2018 (8) TMI 2054 - AT - Insolvency and Bankruptcy

Scope of Financial Creditors - whether the Respondents, 'Dinesh Chand Jain and two others' come within the meaning of 'Financial Creditors' as defined under Section 5(7) and (8) of the Insolvency and Bankruptcy Code, 2016? - HELD THAT - It can be said without any amount of ambiguity that the unsecured loan aforestated represented the money borrowed against the payment of interest and in terms of clause (a) sub-section (8) of Section 5 of the I B Code same tantamount to a debt disbursed against the consideration for the time value of money, which falls within the ambit of 'Financial Debt'. It is apt to notice that the expression 'debt' defined under Section 3(11) means a liability or obligation in respect of a claim which is due from any person and includes a financial debt and operational debt. Non-payment of such debt which has become due and payable and is not repaid by the Debtor or Corporate Debtor falls within the mischief of 'default' defined under Section 3(12) of I B Code. It would therefore be futile on the part of learned counsel for the Appellant to contend that the unsecured loan aforestated did not fall within the definition of 'Financial Debt'. Admittedly, Respondent No. 1 and 2 were treated as unsecured creditors and in terms of the Share Purchase Agreement they transferred their entire shareholding of 7500 shares in favour of Shri Lalit Modi. They were acknowledged as investors as regards the financial debt qua Shri Lalit Modi and the Corporate Debtor, the money having been borrowed initially and such investment having been made for earning interest. Refund of the investment was linked with the transfer of shareholding by the Respondents. Viewed thus, the Respondents can safely be held to be 'Financial Creditors'. Contention raised to the contrary being devoid of merit is repelled. Appeal dismissed.

Summary

Issues:
1. Whether the Respondents qualify as 'Financial Creditors' under the Insolvency and Bankruptcy Code, 2016.

Analysis:
The judgment revolves around the central issue of whether the Respondents, specifically 'Dinesh Chand Jain and two others,' meet the criteria to be classified as 'Financial Creditors' as per Section 5(7) and (8) of the Insolvency and Bankruptcy Code, 2016 (I&B Code). The Respondents, former Directors of 'M/s. Fantastic Buildcon Pvt. Ltd.,' claimed to be 'Financial Creditors' of the company due to loans advanced to the Corporate Debtor. The loans, totaling ?18,67,11,000, were advanced at an interest rate of 18% per annum and were to be repaid by the Corporate Debtor. The dispute arose when the Corporate Debtor failed to repay the outstanding amount, leading the Respondents to initiate insolvency proceedings under Section 7 of the I&B Code.

The court analyzed the definitions of 'Financial Creditor' and 'Financial Debt' as provided in Sections 5(7) and (8) of the I&B Code. The term 'Financial Creditor' includes a person to whom a financial debt is owed. 'Financial Debt' encompasses debts disbursed against the consideration for the time value of money, including money borrowed against interest payment and other financial instruments. The Respondents argued that the loans extended to the Corporate Debtor qualified as 'Financial Debt,' as evidenced by the audited balance sheet and the Share Purchase Agreement entered into with the Corporate Debtor.

The court examined the Share Purchase Agreement, where the Corporate Debtor undertook to refund the unsecured loan amount to the Respondents before a specified date. Despite the absence of explicit interest payment terms in the agreement due to the short repayment timeline, the court found that the loans constituted 'Financial Debt' under the I&B Code. The court highlighted the commercial nature of the transaction, the transfer of shareholding, and the mutual expectations of repayment as factors supporting the classification of the Respondents as 'Financial Creditors.'

Ultimately, the court dismissed the appeal, affirming that the Respondents met the criteria to be considered 'Financial Creditors' under the I&B Code. The judgment emphasized the legal and factual basis for the classification, rejecting the appellant's contention that the loans did not qualify as 'Financial Debt.' The decision upheld the validity of the insolvency proceedings initiated by the Respondents against the Corporate Debtor based on the outstanding loan amount.

In conclusion, the judgment provides a detailed analysis of the legal definitions and factual circumstances surrounding the classification of the Respondents as 'Financial Creditors' under the I&B Code. It underscores the importance of meeting the statutory criteria and contractual obligations in determining the status of creditors within the insolvency framework, ensuring clarity and adherence to the legal provisions governing such proceedings.