Loan Converted Into Equity - NCLT Procedure Being In Summery In Nature, Can't Initiate CIRP; NCLT Kolkata

Background Facts

Anup Jhunjhunwala ("Petitioner") was the Managing Director and shareholder of ADEA Powerquips Private Limited ("Corporate Debtor"). During 2018-19, the Petitioner in its own capacity had granted a temporary loan of Rs.27,00,000/- to the Corporate Debtor with an interest of 12% per annum.

In December, 2018, the Petitioner had sold 4,14,000 equity shares out of 25,20,158 equity shares in Corporate Debtor to Modern Malleables group and their nominees were inducted as additional directors of the Corporate Debtor. A new Board of Directors of the Corporate Debtor was formed and the Petitioner ceased to be the Managing Director after 16.09.2019. The Petitioner on several occasions had requested the Corporate Debtor to refund the loan amount but to no avail.

The Corporate Debtor had served a notice dated 23.08.2019 to the Petitioner that an Annual General Meeting (AGM) was to be held on 16.09.2019 and one of the agenda were to convert the loan of the Petitioner into equity shares. After conclusion of the AGM, the Petitioner had objected to the said notice vide a response dated 11.10.2019 and had requested refund of Rs. 27 Lakhs. The Corporate Debtor intimated the Petitioner on 24.10.2019 that the Board of Corporate Debtor had unanimously converted the loan of the Petitioner into equity shares in the AGM. The Petitioner addressed a response to the Corporate Debtor stating that it had never consented for such conversion.

Thereafter, the Petitioner filed a petition under Section 7 of the Insolvency and Bankruptcy Code, 2016 ("IBC"), seeking initiation of Corporate Insolvency Resolution Process ("CIRP") against the Corporate Debtor, over a default of Rs.29,80,662/- along with interest.

Contentions Of Petitioner

The Petitioner contended that the Corporate Debtor had admitted and acknowledged the loan given by the Petitioner of Rs.27,00,000/- in its Balance Sheets for the Financial Year 2018-19.

Reliance was placed on the NCLAT judgments in Jayanthi G. Ravi v. Chemizol Addictive P Ltd., C.A. (AT) (Ins.) No. 553/2020 and Shailesh Sangani v. Joel Cardoso & Anr., 2019 SCC OnLine NCLAT 52, wherein it was held that the loan given by the shareholder/director is a financial debt.

Contentions Of The Corporate Debtor

The Corporate Debtor submitted that the Petitioner along with his sons was in the Board of Management of the Corporate Debtor, but due to illegal acts that were prejudicial to the company, the sons were removed from the Board. Further the Petitioner had accepted the conversion of its loan amount into equity shares without any protest at the Annual General Meeting held on 16.09.2019.

Decision Of The NCLT

The NCLT observed that Minutes of the Board of Meetings of the Corporate Debtor reflect that it had admitted that Petitioner had disbursed loan to it. The Board of Directors had resolved to convert such loan into equity shares and the same reflects in the audited Balance Sheet of the Corporate Debtor under 'unsecured loan from Directors' head. On 16.09.2019, the same amount was converted to equity shares. Hence, it is clear that the Petitioner had given loan to the Corporate Debtor which eventually converted in equity shares.

The Petitioner had received the agenda for the Annual General Meeting on 23.08.2019 and hence, the Petitioner was well aware of agenda for conversion of loan to equity shares but did not raise any objection after receipt of notice.

"This Adjudicating Authority is a summary court and hence, we cannot venture into a detailed proceeding, the main points in a section 7 petition is to check whether there is a debt and default with the aid of the documents annexed with the pleadings. In the present case, the debt has been converted into equity shares, hence there is no debt at the present."

The Bench rejected the petition, while granting liberty to the Petitioner to resort to other remedies available in law.

Case Title: Anup Jhunjhunwala v ADEA Powerquips Private Limited

Case No.: CP (IB) No. 2079/KB/2019

Counsel For the Financial Creditor: Ms. Urmila Chakraborty, Advocate Mr. Anurag Bagaria, Advocate Ms. Riya Debnath, Advocate

Counsel For the Corporate Debtor: Mr. Reetobroto Mitra, Advocate Mr. Debjyoti Saha, Advocate

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