NCLAT Chennai: Amount Paid As Part Of Business Transfer Agreement, Not A Financial Creditor.

Background Facts

On 02/04/2011, Mahal Hotel Private Limited (“Appellant”) had entered into a Business Transfer Agreement (“BTA”) with the Corporate Debtor for the purpose of acquiring a hotel project as an ongoing concern for a total Sale Consideration of Rs. 480 Crores.

On 22/03/2013, the BTA was terminated as the transaction was not completed. Following this on 22/07/2013, the Appellant sought a refund of the total Consideration paid from the Corporate Debtor, under the terms of the BTA.

Despite several requests, the Corporate Debtor failed to pay the said amount. On 15/12/2015, the Corporate Debtor assured the Appellant that the loan amounting to Rs. 134 Crores would be repaid.

Failing which Corporate Insolvency Resolution Process (“CIRP”) was initiated against the Corporate Debtor admitting a Section 7 Application under Insolvency and Bankruptcy Code, 2016 (“IBC”) on 12/03/2018.

Contentions of Appellant

The Appellant argued that the NCLAT had observed that there was a dispute as to whether Mahal Hotel Pvt. Ltd. comes within the meaning of Financial Creditor or not and therefore, the question of whether the Appellant being a Financial Creditor or any Creditor was not decided and there was an error in concluding that the Appellant is not a part of the CoC and therefore, not falling within the ambit of the definition of Financial Creditor.

Contentions of Respondents

The Respondent opposed the submissions of the Appellant and argued that the Appellant had wrongly chosen to reinitiate an entire set of proceedings on the same issue and therefore, the proceeding is barred by the principle of Res Judicata.

The Respondent further pointed out that the BTA Agreement did not have the commercial effect of a borrowing and it was intended for the transfer of business division on a slump sale basis as evident from the terms and conditions of the BTA Agreement.

The Respondent referred to the judgement of Supreme Court in Satyadhyan Ghosal Vs. Deorajin Debi [(1960) 3 SCR 590].

NCLAT Verdict

NCLAT dismissed the appeal and observed that there is a dispute as to whether Mahal Hotel Pvt. Ltd. comes within the meaning of 'Financial Creditor'.

NCLAT pointed out that once a decision was taken by the Committee of Creditors to call for a Meeting for removal of Mr. Koteswara Rao Karuchola as RP, it was improper for him to include Mahal Hotel Pvt. Ltd. as Financial Creditor of the Member of the Committee of Creditors.

Further, money laundering case having been initiated against Mahal Hotel Pvt. Ltd., the said Hotel cannot be allowed to be Member of Committee of Creditors.

As this Tribunal had examined whether the Appellant is a Financial Creditor within the meaning of Section 5 (7) of the Code, the Appellant herein ought to have preferred an Appeal under Section 62 of the Code. It is not in dispute that the Appellant did not challenge these findings by way of an Appeal. Therefore, we find force in the contention of the Learned Counsel for the Respondent that as the Order dated 18/11/2019 has attained finality and the reliefs sought for by the Appellant namely, inclusion of its Claim as a Financial Creditor and as a Member of the CoC, cannot be reargued at this belated stage.

Case Title: Mahal Hotel Private Limited vs Dr. Govindarajula Venkata Narasimha Rao

Case No.: COMPANY APPEAL (AT) (CH) (INS.) No. 225/2023

Counsel For Appellant: Mr. Sandeep Bajaj & Ms. Aakanksha Nehra, Advocates

Counsel For Respondents Mr. Pradeep Joy, Advocate

Click Here To Read/Download Order