NCLT Mumbai: CIRP Can't Be Initiated U/S 7 Of IBC Based On Transfer Agreement For Purchase Of Debentures From Financial Creditors

Background Facts:

Meeti Developers Pvt. Ltd. ('MDPL') had executed a Development Agreement with New Kamal Kunj Co-op Housing Society Limited ('Society') for re-development of the Society's building. Under a Debenture Trust Deed dated 29.11.2016, MDPL issued Non-convertible Debentures (NCDs) of Rs. 55 Crores to the predecessor of the Edelweiss Asset Reconstruction Company Ltd. (Financial Creditor). These NCDs stood assigned to the Financial Creditor under an Assignment Agreement dated 21.05.2019. Financial Creditor filed a CIRP application u/s 7 of CIRP against MDPL since it defaulted in the repayment of the NCDs. The same was admitted by NCLT.

Post admission of the CIRP by NCLT, Ajmera Realty and Infra India Ltd. (Corporate Debtor) along with MDPL approached the Financial Creditor for the purchase of the NCDs for a sum of Rs. 31.66 crores. Thus, the Financial Creditor and the Corporate Debtor executed a Transfer Agreement and Financial Undertaking dated 08.07.2022 as per which out of Rs. 31.66 crores, the Corporate Debtor would make an upfront payment of Rs. 3.26 crores with the balance sum to be paid by 31.12.2022. The Debtor will be liable to pay an interest at 24% p.a., incase of default.

Further, the NCDs would not be transferred to the Corporate Debtor till the time the Corporate Debtor complies with the payment obligations under the Transfer Agreement and Financial Undertaking and further, on the payment of the upfront amount, the Financial Creditor shall withdraw the CIRP application.

The Financial Creditor complied with its obligation and withdrew the CIRP application, however, post such withdrawal, the Corporate Debtor kept on seeking an extension of time for paying the balance amount of Rs. 28.40 crores. Thus, the Financial Creditor has filed the CIRP petition u/s 7 of IBC against the Corporate Debtor.

NCLT Verdict:

The NCLT Mumbai dismissed the petition and held that the CIRP under Section 7 of IBC cannot be initiated based on a Transfer Agreement/promise for the purchase of Debentures from Financial Creditors.

The Tribunal noted that the Financial Creditor and the Corporate Debtor had a relationship of a transferor and transferee under the Transfer Agreement executed for the purchase of debentures secured, redeemable and non-convertible debentures for Rs. 31.66 crores.

NCLT observed that the purchase of NCDs lacks the basic element of disbursal against the consideration for the time value of money. It relied upon the Transfer Agreement, Financial Undertaking and the Debenture Trust Deed and observed that Clause 3 of the Transfer Agreement and Clause 2 and 3 of Financial Undertaking merely provide that the Corporate Debtor was liable to pay the balance purchase price towards purchase of debentures.

The Tribunal referred to the Supreme Court decision in Anuj Jain vs Axis Bank Limited which states a settled position of law that the element of disbursal against the consideration of time value of money has to be traced in the genesis of debt.

Presently, the transaction included purchase of debentures and no element of disbursal against the consideration for time value of money is present. The CIRP application has been filed by the Financial Creditor to recover money and seek specific performance of the terms of the agreement.

In conclusion, NCLT held that a mere stipulation in an agreement stating that the transferor shall be considered as a Financial Creditor of Guarantor, will not rendered the outstanding amount receivable by the Petitioner herein a Financial Debt within the meaning of IBC.

Case Title: Edelweiss Asset Reconstruction Company Ltd. vs. Ajmera Realty and Infra India Ltd.

Case No.: CP (IB) No.877/MB/2023

Counsel for Financial Creditor: Mr. Gaurav Joshi, Senior Counsel a/w Mr. Ankit Lohia, Advocate, Mr. Varun Nathani, Advocate, Ms. Suchitra Valjee, Ms. Riya Kamdar, Ms. Riya Vasa, Advocates i/b Manilal Kher Ambalal & Co

Counsel for Corporate Debtor: Mr. Shyam Kapadia, Advocate a/w Ms. Rati Patri, Mr. Vikrant Dere, Ms. Sanchi Jain, Advocate i/b M/s. Wadia Ghandy & Co.

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