Implied Admission of Outstanding Debt gives rise to Liability: National Company Law Appellate Tribunal, Chennai Bench

Whether an admission contained within a reply, constituted an admission and gave rise to an outstanding liability, was considered by the NATIONAL COMPANY LAW APPELLATE TRIBUNAL, CHENNAI BENCH, before a bench consisting of Justice M. Venugopal, Member (Judicial); and Kanthi Narahari, Member (Technical), in the matter of Mrs. Jayanthi G. Ravi vs. M/s Chemizol Additives P Ltd. [COMPANY APPEAL (AT) (INSOLVENCY) NO. 553/2020], on 03.01.22.

The Appellant/Applicant/Financial Creditor has preferred the present appeal before this Tribunal being dissatisfied with the order dated 28.01.2020 passed by the ‘Adjudicating Authority’ (National Company Law Tribunal, Bengaluru Bench) in dismissing the Application. In the instant case, the amounts are stated to be given at a time when the Petitioner was a Director in the Respondent Company, for the purpose of keeping the Company running and meeting the Company’s funding requirements. As per the Petition, the Petitioner herself informed the Board about the fund requirement. That was much in the interest of the Petitioner herself as of the Respondent Company, as she was a Director. She then advanced the amounts on 01.12.2016 and 18.01.2017 in two tranches, totalling Rs. 4.10 crore. In the Board Meeting of 23.02.2017, another Director Sri S Jairam, a close associate and statutory auditor in other Companies in which the Petitioner was a Promoter Director and later in the Respondent Company as well, only “informed” the Board that the amounts had been received and were to be repaid in 6 months and bore an interest of 7.5% pa. There was therefore no Agreement or prior approval for the borrowing or for any terms and conditions, nor any other document to establish the debt. The amounts contributed were for the operational expenses of the Company. The amounts were not demanded or borrowed by the Company from the Petitioner. In this entire period, the Petitioner herself was the key person in the Company, chairing the Board meeting, and signing its minutes. All the decisions were virtually taken by the Petitioner unilaterally –decision on requirement of funds, information of payments and terms and intimation of the same, and adoption of Resolutions about each of these events. It is also seen that in the Resolution adopted on 06.04.2017, when the Petitioner was still a Director, the period of return is stated to be 60 days as per the Petition, and not 6 months as mentioned elsewhere. Similarly, the two amounts of Rs. 50 lakh each diverted immediately after receiving the above amounts in the Company to another non-existent Company, in which the Petitioner had been a Director, without any approval, even though the amounts were stated to be given to the Respondent company to meet its expenses.

It was argued that even though she may have given amounts as a Director, to meet the expenses of the Company, it does not necessarily make the amounts owed to her a ‘debt’ in the sense conceived in the Code. Debt, as defined under the Code in Section 3 (11) means a liability or obligation in respect of a claim which is due from any person, and includes a financial debt or an operational debt. Such a debt would arise from a claim, as also defined in Section 3 (6), i.e. from a right to payment in the hands of the Creditor. It was further asserted that it was also not a Financial Debt as per the definition given in section 5 (8) of the Code, as the amounts were not “money borrowed” by the Corporate Debtor. In addition, it was highlighted that there as lack of clarity as to whether it was in the nature of a Financial debt or an Operational debt. In light of precedents, it was argued that it is settled position of law that the provisions of the Code cannot be invoked for recovery of outstanding amount but can be invoked to initiate CIRP for justified reasons as per the Code.

Challenging the order of dismissal dated 28.01.2020 passed by the Adjudicating Authority (NCLT, Bengaluru Bench) The Learned Counsel for the Appellant contents that the impugned order passed by the Adjudicating Authority dated 28.01.2020 is an invalid and illegal one and that the Adjudicating Authority wrongly came to the conclusion that there was a dispute as to the purpose for which the amount was given. In light of precedents, it was argued by the appellant that the question whether the Board of Directors of a company could subsequently ratify an invalid act and validate it retrospectively is no more res integra. It was further asserted that the instant case relates to a ‘Financial Debt’ and it does not pertain to the difference between a ‘Secured’ and an ‘Unsecured Creditor’.

The Tribunal held that the Reply ‘clinchingly’ establishes that the Respondent/Company had admitted its liability to repay the ‘Principal sum’ and ‘Interest’, and held that ‘Admission’ is the best piece of evidence in Law. It was noted that especially the Respondent/Company had sought time to repay Loan and Interest thereon, in one payment by 30.04.2019 and taking into account all these cumulative facts in an integral manner, this ‘Tribunal’ comes to an inevitable, inescapable and consequent conclusion that the ‘Appellant/Financial Creditor’ had established the ‘Financial Debt’ and ‘Default’ being the pre-requisites for admitting the ‘Application’ (under Section 7 of the I & B Code, 2016), filed by the ‘Appellant’. Viewed in that perspective, the contra views arrived at by the ‘Adjudicating Authority’ that the ‘Loan’ was not a ‘Financial Debt’, as the amounts were not ‘money borrowed’ by the ‘Corporate Debtor’ and that the borrowing may not constitute a ‘Financial Debt’ that could be enforced as per the I & B Code, 2016 though the ‘Borrowing’ may be reflected in the ‘Balance Sheet’ as pointed out by the ‘Petitioner (Appellant)’ etc; are legally ‘invalid’ and ‘untenable’. Looking from that angle, this ‘Tribunal’ interferes with the ‘impugned order’ dated 28.01.2020 passed by the ‘Adjudicating Authority’ (National Company Law Tribunal, Bengaluru Bench) and set aside the same, to promote substantial cause of justice. Consequently, the appeal was held to succeed.

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Judgement reviewed by Bhargavi

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