Fraud Or Malicious Intent U/S 65 Of IBC Is Proven If Terms Of Loan Extended By Financial Creditor Are Designed To Cause Default: NCLT

Brief Facts:

The Applicant, Saivi Finance (“Financial creditor”) is a Non-Banking Financial Company that provides financial assistance to under-served businesses in India as per the guidelines issued by the Reserve Bank of India.

The financial creditor extended a loan to M/s AKJ Metals Private Ltd. (“Corporate Debtor”) on 18.09.2023, to which ITJ Retails Private Limited (“Guarantor”) extended a Guarantee.

The Corporate Debtor defaulted on the payment of initial instalment itself on 01.11.2023, in furtherance to which the Financial Creditor sent a demand notice on 01.12.2023. However, even after the issuance of demand notice the Corporate Debtor failed to repay the amount.

Consequently, the Financial Creditor filed a Section 7 petition against the Corporate Debtor for initiation of Corporate Insolvency Resolution Process (“CIRP”) on 04.01.2024.

However, it is important to bring to notice that an application bearing No. (IA)/1044/ND/2024, as it is closely connected to this case. The Application was filed by Mr. Brigesh Singh Bhadauriya i.e., Resolution Professional of RCI Industries and Technologies Ltd, under Section 65 of the code against the Financial Creditor and Corporate Debtor.

Brief of IA/1044/ND/2024

In 2019, Insolvency Proceedings were initiated against RCI by State Bank of India for non-payment of dues. Thereafter, pursuant to the initiation of Insolvency Proceedings against RCI, Corporate Debtor was established just in a time span of two months.

RCI had two properties, which was sold by the Managing director of RCI to the Corporate Debtor after its incorporation. The Corporate Debtor further leased one of the properties to the son of Managing Director of RCI. The Resolution Professional submits that the Corporate Debtor was established as a dummy company to defraud the creditors of RCI and for misappropriation of assets.

Further, the loan transactions that took place between the financial creditor and Corporate Debtor are sham and not genuine. It is a well-established principle that a proper due diligence must be done by the Financial Creditor while granting loan, especially to a loss-making entity.

However, knowing that the Corporate Debtor was under heavy loss, the Financial Creditor granted the loan at an exorbitant interest rate, with an intention with the default to be caused. Along with it the guarantee in the said loan was extended by ITJ Retails Private Limited whose net worth was itself in Negative.

In addition to this the loan provided by the Financial Creditor was only based on an Agreement to sell and there was no title deed executed in favour of the Corporate Debtor. A title deed is crucial when a loan is granted as it provides the lender with rights to take the property is the borrower defaults in the loan repayment.

But there was a Memorandum of Deposit of Title Deed attached as annexure in the petition with respect to the said loan. But such document cannot be counted valid as no title deed was executed in favour of the Corporate Debtor.

Therefore, the Sequence of events, starting from establishment of the Corporate Debtor and sudden initiation of CIRP. Along with questionable nature of loan provided by the financial creditor, undoubtedly demonstrates that the petition has been filed with malicious and fraudulent intent as per Section 65 of the Code.

Findings:

The Tribunal remarked that before advancing any loan, especially to a loss-making entity, the Financial Creditor is under obligation to conduct thorough due diligence. This involves a comprehensive assessment of the borrower's financial health, creditworthiness, and repayment capacity. However, knowing that the Corporate Debtor was under heavy loss, the Financial Creditor granted the loan at an exorbitant interest rate.

The Tribunal further observed that there was no formal sanction letter issued by the Financial Creditor to the Corporate Debtor, for the loan granted. The loan was granted just on the sole basis of an "Agreement to Sell," without the execution of any title deed in Favor of the Corporate Debtor.

Further, the memorandum of deposit of title deed attached with the petition becomes legally untenable in the absence of a valid and enforceable title deed in favour of the corporate debtor.

Also, there was no registration done with the sub-registrar of assurances, who is responsible for registering and maintaining records of property documents. The non-registration also indicates a serious fundamental lapse in the loan provided.

The tribunal remarked that the extending of Loan by the Financial Creditor with an exorbitant interest rate, even after knowing the financial condition of Corporate Debtor was with an intention to make the default occur.

The tribunal further remarked that the petition filed by Financial Creditor is not a genuine attempt to resolve insolvency and is however filed with ulterior purposes with a malicious and fraudulent conduct.

The tribunal noted that “The facts of the case reveal a clear deviation from the objectives of the Code. The structuring of the loan agreement, the deliberate orchestration of a default, and the failure to rebut evidence of collusion underscore a blatant abuse of the insolvency process.”

Hence, the Tribunal admitted the Application of the Resolution Professional Under Section 65 of the Code and dismissed the Section 7 petition filed by the Financial Creditor.

Case Title: M/s Saivi Finance Private Limited V/s M/s AKJ Metals Private Limited

Case Number: IA/1044/ND/2024 and CP(IB)/24/ND/2024

Judgement Date: 24.01.2025

For Applicant: Akshay Goel and Harsh Jadon, Advocates

For Respondent: Tanvi Jain, Advocate

For RP: Abhishek Anand, Karan Kohli, Komal Harlalka, Advocates

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