2023 (5) TMI 934 - AT - Insolvency and Bankruptcy

Initiation of CIRP - Application u/s 7 dismissed by the NCLT - Financial Debt or not - existence of debt due and payable or not - loan was lent for time value of money or not (existence of interest component on loan or not - existence of tripartite agreement between the Appellant, Corporate Debtor and SBI - time limitation. Whether the payment of Rs.10.46 crore by the Appellant to the SBI on behalf of the Corporate Debtor during 2014-2016 in terms of the two MoUs and OTS qualifies to be a financial debt within the meaning and scope of Section 5(8) of the IBC? - HELD THAT - In Pioneer Urban 2019 (8) TMI 532 - SUPREME COURT it has been held that any debt to be treated as financial debt, there must happen disbursal of money and the disbursal must be against consideration for time value of money. The concept of time value of money has been further explained to also include a transaction which does not necessarily culminate into money being returned to the lender or interest being paid in respect of money that has been borrowed. Holding Section 5(8) as a residuary provision which has a catch-all nature, it held that it can include anything which is equivalent to the money that has been loaned as long as commercial effect of borrowing or profit as the aim is discernible - In the matter of Anuj Jain 2020 (2) TMI 1259 - SUPREME COURT , the Hon ble Supreme Court articulated that the essential condition of financial debt is disbursement against the consideration for time value of money - Further in the most recent judgment of Hon ble Supreme Court in Orator 2021 (8) TMI 314 - SUPREME COURT , it has been clearly held that financial debt does not expressly exclude an interest free loan. It has also emphasized that financial debt includes any amount raised under any other transaction having the commercial effect of borrowing. The impugned order has observed that the disbursal made by the Appellant is not in the nature of financial debt on the grounds that there is no interest payable on the loan advanced by the Appellant and that there is no time value of money since there is no time fixed for repayment of the loan. In the present facts of the case, that money had been disbursed by the Appellant on behalf of Corporate Debtor to SBI towards loan repayment is undisputed. It is also an admitted fact that no interest was either claimed by the Appellant nor paid by the Corporate Debtor. That the component of interest is not a sine qua non for bringing a debt within the fold of financial debt has been clearly held by the Hon ble Supreme Court in Orator - The misconceived finding of the Adjudicating Authority cannot be accepted that simply because the instant transaction was bereft of loan component and no time was fixed for repayment, it did not qualify to be a financial debt. Whether in the present case, disbursement of money has taken place against the consideration for time value of money and whether commercial effect of borrowing is found to underpin the transaction? - HELD THAT - The concept of time value of money has not been expressly defined in the IBC. Undoubtedly, the most typical illustration of time value is in the form of interest on the principal amount that has been borrowed. However, it is now a well settled proposition of law that interest on loan is not the only binding criterion for determining time value of money. The Insolvency Law Report, 2018 has also held time value of money to mean compensation or the price paid for the length of time for which money has been disbursed. Thus, time value of money is not only a regular or timely return received for the duration for which the amount is disbursed as an amount in addition to the principal, but also covers any other form of benefit or value accruing to the creditor as a return for providing money for a long duration. The Adjudicating Authority in the impugned order has held that in the absence of time fixed for repayment, it cannot be said that the loan was advanced for time value of money. Even if the loan extended was not interest-bearing and no time was fixed for repayment, it would be both skewed and misconstrued to hold that the loan was disbursed without time value of money. The Appellant had advanced the payment with an intent to gain from the land, plant and machinery and factory building changing hands from the Corporate Debtor to the Appellant as borne out from Clause 4.1.2 of MoU-2 - The expectation to benefit from acquiring the entire right, title and interest over the subject property at a lesser rate compared to the market value has to be factorized as time value of money. As long as the lender visualizes an element of profit and enhancement of economic prospect in return for the money advanced for certain time period, the loan in question entails time value of money and acquires the colour of commercial borrowing which is clearly borne out from the facts of the present case. It has all the trappings of a financial debt and squarely falls within the purview of Section 5(8) of IBC. Thus, the disbursal made by the Appellant in the present case is in the nature of a financial debt and to that extent disagree with the Adjudicating Authority. Whether there was debt, if any, which had become due and payable on the part of the Corporate Debtor and default thereof qua the Appellant? - HELD THAT - It is trite law that under the IBC once a debt which becomes due or payable, in law and in fact, and there is incidence of non-payment of the said debt in full or even part thereof, CIRP may be triggered by the financial creditor as long as the amount in default is above the threshold limit. It is also well accepted that debt means a liability in respect of a claim and claim means a right to payment even if it is disputed. Viewed against this broad backdrop of the IBC framework, we now dwell upon the facts of the present case to find out whether in this case debt was due and payable. The modality of payment by the Appellant by way of direct deposit to the Corporate Debtor s account with SBI was clearly laid down in Clause 5.7 of the MoU-2. There is also no dispute that Appellant had complied to these modalities and routed the disbursal by depositing the same in the Corporate Debtor s account in the SBI. Receipt of this amount has not been controverted by the Corporate Debtor thereafter. Neither has any claim been made that any part of this sum was repaid by the Corporate Debtor. That being the case there arises no doubt that there was a debt on the part of the Corporate Debtor qua the Appellant for an amount of Rs.10.46 crore. The Appellant having already paid Rs.10.46 crore was still required to pay the balance consideration of Rs.16.70 crore by or before 31.03.2016. Further, it is significant to note that Clause 5.1 of the Completion Arrangements in MoU-2 expressly provided that only after final payment is made by the Appellant to the Corporate Debtor s account in SBI that Corporate Debtor was to take further steps for execution of lease deed in respect of land and registration of factory building in favour of the Appellant. The recitals of the MoU make it amply clear that the Appellant was required to remit the full payment of Rs.27.16 crore and until then he was not entitled to acquire rights and title over the subject property. In other words, the debt qua the Corporate Debtor would have become payable only on the full amount having been remitted to the Corporate Debtor s account and this stage was yet to be reached. The MoUs and A2S had been frustrated due to non-payment by the Appellant of the agreed consideration amount contained therein and for this breach the Corporate Debtor cannot be held responsible as that would tantamount to allowing the Appellant to take advantage of his own wrong. The full payment had clearly not been made by the Appellant having admittedly paid only Rs.10.46 crore, we agree with the finding of the Adjudicating Authority that unless the entire payment was made, no right would accrue to the Appellant to enter into the shoes of SBI and have right to title and possession of the subject property - under the given facts and circumstances, the debt had not become due and therefore was not payable. The Corporate Debtor is entitled to point out that a default has not occurred in the sense that the debt is not due. In the present facts, the debt had not become due in the sense that it was payable only after receipt of full agreed amount of Rs.27.16 crore and which not having occurred, there was no event of default and that being so the debt had not become payable and hence Section 7 of the IBC does not get attracted. The impugned order is upheld - appeal dismissed.

Summary

Issues Involved:
1. Whether the payment of Rs.10.46 crore by the Appellant to the SBI on behalf of the Corporate Debtor qualifies as a 'financial debt' under Section 5(8) of the IBC.
2. Whether there was a debt that had become due and payable by the Corporate Debtor to the Appellant and whether there was a default.

Summary:

1. Financial Debt Qualification:
The Appellant argued that the payment made to SBI on behalf of the Corporate Debtor qualifies as a 'financial debt' under Section 5(8) of the IBC. The Adjudicating Authority dismissed this claim, stating that the payment lacked the essential elements of a financial debt, namely interest and disbursal against time value of money. The Tribunal, however, disagreed with this finding, emphasizing that the absence of interest does not preclude a debt from being considered a financial debt. The Tribunal noted that the payment was made with the expectation of gaining ownership of the subject property, which constitutes time value of money. The Tribunal concluded that the disbursal made by the Appellant did qualify as a financial debt.

2. Debt Due and Payable:
The Appellant contended that the Corporate Debtor failed to repay the amount or transfer the subject property, thus defaulting on the debt. The Corporate Debtor argued that the Appellant did not fulfill its obligation to pay the full consideration amount, and therefore, no debt had become due. The Tribunal found that the full consideration amount of Rs.27.16 crore was not paid by the Appellant, and as per the MoUs and Agreement to Sell, the Corporate Debtor's obligation to transfer the property or repay the amount was contingent upon the full payment. Consequently, the Tribunal held that the debt had not become due and payable, and therefore, no default occurred.

Conclusion:
The Tribunal affirmed the dismissal of the Section 7 application, agreeing that the debt had not become due and payable. The Tribunal clarified that while the payment qualified as a financial debt, the conditions for the debt to become due were not met. The Appellant was advised to seek remedial action in an appropriate forum for recovery of the debt.