2020 (2) TMI 633 - AT - Insolvency and Bankruptcy

Maintainability of application - initiation of CIRP - Corporate Debtor failed to make repayment of its debt - existence of debt and dispute or not - HELD THAT - Although the Corporate Debtor is trying to claim that the amount received by the Corporate Debtor from the Financial Creditor was only an advance for future supply of goods, and for the satisfaction of the Financial Creditor, the Agreement dated 4th April, 2017 and Promissory Notes were executed, we are unable to travel beyond the documents executed between the parties. The Share Pledge/Financial Facility Agreement dated 4th April, 2017 clearly referred to the Corporate Debtor as borrower and to the Financial Creditor as lender . There is no substance in the argument of the Appellant that the subsequent Promissory Note cannot be looked into for considering the relationship. When the Financial Creditor gave advance to keep the Corporate Debtor running, to ensure that its raw material becomes available to the Financial Creditor, it was clearly a case of borrowing/lending for time value of money for the loan which the Financial Creditor was advancing. On the basis of the amounts advanced in 2016 - 2017 itself, considering the fact that the Corporate Debtor has not paid the amounts claimed, which are clearly more than ₹ 1 Lakh, we find there is debt and default and that no error could be said to be there in the Impugned Order admitting the Section 7 proceedings filed by the Financial Creditor - Respondent No.1 - Appeal dismissed.

Summary

Issues Involved:
1. Whether the amounts claimed by the Financial Creditor qualify as financial debt under Section 5(8) of the Insolvency and Bankruptcy Code, 2016 (IBC).
2. Whether the transaction between the Financial Creditor and the Corporate Debtor was a financial transaction or a business arrangement.
3. Whether the amounts advanced by the Financial Creditor were for future supplies or constituted a loan.
4. Whether the Adjudicating Authority's order admitting the Section 7 application was correct.

Issue-wise Detailed Analysis:

1. Qualification as Financial Debt under Section 5(8) of IBC:
The Financial Creditor claimed that the amounts disbursed to the Corporate Debtor constituted financial debt as defined under Section 5(8) of the IBC. The Adjudicating Authority observed that "a financial transaction did take place" and that the agreement on record was prima facie one of granting financial assistance to be repaid along with interest. The definition of financial debt under Section 5(8)(f) includes any amount raised under any other transaction, including any forward sale or purchase agreement having the commercial effect of borrowing. The tribunal held that the facts of the case fell within this definition, thus qualifying the amounts as financial debt.

2. Nature of Transaction - Financial Transaction vs. Business Arrangement:
The Corporate Debtor argued that the money received was for future supplies of material and not a financial debt. It claimed that the promissory notes were executed only as security for advance payments. However, the tribunal noted that the "Share Pledge/Financial Facility Agreement" dated 4th April 2017, referred to the Corporate Debtor as "borrower" and the Financial Creditor as "lender," indicating a financial transaction. The tribunal emphasized that it could not "travel beyond the documents executed between the parties," which clearly indicated a borrowing/lending relationship.

3. Purpose of Amounts Advanced - Future Supplies vs. Loan:
The Corporate Debtor contended that the amounts were advances for future supplies of Low Carbon Ferro Chrome and not loans. However, the tribunal highlighted that the agreement and subsequent promissory notes indicated that the amounts were loans with interest payable, thus constituting financial debt. The tribunal referred to the agreement's terms, which included a clause that the financial assistance would attract interest if the borrower failed to perform as per the conditions mentioned.

4. Adjudicating Authority's Order:
The tribunal reviewed the Adjudicating Authority's decision, which admitted the Section 7 application filed by the Financial Creditor. The Adjudicating Authority had concluded that the transaction qualified as financial debt and that the Financial Creditor was entitled to the relief sought. The tribunal found no error in this conclusion, noting that the Corporate Debtor had admitted to receiving significant amounts from the Financial Creditor and had not repaid them. The tribunal held that there was "debt and default" and affirmed the Adjudicating Authority's order.

Conclusion:
The tribunal dismissed the appeal, upholding the Adjudicating Authority's order admitting the Section 7 application. It concluded that the amounts advanced by the Financial Creditor constituted financial debt under the IBC, and the transaction was a financial one rather than a mere business arrangement. The tribunal found that there was no substance in the Corporate Debtor's arguments and confirmed the existence of debt and default.