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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 ..... s (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 terms of section 5(21) of the Code for provision of goods and services and payment in respect thereto. Therefore, the FPAs dated 29.09.2018 and 28.12.2018 cannot be regarded as financial transactions in which a debt was raised or payment was made against the consideration for the time value of money which also had the commercial effect of borrowing - the transactions were essentially simple agreements of sale and purchase. The same would not come within the definition of financial debt under section 5(8)(f) of the Code. The principal agreements not being financial transactions and the amount of any liability in respect of the guarantee contemplated under section 5(8)(i) of the Code, would accordingly not come within the purview of the financial debt. The guarantee essentially was for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 to the Respondent Nos. 2 and 3. Thus the Respondent Nos. 2 3 would have to be regarded as Financial Creditors of the Corporate Debtor. 5. It is contended by the Applicant that one Pragat Akshay Urja Limited, a wholly owned subsidiary of the Corporate Debtor, on 29.09.2018 entered into a Forward Purchase Agreement (FPA) with the Respondent No. 2 for purchase of certain products. The Corporate Debtor as the guarantor executed a deed of guarantee dated 01.10.2018 agreeing to pay to the Respondent No. 2 any amount that would remain outstanding against the said FPA on the event of default by the purchaser. 6. The Corporate Debtor on 28.12.2018 entered into FPA with Respondent No. 3 for purchase of certain materials. It on 05.02.2019 executed a deed of guarantee in favour of Respondent No. 3 agreeing to pay to the Respondent No. 3 any amount in case of default that may remain outstanding. 7. It is further contended that the FPAs were essenti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 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 certain goods to be used in installation of Solar Panel for generation of non-conventional energy. The agreement was valid for five years. The price of the goods was decided on the date of the agreement and was fixed for the term of the agreement irrespective of the market value. Since the tender was time sensitive the Respondent had to keep a heavy inventory and it accordingly invested money for the purpose. It sought a guarantee from the Corporate Debtor to secure the payment in case of default. Accordingly, the Corporate Debtor executed a deed of guarantee on 1st October, 2018. The Corporate Debtor under the deed agreed to indemnify the Respondent against any delay in payment or non-payment by its subsidiary Pragat Akshay. The Corporate Debtor was privy to the invoices raised by the Respondent which were duly served on the Corporate Debtor periodically. Pragat Akshay made certain payments against the purchases up to 31st Jan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Debtor as aforesaid. The transaction is squarely covered under section 5(8)(f) of the Code. Thus, it becomes a financial debt and the transaction would not come within the parameters of an operational debt. Thus, the contentions raised in the Application cannot be accepted. The Application accordingly is liable to be dismissed 12. We have heard Counsel from both the sides and perused the records. A financial debt is defined under section 5(8) of the Code. The same may profitably be quoted as under: (8) financial debt means a debt along with interest, if any, which is disbursed against the consideration for the time value of money and includes- (a) money borrowed against the payment of interest; (b) any amount raised by acceptance under any acceptance credit facility or its de-materialised equivalent; (c) any amount raised pursuant to any note purchase facility or the issue of bonds, notes, debentures ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bility 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 agreement can only be derived from the contents thereof. It would therefore be appropriate to refer to the terms of the agreements. 15. The agreement between Respondent No. 2 and Pragat Akshay Urja Limited (a wholly owned subsidiary of the Corporate Debtor) is placed at Annexure-A6 of the Application. The parties thereto are respectively referred to as seller and buyer . The relevant recitals indicate that the buyer (Pragat Akshay Urja Limited) anticipated supplies through Government Tenders and approached the seller (Respondent No. 2) to source a stable supply of materials described in Annexure-1 (to the Agreement) and ensure timely delivery of supplies to meet its long terms obligations towards its customers. The seller (Respondent No. 2) agreed to supply the products within the lead time during the subsistence of the agreement (five years from 29.09.2018). The parti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 covenants with the Creditor that it will duly and punctually pay to the Creditor all debts and liabilities, present or future, direct or indirect, absolute or contingent, matured or not at any time owed by Principal Debtor to the Creditor upon demand wherever incurred and whether incurred by the Principal Debtor alone or with another or others, including, without limitation, all of the principal of, interest on and all other moneys owing as and when the same become due and payable; and 2. In the event of the failure to perform any of its obligations under the Forward Purchase agreement and in the event of default, the Guarantor shall, on first demand by the Creditor (such notice to be conclusive proof of the default) and without any demure, contest or delay, shall pay to the Creditor the Guarantee Amount (the Guarantee Amount ) and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elivery 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 Dr. B. V. S. Lakshmi v. Geometrix Laser Solutions Private Limited (Company Appeal (AT) (Insolvency) No. 38 of 2017 decided on 22nd December 2017) quoted the following observation from the order impugned, with approval, where the definition of a Financial Creditor has been succinctly dealt with. A perusal of definition of expression 'Financial Creditor' would show that it refers to a person to whom a Financial debt is owed and includes even a person to whom such debt has been legally assigned or transferred to. In order to understand the expression 'Financial Creditor', the requirements of expression 'financial debt' have to be satisfied which is defined in Section 5(8) of the IBC. The opening words of the definition clause would indicate that a financial debt is a debt along with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rporate 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 terms of section 5(21) of the Code for provision of goods and services and payment in respect thereto. Therefore, the FPAs dated 29.09.2018 and 28.12.2018 cannot be regarded as financial transactions in which a debt was raised or payment was made against the consideration for the time value of money which also had the commercial effect of borrowing. On examination of the nature of the transactions, we find that the transactions were essentially simple agreements of sale and purchase. The same would not come within the definition of financial debt under section 5(8)(f) of the Code. The principal agreements not being financial transactions and the amount of any liability in respect of the guarantee contemplated under section 5(8)(i) of the Code, would accordingly not come within the purview of the financia ..... X X X X Extracts X X X X X X X X Extracts X X X X
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