2021 (1) TMI 611 - Tri - Insolvency and Bankruptcy

Classification of Debt - Financial Debt of Operational Debt - payment of advanced money for receivable of gold stock and jewellery in future was arrangement between the Applicant and Corporate Debtor - Novation of contract between parties - Preferential Transactions or not - HELD THAT - In terms of Section 43 (2) (a) the Corporate Debtor by virtue of executing a loan agreement dated 15.04.2019 has converted operational debt into a financial debt, with an intention to prefer the creditor and to put him in a beneficial position that he could have been in the event of distribution of asset in according with section 53 of IBC - this sort of arrangement could not have been done in its ordinary course of business, an Operational Creditor who advanced money with an intention of buying gold was treated as a lender under the Loan Agreement dated 15.04.2019. Looking at the facts of the present case that the CIRP against the Corporate Debtor commenced on 13.11.2019, the Loan Agreement dated 15.04.2019 executed by the Corporate Debtor, substituting the earlier MOU dated 07.03.2017 between the same parties, was created, seven months prior to CIRP, it is concluded that this arrangement is a preferential transaction in terms of Sec 43 (2)(a) of Code and is well within the two years look back period as prescribed by the code. Therefore, this bench declares that Resolution Professional has rightly rejected the claim of Financial Creditor, but has not filed any application under sec.43 for avoidance of transaction, this bench has Suo Moto considered the facts and gravity of the transaction to the extent of conversion of Operational Debt to financial debt for the benefit of the operational creditor and thus treated the transaction dated 15.04.2019 to be a preferential transaction. Application dismissed.

Summary

Issues Involved:
1. Classification of the Applicant's claim as financial debt.
2. Rejection of the Applicant's claim by the Resolution Professional.
3. Allegation of preferential transaction under Section 43 of the Insolvency and Bankruptcy Code (IBC).

Issue-wise Detailed Analysis:

1. Classification of the Applicant's Claim as Financial Debt:
The Applicant sought to classify its claim as a financial debt. The Applicant and the Corporate Debtor initially entered into a memorandum of understanding (MOU) on 07.03.2017 for the supply of gold coins/gold ornaments, with the Applicant disbursing ?39,95,00,000/- in tranches. On 15.04.2019, the parties altered the terms, converting the advance into a loan agreement, repayable in five years with 10% interest. The Applicant filed Form C on 03.03.2020, claiming ?42,61,33,333/- as a financial creditor. However, the Resolution Professional (RP) rejected this claim on 06.05.2020, classifying it under 'Other Creditors,' arguing that the relationship was of a buyer and seller, not lender and borrower.

2. Rejection of the Applicant's Claim by the Resolution Professional:
The RP argued that the transaction was operational, not financial, as it was initially for the future delivery of goods per the MOU dated 07.03.2017. The RP emphasized that the Applicant's demand for a refund on 05.03.2019 was valid under the MOU's termination clause, reinforcing the operational nature of the debt. The RP also contended that the Applicant failed to meet the essential criteria of 'Disbursement' and 'Consideration of time value of money' under Section 5(8) of the IBC.

3. Allegation of Preferential Transaction under Section 43 of IBC:
The Tribunal found that the MOU was replaced by the loan agreement on 15.04.2019, amounting to a novation of contract. This conversion of operational debt into financial debt was seen as preferential, designed to favor the creditor, violating Section 43 of the IBC. The Tribunal referred to the Supreme Court's judgment in Anuj Jain's case, which outlines the criteria for determining preferential transactions. The Tribunal concluded that the loan agreement was executed seven months prior to the commencement of CIRP on 13.11.2019, falling within the two-year look-back period, thus constituting a preferential transaction.

Conclusion:
The Tribunal upheld the RP's rejection of the claim as a financial debt, declaring the conversion of operational debt into financial debt as a preferential transaction under Section 43 of the IBC. The Tribunal dismissed the Applicant's plea, emphasizing the improper elevation of the Applicant's status from operational to financial creditor, which was not in the ordinary course of business and intended to benefit the Applicant unduly. The Tribunal also noted that the RP had not filed an application under Section 43 for avoidance of the transaction, but the bench considered the facts Suo Moto and treated the transaction as preferential.