Case: M/S RADHA EXPORTS (INDIA) PRIVATE LIMITED Vs. K.P JAYARAM &amp; ANR.

were transferred to the NCLT and also the pleadings in CP/77/ (IB)/CB/2018 and WCP No. 770/IB/CB/C-II/2018 filed before the Chennai Bench of NCLT. Any suit filed by the Respondents against Mr. Krishnan or against the company will be decided on its own merits without being swayed by the observations made in this judgment. 42. Even otherwise, the application under Section 7 of the IBC was not maintainable. As rightly held by the NCLT there was no financial debt in existence. In this context, it would be pertinent to refer to the following provisions of the IBC:- 3. Definitions.- In this Code, unless the context otherwise requires,— ……. (8) corporate debtor means a corporate person who owes a debt to any person; ……. (10) creditor means any person to whom a debt is owed and includes a financial creditor, an operational creditor, a secured creditor, an unsecured creditor and a decree-holder; (11) debt means a liability or obligation in respect of a claim which is due from any person and includes a financial debt and operational debt; (12) default means non-payment of debt when whole or any part or instalment of the amount of debt has become due and payable and is not paid by the debtor or the corporate debtor, as the case may be. xxx xxx xxx 5. Definitions.- In this Part, unless the context otherwise requires,- ……... (7) financial creditor means any person to whom a financial debt is owed and includes a person to whom such debt has been legally assigned or transferred to; (8) financial debt means a debt alongwith interest, if any, which is disbursed against the consideration for the time value of money and includes— (a) money borrowed against the payment of interest; (b) any amount raised by acceptance under any acceptance credit facility or its de-materialised equivalent; (c) any amount raised pursuant to any note purchase facility or the issue of bonds, notes, debentures, loan stock or any similar instrument; (d) the amount of any liability in respect of any lease or hire purchase contract which is deemed as a finance or capital lease under the Indian Accounting Standards or such other accounting standards as may be prescribed; (e) receivables sold or discounted other than any receivables sold on nonrecourse basis; (f) any amount raised under any other transaction, including any forward sale or purchase agreement, having the commercial effect of a borrowing; (g) any derivative transaction entered into in connection with protection against or benefit from fluctuation in any rate or price and for calculating the value of any derivative transaction, only the market value of such transaction shall be taken into account; (h) any counter-indemnity obligation in respect of a guarantee, indemnity, bond, documentary letter of credit or any other instrument issued by a bank or financial institution; (i) the amount of any liability in respect of any of the guarantee or indemnity for any of the items referred to in sub-clauses (a) to (h) of this clause; xxx xxx xxx 7. Initiation of corporate insolvency resolution process by financial creditor.- (1) A financial creditor either by itself or jointly with other financial creditors, or any other person on behalf of the financial creditor, as may be notified by the Central Govt. may file an application for initiating corporate insolvency resolution process against a corporate debtor before the Adjudicating Authority when a default has occurred. xxx xxx xxx 8. Insolvency resolution by operational creditor.- (1) An operational creditor may, on the occurrence of a default, deliver a demand notice of unpaid operational debtor copy of an invoice demanding payment of the amount involved in the default to the corporate debtor in such form and manner as may be prescribed. (2) The corporate debtor shall, within a period of ten days of the receipt of the demand notice or copy of the invoice mentioned in sub-section (1) bring to the notice of the operational creditor— (a) existence of a dispute, if any, on record of the pendency of the suit or arbitration proceedings filed before the receipt of such notice or invoice in relation to such dispute; (b) the payment of unpaid operational debt— (i) by sending an attested copy of the record of electronic transfer of the unpaid amount from the bank account of the corporate debtor; or (ii) by sending an attested copy of record that the operational creditor has encashed a cheque issued by the corporate debtor. Explanation.—For the purposes of this section, a demand notice means a notice served by an operational creditor to the corporate debtor demanding payment of the operational debt in respect of which the default has occurred. 43. The definition of financial debt in Section 5(8) makes it clear that financial debt means a debt along with interest, if any, disbursed against the consideration for time value of money and would include money raised or borrowed against the payment of interest; amount raised by acceptance under any acceptance credit facility or its de-materialised equivalent; amount raised pursuant to any note purchase facility or the issue of bonds, notes, debentures, loan stock or any similar instrument; the amount of any liability in respect of any lease or hire purchase contract which is deemed as a finance or capital lease under the Indian Accounting Standards or such other accounting standards as may be prescribed; receivables sold or discounted other than any receivables sold on non-recourse basis or any amount raised under any other transaction, including any forward sale or purchase agreement, having the commercial effect of a borrowing. Explanation to Section 5(8) which relates to real estate projects is of no relevance in the facts and circumstances of this case. The payment received for shares, duly issued to a third party at the request of the payee as evident from official records, cannot be a debt, not to speak of financial debt. Shares of a company are transferable subject to restrictions, if any, in its Articles of Association and attract dividend when the company makes profits.

Decision (1 = appeal accepted, 0 = rejected): 1

Explanation:
1[ds]16. Allegations of forgery and fraud are not decided in proceedings under Sections 433 and 434 of the Companies Act 1956 for winding up of a company. Such disputes necessarily have to be adjudicated in a regular suit, on the basis of evidence, including forensic examination reports.30. It appears that the Appellate Authority was not inclined to accept the submission of the Appellant Company, that the entire amount had been paid, for two purported reasons. The first reason was that the Correlation Statement showed payments of certain amounts amounting to Rs.53,05,000/- in favour of Customs, Chennai and payments amounting to Rs.1,75,000/- in favour of one Mr. Kulasekaran. The Respondents, as Financial Creditors had disputed that these payments were towards the dues of the Financial Creditors. The second reason was that, if the total amount had been paid, there was no reason for the Appellant Company to take the plea that the amount was not payable, the same being barred by limitation.31. It is well settled in law that alternative defences are permissible to contest a claim. It was thus open to the Appellant Company, to refute the claim of the Respondents by taking the plea of limitation and also to contend that no amount was in fact due and payable by the Appellant Company to the Respondents.33. The proposition of law which emerges from Innoventive Industries Ltd. (supra) is that the Insolvency Resolution Process begins when a default takes place. In other words, once a debt or even part thereof becomes due and payable, the resolution process begins. Section 3(11) defines debt as a liability or obligation in respect of a claim and the claim means a right to payment even if it is disputed. The Code gets triggered the moment default is of Rs.1,00,000/- or more. Once the Adjudicating Authority is satisfied that a default has occurred, the application must be admitted, unless it is otherwise incomplete and not in accordance with the rules. The judgment is however, not an authority for the proposition that a petition under Section 7 of the IBC has to be admitted, even if the claim is ex facie barred by limitation34. On the other hand, in B.K. Educational Services Pvt. Ltd. v. Parag Gupta and Associates (2019) 11 SCC 633 , this Court held:-42. It is thus clear that since the Limitation Act is applicable to applications filed under Sections 7 and 9 of the Code from the inception of the Code, Article 137 of the Limitation Act gets attracted. The right to sue, therefore, accrues when a default occurs. If the default has occurred over three years prior to the date of filing of the application, the application would be barred under Article 137 of the Limitation Act, save and except in those cases where, in the facts of the case, Section 5 of the Limitation Act may be applied to condone the delay in filing such application.35. The judgment in B.K. Educational Services Pvt. Ltd. (supra) was referred to and relied upon by the Court in Vashdeo R. Bhojwani v. Abhyudaya Co-operative Bank Ltd. (2019) 9 SCC 158 . 36. It was for the applicant invoking the Corporate Insolvency Resolution Process, to prima facie show the existence in his favour, of a legally recoverable debt. In other words, the respondent had to show that the debt is not barred by limitation, which they failed to do.37. Under clauses (19) to (21) of Part II of the Schedule of the Limitation Act 1963, the period of limitation for initiation of a suit for recovery of money lent, is three years from the date on which the loan is paid. The last loan amount is said to have been advanced in 2004-2005. In the winding up petition, there is not a whisper of any agreed date by which the alleged loan was to be repaid to the Respondents. In the instant case, apparently the debt was barred by limitation even in the year 2012, when winding up proceedings were initiated in the Madras High Court.38. The NCLT rightly refused to admit the application under Section 7 of the IBC, holding the same to be barred by limitation. The Appellate Tribunal has erred in law in reversing the judgment and order of the earlier Adjudicating Authority. The Adjudicating Authority rightly rejected the application as barred by limitation. The Appellate Authority patently erred in law in reversing the decision of the adjudicating authority and admitting the application.39. As recorded in the said order dated 19 th December, 2018 passed by the NCLT Chennai, the Respondent Nos. 1 and 2 jointly addressed the letter dated 11 th January, 2011 to the Income T ax Department confirming that the Respondent No.1 had requested the Appellant Company to transfer a sum of Rs.90 lakhs to his wife, the Respondent No.2 for allotment of shares in the Appellant Company and further acknowledged that the amount outstanding from the erstwhile firm M/s. Radha Exports to the Respondent was Rs.1,39,60,000/- as on 31 st March, 2004. The said letter has been extracted in full in Paragraph (9) of the judgment and order dated 19 th December, 2018 of NCLT.40. There are, as observed above cogent records including letters signed by the Respondent Nos. 1 and 2 which evince that on 6 th October, 2007, Respondent No.2 resigned from the Board of the Appellant Company and at that time the Respondent No.2 requested the Appellant Company to treat the share application money of Rs.90,00,000/- as share application money of Mr. M. Krishnan and to issue shares for aforesaid value to Mr. M. Krishnan. The amount was to be treated as a personal loan from the Respondent No.2 to Mr. M. Krishnan. A personal Loan to a Promoter or a Director of a company cannot trigger the Corporate Resolution Process under the IBC. Disputes as to whether the signatures of the Respondents are forged or whether records have been fabricated can be adjudicated upon evidence including forensic evidence in a regular suit and not in proceedings under Section 7 of the IBC.41. It is, however, made clear that the observations made above, with regard to limitation are based on the pleadings and annexures in the winding up proceedings under Sections 433/434 of the Companies Act, 1956 filed in Madras High Court, which were transferred to the NCLT and also the pleadings in CP/77/ (IB)/CB/2018 and WCP No. 770/IB/CB/C-II/2018 filed before the Chennai Bench of NCLT. Any suit filed by the Respondents against Mr. Krishnan or against the company will be decided on its own merits without being swayed by the observations made in this judgment.42. Even otherwise, the application under Section 7 of the IBC was not maintainable. As rightly held by the NCLT there was no financial debt in existence.The payment received for shares, duly issued to a third party at the request of the payee as evident from official records, cannot be a debt, not to speak of financial debt. Shares of a company are transferable subject to restrictions, if any, in its Articles of Association and attract dividend when the company makes profits.43. The definition ofSection 5(8) makes it clear that financial debtmeans a debt along with interest, if any, disbursed against the consideration for time value of money and would include money raised or borrowed against the payment of interest; amount raised by acceptance under any acceptance credit facility or its de-materialised equivalent; amount raised pursuant to any note purchase facility or the issue of bonds, notes, debentures, loan stock or any similar instrument; the amount of any liability in respect of any lease or hire purchase contract which is deemed as a finance or capital lease under the Indian Accounting Standards or such other accounting standards as may be prescribed; receivables sold or discounted other than any receivables sold on non-recourse basis or any amount raised under any other transaction, including any forward sale or purchase agreement, having the commercial effect of a borrowing. Explanation to Section 5(8) which relates to real estate projects is of no relevance in the facts and circumstances of this case.