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Sree Bhadra Parks And Resorts Ltd. v. Ramani Resorts And Hotels Pvt. Ltd.
Factual and Procedural Background
The case concerns an application filed by the Respondent/Applicant/Financial Creditor under Section 7 of the Insolvency & Bankruptcy Code, 2016 (IBC), seeking initiation of the Corporate Insolvency Resolution Process (CIRP) against the Appellant/Corporate Debtor for default in payment of Rs. 4,25,32,016.405. The financial debt arose from a Share Purchase Agreement dated 21.11.2012, pursuant to which the Respondent purchased 100% shares of the Appellant for Rs. 33,08,00,000/-, with an initial payment of Rs. 1,00,00,000/-. The agreement included an Addendum directing part payments to other creditors of the Corporate Debtor.
The Adjudicating Authority (National Company Law Tribunal, Kochi Bench) admitted the Section 7 application on 25.8.2020, recognizing the debt as a financial debt and the Respondent as a financial creditor. Subsequently, a settlement was arrived at on 26.8.2020 between the parties for Rs. 2,25,00,000/- as full and final settlement, leading to withdrawal of the CIRP application with liberty to file a fresh application if settlement terms were not met.
Following default in payment as per the settlement terms, the Respondent invoked Rule 11 of the National Company Law Tribunal Rules, 2016, seeking restoration of the withdrawn application. The Adjudicating Authority allowed the restoration application. The Appellant challenged this restoration before the Appellate Tribunal, which dismissed the appeal and upheld the restoration order.
Legal Issues Presented
- Whether the National Company Law Tribunal (NCLT) can exercise its inherent powers under Rule 11 of the NCLT Rules, 2016 to allow restoration of a withdrawn insolvency application where a settlement has failed and the Committee of Creditors is not yet constituted.
- Whether the Section 7 application filed by the Respondent/Financial Creditor was competent and within the limitation period.
- The validity and effect of the Share Purchase Agreement and the related settlement agreement in the insolvency proceedings.
- The impact of disqualification of Directors of the Respondent/Financial Creditor on the competence to initiate insolvency proceedings.
Arguments of the Parties
Respondent/Applicant/Financial Creditor's Arguments
- The Respondent filed the Section 7 application alleging default by the Appellant in payment under the Share Purchase Agreement and sought initiation of CIRP.
- The Respondent contended that the debt was acknowledged by the Appellant through various communications and the application was filed within limitation.
- The Respondent invoked Rule 11 of the NCLT Rules, 2016, to restore the withdrawn application after default in settlement payments.
- The Respondent argued that the Directors’ disqualification was quashed by the Madras High Court, validating their competence to file the application.
Appellant/Corporate Debtor's Arguments
- The Appellant contended that the Share Purchase Agreement was invalid as it was not executed on stamp paper and lacked the company’s common seal, rendering it unenforceable.
- The Appellant challenged the competence of the Respondent to file the Section 7 application on grounds of disqualification of its Directors.
- The Appellant argued against the restoration of the application after withdrawal based on the settlement.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Swiss Ribbons Pvt. Ltd. v. Union of India, Manu/SC/0079/2019 | Authority of NCLT to invoke NCLT Rules, 2016 for withdrawal or settlement applications before constitution of Committee of Creditors; proceedings under IBC are proceedings in rem. | The court relied on this precedent to uphold the Adjudicating Authority's power under Rule 11 of NCLT Rules, 2016, to allow restoration of the insolvency application and to consider applications for withdrawal or settlement before constitution of the Committee of Creditors. |
Court's Reasoning and Analysis
The court recognized that insolvency proceedings under the IBC are collective proceedings in rem, requiring oversight by the Adjudicating Authority and consultation with the Committee of Creditors once constituted. However, in the interim period before constitution of the Committee, the NCLT Rules, 2016 empower the Tribunal to allow or disallow withdrawal or settlement applications after hearing all parties and considering relevant factors, as held in Swiss Ribbons Pvt. Ltd. v. Union of India.
The court found the Section 7 application filed by the Respondent to be within the limitation period, supported by acknowledgment of debt by the Appellant. The validity of the Share Purchase Agreement was deemed an otiose issue since the agreement had not fructified.
Regarding the disqualification of the Respondent’s Directors, the court noted that the Madras High Court had quashed the disqualification and related consequences, validating the Respondent’s competence to initiate proceedings.
The Adjudicating Authority's decision to restore the Section 7 application under Rule 11 of the NCLT Rules, 2016, was upheld as a proper exercise of inherent powers to meet ends of justice and prevent prejudice to the Respondent.
The court emphasized that the restoration application was not a review but an interlocutory application supported by proper material, and thus did not warrant interference by the Appellate Tribunal.
Holding and Implications
The Company Appeal (AT) (CH) (Insolvency) No. 06 of 2021 is dismissed.
The court upheld the Adjudicating Authority's order restoring the Section 7 application after failure of settlement, confirming the Tribunal’s inherent power under Rule 11 of the NCLT Rules, 2016 to allow such restoration before constitution of the Committee of Creditors. The decision affirms the procedural flexibility available under the IBC framework to ensure justice and effective insolvency resolution. No new precedent was set beyond the application of existing principles as laid down in Swiss Ribbons Pvt. Ltd. v. Union of India. The direct effect is that the insolvency proceedings against the Appellant/Corporate Debtor shall continue as restored.
Court in Swiss Ribbons Pvt.Ltd. V Union of India reported in Manu/SC/0079 of 2019, wherein it was held that the National Company Law Tribunal Rules, 2016, can be invoked by the Tribunal for the proceedings Company Appeal (AT) (CH) (Insolvency)No.06 of 2021 under Insolvency & Bankruptcy Code, 2016. Further, the relevant portion of the judgement at Paragraph 52 runs as under : It is clear that once the Code gets triggered by admission of a Creditors petition under Sections to 9, the proceeding that us before the Adjudicating Authority, being a collective proceeding, is a proceeding in rem. Being a proceeding in rem, it is necessary that the body which is to oversee the resolution process must be consulted before any individual corporate debtor is allowed to settle its claim. A question arises as to what is to happen before a committee of creditors is constituted (as per the timelines that are specified, a committee of creditors can be appointed at any time within 30 days from the date of appointment of the interim resolution professional). We make it clear that at any stage where the committee of Creditors is not yet constituted, a Party can approach the NCLT Rules, 2016, allow or disallow an application for withdrawal or settlement. This will be decided after hearing all the concerned parties and considering all relevant factors on the facts of each case.
31. The Learned Counsel for the Respondent contends that in the present case, the Committee of Creditors is not constituted and upon default in the payment in the terms of the Settlement dated 26.8.2020, the Respondent invoked Rule 11 of the National Company Law Tribunal Rules, 2016 and the Adjudicating Authority was pleased to allow the Restoration Application. Company Appeal (AT) (CH) (Insolvency)No.06 of 2021 EVALUATION :
32. The Respondent/Applicant/Financial Creditor projected an application in IBA/13/KOB/2020 on the file of the Adjudicating Authority (National Company Law Tribunal, Kochi Bench, Kerala) (Under Section 7 of the Insolvency & Bankruptcy Code, r/w Rule 4 of the Insolvency & Bankruptcy Code (AAA)Rules, 2016, averring that the Appellant/Respondent/Corporate Debtor had committed default in making payment of Rs.4,25,32,016.405 and thereby sought to initiate Corporate Insolvency Resolution Process (CIRP) against the Appellant/Respondent/Corporate Debtor.
33. To put it precisely, in Form-1, Part-II of the Application under Section 7 of the Insolvency & Bankruptcy Code, the Respondent/ Applicant/Financial Creditor had averred that it entered into Share Purchase Agreement with the Appellant/ Respondent/Corporate Debtor for purchase of 100% shares of the Appellant for a total consideration of Rs.33,08,00,000/- and that the Respondent paid a sum of Rs.1,00,00,000/- on 21.11.2012. Further, it was mentioned by the Respondent/ Financial Creditor that at the time of entering into the aforesaid agreement, the Appellant/ Corporate Debtor intimated that the properties and assets were encumbrance free and that on investigation, the Respondent/ Financial Creditor found that there were numerous encumbrances and both parties entered into Addendum on 21.11.2012 itself, wherein the Appellant/ Corporate Debtor instructed the Respondent/ Financial Creditor to pay part of the consideration to its other Creditors directly as mentioned in the Agreement. Company Appeal (AT) (CH) (Insolvency)No.06 of 2021
34. The Respondent/ Financial Creditor had also averred that other creditors of the Appellant/Corporate Debtor had not accepted the Settlement of the Appellant and requested to take any payments from the Respondent/ Financial Creditors on behalf of the Appellant/ Corporate Debtor.
35. In the application, the Respondent/ Financial Creditor had claimed a sum of Rs.4,25,32,016.405 along with interest at 24% per annum based on the fact that the debt was acknowledged by the Appellant/ Corporate Debtor from time to time as per their letter dated 5.9.2014, 17.3.2015, e-mail dated 28.11.2018 and the reply notice dated 31.1.2018, whereunder the liability was not denied.
36. The Respondent/ Applicant/ Financial Creditor had filed Section 7 Application of the Code, alleging violation of Share Purchase Agreement dated 21.11.2012, in and by which a sum of Rs.30,00,00,000/- was agreed to be paid by the Respondent/ Financial Creditor to the Corporate Debtor for acquiring the Company. Further, on the aforesaid date an Addendum to the Agreement was also executed wherein the Respondent/ Financial Creditor agreed to make payment to the Creditors of the Appellant/Corporate Debtor.
37. Besides, this, the Appellant/ Corporate Debtor on 27.11.2012, had issued a letter requesting to hand over a sum of Rs.1,00,00,000/- to Dr.J.J.R.Justin. Subsequently, on 5.9.2014 and 17.3.2015, the Respondent/ Financial Creditor had issued a letter agreeing to refund the advance amount.
38. Also that, on 28.11.2018, the Corporate Debtor had issued another Letter to the Respondent/ Financial Creditor interalia stating that they were in verge of selling their property in order to Company Appeal (AT) (CH) (Insolvency)No.06 of 2021 settle their liabilities and further that they were trying their level best to find a buyer and to refund the Respondents advance amount and requested to bear with the delay in this regard and assured the refund as soon as possible.
39. Taking note of the fact, the Respondent/ Applicant/ Financial Creditor had filed Application under Section 7 of the Insolvency & Bankruptcy Code, on 21.1.2020 and keeping in mind that the Appellant/ Corporate Debtor acknowledged the debt of Respondent/ Financial Creditor on 28.11.2018, it is held by this Tribunal that the application filed by the Respondent/ Applicant/ Financial Creditor in IBA/13/KOB/2020 is within the limitation period.
40. Before the Adjudicating Authority, the Appellant/Respondent/Corporate Debtor in its Counter to Application IBA/13/KOB/2020 had stated that the agreement was made between two parties and the same ought to be made in stamp paper when the subject matter was related to the transfer of 100% share and Company including Immovable properties, the same is a Compulsorily Registerable Document. Furthermore, it was mentioned that the said agreement was executed in a white paper without registering the same and hence it is an invalid one.
41. Continuing further, the Appellant/ Respondent/ Corporate Debtor had also stated in the Counter (before the Adjudicating Authority) that the Agreement lacked the common seal of the company and as such the same could not be treated as an agreement executed by the company and further that the said agreement is not a valid document. Apart from that, the stand of the Appellant/ Respondent/Corporate Company Appeal (AT) (CH) (Insolvency)No.06 of 2021 Debtor is that Section 7 Application filed by the Respondent/ Financial Creditor was filed by an incompetent person.
42. In view of the fact that the Share Purchase Agreement dated 21.11.2012 entered into between the parties had not fructified, the aspect of validity of the said agreement due to non-registration is an otiose one and as such, it is not delved in deep, by this Tribunal.
43. The Adjudicating Authority (National Company Law Tribunal, Kochi Bench, Kerala) on 25.8.2020 came to the conclusion that the present debt arose out of the Share Purchase Agreement dated 21.11.2012 and that the said amount was a debt disbursed against the consideration for advance payment as per the agreement and hence was covered within the definition of financial Debt and that the Respondent/ Applicant would be treated as Financial Creditors and resultantly admitted the Section 7 Application of the Respondent/ Financial Creditor/ Applicant for initiation of CIRP.
44. It comes to light that the Appellant / Corporate Debtor filed application as per Rule 11 of the National Company Law Tribunal Rules, 2016 to recall the order passed by the Adjudicating Authority dated 25.8.2020 in IBA/13/KOB/2020 and permitted it to settle the matter, along with the Application Form FA for withdrawal of CIRP, duly signed by the Respondent/ Applicant in IBA/13/KOB/2020 mentioning that on 26.8.2020, a settlement was arrived at for a total amount of Rupees Two Crore twenty Five Lakhs only) as full and final settlement of the whole claim between the Appellant/ Corporate Debtor on the following terms: Company Appeal (AT) (CH) (Insolvency)No.06 of 2021
a) M/s Sree Bhadra Parks and Resorts limited have paid a sum of Rs.1,00,000/- on 26.8.2020.
b) Cheque dated 10.09.2020 bearing No.214323 for Rs.10,00,000/- was given. However, returning the said cheque M/s Sree Bhadra Parks and Resorts Limited has made an electronic transfer through RTGS of Rs.10,00,000/- to the account of M/s Ramani Resorts and Hotels Pvt.Ltd. on 10.09.2020.
c) A cheque dated 30.11.2020 bearng No.214322 for Rs.2,14,00,000/- drawn on South Indian Bank Limited, Kanyakumari Main Branch is yet to be encashed and can be done only on 30.11.2020.
45. Not resting with the above, it was further averred that the remaining amount of settlement of Rs.2,14,00,000/- arrived at between the parties was only for the settlement and if the Appellant/ Corporate Debtor fail to pay the said sum of on or before 30.11.2020 then the Respondent/ Financial Creditor/ Applicant shall be at liberty to file a fresh application with a actual sum of Rs.4,25,32,016.405 together with interest at 24% per annum standing due as on date etc.
46. Viewed in that background, the Applicant desired to withdraw the application IBA/13/KOB/2020 (filed under Section 7 of the Code) with liberty to file fresh application, if the settlement agreement was not complied with by the Appellant/ Respondent/ Corporate Debtor.
47. The Adjudicating Authority (National Company Law Tribunal, Kochi Bench, Kerala), because of the settlement arrived at between the parties by filing of Form FA before it Company Appeal (AT) (CH) (Insolvency)No.06 of 2021 had disposed of the IBA/13/KOB/2020, granting liberty to the Respondent / Financial Creditor/ Applicant to file fresh application, if the Appellant/ Corporate Debtor complied with the conditions mentioned in the settlement in Form -FA.
48. The Respondent/ Financial Creditor/ Applicant before the Adjudicating Authority had filed IA No.02/KOB/2021 in IBA/13/KOB/2020 (under Rule 11 of National Company Law Tribunal Rules, 2016) against the Appellant/ Respondent/ Corporate Debtor seeking an order to restore and revive Application No.IBA/13/KOB/2020 (filed under Section 7 of the Insolvency & Bankruptcy Code, 2016) and to pass an order in directing the Appellant/ Corporate Debtor to comply with the consent terms and the Adjudicating Authority after observing that when a settlement was arrived at between the parties, it is duty bound by the Appellant/ Corporate Debtor to make good the payments proposed in the settlement etc. and ultimately allowed IA No.02/KOB/2021 and ordered the restoration of the main application in IBA/13/KOB/2020 to its file.
49. It is brought to fore that the Appellant/ Corporate Debtor based on the settlement arrived at between the parties had paid a sum of Rs.1,00,000/- on 26.8.2020 and Rs.10,00,000/- to the account of the Respondent/ Financial Creditor on 10.9.2020.
50. In regard to the plea of the disqualification of the Directors of the Respondent/ Financial Creditor/ Applicant, the Writ Petition No.18641 of 2020 was filed before the Honble High Court of Madras on 15.12.2020, the Honble High Court of Madras had allowed the Appeals by setting aside the Impugned Order dated 27.1.2020 therein and consequently, Company Appeal (AT) (CH) (Insolvency)No.06 of 2021 quashed the publication of the list of disqualified Directors by the Registrar of Companies and the deactivation of the Directors of the Appellants, etc. COMPANIES ACT 2013:
51. It is to be pointed out that Section 164 of the Companies Act, 2013, provides disqualification for appointment of a person as a Director of Company. Section 164(2) of the Companies Act, 2013 came into effect from 01.01.2014 and it applies prospectively. In fact, Section 164 of the Companies Act, 2013 applies by operation of Law resting on the circumstances emerging and coming into existence of the set of facts mentioned therein. As per Section 164(2) of the Companies Act, 2013, there is no distinction between the defaulting Public Company and Private Company. It is relevantly pointed out that the Companies Act, is silent on the qualification for Directorship although it specifies the grounds on which a person may be disqualified from being appointed as Director of any Company. The defaults enjoined under section 164(2)(a) of the Companies Act, 2013 in regard to the non- filing of Financial Statements and Annual Returns for any continuous period of three financial years would be defaults, to be reckoned from the Financial Year 2014-15 and not 2013/2014.
52. A mere glance of the ingredients of Section 167(1)(a) of the Companies Act, clearly points out that the Office of the Director shall be vacant in all the Companies other than the Company which is in default. In fact, the Directors were disqualified for Respondent/ Companys default and hence they were authorised and qualified to prefer the original Application by virtue of Section 167(1)(a) of the Companies Company Appeal (AT) (CH) (Insolvency)No.06 of 2021 Act, 2013. It must be borne in mind, the disqualification was quashed by the order of the Honble High Court of Madras on 15.12.2020 in Writ Petition No. 18641 of 2020 and therefore, the contra plea taken on behalf of the Appellant is unworthy of acceptance.
53. It is relevantly pointed out that as per amendment made by Companies (Amendment) Act, 2019, (w.e.f. 2.11.2018) a new clause (i) has been inserted in sub-section (1) as per which a person shall be subject to disqualification if he accepts Directorship exceeding maximum number of Directorship provided in Section 165 of the Companies Act, 2013. REVIEW:
54. In Law, a Review Petition has a limited role and cannot be allowed to act as an Appeal in disguise. Only a manifest error would be a ground for Review. I & B (APPLICATION TO ADJUDICATING AUTHORITY) RULES, 2016:
55. Dealing with the aspect of the Appellants contentions that as per Rule 10 etc., of the Insolvency & Bankruptcy (Application to Adjudicating Authority) Rules, 2016, under the caption Filing of application and application fee that, till such time the Rules of Procedure for conduct of proceedings under the Code are notified, the application made under Sub- Section (1) of Section 7, Sub-Section (1) of Section 9 or Section (1) of Section 10 of the Code shall be filed before the Adjudicating Authority in accordance with Rules, 20,21,22,23,24 and 26 of Part III of the National Company Tribunal Rules, 2016 etc., this Tribunal pertinently points out Company Appeal (AT) (CH) (Insolvency)No.06 of 2021 that the decision of the Honble Supreme Court in Swiss Ribbons Pvt.Ltd. V. Union of India dated 25.1.2019 reported in Manu/SC/0079/2019 squarely applies to the facts of the present case and in fact, the Honble Supreme Court at Paragraph 52 of the Judgement in Swiss Ribbons had made it clear that at any stage where the Committee of Creditors is not yet constituted, a party can approach National Company Law Tribunal directly, which Tribunal may in exercise of its inherent powers under Rule 11 of the National Company Law Tribunal Rules, 2016 allow or disallow an application for withdrawal or settlement and as such, it cannot be said by any stretch of imagination that the Adjudicating Authority(National Company Law Tribunal, Kochi Bench, Kerala) cannot pass an order to restore and revive the application in IBA/13/KOB/2020 by way of an Interlocutory Application filed by the Respondent/Financial Creditor/ Applicant. Consequently, the contra plea taken on behalf of the Appellant is not acceded to by this Tribunal. INHERENT POWER:
56. It is to be mentioned that an inherent power of the Tribunal has its gross root in necessity and the said power can be exercised by a Tribunal based on the rudimentary principle that an act of Court shall prejudice no person. Further, to meet the ends of justice an inherent power of a Tribunal being Co-extensive with need can be exercised to render justice to the litigants. Also that, I A No. 02/KOB/2021 filed by the Respondent/Financial Creditor/Applicant to restore and Revive the Application IBA/13/KOB/2020 (filed under Section
7 of the Code) is not to be termed as one of Review Application or to be confused with, in the considered opinion Company Appeal (AT) (CH) (Insolvency)No.06 of 2021 of this Tribunal. Undoubtedly, the Adjudicating Authority (National Company Law Tribunal, Kochi Bench, Kerala) had rightly allowed IA No.02/KOB/2021 in IBA/13/KOB/2021 on 28.01.2021 (filed under Rule 11 of National Company Law Tribunal Rules, 2016 by the Respondent/ Financial Creditor) of course, based on proper material before it and the same requires no interference in the hands of this Appellate Tribunal sitting in Appeal. Looking at from any angle, the Appeal sans merits. CONCLUSION: In fine, the instant Company Appeal Comp.App.(AT)(CH)(Ins) No. 06/2021 is dismissed. No costs. IA No.17 of 2021(Stay Application) is closed. [Justice Venugopal M] Member (Judicial) [V.P. Singh] Member (Judicial) .April, 2021
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