2019 (12) TMI 1547 - Tri - Insolvency and Bankruptcy

Maintainability of application - initiation of CIRP - Corporate Debtor failed to make repayment of its dues - Financial Creditors or not - Financial Debt or not - existence of debt and dispute or not - HELD THAT - A perusal of definition of expression 'Financial Creditor' would show that it refers to a person to whom a Financial debt is owed and includes even a person to whom such debt has been legally assigned or transferred to. In order to understand the expression 'Financial Creditor', the requirements of expression 'financial debt' have to be satisfied which is defined in Section 5(8) of the IBC. The opening words of the definition clause would indicate that a financial debt is a debt along with interest which is disbursed against the consideration for the time value of money and it may include any of the events enumerated in sub-clauses (a) to (i). Therefore the first essential requirement of financial debt has to be met viz. that the debt is disbursed against the consideration for the time value of money and which may include the events enumerated in various sub-clauses. A Financial Creditor is a person who has right to a financial debt. The key feature of financial transaction as postulated by section 5(8) is its consideration for time value of money. In other words, the legislature has included such financial transactions in the definition of 'Financial debt' which are usually for a sum of money received today to be paid for over a period of time in a single or series of payments in future - It is essentially a contract for sale of specified goods. It is true that some time financial transactions seemingly restructured as sale and repurchase. Any repurchase and reverse repo transaction are sometimes used as devices for raising money. In a transaction of this nature an entity may require liquidity against an asset and the financer in return sell it back by way of a forward contract. The respondent has made categorical assertion which goes unrebutted establishing that no element of time value for money is attracted and it is a simple friendly loan. There is no document on record to prove that element of interest - such a transaction would not acquire the status of a 'financial debt' as the transaction does not have consideration for the time value of money, which is a substantive ingredient to be satisfied for fulfilling requirements of the expression 'Financial Debt'. In the instant case no such financial contract has also been produced in compliance with the provisions of the Code or of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 either in the petition or additional affidavits - the petitioner does not answer the description of Section 7 read with Section 5(7) 5(8) of IBC. Petition dismissed.

Summary

Issues Involved:
1. Determination of the status of the petitioner as a 'financial creditor.'
2. Classification of the transaction as a 'financial debt.'
3. Compliance with procedural requirements under the Insolvency and Bankruptcy Code, 2016.

Issue-wise Detailed Analysis:

1. Determination of the status of the petitioner as a 'financial creditor':

The petitioner claimed to be a 'financial creditor' under Section 7 of the Insolvency and Bankruptcy Code, 2016 (the Code), seeking to initiate the Corporate Insolvency Resolution Process (CIRP) against the corporate debtor. The petitioner argued that the respondent took a sum of Rs. 40 lacs for the issuance of shares, which was not allotted, and the amount should be treated as a deposit. The respondent returned the principal amount on 09.02.2018 but did not pay the interest as per the Companies (Acceptance of Deposits) Rules, 2014 (Rules, 2014).

The respondent contested the petition, asserting the absence of an agreement for interest payment and denying the classification of the amount as a financial debt. The respondent emphasized that the debt, if any, was discharged in full when the principal amount was refunded, and no documentary evidence was provided by the petitioner to substantiate the claim of interest.

2. Classification of the transaction as a 'financial debt':

The tribunal examined whether the transaction constituted a 'financial debt' under Sections 5(7) and 5(8) of the Code. The definition of 'financial debt' requires the debt to be disbursed against the consideration for the time value of money. The tribunal noted that the petitioner failed to provide any document proving that interest was payable on the amount given to the corporate debtor. The tribunal emphasized that the key feature of a financial transaction is its consideration for the time value of money, which was absent in this case. The transaction was characterized as a simple friendly loan without any element of interest or time value for money.

3. Compliance with procedural requirements under the Insolvency and Bankruptcy Code, 2016:

The tribunal highlighted the procedural requirements under Section 7(3)(C) of the Code, which mandates the financial creditor to furnish a financial contract reflecting the terms of the financial debt, including tenure, interest payable, and the date of repayment. The petitioner failed to produce any financial contract or documentary evidence in compliance with the Code or the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016.

Conclusion:

The tribunal concluded that the petitioner did not qualify as a 'financial creditor' as per the definitions provided in Sections 5(7) and 5(8) of the Code. The transaction did not meet the criteria of a 'financial debt' due to the absence of consideration for the time value of money and lack of documentary evidence supporting the claim of interest. Consequently, the petition was dismissed. The tribunal clarified that the observations made in the order should not prejudice the petitioner's rights before any other forum.