What will be the impact of insufficient stamping on the insolvency proceedings? NCLAT clarifies position

A.INTRODUCTION

The Main Bench of the National Company Law Appellate Tribunal (NCLAT), in the Matter of Praful Nanji Satra v Vistra ITCL (India) Limited & Others in Company Appeal (AT) (Ins.) No 713 of 2020, dated August 2, 2022, rendered a judgment stating that the underpayment of stamp duty on the Non-Convertible Debenture Subscription Agreement and the Debenture Indenture, both dated March 1, 2014 (Documents), will not affect the admission of the corporate insolvency resolution process (CIRP) under the Insolvency and Bankruptcy Code Act, 2016 (Code) as it is not relevant and not justified for application under the Section 7 (Enforcement).

B. FACTS OF THE MATTER

M/s Satra Properties (India) Limited (debtor company) is engaged in real estate business. The debtor company raised funds up to 56,000,000,000 by issuing 5,600 secured non-convertible debentures (NCD) to Mr. Mayank J. Shah and Mrs. Shruti Mayank Shah (respondents) for the purpose of developing projects in Borivali and Jodhpur and for other general corporate purposes. The debtor company has not reimbursed the remaining NCD 4,330 according to the documents.

The National Company Law Tribunal (NCLT) granted the claim. Subsequently, Mr. Praful Nanji Satra (Appellant) appealed to the NCLAT under Section 61 of the Code.

C. PROCEDURE BEFORE NCLAT

1. Arguments of the Appellant

1.1 The Appellant stated that the debtor company entered into negotiations with MJS Group and IIFL Group for the settlement of the debts (including the NCDs which remained to be redeemed) and that a settlement was reached between the parties on January 31, 2018 (settlement ) . He also claimed that the documents were novated through the settlement, considering that all existing debt was settled.

1.2 The Appellant argued that the Motion could be narrowed by placing only the Jodhpur project under the CIRP instead of all projects of the Debtor Company since the NCDs were issued to obtain financing and also provided security for the Jodhpur project only.

1.3 The Appellant further alleged that the Documents were not sufficiently stamped.

2. Key issues

2.1 Has NTM-related debt been considered under the Settlement?

2.2 Can the Documents be considered a valid legal document even if they are not sufficiently stamped or if they must be seized and transmitted to the competent authority for an adequate stamp?

3. Arguments of the Respondents

3.1 The defendants argued that the settlement relates to the liabilities of two hundred crore Indian Rupees relating to MJS Group and IIFL Group and not the NCDs. The respondents also submitted that, in accordance with the request of the debtor company, the interest rates were reduced by the letters dated February 14, 2018 and March 27, 2018 issued by the trustee of the debentures. The Debenture Trustee (acting on the Respondents’ instructions) had also extended the NCD repayment schedule. It was therefore argued by the Respondents that these two aforementioned actions were made at a later date, after the conclusion of the purported settlement.

3.2 The Defendants have stated that the Settlement has itself been withdrawn, as evidenced by the letter dated January 24, 2019 issued by IIFL Group considering that the Debtor Company has not fulfilled its obligations under the Settlement.

3.3 Defendants have argued that proceedings under the Code are of a summary nature and that the adjudicating authority is not required to record evidence under the Evidence Act 1872.

3.4 The Respondents have also argued that the Debtor Company is solely responsible for the proper postage of the Documents (in accordance with the provisions agreed in the terms of the Documents) and that the Debtor Company itself cannot take advantage of its own default.

4. NCLAT Submissions and Decision

4.1 NCLAT accepted the Defendants’ assertion that the Settlement relates to financing obtained from MJS Group and does not cover debts under the CRS and rejected the Debtor Company’s argument that there was indeed a novation of the Documents after Settlement. .

4.2 NCLAT found that the debtor company admitted to having signed the documents and that this was not contested by the debtor company.

4.3 The NCLAT referred to the Supreme Court judgment in Innoventive Industries Limited v ICICI Bank & Another, (2018) 1 SCC 407, which clearly stated:-

“in the case of a debtor company that defaults on a financial debt, the contracting authority need only consult the records of the information service or other evidence produced by the financial creditor to ensure that a fault has occurred…”.

4.4 The NCLAT referred to Swiss Ribbons Private Limited v Union of India, (2019) 4 SCC 17, which also cited the judgment in Innoventive Industries, stating that Form I annexed to the Rules 2016 on Insolvency and Bankruptcy (awarding authority) provides a list of sources that attest to a financial debt. 4.5 The NCLAT observed that the issue of debt due is not prohibited by any statute, but a technical defect of insufficient stamping has been raised and can be remedied. NCLAT argued that the documents are sufficient to prove the corporate debtor’s debt as claimed in the application.

D. KCO COMMENTS

The judgment clarifies the position with respect to the improper stamping of documents when produced for the filing of an application under the Code, as previously there were various conflicting opinions from different NCLTs on this particular issue, such as indicated below :

  • NCLT Chandigarh in Edelweiss Asset Reconstruction Company Limited v M/s Winsome Yarns Limited (in CP (IB) No 291/CHD/2018) dismissed a claim under Section 7 due to the unenforceability of the deed of assignment resulting from an insufficient stamp of the document.
  • NCLT Mumbai detained in Vistra ITCL (India) Limited v M/s Satra Properties (India) Limited (in CP(IB) No. 1632/MB/2019) cleared an insolvency claim only on the condition that the debenture trust indenture and bond subscription agreement be seized, and the required (differential) stamp duty be paid thereon.

This judgment reinforces the opinion that an inadequate stamp being only a repairable technical defect will in no way affect the liability of a debtor legal entity. However, parties should ensure that the appropriate stamp duty on the documents is paid to avoid complexities at the time of CIRP initiation. He also emphasized the principle that no one can profit from his own misdeeds.

The contents of this document do not necessarily reflect the views/positions of Khaitan & Co but remain solely those of the authors. For any other questions or follow-up, please contact Khaitan & Co at [email protected].

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