2021 (1) TMI 1059 - AT - Insolvency and Bankruptcy

Maintainability of application - initiation of CIRP - Scope of the term 'Deposit' - Financial Debt under section 5(8)(a) and Section 5(8)(f) of the I B Code - stand of the Appellant is that his claim is that of a Deposit and not of a Financial Debt was never brought out by either the Respondent or the Adjudicating Authority as such, the Appellant never got an opportunity to respond to the said issue and was shocked by the impugned order - HELD THAT - It must be borne in mind that a Financial Creditor is a person to whom the financial debt is owed. A Financial Creditor is a person who has a right to financial debt. A Financial Creditor can be either a secured creditor or an unsecured creditor - A Corporate Debtor is a person who owes a debt to any person. The term debt means a liability or an obligation in respect of a claim due from any person and includes (i) a Financial Debt (ii) An Operational Debt. As a matter of fact, Section 3(6) of the Code speaks of Definition of Claim meaning (a) a right to payment, whether or not such right is reduced to judgement, fixed, disputed, undisputed, legal, equitable, secured or unsecured. It cannot be gainsaid that the term deposit includes any receipt of money by a company either as deposit or loan or in any other form by it. Under the Companies (acceptance of deposits) Rules, 2014 the term Deposit is defined under Rule 2(1)(c) in an inclusive manner. The meaning of Deposit is enlarged by covering receipts of money in any other form. After all, a deposit is something more than a mere loan of money - For invoking the jurisdiction of the Tribunal as per Section 74(2) under the Companies Act, 2013, even a partial failure by the Company to repay the deposit was sufficient. In fact, Section 2(31) of the Companies Act speaks of the meaning of deposit. Also, that the Tribunal has vide discretionary powers regarding the repayment of Deposit (s) but it must exercise its discretion objectively taking into consideration all the relevant aspects in a conspectus judicial manner. In reality, the distinction between deposit and loan may not be a relevant factor for interpreting the term Deposit . To put it succinctly, under the new Companies Act, 2013, the definition of the term Deposit is of wider amplitude, as opined by this Tribunal. In view of the fact that the Respondent / Corporate Debtor had accepted certain amounts from the Appellant and credited the interest in a consistent manner against such amounts for a continuous period of five years, as pleaded by the Appellant and also that the Corporate Debtor had accepted money from the Appellant against the payment of interest and bearing in mind the payment of interest on the amounts borrowed by the Respondent Company is nothing but a consideration for the time value of money and in as much as the interest is the compensation paid by the borrower to the lender for using the lender s money over a period of time, this Tribunal comes to an inevitable and inescapable conclusion that the Appellant s status is that of a Financial Creditor as per Section 5(7) read with Section 5(8) of the Code and that there is a default in payment of the accepted amounts by the Respondent/CD and in short, the Respondent / Corporate Debtor comes within the purview of the definition of Financial Debt - the contra view taken by the Adjudicating Authority in coming to the conclusion that the application filed by the Appellant / Financial Creditor is not maintainable for initiation of Section 7 of the Code is clearly unsustainable in the eye of law, as held by this Tribunal, to prevent an aberration of justice. Appeal allowed.

Summary

Issues Involved:
1. Definition and classification of "Financial Debt" under the Insolvency and Bankruptcy Code (I&B Code).
2. Interpretation of Sections 73 and 74 of the Companies Act, 2013, and Companies (Acceptance of Deposits) Rules, 2014.
3. Applicability of Section 7 of the I&B Code for initiating Corporate Insolvency Resolution Process (CIRP).
4. Determination of the status of the appellant as a "Financial Creditor."

Issue-wise Detailed Analysis:

1. Definition and Classification of "Financial Debt" under the Insolvency and Bankruptcy Code (I&B Code):

The central issue was whether the amounts disbursed by the appellant to the respondent constituted a "Financial Debt" under Section 5(8) of the I&B Code. The appellant argued that the disbursed amounts were in lieu of gaining interest, thus qualifying as a "Financial Debt" under Sections 5(8)(a) and 5(8)(f) of the I&B Code. The appellant contended that the payment of interest on the amounts borrowed by the respondent was consideration for the time value of money, referencing the decisions in 'Nikhil Mehta and Sons v. AMR Infrastructure Limited' and 'Pioneer Urban Land and Infrastructure Ltd. & Anr. v. Union of India & Ors.'

The respondent countered that the amounts deposited did not fall within the definition of "Financial Debt" as per Section 5(8) of the Code, arguing that the appellant had described the amounts as deposits, not loans, and there was no written or oral agreement regarding the alleged unsecured loan. The tribunal concluded that the appellant's status was that of a "Financial Creditor" as per Section 5(7) read with Section 5(8) of the Code, given the consistent crediting of interest over five years.

2. Interpretation of Sections 73 and 74 of the Companies Act, 2013, and Companies (Acceptance of Deposits) Rules, 2014:

The National Company Law Tribunal (NCLT) referred to Sections 73 and 74 of the Companies Act, 2013, and the Companies (Acceptance of Deposits) Rules, 2014, which came into force on April 1, 2014. Section 73 prohibits companies from inviting, accepting, or renewing deposits from the public except as provided under the chapter. Section 74 mandates the repayment of deposits accepted before the commencement of the Act within specified periods, with penal provisions for non-compliance.

The NCLT observed that the appellant's claim did not fall under the definition of "Financial Debt" but was rather a deposit under the Companies Act and related rules. The tribunal noted that the appellant could seek remedy under Chapter V of the Companies Act, 2013, but not under Section 7 of the I&B Code.

3. Applicability of Section 7 of the I&B Code for Initiating Corporate Insolvency Resolution Process (CIRP):

The NCLT held that the initiation of proceedings under Section 7 of the I&B Code was not maintainable, as the appellant's claim did not constitute a "Financial Debt." The appellant argued that there was a default in payment, thus making the Section 7 application maintainable. However, the NCLT concluded that the amounts deposited did not meet the definition of debt under the I&B Code, thus rejecting the appellant's application to initiate CIRP.

The appellate tribunal, however, disagreed with the NCLT's conclusion, determining that the appellant's status as a "Financial Creditor" was valid, and there was a default in payment by the respondent. Consequently, the appellate tribunal directed the NCLT to restore the application filed by the appellant under Section 7 of the I&B Code and proceed accordingly.

4. Determination of the Status of the Appellant as a "Financial Creditor":

The appellant contended that the amounts disbursed were financial debts, supported by the respondent's consistent interest payments over five years. The appellant also highlighted the respondent's acknowledgments and admissions of liability through email communications and other documents.

The respondent argued that the amounts were deposits, not loans, and thus did not qualify as financial debts. The appellate tribunal, considering the consistent interest payments and the nature of the transactions, concluded that the appellant was indeed a "Financial Creditor" under the I&B Code.

Conclusion:

The appellate tribunal allowed the appeal, set aside the NCLT's order, and directed the NCLT to restore and admit the appellant's application under Section 7 of the I&B Code, proceeding further in accordance with the law.