White Stocks Limited vs Prajay Holdings Private Limited
Company Appeal (AT ) (Ins) 271 of 2022
Facts:
1.Whitestock Limited’ is a ‘Financial Creditor’ and operated as ‘Special Purpose Vehicle’ (‘SPV’) established in `Cyprus’ and is beneficially owned by ‘State General Reserve Fund’. Prajay Holdings Private Limited’ (‘Corporate Debtor) is engaged in business of ‘Construction and Real Estate Development Activities’ having Registered Office in Hyderabad, Telengana.
2.Mr. Vijay Sen Reddy Dantapalli’ Ex- CMD allegedly persuaded ‘Financial Creditor’ for making investment in ‘Corporate Debtor’ for development of project ‘Virgin Country’. Project ‘Virgin Country’ relates to the construction and development of an integrated township, consisting of luxury villas and group housing complexes i.e., 4,248 apartments and 220 units of villas, to be constructed at the 85.9 acre gunta site in the Maheshwaram suburb of Hyderabad.
3.By way of `Investment Agreement’ dated 03.08.2011, (hereinafter referred to as “Whitestock Investment Agreement”) (in short ‘WIA’), ‘Financial Creditor’ made investment in Corporate Debtor company with Subscription to Convertible Debentures issued by ‘Corporate Debtor’ i.e. Rs. 105.60 crore fully and `Compulsorily Convertible Debentures’ and subscription to equity of the company and `Sale and Purchase Agreement’ dated 15.06.2021 relating to ‘Corporate Debtor’ with ‘LB Hyderabad Investments LLC’, to purchase by the ‘Financial Creditor’ from ‘LB Hyderabad Investments LLC’ of 7,16,265 CCDs of par value Rs. 1000 each, amounting to Rs. 71.62 Crore, carrying a coupon rate, or 10% per annum, along with Purchase of 100 Equity Shares of par value, at a premium of Rs. 690 per share.
4.As per clause 4.1.3 of ‘WIA’ ‘Article of Association’ (in short ‘AoA’) of ‘Corporate Debtor’ was altered to set out commercial terms of ‘WIA’ and to take care Corporate Governance’ related issues. It was made clear that money received from issue of debentures and sale of shares were to be used in accordance with business plan as per Article 65(f) of the ‘Articles of Association’ of the ‘Corporate Debtor’. Any change, inBusiness Plan’ was required to be made with the consent of the ‘Financial Creditor’.
5.In the original Petition before the ‘Adjudicating Authority’ (vide C.P. No. 468/241/HDB/2018), the Financial Creditor’ brought out to the notice that the ‘Financial Creditor’ had not received anyreturn of investment in any form’ and alleged regarding systemic, long standing mis-management’ and malaise’ by the ‘Corporate Debtor’ was noticed affecting the project and the investment of the ‘Financial Creditor’ badly.
6.In 2015 ‘Financial Creditor’ came to know about adverse financial position of the ‘Corporate Debtor’. In the meantime, ‘Financial Creditor’ on its own appointed PWC to conduct Independent Audit’ and PWC’, despite not getting any corporation from the Corporate Debtor, gave its report, according to which, many irregularities were pointed out, including payment of Rs. 64.8 crore, which was unexplained’. Financial Creditor’ also alleged issues relating to post-dated cheques, fictitious Board Meeting and unlawful alteration to ‘Board of Directors’.
7.Financial Creditor’ had earlier filed a CP No. 468/241/HDB/2018 under Section 241 & 242 of the Companies Act, 2013 against the ‘Corporate Debtor’ (i.e. Respondent), (its Parent Entity, Subsidiary, Directors, Promoters and purported Additional Directors/ Directors), before the `Adjudicating Authority’ which was referred to mediation by way of order dated 24.12.2021. FC filed application under section 7 of the code which was also referred to mediation by way of order dated 13.05.2022.
8.Appellant is challenging the decision of the AA of referring section 7 application to mediation.
Issue:
1.Whether, petitions made under Section 241 & 242 of the Companies Act, 2013’, can be equated with Application filed under Section 7 of the I & B Code, 2016?
2.Whether, the `Adjudicating Authority’ can refer Application proceedings under Section 7 of I & B Code, 2016 for mediation under Section 442 of the ‘Companies Act, 2013?
Arguments:
For Appellants:
1.Learned Counsel submitted that grievances of the Financial Creditor’ in the Section 241 Petition were, inter alia, the exclusion of the Appellant from the governance of the Respondent company, non-service of notices’ of Board’ / Shareholders’ Meetings upon the Appellant and its Nominee Director and siphoning off of funds’ to the parent company’ of the Corporate Debtor’, etc
2.Learned Counsel submitted that Mediation Proceedings of company affairs under section 241 of the Companies act 2013 have no bearing on the Insolvency Petition. The Learned Counsel further argued that despite Appellant’s vehemently opposing the reference of the Section 7 Application for Mediation’, the Adjudicating Authority’ passed an order dated 13.05.2022, directing the Appellant and Respondent herein, for Mediation’ in the `Insolvency Petition’ proceedings under Section 7 of the I & B Code, 2016
3.Counsel further alleged that the Adjudicating Authority’ has failed to appreciate the difference between the proceedings initiated by the Financial Creditor’ against the `Corporate Debtor’ under Sections 241 and 242 of the Companies Act, 2013 vis-a-vis under Section 7 of the I & B Code, 2016. He submitted that Under the Sale and Purchase Agreement’ and the Investment Agreement’, the Appellant’ was more as Shareholder’ whose legal rights were being violated, and also alleged Operational Mismanagement by the Corporate Debtor’ under Section 241 & 242 of the Companies Act, 2013, whereas in Section 7 Application of the I& B Code, 2016 the Appellant’ was in the role as Financial Creditor’ and that the Adjudicating Authority’ had not appreciated these two different roles of the Appellant’ and separate remedies available under separate sections of the different Act’ and `Code’.
4.Further while the issues and reliefs sought for by the Financial Creditor in Section 241 Petition under the Companies Act, 2013, was with respect to return of funds siphoned off by the Corporate Debtor’, Financial Creditor’s participation in Corporate Debtor’s management, etc., the reliefs sought in the Insolvency Petition’ are with respect to the Financial Debt’, due to the Financial Creditor’, with respect to the Principal Amount’ invested and unpaid interest accrued’, on
the Coupons’, payable on the CCDs’, held by the `Financial Creditor
5.The Learned Counsel stated that I & B Code, 2016 being a complete code in itself, does not provide for an `Adjudicating Authority’ to undertake any other course of action, except two choices available under Section 7(5) of the I & B Code, 2016. In this connection, the Learned Counsel cited the decision of the Hon’ble Supreme Court of India in E.S. Krishnamurthy vs. Bharath Hi-Tech Builders (P) Ltd., (2022) 3 SCC 161 (at para nos. 30 to 32), which also followed the ratio given in Innoventive Industries Ltd, vs. ICICI Bank, (2018) 1 SCC 407.
6.Her further contended that by action of the Adjudicating Authority’ referring parties in Section 7 of I & B Code, 2016 proceedings for Mediation’ under Section 442 of the ‘Companies Act, 2013’ was incorrect. The Learned Counsel mentioned that power of the Adjudicating Authority’ to refer for Mediation’ is limited, to the proceedings under the `Companies Act, 2013’, and no such power to refer matter for mediation under I & B Code, 2016 are available to the said Authority.
For Respondent:
1.Learned Counsel submitted that as per the settled law, that timelines specified under Section 7 of the I & B Code is directory and not mandatory. He relied on the judgment in Vidarbha Industries Power Limited v Axis Bank Limited, 2022 SCC Online SC 841 to buttress his argument.
2.Further submitted that Appellant had moved a Company Petition in CP.No.468/241/HDB/2018 and the Adjudicating Authority’ vide ‘impugned order’ dated 24.12.2021 referred case to IAMCH for Mediation’, admittedly, with the consent of both sides. He pleaded that the Appellant being a Shareholder’ with 22%Equity’ cannot come to the Adjudicating Authority’ for initiating the CIRP’ against the corporate debtor.
3.He submitted that Hon’ble Appellate Tribunal had held that as per Section 60(1) of I & B Code, the National Company Law Tribunal’ is an Adjudicating Authority’, possessing concurrent jurisdiction under the Companies Act and
also under the I & B Code, 2016.
Decision:
1.Petitions made under Section 241 of the Companies Act, 2013’ cannot be equated with Application filed under
Section 7 of the I & B Code, 2016,
2.Adjudicating Authority’ cannot refer Application proceedings under Section 7 of I & B Code, 2016 for mediation under Section 442 of the ‘Companies Act, 2013.
Rationale:
1.NCLAT noted that Financial Creditor was entitled to receive Coupons (interest) at the rate of 10% and 11% per annum on the CCDs held in the Respondent company. The Financial Creditor alleged that no payment was made by the Corporate Debtor and therefore the Financial Creditor filed CP (IB) No. 17/7/HDB/2021 under Section 7 of the I & B Code, 2016 and Rule 4 of the I & B Code, 2016 (Application to Adjudicating Authority Rules, 2016)
2.It noted that financial arrangement made between the Financial Creditor and the Corporate Debtor clearly falls in definition of Debt’ ,Financial Debt’ and Default’. Therefore, the Financial Creditor had right to move an Application’ filed under Section 7 of the I & B Code, 2016.
3.It is settled law that role of the Adjudicating Authority’ has been clearly elaborated under I & B Code, 2016. The Adjudicating Authority’ is required to admit the Petition under Section 7(5)(a) of the I & B Code, 2016 where the Debt’ is due and was not paid. Alternatively, the Adjudicating Authority’ under Section 7(5)(b) can reject the Petition’ if there was no Debt’. This is to be done within 14 days from the receipt of Petition under Section 7 based on records made available
4.It further that Section 241 of the ‘Companies Act, 2013 ’ is entirely for different purpose which entitles aggrieved party due to oppression and mismanagement to file Application before the Tribunal and the Tribunal power are prescribed under Section 242 of the Companies Act, 2013. Whereas, Section 7 of the I & B Code, 2016 is purely regarding initiation of CIRP for default of debt of more than Rs. 1 crore.
4.Purpose of Section 241 of the ‘Companies Act, 2013’ cannot be equated with Section 7 of the I & B Code, 2016. Similarly, the powers of the Tribunal under Section 242 of the Companies Act, 2013 w.r.t oppression and mismanagement are quite comprehensive in comparison to Section 7 which grants limited powers to the Adjudicating Authority’ of either acceptance or rejection of the claims made by the Financial Creditor.
5.In Vidarbha Industries Power Limited case, one appeal was pending before the Hon’ble Supreme Court of India and if that appeal would have come in favour of Vidarbha Industries Power Limited, they could have paid all the debt dues. However, in the present case it is squarely for Adjudicating Authority’ to decide about the claim of default of Financial Creditor and there was no material basis for any alternative remedy other than as stipulated under Section 7(5) of the I & B Code, 2016 to Adjudicating Authority’.
6.Power of the Adjudicating Authority’, (National Company Law Tribunal’), under Section 442 of the Companies Act, 2013 is limited to the proceedings under the Companies Act, 2013, but not in the matter related to I & B Code, 2016.
Order Copy:
