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TMI Blog2021 (1) TMI 271X X X X Extracts X X X X X X X X Extracts X X X X ..... 10.10.2019 in CP No. 1874 of 2019 under section 7 of the Insolvency and Bankruptcy Code, 2016 (the Code) admitted the Company Petition and directed the initiation of Corporate Insolvency Resolution Process (CIRP) of the Corporate Debtor. It appointed the Respondent No. 1 as the Interim Resolution Professional (IRP). The IRP in accordance with the provisions of the Code made public announcement and constituted the Committee of Creditors (CoC). The CoC initially comprised of the Applicant and Respondent Nos. 4 and 5 as its members. 3. The first meeting of CoC was convened on 18.11.2019. In response to the advertisement the Respondent No. 2 and Respondent No. 3 submitted their claims respectively to the tune of Rs. 5 (five) Crores (Form-C dated 02.11.2019) and US$ 8 million equivalent to Rs. 58.60 Crores (Form-C dated 04.11.2019) towards their debt owned by the Corporate Debtor. 4. The Applicant in the meeting dated 18.11.2019, claimed that the debt of the Respondent Nos. 2 and 3 should be classified as an Operational Debt. The Respondent Nos. 4 and 5 also went with it. The IRP however, was of the opinion that the Corporate Debtor being a financial guarantor owed a financial debt t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Hon'ble Tribunal be pleased to exclude time period from the CIRP from the day of appointment of IRP till the conclusion of Application; f. For any other orders which this Hon'ble Tribunal may deem fit and proper; g. For costs; 8. The Respondent No. 4 and Respondent No. 5 went with the Applicant. 9. In response to the notice the Respondent No. 1 filed a counter reiterating his stand taken before the CoC. It is contended by him that sec 5(8)(f) of the Code, covers the transactions of the FPAs and any liability in respect of the guarantees for such agreements would be covered as a financial debt. The terms of FPAs as well as the deeds of guarantee clearly indicated that deeds of guarantee would be a financial guarantee. Thus, the financial deeds have the commercial effect of borrowing. Therefore, the status of the Respondent Nos. 2 and 3 could only be those of financial creditors vis-a-vis the Corporate Debtor. The application thus deserves to be dismissed. 10. The Respondent Nos. 2 and 3 objected to the Application by filing separate replies. It is contended by the Respondent no. 2 that it entered into a FPA on 29th September, 2018 with Pragat Akshay Urja Ltd. for supply of c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Contract Act to make good the payment. Therefore, the action of the Respondent no. 1 in accepting the Respondent no. 2 as a Financial Creditor cannot be faulted. In this connection reliance is placed on the decision of the Hon'ble NCLAT in Dr. BVS Lakshmi v. Geometrix Laser (Company Appeal (AT) (Insolvency) No. 38 of 2017). The Application accordingly bears no merit and is liable to be rejected. 11. It is contented by the Respondent No. 3 that it had entered into FPA for supply of products which were to be developed under the brand of the Corporate Debtor. The FPA had the commercial effect of borrowing. The deed of guarantee provided for a guarantee to the tune of US$ 50 Million. But the Respondent No 3 invoked only US$ 8 Million which it actually spent/invested. This amounts to a debt recoverable by the Respondent No. 3, as the same has been spent on behalf of the Corporate Debtor. By way of the FPA Respondent No. 3 invested the initial capital in order to fulfil the requirement of the Corporate Debtor. The Corporate Debtor has assured in writing and guaranteed minimum sale to the Respondent No. 3. The FPA was for supply of products which were to be used by the Corporate Debt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ms referred to in sub-clauses (a) to (h) of this clause;" 13. Clause (f) of the sub-section is of particular relevance in the present context. As is apparent the definition is essentially an inclusive definition and not an exhaustive one. A 'debt' in order to qualify as a 'financial debt' first needs to have been disbursed against 'the consideration for the time value of money'. In addition, the amount inter alia raised under a forward purchase agreement would only become a 'financial debt' when it has the 'commercial effect of a borrowing'. The amount raised under a FPA would not come within the definition of a financial debt unless it bears the dual attributes of having been i) disbursed against the consideration for time value of money and ii) has the commercial effect of a borrowing. Once the amount raised under such an agreement is classified as a financial debt, any liability in respect of the guarantee for transactions referred to in clause (f) would there upon be a financial debt in terms of clause (i) of the section. 14. For the purpose of ascertaining the above parameters, the recitals of the documents, in this case the FPAs, would assume significance. The effect of an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s contained in the Financial Guarantee Agreement entered separately. 8. The seller shall have right to claim the full value of the supplies of the product to be made within the contract period from the guarantor irrespective of any arrangement or lack of arrangement between the guarantor and the buyer and irrespective of the fact that buyer has not purchased entire quantity of the product over the contract period." 16. Pursuant to the terms of the Agreement, the Corporate Debtor executed the deed of guarantee on 01.10.2018, annexed as Annexure A7 to the Application. The conditions of the guarantee inter alia provided that, "3. The Creditor has entered into a Forward Sale Agreement with M/s. Pragat Akshay Urja Limited, a subsidiary company of the Guarantor dated 29th September to supply materials to cater to tenders by Government Bodies and in order to secure the payment of the materials, the Guarantor has agreed to provide Financial Guarantee to the Supplier for 50% of the value of the Forward Purchase Agreement amount i.e. rs.150,00,00,000/- for 1 year subject to renewal for a term of 1 year for 5 years (period of Forward Purchase Agreement). xxx xxx xxx 1. Guarantees and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion USD to be delivered to the Purchaser as per their requirements Schedule I or demand whichever is earlier and get the same delivered to the Purchaser. Failing to fulfil the requirements of Pruchaser within the span of 15 days from the date of Purchase Order will make the Purchaser liable to pay 3% of the Purchase Order as penalty to the Purchaser. 6. The Seller will supply materials to "Purchaser" and to order to tenders by Government Bodies and in order to secure the payment of the materials, the Guarantor has agreed to provide Financial Guarantee to the seller of which a separate document shall be executed. 7. The Purchaser shall at the time of raising purchase order pay 20% of the document due as per purchase order to the seller as advance while balance will be paid 90 days Open Account from the date of delivery and due inspection of the goods received." 18. Pursuant to such agreement the Corporate Debtor itself furnished the deeds of guarantee on 05.02.2019 under similar terms. The recitals of the Agreements and the deeds of guarantee doesn't envisage raising of any debt by the buyers/purchasers from the Respondent Nos. 2 and 3. 19. The Hon'ble NCLAT in the matter of D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... financial instruments which may not provide a happy situation to decipher the true nature and meaning of a transaction." 20. As already indicated a Forward Purchase Agreement may or may not be regarded as a financial transaction for it to be a financial debt. It must have the commercial effect of a borrowing. The recitals of the Forward Purchase Agreement indicated above do not envisage the financial transactions in the nature of financial debt as defined under section 5(8) of the Code. The Agreements do not satisfy the parameters discussed in the cited precedent supra. A forward contract to sell a product at the end of a specified period cannot be regarded as a financial contract. 21. Both the FPAs indicate that they were essentially forward contracts for supply of specified goods (products). The Corporate Debtor or for that matter the purchaser under the Agreement dated 29.09.2018 has not raised any amount thereunder. Under the Agreements they agreed to purchase certain products and pay therefor. The Corporate Debtor executed deeds of guarantee binding itself to pay any shortfall in case of default. Such transactions accordingly may at best amount to an operational debt in ter ..... X X X X Extracts X X X X X X X X Extracts X X X X
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