ARTICLE
5 September 2024

Insufficiently Stamped Agreements Between The Parties Cannot Be A Ground To Dismiss Applications For CIRP

AP
Argus Partners

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On July 16, 2024, the National Company Law Tribunal ("NCLT"), in Q West Infrastructure Private Limited v. Starwort Engineers Private Limited, (CP (IB) No. 229/MB/2024)...
India Insolvency/Bankruptcy/Re-Structuring

On July 16, 2024, the National Company Law Tribunal ("NCLT"), in Q West Infrastructure Private Limited v. Starwort Engineers Private Limited, (CP (IB) No. 229/MB/2024), has held that, insufficiently stamped agreements between the parties cannot be a ground to dismiss applications for corporate insolvency resolution process ("CIRP") under Section 7 of the Insolvency and Bankruptcy Code, 2016 ("IBC").

Facts:

The financial creditor, Q West Infrastructure Private Limited, filed a petition under section 7 of the IBC against the corporate debtor, Starwort Engineers Private Limited, for default on repayment of outstanding principal debt amounting to approximately Rs. 17.91 crore under an Inter Corporate Deposit Agreement ("ICD Agreement").

Under the ICD Agreement, the financial creditor disbursed a sum of Rs. 11 crores ("ICD Amount") with interest at the rate of 15% per annum, due on or before November 10, 2021. The corporate debtor sought and was granted an extension for a period of one year. However, the corporate debtor failed to discharge the debt and subsequently, a settlement agreement was entered into between the parties, according to which, the corporate debtor was required to repay only the ICD Amount, i.e., the principal, in two equal instalments, i.e., on or before June 30, 2023, and December 31, 2023. The corporate debtor failed to pay under the settlement agreement as well and the financial creditor issued a Demand cum Invocation Notice and subsequently, approached the NCLT. The ICD Agreement and the settlement agreement were executed on stamp paper of Rs. 500 (five hundred only).

Submissions by corporate debtor:

The counsel for the corporate debtor submitted that the ICD Agreement and the settlement agreement, were chargeable with stamp duty, in excess of Rs. 500 (five hundred only), under Article 5(h)(A)(iv)(b) of Schedule 1 to the Maharashtra Stamp Act, 1958 and therefore, were inadmissible in evidence to constitute the existence of a financial debt and default on part of the corporate debtor.

Findings:

The NCLT, relying on Supreme Court's decision in Swiss Ribbons Private Limited v. Union of India, (2019) 4 SCC 17, highlighted that the primary objective of IBC is to facilitate the revival of the corporate debtor rather than being a mere debt recovery legislation for creditors. Even if the documents were held to be insufficiently stamped, ascertainment of existence of debt and default can be proved by means other than a loan or mortgage agreement, such as bank statements and financial records submitted to the information utility. Lastly, it held that the NCLT simply needs to arrive at a two-fold conclusion, i.e., (a) that a default of Rs. 1 (one) crore or more has been committed by the corporate debtor and (b) that the corporate debtor requires a resolution to sustain itself.

Author`s View:

Generally speaking, non-stamping or insufficient stamping does not result in the instrument becoming void. Rather, it is a curable defect and the Stamp Act itself provides the procedure to remedy the same. Therefore, the underlying document alleged to be insufficiently stamped ought not to extinguish the liability of the corporate debtor in a CIRP, especially when the default can be proved through other means. The purpose of IBC is maximization of assets of the corporate debtor to lead it towards the path of resolution and inadequacy of stamp duty should not negate it.

Please find attached a copy of the judgement.

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