2020 (7) TMI 297 - Tri - Insolvency and Bankruptcy

Maintainability of application - initiation of CIRP - Corporate Debtor failed to make repayment of its dues - existence of debt and dispute or not - HELD THAT - Taking into consideration cumulatively clause 8 and 9 of the Franchise Agreement, a sum of ₹ 65 lakhs being an investment on which guaranteed ROI was also promised is required to be treated as a 'financial debt' and that the payment of said 'financial debt' which stood defaulted and hence this Petition will lie before this Tribunal under IBC, 2016 in view of the ROI promised month after month being a consideration for time value to money not being remitted by the Corporate Debtor and in the circumstances the debt will be considered as 'financial debt' falling within the confines of Section 5 (8) (f) of IBC, 2016 and the Petition is hence maintainable before this Tribunal and the jurisdiction of this Tribunal to entertain this Petition cannot be questioned by the Corporate Debtor. The Franchise Agreement is to be read as a whole in its entirety which enjoins upon the parties their respective duties and obligations as well as their rights. As rightly pointed out by Counsel for the Corporate Debtor the Franchise Agreement or for that matter any document which the parties have chosen to rely on, cannot be read in piecemeal and has to be read as a whole which is a well established legal principle - It is also further seen that the responsibility of running the Store, even though clauses in relation to the same was heavily relied upon by the Counsel for the Petitioner is placed upon the Franchisor, it is required to be seen that the said clauses when Franchise Agreement read as a whole is provided more as a protective measure with a view to protect its trade name and mark and also normally order to have a uniformity and consistency in relation to the Stores operated at several places including the one in the present one and in the circumstances the said clauses cannot be read in isolation viz., 9.1. The standard as prescribed in relation to the quality, quantity or otherwise taking into consideration the expectancy of the user public when the trade name Fipola is associated any adverse usage by the Franchisee will be only detrimental to the trade name of the Franchisor as well as in relation to the Franchise and as already pointed out is o protective measure in relation to its 'trade name' permitted to be utilized by the Financial Creditor - It is also required to be noted that all 'claims' as defined under the provisions of IBC, 2016 namely under Section 3 (6) cannot lead to the filing of a Petition under the provisions of IBC, 2016 in relation to the Corporate Debtor as a 'financial debt' or as an 'operational debt' unless the conditions as provided under Section 5 (8) or 5 (20) as the case may be is satisfied by the Petitioner approaching this Tribunal. The claim cannot be treated as a 'financial debt' and the Petitioner cannot be treated as a 'Financial Creditor' as defined under Section 5 (8) and 5 (7) of IBC, 2016 respectively - Petition dismissed.

Summary

Issues Involved:
1. Whether the debt claimed by the Petitioner qualifies as a 'financial debt' under Section 5(8) of the Insolvency and Bankruptcy Code, 2016 (IBC, 2016).
2. Whether the Petitioner can be categorized as a 'Financial Creditor' under IBC, 2016.
3. Jurisdiction of the Tribunal to adjudicate the petition under Section 7 of IBC, 2016.

Issue-wise Detailed Analysis:

1. Whether the debt claimed by the Petitioner qualifies as a 'financial debt' under Section 5(8) of the Insolvency and Bankruptcy Code, 2016 (IBC, 2016):

The Petitioner, a financial creditor, filed a petition under Section 7 of IBC, 2016, claiming a sum of ?3,38,09,878/- as a financial debt. The claim was based on a Franchise Agreement dated 31.05.2018, where the Petitioner invested ?65 lakhs with a promised Return on Investment (ROI) of ?1,80,555/- per month for 36 months. The Corporate Debtor contested that the debt did not qualify as a 'financial debt' as per Section 5(8) of IBC, 2016, arguing that the Franchise Agreement was primarily for availing the brand name "Fipola" and establishing a retail shop, thus constituting an operational transaction rather than a financial one.

The Tribunal examined the Franchise Agreement, particularly clauses 8.1, 8.2, and Schedule 1, which outlined the guaranteed ROI. The Tribunal noted that the Agreement should be read "as a whole" and not "in isolation." It was emphasized that the Franchisee's primary objective was to utilize the trade name "Fipola" for business benefits, and the investment was for the Franchise Store's benefit, not the Corporate Debtor's individual benefit. The Tribunal concluded that the Franchise Agreement did not constitute a financial contract as per 'AAA' Rules, 2016, and thus, the debt could not be considered a 'financial debt' under Section 5(8) of IBC, 2016.

2. Whether the Petitioner can be categorized as a 'Financial Creditor' under IBC, 2016:

The Petitioner argued that the investment of ?65 lakhs, along with other investments, should classify it as a 'Financial Creditor' due to the guaranteed ROI. The Corporate Debtor countered that the Franchise Agreement's primary purpose was operational, involving the use of the brand name and establishment of a retail outlet, and thus, the Petitioner could not be categorized as a 'Financial Creditor.'

The Tribunal considered the entirety of the Franchise Agreement, including clauses 2.1, 2.2, 4.1, and 7, which detailed the rights and obligations of the parties, the non-refundable franchise fee, and the utilization of the Franchisee Investment. It was highlighted that the Agreement aimed to benefit the Franchise Store and not the Corporate Debtor individually. The Tribunal concluded that the Petitioner's claim did not meet the criteria to be treated as a 'financial debt,' and thus, the Petitioner could not be categorized as a 'Financial Creditor' under Sections 5(8) and 5(7) of IBC, 2016.

3. Jurisdiction of the Tribunal to adjudicate the petition under Section 7 of IBC, 2016:

The Corporate Debtor questioned the Tribunal's jurisdiction to accept and adjudicate the petition under Section 7 of IBC, 2016, based on the nature of the debt. The Tribunal reiterated that for a petition to be maintainable under IBC, 2016, the debt must qualify as a 'financial debt' or 'operational debt' as defined under Sections 5(8) and 5(20) respectively.

Given the Tribunal's finding that the debt did not qualify as a 'financial debt' and the Petitioner could not be categorized as a 'Financial Creditor,' it concluded that the petition was not maintainable under Section 7 of IBC, 2016. Consequently, the Tribunal dismissed the petition without costs.

Conclusion:

The Tribunal dismissed the petition, concluding that the debt claimed by the Petitioner did not qualify as a 'financial debt' under IBC, 2016, and the Petitioner could not be categorized as a 'Financial Creditor.' The Tribunal emphasized the necessity of reading the Franchise Agreement as a whole and not in isolation, and found that the Agreement primarily aimed to benefit the Franchise Store, not the Corporate Debtor individually.