2024 (4) TMI 1067 - SC - Insolvency and Bankruptcy

Initiation of CIRP - Financial Creditor of Operational Creditor - Scope and Meaning of the term Financial creditor u/s 7(5) of IBC - security deposits under the agreements constitute financial debt or not - Invoking sub-section (5) of Section 60 of the IBC - HELD THAT - Where one party owes a debt to another and when the creditor is claiming under a written agreement/ arrangement providing for rendering 'service', the debt is an operational debt only if the claim subject matter of the debt has some connection or co-relation with the service subject matter of the transaction. The written document cannot be taken for its face value. Therefore, it is necessary to determine the real nature of the transaction on a plain reading of the agreements. What is surprising is that for acting as a Sales Promoter of the beer manufactured by a corporate debtor, only a sum of Rs.4,000/- per month was made payable to the first respondent. Apart from the sum of Rs.4,000/- per month, there is no commission payable to the first respondent on the quantity of sales. Clause (6) provides for termination of the appointment by giving thirty days notice. Though clause (10) provides for the payment of the security deposit by the first respondent, it is pertinent to note that there is no clause for the forfeiture of the security deposit. As there is no clause regarding forfeiture of the security deposit or part thereof, the corporate debtor was liable to refund the security deposit after the period specified therein was over with interest @21% per annum. Since the security deposit payment had no correlation with any other clause under the agreements, as held by the NCLAT, the security deposit amounts represent debts covered by subsection (11) of Section 3 of the IBC. The reason is that the right of the first respondent to seek a refund of the security deposit with interest is a claim within the meaning of subsection (6) of Section 3 of the IBC as the first respondent is seeking a right to payment of the deposit amount with interest. Therefore, there is no manner of doubt that there is a debt in the form of a security deposit mentioned in the said two agreements. Coming back to the definition of a financial debt under sub-section (8) of Section 5 of the IBC, in the facts of the case, there is no doubt that there is a debt with interest @21% per annum. The provision made for interest payment shows that it represents consideration for the time value of money. Now, we come to clause (f) of sub-section (8) of Section 5 of the IBC. The first condition of applicability of clause (f) is that the amount must be raised under any other transaction. Any other transaction means a transaction which is not covered by clauses (a) to (e). Clause (f) covers all those transactions not covered by any of these sub-clauses of sub-section (8) that satisfy the test in the first part of Section 8. The condition for the applicability of clause (f) is that the transaction must have the commercial effect of borrowing. Transaction has been defined in sub-section (33) of Section 3 of the IBC, which includes an agreement or arrangement in writing for the transfer of assets, funds, goods, etc., from or to the corporate debtor. In this case, there is an arrangement in writing for the transfer of funds to the corporate debtor. Therefore, the first condition incorporated in clause (f) is fulfilled. In the financial statement of the corporate debtor for the Financial Year 2016-17, the amounts paid by the first respondent were shown as other long-term liabilities . Therefore, if the letter mentioned above and the financial statements of the corporate debtor are considered, it is evident that the amount raised under the said two agreements has the commercial effect of borrowing as the corporate debtor treated the said amount as borrowed from the first respondent. The NCLAT's view that the amounts covered by security deposits under the agreements constitute financial debt, is agreed upon. As it is a financial debt owed by the first respondent, sub-section (7) of Section 5 of the IBC makes the first respondent a financial creditor. Appeal dismissed.

Summary

Issues Involved:
1. Whether the first respondent is a financial creditor u/s 5(7) of the Insolvency and Bankruptcy Code, 2016 (IBC).
2. Whether the 1st to 4th respondents in Civil Appeal nos.6991-6994 of 2022 are financial creditors of the corporate debtor.

Issue 1: Financial Creditor Status of the First Respondent (Civil Appeal no.1143 of 2022)
The primary issue is whether the first respondent qualifies as a financial creditor u/s 5(7) of the IBC. The agreements dated 1st April 2014 and 1st April 2015 between the corporate debtor and the first respondent were examined. These agreements appointed the first respondent as a 'Sales Promoter' with a condition to deposit a minimum security, which carried interest @21% per annum. The National Company Law Tribunal (NCLT) initially rejected the first respondent's claim as a financial creditor. However, the National Company Law Appellate Tribunal (NCLAT) reversed this decision, holding that the first respondent was indeed a financial creditor.

Issue 2: Financial Creditor Status of the 1st to 4th Respondents (Civil Appeal nos.6991-6994 of 2022)
The second issue pertains to whether the 1st to 4th respondents are financial creditors of the same corporate debtor. The respondents had provided financial assistance to the corporate debtor in various amounts. The Resolution Professional rejected their claims as financial creditors, leading them to file applications before the NCLT, which were also rejected. The NCLAT allowed their appeals, relying on its judgment in Civil Appeal no.1143 of 2022.

Factual Aspects:
The agreements dated 1st April 2014 and 1st April 2015 required the first respondent to deposit a security amount with the corporate debtor, which would earn interest. The corporate debtor acknowledged the liability of paying interest on the security deposit and deducted TDS on the interest payable. The NCLAT found that the amounts were treated as long-term loans and advances in the financial statements of the corporate debtor, indicating the commercial effect of borrowing.

Consideration of Submissions:
The learned senior counsel for the appellants argued that the first respondent is an operational creditor, citing the definition of "operational debt" u/s 5(21) of the IBC. They contended that the security deposit was not intended as a financial facility. In contrast, the learned senior counsel for the first respondent argued that the agreements had the commercial effect of borrowing, satisfying the criteria for a financial debt u/s 5(8) of the IBC.

Findings on Factual Aspects:
The Supreme Court found that the security deposit amounts under the agreements constituted financial debt. The provision for interest payment indicated consideration for the time value of money. The financial statements and the letter from the corporate debtor confirmed that the amounts were treated as borrowed funds, fulfilling the criteria for a financial debt.

Conclusion:
The Supreme Court concurred with the NCLAT's view that the amounts covered by the security deposits under the agreements constituted financial debt, making the first respondent a financial creditor u/s 5(7) of the IBC. Similarly, the contracts in Civil Appeal nos.6991-6994 of 2022 had similar clauses, leading to the same conclusion.

Summary:
a. There cannot be a debt within the meaning of sub-section (11) of section 5 of the IBC unless there is a claim within the meaning of sub-section (6) of section 5 thereof.
b. The test to determine whether a debt is a financial debt u/s 5(8) is the existence of a debt along with interest, disbursed against the consideration for the time value of money.
c. The real nature of the transaction must be ascertained from the written agreement/arrangement.
d. A debt is an operational debt only if the claim has some connection or correlation with the service subject matter of the transaction.

Operative Part:
The Supreme Court upheld the NCLAT's judgments, confirming that the first respondent and the 1st to 4th respondents in Civil Appeal nos.6991-6994 of 2022 are financial creditors. The appeals were dismissed, and the Resolution Professional was directed to continue with the Corporate Insolvency Resolution Process (CIRP) in accordance with the impugned judgments.