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

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

The CIRP proceedings were initiated against the corporate debtor under the Insolvency and Bankruptcy Code

The Chennai Bench of the National Company Law Appellate Tribunal (NCLAT) has dismissed an appeal and held that the claims of a financial creditor and members of the Committee of Creditors (CoC) cannot be re-argued once the tribunal’s order attains finality.

On 02 April 2011, Mahal Hotel Private Limited (appellant) entered a Business Transfer Agreement (BTA) with the corporate debtor for acquiring a hotel project as an ongoing concern for a total Sale Consideration of Rs.480 crores.

On 22 March 2013, the BTA was terminated as the transaction was not completed. Thereafter, on 22 July 2013, the appellant sought a refund of the total consideration paid from the corporate debtor, under the BTA terms.

The corporate debtor failed to pay the amount despite several requests. But, on 15 December 2015, assured the appellant of paying the loan of Rs.134 crores.

However, when it did not happen, on 12 March 2018, the Corporate Insolvency Resolution Process (CIRP) was initiated against the corporate debtor under Section 7 of the Insolvency and Bankruptcy Code (IBC), 2016.

The appellant argued that the tribunal had observed there was a dispute of whether Mahal Hotel was a financial creditor. Thus, the question of whether the appellant (being a financial creditor or any creditor) was not decided. Whether there was an error in concluding that the appellant was not a part of the CoC; therefore, it did not come under the ambit of the financial creditor definition.

On the other hand, the respondent argued that the appellant wrongly chose to reinitiate an entire set of proceedings on the same issue. Therefore, the proceeding was barred by the res judicata principle. The BTA did not have the commercial effect of borrowing. It was intended for the transfer of business division on a slump sale basis.

To make its point, the respondent referred to the judgment of the Supreme Court in the Satyadhyan Ghosal vs. Deorajin Debi (1960) 3 SCR 590 case.

The Coram of Justice Rakesh Kumar Jain (Judicial Member) and Shreesha Merla (Technical Member), while dismissing the appeal, observed that there was a dispute about whether Mahal Hotel could be referred to as the financial creditor.

It stated that once a decision was taken by the CoC to hold a meeting for the removal of Koteswara Rao Karuchola as a Resolution Professional (RP), it was improper for him to include Mahal Hotel as a financial creditor or the member of the CoC. It further held that a money-laundering case was initiated against Mahal Hotel, and it could not be allowed to be a member of the CoC.

The NCLAT further stated that as it had examined whether the appellant was a financial creditor under Section 5 (7) of the IBC, the appellant should have preferred an appeal under Section 62. It was indisputable that the appellant did not challenge the findings by way of an appeal.

It agreed with the contention of the respondent that as the 18 November 2019 order attained finality, it could not be re-argued at a belated stage.