COB Bank filed an application under Section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC) for initiating a Corporate Insolvency Resolution Process (CIRP) against the Corporate Debtor, M/s. Gupta Infra Private Limit

CS Professional · Insolvency - Law and Practice · PYQS · December 2024
COB Bank filed an application under Section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC) for initiating a Corporate Insolvency Resolution Process (CIRP) against the Corporate Debtor, M/s. Gupta Infra Private Limited (GIPL). The said application was admitted by the Adjudicating Authority (AA) during October, 2018 and a Resolution Professional (RP) was appointed as an Interim Resolution Professional (IRP). Following is the financial position of GIPL as on the date of commencement of the CIRP: Liabilities Amount in ₹ Crores Assets Amount in ₹ Crores Share Capital - Equity 100.00 Fixed Assets - Land and Building 115.00 Share Capital - Redeemable Preference Shares 75.00 Fixed Assets - Plant and Machinery 165.00 Share Capital - Convertible Preference Shares 25.00 Other Fixed Assets 70.00 Debentures (Unsecured fully convertible) 50.00 Investments in Subsidiaries 50.00 Long Term Borrowings - Fully Secured 300.00 Inventories 150.00 Short Term Borrowings - Unsecured 75.00 Receivables 110.00 Loan from Related Parties 25.00 Cash and Bank Balances 15.00 Payables 65.00 Other Current Assets 25.00 Provisions 35.00 Accumulated Losses 100.00 Deferred Tax Liabilities 15.00 Other Current Liabilities 35.00 Total Liabilities 800.00 Total Assets 800.00 Other Additional information provided by the Corporate Debtor: [Amounts stated in the table above can be treated as claims made by each of the parties in their respective category]. Other Current Liabilities include: In Crores Workmen Wages Payable for 36 months 9.00 Salary Payable for 20 months 100.00 PF Liabilities 3.80 Sales Tax/Commercial Taxes Due * 4.80 Other Statutory Dues 2.40 * On the sales tax and commercial taxes due, the Commercial Tax Authorities have already attached one of the immovable properties of the Corporate Debtor valued at ₹3.50 crores. Fixed Assets includes buildings occupied on long term lease for a period of 75 years obtained from the State Industrial Development Authority (SIDA) for ₹5 Crores. SIDA has also submitted their claim with the RP stating that their premium amount along with interest and penal interest is due for since last 7 years. SIDA has filed its claim as a Financial Creditor. Whereas, the Resolution Professional has requested SIDA to submit their claim as an Operational Creditor. (This amount is included in Other Current Liabilities). Further, it was informed by the Resolution Professional that the Corporate Debtor, M/s. Gupta Infra Private Limited, who initiated a CIRP against one of its Operational Creditor, namely C-Digital Arts Private Ltd for ₹6 Crores and going forward, the National Company Law Tribunal (NCLT) has already ordered for initiation of Corporate Insolvency Resolution Process (CIRP). However, one of the suspended Director on the Board of C-Digital Arts Private Limited filed an appeal before the National Company Law Appellate Tribunal (NCLAT) stating that there was no notice given as required under Section 8 of the Insolvency and Bankruptcy Code, 2016 read with Rule 5 of the insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 which entails that for initiation of insolvency resolution process by an Operational Creditor, a demand notice has to be served by the unpaid Operational Debtor on the Corporate Creditor. Nevertheless, the aforesaid suspended director he has not denied the debts due. This matter is pending before NCLAT for disposal. Investments includes investment in Foreign Subsidiary of ₹30 Crores and in an Indian Subsidiary of ₹18 Crores and Investment in shares amounting to ₹2 Crores in another company incorporated and registered with charitable objects and not for profit. Inventories and Receivables realisable only for 80% of its value. Loan from related parties is from wife and son of one Director of GIPL. Other Current Assets includes ₹10 Crores paid to National Highway Authority of India (NHAI) towards a bid amount for a road project. Other Current Assets includes ₹2 Crores of assets of third party held under Trust. Machinery, the carrying value of which is ₹1.50 crores belonging to an Indian Subsidiary is lying in one of the Units of the Corporate Debtor. A Machinery which was acquired for dispatching to the Foreign Subsidiary is also lying in the factory premises of the Corporate Debtor having a carrying value of ₹3 crores. Cranes worth ₹5 Crores belonging to a proprietorship concern of one of the Director is also lying the Factory premises of the Corporate Debtor. CIRP costs payable including all expenses is ₹2 Crores. The Security Interest charged for COB Bank is 91.25% and SID Bank is 8.75%. (both the financial creditors have not relinquished their security interest). During the CIRP, in one of the Meeting of the 'Committee of Creditors' (CoC), Resolution Plans were discussed. Revised Resolution Plans were submitted by the prospective Resolution Applicants. Resolution Plan was put to e-Vote and by majority of 94.79%, the Resolution Plan of 'GIPL' was approved. The Resolution plan proposes for utilisation of all assets including the assets under lease. Further, the Resolution Professional has sent a letter to the Commercial Taxes Authorities to release the property attached by them and on the contrary, the Authorities informed that the Department will get their portion as per the proposed Resolution Plan. One of the Financial Creditor (SID Bank) sent an objection with respect to the distribution of the proceeds of the resolution plan under the Resolution Plan. SID Bank also filed seeking direction to the Resolution Professional to distribute the proceeds of the Resolution Plan and made the following prayers: "It is most respectfully prayed that: 1. The present application may kindly be allowed and the directions be issued to the Respondent No. 1 to modify/clarify the distribution to dissenting members as per the Resolution Plan and distribute the proceeds of the resolution plan to the Applicant SID Bank, for an amount of ₹8.97 Crores in priority in accordance with provisions of IBC, 2016 in the interest of justice and equity. 2. Interim stay be granted on distribution of the resolution plan amount by the Resolution Professional to the Committee of Creditors till the present application is decided." The case of the Appellant, namely SID Bank in the Application was that, as per the security interest of the Appellant, the Appellant is entitled to 8.75% i.e. the amount of ₹8.97 Crores and as per voting share as approved by the CoC, the Appellant is entitled to 5.21% i.e., ₹5.34 Crores. The case of the Appellant SID Bank set up in the Application is that he is entitled for his distribution of plan amount as per value of the security interest of the Appellant. The Application was objected by the Resolution Professional. The Adjudicating Authority, by its Order, upheld the decision of the CoC for distribution of proceeds of the Resolution Plan as per the voting share. The Appellant, aggrieved by the said Order, has come up with the Appeal to the National Company Law Appellate Tribunal (NCLAT). In the light of the above case study inputs and referring to the decisions of applicable case laws with reasons and the provisions of Insolvency and Bankruptcy Code, 2016 (IBC, 2016) and the Regulations made thereunder, answer the following questions: Explain whether the claim of the Resolution Professional to require the State Industrial Development Authority (SIDA) to revise its claim as an Operational Creditor is correct? Support your answer in the light of the decided case laws in this regard.

Answer & Explanation:

The facts of the question are similar to the case of New Okhla Industrial Development Authority vs. Anand Sonbhadra decided by the Supreme Court of India on May 17, 2022, in which the Apex Court had a detailed analysis on the following aspects under the IBC: Claim: The golden thread that runs through the word 'claim' is the right to payment. The right to payment may arise from a judgment. It may or may not be fixed. It may be disputed or undisputed, legal or equitable, secured or unsecured, but what is indispensable is that there must be a right to payment. Similarly, in cases of breach of contract, under any law in force, if it gives rise to a right to payment, irrespective of whether it is reduced to a judgment or fixed or matured or unmatured, disputed or undisputed, secured or unsecured, as long as there is a right to payment, a claim arises. When there is a claim and, in regard to such a claim, there is a liability or obligation, which is due from any person, it gives rise to a debt. Debt: A debt is a liability or an obligation in respect of a right to payment. Irrespective of whether there is adjudication of the breach, if there is a breach of contract, it may give rise to a debt. A debt includes a financial debt and an operational debt. It is after defining the word 'debt' with reference to the existence of a right to payment in the broadest terms, as defined in the term 'claim' and including the word 'financial debt' within the expression 'debt', the word financial debt, in turn, is elaborately defined in Section 5(8). Relation between Debt & Claim: A perusal of the definition of the word 'debt', no doubt, reveals that it is closely intertwined with the definition of the word 'claim' in Section 3(6). The word 'transaction' is conspicuous by its absence in the definition of both the word 'claim' and the word 'debt'. 'Debt' means a liability or obligation, which relates to a claim. The claim or right to payment or remedy for breach of contract occasioning a right to payment must be due from any person. Now, if it is due from any person, it must be due to someone who would then be the creditor. Transaction: 'Transaction', as defined in Section 3(33) of the Insolvency and Bankruptcy Code, would, undoubtedly, include an agreement or arrangement in writing or the transfer of funds. The transfer of funds may take place from a corporate debtor. A transfer can also take place when there is transfer of funds to the debtor. A transfer may include a transfer of assets in writing again from or to the corporate debtor. Section 5(8) of the Insolvency and Bankruptcy Code defines 'financial debt' as meaning 'a debt along with interest, if any, which is disbursed against the consideration of time value of money'. Thereafter, Clauses (a) to (i) deal with transactions which are included as financial debt. It is, thereafter, that Clause (f) provides that a financial debt includes any amount raised under any other transaction, including any forward sale or purchase agreement, having the commercial effect of a borrowing. Disbursement is essential: What is relevant to attract Section 5(8), on its plain terms, is disbursement. While, it may be true that the word 'transaction' includes transfer of assets, funds or goods and services from or to the corporate debtor, in the context of the principal provisions of Section 5(8) of the IBC, we are of the view that to import the definition of 'transaction' in Section 2(33), involving the need to expand the word 'disbursement', to include a promise to pay money by a debtor to the creditor, will be uncalled for straining of the provisions. 'Disbursement', within the meaning of Section 5(8), is the payment of money, which flows to the debtor. Disbursement is essential: The essential requirements to attract Section 5(8) are that there must be a debt along with interest, if any, which is disbursed against consideration for the time value of money. There can be no dispute that there is a debt in this case. Even the respondents would contend that it is actually a debt but an operational debt under Section 5(21). That interest is payable in connection with the debt, cannot be disputed, having regard to the terms of the lease deed. It is another matter that liability to pay interest is not an essential feature to attract Section 5(8). The next requirement is that there be disbursement. Disbursement is an indispensable requirement to constitute a debt, a financial debt, within the meaning of Section 5(8) and that disbursement must be from the creditor to debtor. The Court is of the view that, in the lease in question, there has been no disbursement of any debt (loan) or any sums by the appellant to the lessee. The appellant would, therefore, not be a financial creditor within the ambit of Section 5(8). Accordingly, in the given case, State Industrial Development Authority is an operational creditor and the Resolution Professional is right in asking it to file claim as an Operational Creditor.

Topics: Corporate Insolvency Resolution Process (CIRP)

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