2023 (3) TMI 1213 - AT - Insolvency and Bankruptcy

Initiation of CIRP - Financial Creditors or Operational creditors - receivables sold or discounted on a non-recourse basis - financial debt or not. Whether the Appellants in the second appeal (Financiers) are the Financial Creditors as against the Corporate Debtor or have stepped in to shoes of the Seller as an Operational Creditors and as such application filed by the Appellants in the second appeal under Section 7 of the Code has rightly been held to be not maintainable and were rightly relegated to avail their remedy of filing the application under Section 9 of the Code? HELD THAT - The Agreement (COR) was entered into between the Seller, Financier and the Corporate Debtor (As customer). As per the agreement, the Seller had agreed for discounting of invoice of the customer (CD) for the creation of the right and interest in the invoice receivables in favour of the Financier (Appellant). Upon execution of agreement of COR, the Appellant as a Financier discounted the invoice and deposited the amounts into an escrow/nodal account maintained by KredX with an escrow/nodal agent, namely, Yes Bank Limited who further transferred the said amount to the account of the Seller and on receiving, the Seller transferred its right to receive the money under the invoices in favour of the Financiers/Appellants. In this transaction, the money was never disbursed much less for the time value as a financial debt to the Corporate Debtor and by virtue of discounting the invoice of the Seller of an amount of Rs.3,42,03,903/- for amount of Rs.1,75,23,133/- the Financiers/Appellants entered into shoes of the Seller and had become Operational Creditors in terms of Section 5(20) as well as 21(5) and Section 5(7) and 5(8)(e) of the Code is not at all applicable. There is no error in the order of the Adjudicating Authority who has though rejected the application filed under Section 7 of the Code but relegated the Appellants (Financiers) to avail their remedy under Section 9 of the Code in accordance with law. Appeal dismissed.

Summary

Issues Involved:
The judgment addresses the issues of whether the appellants are Financial Creditors or Operational Creditors, the validity of the application filed under Section 7 of the Insolvency and Bankruptcy Code, and the interpretation of relevant provisions of the Code.

Issue 1: Appellants' Status as Financial Creditors
The case involves two appeals filed against the same impugned order regarding the dismissal of an application under Section 7 of the Insolvency and Bankruptcy Code. The appellants claimed to be Financial Creditors of the Corporate Debtor due to their involvement in invoice discounting. The Adjudicating Authority found that the appellants had stepped into the shoes of the Operational Creditor (Seller) and were not eligible to file under Section 7 but could file under Section 9 of the Code.

Issue 2: Interpretation of Financial Debt
The core issue was whether the appellants, as financiers, constituted Financial Creditors under the Code. The appellants argued that the amount disbursed by them against the receivables qualified as a financial debt under Section 5(8)(e) of the Code. They contended that the disbursement was made on a recourse basis, fulfilling the conditions of financial debt.

Issue 3: Application of Relevant Code Provisions
The Respondent challenged the appellants' status as Financial Creditors, citing Section 5(20) and 21(5) of the Code. The Respondent argued that the amount was not disbursed to the Corporate Debtor and relied on previous judgments to support the contention that the appellants were Operational Creditors. The Tribunal analyzed the agreements and transactions to determine the nature of the debt and the appellants' creditor status.

Conclusion:
The Tribunal upheld the Adjudicating Authority's decision, stating that the appellants, by discounting the invoices of the Seller, had become Operational Creditors and not Financial Creditors of the Corporate Debtor. The Tribunal found that the appellants had not disbursed the amount as a financial debt to the Corporate Debtor, leading to the dismissal of the appeal. The appellants were directed to seek their remedy under Section 9 of the Insolvency and Bankruptcy Code.