper authority.

Despite the guarantee being executed on 2 September 2014, no challenge was made earlier by any shareholder or director before any competent authority or court.

Respondent's Position

The Corporate Guarantee was validly executed and undisputedly given by the Corporate Debtor in favour of the Principal Borrower.

The Adjudicating Authority correctly admitted the Section 7 application based on the existence of default on the financial debt.

The legality or propriety of the Corporate Guarantee is not a matter for the Adjudicating Authority under Section 7 proceedings.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Innoventive Industries Ltd. Vs. ICICI Bank and Ors., (2018) 1 SCC 407	Interpretation of the Insolvency and Bankruptcy Code regarding initiation of insolvency resolution process by financial creditors under Section 7, definition of default and debt, and the limited scope of the Adjudicating Authority to examine disputes at admission stage.	The Court applied the principles from Innoventive Industries Ltd. to hold that the Adjudicating Authority must admit the application if a default is established, and that questions regarding the legality of the debt or guarantee are not to be decided at this stage.

Precedent

Rule or Principle Cited For

Application by the Court

Innoventive Industries Ltd. Vs. ICICI Bank and Ors., (2018) 1 SCC 407

Interpretation of the Insolvency and Bankruptcy Code regarding initiation of insolvency resolution process by financial creditors under Section 7, definition of default and debt, and the limited scope of the Adjudicating Authority to examine disputes at admission stage.

The Court applied the principles from Innoventive Industries Ltd. to hold that the Adjudicating Authority must admit the application if a default is established, and that questions regarding the legality of the debt or guarantee are not to be decided at this stage.

Court's Reasoning and Analysis

The Court acknowledged that the Corporate Guarantee was executed by the Managing Director without Board or Special Resolution, contrary to Section 185 of the Companies Act, 2013. However, since no shareholder or director challenged the guarantee since its execution in 2014, the Court held that such a challenge cannot be raised in a Section 7 petition. The Adjudicating Authority's jurisdiction under Section 7 is limited to determining whether a default on a financial debt has occurred and does not extend to deciding on the legality or propriety of the Corporate Guarantee. The Court relied on the Supreme Court's ruling in Innoventive Industries Ltd. which emphasized that the insolvency process is triggered upon default of a debt and that disputes regarding the debt's validity or amount are not to be adjudicated at the admission stage. Since the Adjudicating Authority found that the debt was payable and default had occurred, it rightly admitted the application under Section 7.

Holding and Implications

The appeal is dismissed and the admission of the Section 7 application by the Adjudicating Authority is upheld.

The decision confirms that challenges to the validity of corporate guarantees or underlying transactions cannot be entertained by the Adjudicating Authority at the stage of admission of a Section 7 insolvency application. The Court emphasized the limited scope of the Adjudicating Authority’s jurisdiction to ascertain only the existence of default. No costs were imposed. This ruling directly affects the parties by maintaining the insolvency proceedings initiated against the Corporate Debtor and does not establish any new precedent beyond the application of existing Supreme Court principles.

Padmaiah Vuppu v. Reliance Capital Aif Trustee Company Pvt. Ltd. And Others

14.10.2019: The Respondent Reliance Capital AIF Trustee Company Pvt. Ltd. alongwith Another filed application under Section 7 of Insolvency and Bankruptcy Code, 2016 (for short I&B Code) for initiation of Corporate Insolvency Resolution Process against M/s Fortuna Projects (India) Private Limited (Corporate Debtor). The Adjudicating Authority (National Company Law Tribunal), Bengaluru Bench by impugned order dated 9th August, 2019 having admitted the application under Section 7, the present appeal has been preferred by one of the Director/ Shareholder.

2. The appeal has been preferred after delay of 12 days but grounds have been explained. Having heard Mr. Darpan Wadhwa, learned senior counsel for the Appellant and Ms. Aanchal Tikmani, learned counsel for M/s Reliance Capital AIF Trustee Company Pvt. Ltd. and being satisfied of the grounds, delay of 12 days in preferring the appeal is condoned. I. A. No. 3080 of 2019 stands disposed of.

3. The case of the Appellant is that M/s Reliance Capital AIF Trustee Company Pvt. Ltd. disbursed loan in favour of M/s Fortuna Buildcon India Pvt. Ltd. (Principal Borrower). While granting such loan, the purported guarantee was given by M/s Fortuna Projects (India) Private Limited (Corporate Debtor) through the erstwhile Managing Director. According to the counsel for the Appellant, the Managing Director had no jurisdiction to provide such guarantee on behalf of M/s Fortuna Projects (India) Private Limited. Though such plea has been taken but it is not disputed that Corporate Guarantee was given by the Corporate Debtor to M/s Reliance Capital AIF Trustee Company Pvt. Ltd. (Financial Creditor) in favour of the Principal Borrower.

4. It is submitted that the Corporate Guarantee was given by the Managing Director of the Corporate Debtor against the provisions of Section 185 of the Companies Act, 2013 and no Board or Special Resolution was passed. However, it is not in dispute that the Corporate Guarantee was executed on 2nd September, 2014 and since then the matter was not challenged by any of the Shareholder / Director of the Corporate Debtor before any competent authority or Court of Law.

5. In such circumstance, it is not open to any Shareholder/ Director/ Managing Director to raise such issue in petition under Section 7 of the I&B Code, as the Adjudicating Authority has no jurisdiction to decide the question of legality and propriety of the Corporate Guarantee executed by the Corporate Debtor. Company Appeal (AT) (Insolvency) No. 1025 of 2019

6. The Honble Supreme Court in Innoventive Industries Ltd. Vs. ICICI Bank and Ors. (2018)1 SCC 407 observed as under:

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 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 Company Appeal (AT) (Insolvency) No. 1025 of 2019 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 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 Company Appeal (AT) (Insolvency) No. 1025 of 2019 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 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 Company Appeal (AT) (Insolvency) No. 1025 of 2019 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.

7. In the present case, we find that the Adjudicating Authority has noticed that the debt is payable and there is default. In view of the above, we hold that the Adjudicating Authority has rightly admitted the application under Section 7. The appeal stands disposed of with aforesaid observations. No cost. [Justice S. J. Mukhopadhaya] Chairperson [Justice A. I. S. Cheema] Member (Judicial) (Kanthi Narahari) Member (Technical) am/gc Company Appeal (AT) (Insolvency) No. 1025 of 2019

Company Appeal (AT) (Insolvency) No. 1025 of 2019

Padmaiah Vuppu v. Reliance Capital Aif Trustee Company Pvt. Ltd. And Others

Factual and Procedural Background

Legal Issues Presented

Arguments of the Parties

Appellant's Arguments

Respondent's Position

Table of Precedents Cited

Court's Reasoning and Analysis

Holding and Implications

Padmaiah Vuppu v. Reliance Capital Aif Trustee Company Pvt. Ltd. And Others

Comments