2024 (11) TMI 551 - AT - IBC

Classification of the Security Deposit as Financial Debt or Operational Debt - Security Deposit made by the Appellant with the Corporate Debtor for the purpose of the lease deed - whether the RP s treatment of the claim made by the Appellant in respect of the Security Deposit made in pursuance of the Lease Deed in the category of Other Creditor is justifiable in the facts of the present case? - HELD THAT - The Security Deposit claimed by the Appellant is clearly a claim within the meaning of IBC. Now that it is noted the statutory construct of IBC and the provisions of the Lease Deed, it is required to examine the contention of the Appellant that they deserve to be treated as Financial Creditor and their claim of Security Deposit to be treated as financial debt qua the Corporate Debtor. The essential elements of financial debt in the context of Section 5(8) of IBC is inclusive of debt alongwith interest which 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. It is a well settled proposition of law as laid down by the Hon ble Apex Court in Pioneer Urban Land and Infrastructure Ltd. v. Union of India 2019 (8) TMI 532 - SUPREME COURT that any debt to be treated as financial debt, there must happen disbursal of money to the borrower for utilization by the borrower and that the disbursal must be against consideration for time value of money. The Adjudicating Authority has returned the finding that the Appellant did not fall in the category of a financial creditor nor the alleged transaction of Security Deposit fell within the ambit of financial debt in terms of the statutory provisions enshrined in Section 5(7) and 5(8) of the IBC. The above findings of the Adjudicating Authority have been predicated on the terms of Lease Deed entered between the Appellant and the Corporate Debtor. From the records and documents, the intent of the two parties was that the Security Deposit was a corpus amount of four months of lease rent kept on hold with Corporate Debtor which would be refundable to the Appellant without interest on termination of lease and after deducting dues arising on account of unpaid lease rent, utility charges and damages caused to property, if any, other than normal wear and tear. It is clear, therefore, that Security Deposit was never disbursed or deposited against consideration for time value of money. Only in the event of failure to refund the Security Deposit from the date such refund was due that the deposit was to be returned with interest of 18%. It was bereft of all elements of commercial borrowing. The essential elements in the principal clause of Section 5(8) of the IBC pertaining to financial debt was therefore not satisfied. Clearly therefore, the present transaction was not disbursement for time value of money and does not fall within the canvas of financial debt as defined under Section 5(8) of the IBC. From a plain reading of the definition of operational debt , it is clear that it must relate to a claim which is confined to either of the four categories viz. provision of goods, services, employment and Government dues. It may be pertinent to add here that the expression services has not been defined in the IBC and has to be interpreted in a broad and purposive manner. The sum of Security Deposit made in the facts of the present case which was given in the form of advance by the Appellant to the Corporate Debtor for prospective occupation of the leased premises on rent, this deposit was in the nature of advance for use of the premises - the impugned order in not treating the Appellant as an Operational Creditor suffers from legal infirmity and the same cannot be supported. The Security Deposit was in the nature of operational debt. The categorisation followed by the RP by placing the Appellant in the category of Other Creditors , cannot be agreed upon. Since the ingredients of operational debt stands satisfies, and includes all those provide or receive operational services from the Corporate Debtor. The Appellant in the present factual matrix should be accorded the status of an operational creditor. The RP is directed to admit the claim of the Appellant as an Operational Creditor and Appellant be allowed to substitute Form-C as already filled up with Form-B - appeal disposed off.

Summary

Issues Involved:

1. Classification of the Security Deposit as Financial Debt or Operational Debt.
2. The status of the Appellant as Financial Creditor, Operational Creditor, or Other Creditor.
3. The applicability of Section 18 of IBC regarding control and custody of assets.
4. The implications of the Lease Deed terms on the classification of debt.

Issue-wise Detailed Analysis:

1. Classification of the Security Deposit as Financial Debt or Operational Debt:

The core issue was whether the Security Deposit made by the Appellant could be classified as a financial debt under the Insolvency and Bankruptcy Code (IBC). The Appellant argued that the Security Deposit was intended to finance the construction of leased premises and should be treated as a financial debt. However, the Tribunal found that the Security Deposit was not disbursed against consideration for the time value of money, a key element for financial debt under Section 5(8) of IBC. The Tribunal noted that the Security Deposit was equivalent to four months' lease rent and was to be retained without interest, except in case of default in refund. Therefore, it lacked the commercial effect of borrowing, and thus, did not qualify as financial debt.

2. The status of the Appellant as Financial Creditor, Operational Creditor, or Other Creditor:

The Tribunal examined whether the Appellant could be classified as a financial creditor or operational creditor. It was concluded that the Appellant did not qualify as a financial creditor due to the absence of disbursement for time value of money. However, the Tribunal found that the Security Deposit was an advance for the use of premises, which falls under the provision of services. Therefore, it should be classified as operational debt, making the Appellant an operational creditor. The Tribunal held that the Adjudicating Authority erred in not treating the Appellant as an operational creditor and directed the Resolution Professional (RP) to admit the claim as such.

3. The applicability of Section 18 of IBC regarding control and custody of assets:

The Tribunal addressed the applicability of Section 18 of IBC, which mandates the RP to take control and custody of assets of the Corporate Debtor, excluding third-party assets. The Appellant argued that the Security Deposit was not an asset of the Corporate Debtor. However, the Tribunal found no fault with the RP including the Security Deposit in the pool of assets under CIRP, as it was part of the contractual arrangement between the parties. The RP's actions were in compliance with Section 18, and the Tribunal upheld the RP's decision to include the Security Deposit in the Corporate Debtor's assets.

4. The implications of the Lease Deed terms on the classification of debt:

The Tribunal examined the Lease Deed terms, particularly Articles 3.4 and 6, which outlined the conditions for the Security Deposit. The Lease Deed specified that the Security Deposit was to be retained without interest, except in case of failure to refund, where interest would be charged from the due date of refund. The Tribunal emphasized that the Lease Deed did not indicate that the Security Deposit was a loan or had the commercial effect of borrowing. Consequently, the Tribunal concluded that the Security Deposit did not constitute financial debt but was an operational debt due to its nature as an advance for services.

Conclusion:

The Tribunal directed the RP to classify the Appellant as an operational creditor and to allow the substitution of Form-C with Form-B, reflecting the status of the Appellant as an operational creditor. The appeal was disposed of with these observations, and the impugned order was modified accordingly.