2024 (10) TMI 726 - AT - IBC

Admission of Section 7 application - Financial Debt within meaning of Section 5(8) of the Insolvency and Bankruptcy Code, 2016 - default with regard to payment of Security Deposit under the terms Development Agreement - estoppel from asserting the claim for refund of Security Deposit without completing the development work under the Development Agreement. Whether the debt for which the application under Section 7 was filed can be treated to be a Financial Debt? - HELD THAT - For a transaction to be covered under Section 5(8) first requirement is disbursal against the consideration of the time value of money. Sub section (f) of Clause 8 is a residuary Clause which provides for any amount raised under any other transaction having the commercial effect of the borrowing . The Development Agreement is a transaction between the parties and looking to the Clauses of Development Agreement, it is clear that transaction has commercial effect of the borrowings. Payment of 18% interest compoundable and payable quarterly clearly indicate time value of money. Corporate Debtor has clear understanding that advance made over and above of Security Deposit Rs. 12 Crores carry interest @ 18% interest p.a. compounded and payable quarterly. Letter further said that since even after more than five an half years of signing of Development Agreement, Project has not taken off, hence they are not in a position to make provision for interest for the time being on the additional part of Security Deposit received. An application was filed before the Adjudicating Authority by first Respondent seeking a direction to IRP to admit the claim as Financial Creditor. Adjudicating Authority held that first Respondent was a Financial Creditor and not an Operational Creditor. Appeal was filed by challenging the order of the Adjudicating Authority. In the above context, Hon ble Supreme Court has occasion to consider the ingredients of a Financial Debt. Development Agreement clearly contains the details of transaction entered between the parties which makes it clear that advance of Rs. 3.5 Crores carried interest of 18% which transaction falls within Financial Debt under Section 5(8) - Classification of the same as inventory in the Books of Financial Creditor will not change the nature of transaction and the Financial Creditor has been relying on the acknowledgement of the Corporate Debtor in the Balance Sheet for purposes of limitation under Section 18, which has rightly been noted and accepted by the Adjudicating Authority. The Adjudicating Authority did not commit any error in considering the relevant issues which arose between the parties and after detailed discussion came to the conclusion that Financial Creditor has been able to prove debt and default. No error has been committed by the Adjudicating Authority in admitting Section 7 application - there are no error in the order of the Adjudicating Authority, warranting our interference in the exercise of the appellate jurisdiction. There is no merit in the appeal. The appeal is dismissed.

Summary

Issues Involved:

1. Whether the debt in question qualifies as a "Financial Debt" under Section 5(8) of the Insolvency and Bankruptcy Code, 2016.
2. Whether the application under Section 7 of the Insolvency and Bankruptcy Code is barred by limitation.
3. The impact of the classification of the refundable Security Deposit as inventory by the Financial Creditor.
4. The implications of the Financial Creditor's voting share in the Committee of Creditors.

Detailed Analysis:

1. Financial Debt Qualification:

The primary issue was whether the debt claimed by the Respondent qualifies as a "Financial Debt" under Section 5(8) of the Insolvency and Bankruptcy Code, 2016. The Development Agreement between the Corporate Debtor and Avani Towers Pvt. Ltd. included a refundable Security Deposit of Rs. 12 Crores, which did not accrue interest, and an additional amount of Rs. 3.5 Crores, which was to bear interest at 18% compounded quarterly. The Tribunal noted that the transaction involving the Rs. 3.5 Crores had the commercial effect of a borrowing, as it was disbursed against the consideration for the time value of money, fulfilling the criteria under Section 5(8). The Corporate Debtor's acknowledgment of this amount as a long-term borrowing in its financial statements further supported its classification as a "Financial Debt."

2. Limitation Period:

The Tribunal addressed whether the Section 7 application was barred by limitation. The default was claimed to have occurred on 01.10.2010. However, the Corporate Debtor had acknowledged the debt in its financial statements for several years, including 2013-14, 2014-15, and 2017-18. These acknowledgments effectively reset the limitation period, making the application filed on 30.09.2019 timely. The Tribunal relied on the principle that an acknowledgment of debt in financial statements can extend the limitation period under Section 18 of the Limitation Act.

3. Classification as Inventory:

The Appellant argued that the Respondent had classified the refundable Security Deposit as inventory in its books, which should preclude it from being treated as a Financial Debt. The Tribunal rejected this argument, emphasizing that the nature of the transaction, as defined in the Development Agreement, and the Corporate Debtor's acknowledgment in its financial statements, were determinative. The classification in the Respondent's books did not alter the fundamental nature of the transaction as a Financial Debt.

4. Financial Creditor's Voting Share:

The Appellant contended that the Financial Creditor's 99.97% voting share in the Committee of Creditors, as an Operational Creditor, should impact the proceedings. The Tribunal found this argument irrelevant to the admission of the Section 7 application. The focus was on whether there was a default in a Financial Debt, not the composition or voting rights within the Committee of Creditors.

Conclusion:

The Tribunal concluded that the Adjudicating Authority correctly admitted the Section 7 application, as the Respondent had established the existence of a Financial Debt and default. The appeal was dismissed, affirming the Adjudicating Authority's decision, with no error found in its judgment. The Tribunal emphasized the importance of the true nature of the transaction and the Corporate Debtor's acknowledgments in determining the case.