2024 (2) TMI 1026 - AT - Insolvency and Bankruptcy

Maintainability of section 7 application - Seeking initiation of Corporate Insolvency Resolution Process (CIRP) against the Corporate Debtor - threshold limit involved in in application - exclusion of amount of commission on sale in computation of debt amount. Principal stand of the Appellant is that though their claim of outstanding dues amounting Rs. 1,11,63,151/- qua the Respondent is duly reflected on the NeSL data, the Adjudicating Authority erroneously held the default amount to be less than the prescribed threshold limit - HELD THAT - At a time when the principal outstanding amount; the applicable rate of interest and date of default in both the Section 7 applications remained constant and the duration of Agreement was only one year, the interest calculations should have remained confined to one year only. The reason for calculating the interest amount for a different time-period in the present Section 7 application, prima-facie, appears unjustified and irrational - the findings of the Adjudicating Authority that the interest calculation in the present Section 7 application has been unduly inflated and enhanced by the Appellant with the ulterior motive of crossing the threshold limit, agreed upon. Whether commission on sale amount which has been excluded by the Adjudicating Authority should have been included in the computation of debt amount? - HELD THAT - It is a well settled proposition of law that any debt to be treated as financial debt , there must take place disbursal of money and the disbursal must be against consideration for time value of money and also includes anything which is equivalent to the money that has been loaned as long as commercial effect of borrowing or profit is discernible. There are no good reason to disagree with the findings referred in the impugned order that commission on sale amount neither falls in the menu of transactions delineated at sub clauses (a) to (i) of Section 5(8) of the IBC nor does it fall in the category of being a disbursal having time value of money. The commission on sale does not carry the implications of commercial effect of borrowing either. Thus, the Adjudicating Authority did not commit any error in coming to the conclusion that the amount of outstanding financial debt is only Rs. 78,40,000/- and that this amount does not meet the threshold limit of Rs. 1 crore as stipulated under Section 4 of the IBC - the Appellant having failed to meet the threshold limit in the earlier Section 7 application has now tried to overcome this impediment by inflating the claim amount by resorting to a calculation methodology which lacks rational basis. This is a clear case where the Appellant has reagitated the same issue which had been already dismissed by the Adjudicating Authority on an earlier occasion simply to cross the threshold bar. This amounts to misuse of the provisions of IBC to resolve a contractual dispute. There are no merit in the appeal - appeal dismissed.

Summary

Issues Involved:
1. Whether the outstanding amount met the threshold limit under Section 4 of the IBC.
2. Whether the "commission on sale" qualifies as "financial debt" under Section 5(8) of the IBC.
3. Whether the Adjudicating Authority erred in its computation of the outstanding financial debt.

Summary:

Issue 1: Threshold Limit Under Section 4 of the IBC

The Appellant filed a Section 7 petition seeking initiation of Corporate Insolvency Resolution Process (CIRP) against the Respondent, which was dismissed by the Adjudicating Authority on the ground that the outstanding amount did not meet the threshold limit under Section 4 of the IBC. The Appellant claimed outstanding dues amounting to Rs. 1,11,63,151/-, but the Adjudicating Authority held the default amount to be less than the prescribed threshold limit. The Adjudicating Authority noted that the principal amount in both the Section 7 applications remained constant at Rs. 70,00,000/-, and the interest calculation in the present application was inflated to cross the threshold limit.

Issue 2: "Commission on Sale" as "Financial Debt"

The Adjudicating Authority referred to the definition of "financial debt" under Section 5(8) of the IBC and concluded that the "commission on sale" does not qualify as "financial debt." The relevant findings stated that "financial debt" must include debt along with interest, disbursed against the consideration for the time value of money. The "commission on sale" neither has the time value of money nor is covered under any type of transactions specified under sub-clauses (a) to (i) of Section 5(8).

Issue 3: Computation of Outstanding Financial Debt

The Adjudicating Authority computed the principal and interest amount, concluding that the Appellant was entitled to receive interest payment only for a period of one year. The total amount of unpaid financial debt, including the principal and interest, was calculated to be Rs. 78,40,000/-, which is below the threshold limit. The Adjudicating Authority found that the Appellant inflated the interest calculation to meet the threshold limit, which was unjustified and irrational.

Conclusion:

The Adjudicating Authority did not err in its conclusion that the outstanding financial debt was only Rs. 78,40,000/-, below the threshold limit of Rs. 1 crore under Section 4 of the IBC. The "commission on sale" does not qualify as "financial debt." The appeal was dismissed, and the imposition of costs of Rs. 1,00,000/- on the Appellant was affirmed due to the misuse of IBC provisions to resolve a contractual dispute.