2020 (8) TMI 576 - AT - Insolvency and Bankruptcy

Cross security deposit - failure of compliance of the execution of the construction contract - HELD THAT - It is apparent from the wordings of this MoU dated 13.09.2017 that the return of the amount was being assured with an allotment of plots and issuance of cheques. The amount was referred as loan at more than one place. As regards allotment, paragraph-11 of the Notice dated 27.11.2018 (Annexure-A9) appears to be more in the context of wording of the MoU where it is stated that First Party allots certain plots. There is nothing that actual allotment letters were issued, or possession handed over. The intent of the parties in all the MoUs appear to be of extending Financial Debt. There are no reason to interfere with the Impugned Order of the Adjudicating Authority. The Adjudicating Authority has found it to be Financial debt outstanding and admitted the Section 7 Application - appeal dismissed.

Summary

Issues:
1. Classification of transaction as Financial Debt or Operational Debt.
2. Interpretation of Memorandums of Understanding (MoUs) between the parties.
3. Adjudication of the nature of the debt and the entitlement of the Financial Creditor.

Analysis:
1. The Appellant, as the Managing Director of the Corporate Debtor, argued that the transaction in question should be classified as an Operational Debt rather than a Financial Debt. The Financial Creditor contended that the Corporate Debtor sought financial assistance for a construction project, with multiple MoUs outlining the terms of the deposit and repayment structure. The Financial Creditor claimed that the Corporate Debtor failed to repay the deposit, leading to the initiation of the Section 7 Application under the Insolvency and Bankruptcy Code, 2016.

2. The parties presented arguments based on the contents of the MoUs, highlighting the details of the deposit, interest rates, lock-in periods, and the allotment of plots as security. The Adjudicating Authority examined the wording of the MoUs, particularly the third MoU dated 13.09.2017, which specified the deposit amount, interest rates, lock-in period, and the allotment of villa plots as security. The Adjudicating Authority observed that the intent of the parties appeared to be related to extending a Financial Debt, as evidenced by the issuance of post-dated cheques and the lack of actual allotment letters or possession transfer.

3. The Adjudicating Authority concluded that despite the reference to "security deposit" in the MoUs, the transaction was essentially a financial assistance arrangement, attracting interest payments. The failure of the Corporate Debtor to repay the amount led to a default situation, justifying the Financial Creditor's claim for outstanding debt. The Appellate Tribunal upheld the decision of the Adjudicating Authority, dismissing the Appeal and affirming the classification of the debt as Financial, rather than Operational. The Tribunal noted a clerical error regarding the term "Operational Creditor" in the Adjudicating Authority's order but found no grounds to interfere with the decision.

In summary, the judgment revolved around the classification of the transaction as either Financial or Operational Debt based on the terms of the MoUs and the parties' intentions. The Adjudicating Authority and the Appellate Tribunal concurred that the nature of the transaction aligned more with a Financial Debt, leading to the dismissal of the Appeal and upholding the Financial Creditor's claim for outstanding debt under the Insolvency and Bankruptcy Code, 2016.