This article is written by Amarpal Singh.
Table of Contents
Introduction
A financial creditor may submit documents along with section 7 application under Insolvency and Bankruptcy Code, 2016 (hereinafter IBC) for initiating corporate insolvency resolution process (hereinafter CIRP) against the corporate debtor, to establish the debt due to him, in accordance with Regulation 8 (2) (iii) of the Insolvency and Bankruptcy Board of India (Insolvency for Corporate Persons) Regulations, 2016 (hereinafter CIRP Regulations).
However, there can be a scenario where the documents submitted along with the application are inadequately stamped. According to section 33 of the Indian Stamp Act, 1899 (hereinafter Stamp Act), the judge has to impound the documents, if he finds that documents submitted as evidence to him are inadequately stamped and send them back for payment of stamp duty and penalties as provided in the Stamp Act. In a scenario like this question arises whether NCLT can impound the inadequately stamped documents. The above question was dealt with by NCLT, Mumbai in the case of Vistra ITCL India Limited v. M/s Satra Properties (India) Limited.
Facts
In this case, Vistra ITCL India Private Limited (hereinafter Financial Creditor/ Petitioner) had subscribed to secured, non-convertible debenture (hereinafter NCD) issued by Satara Properties (India) Limited (hereinafter Corporate Debtor) which were to be redeemed according to the agreed terms and conditions. A Debenture Trustee was also appointed according to the Debenture Trust Deed to represent the interests of the Debenture Holders.
The Corporate Debtor, despite repeated requests from the Financial Creditor, failed to redeem the NCD. Therefore, the Financial Creditor filed an application under section 7 of IBC before NCLT, Mumbai, for initiating CIRP against the Corporate Debtor.
The Corporate Debtor filed a reply to that application stating that the liability of Corporate Debtor was discharged as the parties entered into negotiations and arrived at novated contract/agreement. Subsequently, the Corporate Debtor also filed a miscellaneous application before the NCLT, Mumbai stating that the NCD subscription agreement and Debenture Trust Deed are inadequately stamped, and therefore should be impounded according to the provisions of the Stamp Act.
Issues
- Whether the NCD subscription agreement and Debenture Trust Deed are inadequately stamped?
- Whether the documents are liable to be impounded, in a summary proceeding under IBC?
- Whether there was a novation of contract?
- Whether the Financial Creditor is entitled to recover the outstanding amount due to be redeemed under the NCD subscription agreement and Debenture Trust Deed?
- Whether the NCD subscription agreement and Debenture Trust Deed are enforceable?
Judgment
Issue 1
The Debenture Trust Deed and NCD agreement were executed and registered in Delhi and were brought to the State of Maharashtra for enforcement. According to section 19 of the Maharashtra Stamp Act, 1958, if any instrument is executed out of the state and is subsequently received in the state, then the stamp duty will be charged according to the provisions of the Maharashtra Stamp Act. However, if the stamp duty is already paid according to the laws of other states, then the amount paid should be excluded and the difference should be paid. Thus the difference in stamp duty had to be paid. Therefore, NCLT Mumbai held that the documents are inadequately stamped.
Issue 2
The judgement on this issue garnered a lot of attention as the Hon’ble Judicial and Technical Members gave separate judgements –
Judicial Member
Hon’ble Judicial Member held that section 33 of Maharashtra Stamp Act which is pari-materia to section 33 of Stamp Act casts an obligation on the Judicial officer to impound the documents submitted to him as evidence if they are inadequately stamped. The documents submitted before the NCLT were not admitted and marked as evidence, but the admission of any claim is based on contractual obligation between the parties, and the basic documents based on which the claim arose are inadequately stamped. It is necessary that documents comply with the fiscal measure of a state.
It was further held that Financial Creditor is enforcing his rights under the Debenture Trust Deed and NCD agreement. The event of default as provided in the Debenture Trust Deed gives a right to Financial Creditor to file an application under section 7 under IBC. Therefore, inadequately stamped documents have to be impounded.
Technical Member
According to Hon’ble Technical Member, the debentures issued were shown in the balance sheet of the Corporate Debtor for several years. Some debentures were redeemed according to the terms and conditions in the agreement. The claim of the Financial Creditor was based on the debentures which were not redeemed. The financial statements were annexed to the annual report and produced before NCLT during the hearing. According to his view, the financial statements were sufficient to adjudicate section 7 application, without going to the question of whether Debenture Trust Deed and NCD agreement are inadequately stamped. The documents submitted along with the application are ancillary/incidental so, they should not be given weightage at the time of deciding the application. Therefore, the inadequately stamped documents do not have to be impounded.
The issue is referred to the 3 Member bench and is pending adjudication.
Issue 3
The Financial Creditor had revoked the understanding entered through a letter, which also showed that the understanding was never acted upon. Therefore, all the payments and outstanding dues were never subsumed into a larger understanding. Hence, the contract was no novation of contract, and the liability of the Corporate Debtor was not discharged.
Issue 4
The Corporate Debtor had not disputed the execution of Debenture Trust Deed and NCD agreement and liability thereunder. As the understanding had also been revoked by the Financial Creditor. It was held that the Corporate Debtor had defaulted in the payment of outstanding dues to the Financial Creditor. Therefore, the section 7 application under IBC was admitted.
Issue 5
Hon’ble Judicial Member held that the NCD agreement and Debenture Trust Deed are not enforceable. The right course of action is to impound these documents and send them back for payment of requisite stamp duty and penalty under the Stamp Act to make these documents enforceable.
Analysis
Factors to be considered while admitting section 7 application.
As held by the Supreme Court of India in the case of Innoventive Industries Pvt. Ltd. v. ICICI Bank that NCLT is only required to see the following while admitting section 7 application and nothing else-
- There is an existence of debt and default.
- The application filed by the Financial Creditor under section 7 of IBC is complete.
- There are no disciplinary proceedings initiated against the interim resolution professional who is proposed to be appointed.
Further, it was also held by the Supreme Court of India in the case of Mobilox Industries v. Kirusa Industries that NCLT has to merely see the records of information utility and other documents produced as evidence by the financial creditor to satisfy itself that default has occurred.
Thus, it can be concluded from the above judicial decision that NCLT does not have the jurisdiction to delve into the question of whether the documents submitted along with the section 7 application are inadequately stamped. Whereas, the Hon’ble Judicial Member of NCLT Mumbai delved into the above question and impounded the Debenture Trust Deed and NCD agreement. Moreover, the Debenture Trust Deed and NCD agreement were not admitted or marked as evidence before the NCLT Mumbai.
Orders passed in an arbitration proceeding should not be considered under IBC.
In the judgement, Hon’ble Judicial Member relied on the following judgements –
SMS Tea Estate Pvt. Ltd. v. Chandmari Tea Company Pvt. Ltd.
In this case, it was held that documents that are inadequately stamped cannot be acted upon. Further, it was held that those documents should mandatorily be impounded under section 33 of the Indian Stamp Act.
Garware Wall Ropes Limited v. Coastal Marine and Constructions Limited
In this case, also the Court held that in a proceeding under section 11 of the Arbitration and Conciliation Act an unstamped arbitration agreement has to be impounded for the payment of requisite stamp duty and penalty. The High Court can only appoint the arbitrator under section 11 after the payment of penalty and stamp duty.
However, the same question was considered by a coordinate bench of the NCLT, in the case of Bennet Property Holdings v. Bricks Eagle wherein the Corporate Debtor relied on the above judgements in his contention. The NCLT in the case held that the judgements were passed in arbitration considering and cannot be relied on while considering an application under IBC.
Conclusions
It can be concluded from the above analysis that the NCLT does not have the jurisdiction to impound the documents submitted along with the section 7 application under IBC. If the judgement of the Hon’ble Judicial Member is upheld, it will only act as an impediment for the Financial Creditor to initiate CIRP proceedings against the Corporate Debtor.
References
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