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2022 (9) TMI 488 - AT - Insolvency and BankruptcyCIRP - Financial Creditors - Financial Debt - Development Agreement with reciprocal promises - existence of debt and dispute or not - time limitation - Accretion of penal interest - HELD THAT - From the perusal of the agreement, it is very much clear that these are all business agreements where each party has a role and there is a mechanism to release payment at various stages and the recoupment of such payments including the management of project land in consideration, failure of which will result into forfeiture of deposit, penal interest, liquidated damages etc. It is not in dispute that this is an inclusive definition of financial debt but certain conditions must be complied with to be a financial debt i.e the CD must have borrowed the money from the Creditor against the payment of interest /time value of money. It means, the transactions require to be purely in borrowing nature. This does not cover the business transaction between the Creditor and Debtor which is applicable in business organization where either sale or purchase involved or construction activities involved or in Real Estate Project, multiple agencies with multiple terms and conditions are involved and each is supposed to gain or lose based on the performance of the business. In order to meet the time schedule whether in purchase or sale or development agreement or in any Real Estate project, there is always a clause for liquidated damages and the same may be either in the percentage form or sometime even other form of penal interest. Accretion of penal interest emerging from clause 4 of the Agreement dated 20.03.2012 - HELD THAT - There must be a disbursal of fund by the Creditor to the Debtor purely in the form of release of fund as a borrowing and must have a time value of money . The method may be different but the nature must be borrowing and in extended terminology even the liability in respect of guarantee is also covered. There must be a Financial Debt which is owed by the other side i.e. the Debtor. It should be amply clear that the CD owe the Financial Debt to the Creditor. There is a difference between the levy of liquidated damages or penal interest for default and the financial debt per se - interest per se in any business contract cannot be termed to make the debt as a Financial Debt , if it is in the nature of liquidated damages or in the nature of penal interest, which is a result of compensation for breach of contract which is stipulated for penalty. Hence, while examining the case, whether the Appellant is a Financial Creditor or not, a conclusion is now arrived at, based on above said discussions both on law on facts and the citations produced by the parties, some of which have been explicitly cited as above reveals that the Appellant is not a Financial Creditor and hence, the order of the Adjudicating Authority are upheld. Appeal dismissed.
Issues Involved:
1. Whether the amount claimed by the applicant is a financial debt within the definition of the Insolvency and Bankruptcy Code, 2016 (the Code)? 2. Whether the Resolution Professional (RP) has committed any illegality in rejecting the claim of the petitioner as a Financial Debt? Issue-wise Detailed Analysis: 1. Definition of Financial Debt: The Tribunal examined whether the amount claimed by the applicant qualifies as a financial debt under Section 5(8) of the Code. The definition of financial debt includes various forms of borrowing and liabilities, such as money borrowed against payment of interest, amounts raised by acceptance under credit facilities, and liabilities in respect of finance or capital leases. The Tribunal noted that a mere right to payment does not qualify as a financial debt unless it falls within the specific categories mentioned in the Code. The applicant claimed interest as a financial debt for the alleged breach of several agreements with the Corporate Debtor (CD). The Tribunal found that the claim was based on a penalty for breach, which does not constitute financial debt. The RP's rejection of the claim was deemed appropriate, as it was a mere claim for penalty interest and not a financial debt. 2. Legitimacy of RP's Rejection of Claim: The Tribunal considered whether the RP acted illegally in rejecting the applicant's claim. The applicant contended that the RP delayed the assessment of the claim and failed to verify it within the prescribed timeline. The Tribunal clarified that the seven-day timeline for claim verification under Regulation 13 is directory, not mandatory, and no consequence is provided for non-compliance. The RP's delay was attributed to the COVID-19 pandemic, and the RP was found to have acted in accordance with the Code. The applicant argued that it was in a better position to assess the viability of any proposed Resolution Plan due to its significant financial interest. However, the Tribunal rejected this argument, stating that the applicant's claim did not qualify as a financial debt, and therefore, the applicant could not be considered a financial creditor. Supplemental Arguments and Legal Precedents: The Tribunal reviewed various agreements between the applicant and the CD, including development agreements and supplemental agreements. The applicant argued that these agreements involved periodic payments to finance the CD's project, constituting a financial debt. The Tribunal, however, emphasized that the nature of the transactions was commercial and did not involve borrowing with the time value of money. The Tribunal referred to several legal precedents, including the Supreme Court judgments in Pioneer Urban Land and Infrastructure Ltd. vs. Union of India and Swiss Ribbons Pvt. Ltd. vs. Union of India, to support its interpretation of financial debt. The Tribunal concluded that the applicant's claim was a business transaction with penal interest for breach, not a financial debt. Conclusion: The Tribunal upheld the RP's rejection of the applicant's claim as a financial debt. The claim was found to be a penalty for breach of contract, not a borrowing with the time value of money. The appeal was dismissed, and the order of the Adjudicating Authority was sustained. The Tribunal emphasized that financial debt must involve disbursal against the consideration for the time value of money, which was not present in this case.
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