EDITORIAL BOARD’S OBSERVATIONS

Verdict: Accept

 The author has chosen a topic which is based on a recent case and rightly points out the
controversy and legal issues of the same. He/she has given some legitimate viewpoints and
has backed them with sound reasoning to present an article which is quite original in its true
sense.
 Further, the analysis given by the author on the legal controversy is sound and constructive
enough.
 It is suggested that author should use the abbreviations in proper format as stated by the
editors in the comments.
 THE CONUNDRUM OF UNSTAMPED DOCUMENTS UNDER
SECTION 7 PROCEEDINGS: IBC

Recently, the members of the coordinate Bench of NCLT Mumbai in the case of Vistra ITCL
(India) Limited v. M/s Satra Properties (India) Limited, disagreed on a point of issue raised
during the course of arguments. In the summary proceedings, the issue raised before the
tribunal was whether the Debenture Subscription Agreement and the Debenture trust deed are
liable to be impounded u/s 33 and 34 of the Maharashtra Stamp Act, 1958 on the grounds that
they were insufficiently stamped. Eventually the application under Section 7 filed by Vistara
(Financial Creditors) was allowed. However, the judicial member Hon’ble Suchitra
Kanuparthi while allowing the application for CIRP impounded the documents and directed
the Interim Resolution Professional to consider the documents upon the payment of the
requisite stamp duty. Whereas, the technical member V. Nallasenapathy while allowing the
CIRP refused to accept the argument of the Corporate Debtor that the documents are liable to
be impounded because they were not adequately stamped. He stated that the proceeding
under Section 7 of the Code is a summary proceeding and not a recovery proceeding. In this
short article we critically analyse the opinions of both the members in light of the concerned
issue and position, with adequate authorities that the view of the Judicial member cannot
sustain under the objectives of IBC for manifold reasons and that the NCLT cannot delve into
the aspect of examining the validity of the documents while dealing with the proceedings
under Section 7 or other similar provisions.

For a better understanding of the concerned issue it is pertinent to delve into a few facts of the
case. The Petitioners (Financial creditor) subscribed the debentures of the Corporate Debtor
(Respondent in the title) which were to be redeemed as per certain terms and conditions. The
latter failed to redeem it in spite of repeated requests. The creditor therefore filed an
application u/s 7 for initiation of the CIRP. It is pertinent to note that the case of the corporate
debtor was on the grounds that there had been an alleged novation of the contract with a
future settlement due to which the prior liability was subsumed and in no way denied the
existence of the liability. The judicial member of the Bench while allowing the application
impounded the documents of the Debenture Agreement on the grounds that they were
insufficiently stamped. The question that merits consideration is whether the Adjudicating
Authority can impound the documents under S7 proceedings. The article forwards a
multipronged approach to show that while examining the application u/s, the NCLT can only
examine the existence of the debt and default and cannot in any way go beyond and impound
the document(s) unless the existence of the debt is to be proved by the document itself.

1. Existence and Validity of debt.

Firstly, there is a vital difference b/w existence of the debt and validity of the debt. S7 of the
IBC which encapsulates application by financial creditors like in the present case, clause (4)
of which clearly specify that “The Adjudicating Authority shall ascertain the existence of a
default from the records of an information utility or on the basis of other evidence furnished
by the financial creditor under sub-section”. A bare reading of this text and referring to the
Supreme Court jJudgement in the Innoventive Case, a highly regarded case which acts as a
guiding beacon for future IBC cases wherein it was noticed, “Under Section 7, in the case of
a corporate debtor who commits a default of a financial debt, the adjudicating authority has
merely to see the records of the information utility or other evidence produced by the
financial creditor to satisfy itself that a default has occurred. The scope of enquiry before the
adjudicating authority is therefore limited to assessing the records provided by the financial
creditor to satisfy itself that the default has occurred.”

Therefore the jurisprudence under S7 is explicitly clear that the applicant is merely required
to prove the existence of the debt. While referring to the Innoventive Case, the NCLT has laid
down that, “The rational and reasoning which can be drawn from the above lines of the
citations clearly indicate mainly two aspects and that is existence of debt and the default
which the present facts of the case clearly demonstrate. So any amount of argument that
deals with issues which are not pertinent and trivial to the main issues concerned does not or
cannot come in the way of adjudication of the lis in favour of the Petitioners.”

The existence of debt can be confirmed by the documents that are brought on record. In the
present case the impounded documents were not brought on record by the Petitioner rather
the Judicial and the Technical member in concurrence have relied on the Balance Sheet and
the letters requesting postponement of the redemption written and sent by the Corporate
Debtor. This is a direct and implicit admission of existence of the liability as per Regulation 8
(2) (iii) of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for
Corporate Persons) Regulations, 2016. Thus the issue of inadequate payment of stamp duty
does not arise as the applicant did not intend to rely on the concerned documents. Had the
case been where the existence of debt was solely being proved by the concerned documents
then they would have been liable to be impounded so as to complying with the stamp duty
requirements is must in order for it to be admissible and enforceable.

2. S7 of the IBC v. S11 of the Arbitration and Conciliation Act, 1996 (A&C)

While forwarding the contention of insufficiency of stamp duty, the corporate debtor relied
on the judgment of the SC in SMS Tea Estates and Garware Wall Ropes. Briefly, iIn these
judgments the Court had held that before proceeding with S11 applications and likewise, if
the arbitration agreement is present in an insufficiently stamped agreement then the
provisions of the Indian Stamp Act, mandates the Judge to impound the documents and send
it back for adequate payment of the stamp duty and penalties as prescribed by the Act.
Garware Wall Ropes is an affirmation of its former part with harmonious construction b/w
the Stamp Act and A&C, 1996. It is pertinent to note that NCLT in the case of Bennett
Property Holdings Company Limited Vs. Brick Eagle Affordable Housing Advisory refused to
rely on the dicta in SMS Tea Estates and Garware Wall Ropes on the grounds that the “order
was passed in arbitration proceeding and not while considering petition under IBC, 2016”.
The basis of this refusal lies in the fact that while considering the application under S11,
A&C Act,. tThe perusal percolates down to the arbitration clause or the agreement either
present in the parent agreement or separately, therefore it is necessary for it to be enforceable
and brought on record whereas S7 of IBC provides for no such requirement and the existence
of the debt can be proved in either manner convenient for the applicant and the Courts perusal
shall strictly be limited to the evidence brought forward.

3. Objective of the IBC

After a prolonged struggle in the Indian Credit market, the GoI enacted IBC touting a
consolidated and robust code governing Insolvency and Bankruptcy matters. The essence of
the Code lies in time bound settlement of claims. On a thorough perusal of the Chapter for
CIRP, it is conspicuous from the provisions which put the creditor in charge as soon as the
application for CIRP gets admitted that this chapter of the Code is designed to follow a pro-
creditor approach in order to give them an upper hand in the Indian Credit market while
motivating them to pump funds in the economy. The words of S7 are strictly limited to
existence and there is no tacit presence about the procedure to prove such existence. Further
the Code provides for a time constraint of 14 days on the AA i.e. the NCLT to discharge the
application u/s 7. There will be a stark violation of these intentions and objectives if the
NCLT is granted the power of this latitude to impound the documents which are not even
brought on record while dealing with S7 or likewise applications. Enough powers have been
granted to the Resolution Professional to deal with the validity and proof of default and the
NCLT shall strictly restrict itself to its function of examination of the existence of a debt and
not go any further in its quest to do everything right.

Conclusion

IBC was enacted to instilinstill confidence and faith in the Indian Credit market. The
distinguishing factor of the Code lies in the establishment of a framework for quick resolution
of underlying debts. The provisions of this special legislation shall be interpreted positively
and the authorities shall function within the contours set by the Code in order for it to attain
the desired objectives. The proceedings under S7 impose the responsibility in the AA to
ascertain existence debt from the information available and not compulsorily from any
documentary evidence and hence the insufficient stamping should not act as an impediment.
Further, the provisions of the Stamp Act are a fiscal measure intended merely to collect
revenue and if at all will go to the validity of the agreement and not its existence which will
again be in contradiction to the IBC. Furthermore, Section 128 overrides other laws for the
time being in force. The authors are of the view that while impounding the documents, the
NCLT went beyond the words of S7 and the power conferred upon it by the provision for the
above reasons. If this trend is set forth, then it would directly hamper the future proceedings
and set a precedent which might allow the AA to divulge into issues which do not materially
hamper the case, in turn negating the legislative intent behind the Code.