Mumbai's NCLT Affirms: Loan Document Stamping Not a Basis for Dismissal of Section 7 Petition

Mumbai's NCLT Affirms: Loan Document Stamping Not a Basis for Dismissal of Section 7 Petition

In a recent ruling on the Kotak Mahindra Bank Ltd. Vs M/s Hybro Foods Private Limited case, the Mumbai Bench of the National Company Law Tribunal, comprising of Judicial Member Kuldip Kumar Kareer and Technical Member Anuradha Sanjay Bhatia, affirmed that inadequate stamping of loan documents is not a valid basis for rejecting a petition filed under Section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC).

Hybro Foods Private Limited, the corporate debtor, obtained a Credit Facility Loan from Religare Finvest Limited, the original lender, with a cash credit limit of ₹110 million at a floating reference rate of 13 per cent per annum. On October 9, 2018, the original lender executed an Assignment Agreement with Kotak Mahindra Bank Limited, the financial creditor, transferring the debt and all related rights and liabilities to the latter.

According to Kotak Mahindra Bank, the financial creditor, Hybro Foods, the corporate debtor, defaulted on loan repayments, prompting the bank to issue two demand letters on September 23, 2019, and December 13, 2019, requesting payment of the outstanding amount.

In response, Hybro Foods sent a letter to the bank on January 15, 2020, requesting more time to settle the dues. However, due to additional defaults in December 2019 and January 2020, Hybro Foods' accounts became irregular and were classified as non-performing assets.

Consequently, Kotak Mahindra Bank issued a Demand Notice under Section 13(2) of the SARFAESI Act, 2002 on February 27, 2020. After receiving no response to the Demand Notice, the bank sent a letter on March 12, 2020, recalling the facility until payment and realisation. As a result, the bank filed a petition under Section 7 of the IBC.

In contrast, Hybro Foods contended that the Assignment Deed lacked sufficient stamp duty as per Section 18 of the Maharashtra Stamp Act, 1958, which mandates that any instrument executed outside the state must be stamped within 3 months from its first receipt in the state.

The Debtor claimed that it is unclear when the documents were received from New Delhi, making them insufficiently stamped. Additionally, the Debtor alleged that the Financial Creditor had previously stated that only 90 per cent of the loan was assigned from the Original Lender, Religare Finvest, with the remaining 10 per cent still due to the Original Lender. As a result, since the Original Lender was not named in the petition, it should be dismissed. The Debtor Hybro Foods further argued that the petition is invalid under section 10A of IBC and that there is no contractual relationship between the Financial Creditor and the Corporate Debtor, rendering the petition dismissible.

The Tribunal emphasised that the adequacy of stamping on loan documents is immaterial when determining the admissibility of a petition under Section 7 of IBC. The Tribunal referred to the ruling of the Madras High Court in SpiceJet Limited v/s Credit Suisse AG, which held that the sufficiency of stamping on the document in question is irrelevant. What matters is whether the debt is genuinely disputed and whether the defence put forth is a significant one.

The Tribunal noted that Section 10A of IBC was intended to offer a temporary reprieve to defaulting borrowers by restricting the initiation of Corporate Insolvency Resolution Process applications for a limited duration of one year, between March 24, 2020, and March 25, 2021.

The Tribunal further emphasised that this provision cannot be exploited to evade payment of a debt taken prior to its introduction. The Corporate Debtor's loan account was declared NPA on January 31, 2020, and a Demand Notice was issued under SARFAESI Act, 2002 on February 27, 2020, followed by a recall notice dated March 12, 2020. Since both the classification as NPA and the Demand Notice were issued well before the period under Section 10A, the petition cannot be dismissed under Section 10A.

Additionally, the Tribunal noted that the Assignment Agreement explicitly granted the Financial Creditor the right to initiate recovery proceedings in its own name. Furthermore, the Corporate Debtor addressed its letter dated January 15, 2020, requesting time for settlement of dues to the Financial Creditor and not the Original Lender, thereby recognising the Financial Creditor's legal standing.

Taking into account these observations, the Tribunal deemed the petition admissible and initiated the Corporate Insolvency Resolution Process (CIRP) against the Corporate Debtor Hybro Foods Private Limited.