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TMI Blog2021 (4) TMI 775X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Appellant (filed to the Reply of the Second Respondent/Financial Creditor/Applicant) in paragraph 5 (1), it is mentioned that there is neither a Financial Service provided by the Second Respondent as per section 2(16) of the I B Code, nor a Financial Product as per section 2(15) of the I B Code, 2016, but an ordinary lease of furniture and fixtures to the First Respondent Company that are fully owned by the Second Respondent, therefore, the Second Respondent is not a Financial Service Provider under section 2(17) of the I B Code, 2016. Section 3(14) (a to d) of the Code defines Financial Institution .(including a financial institution as defined in section 45 -I of the Reserve Bank of India Act, 1934 (2 of 1934). Section 50 of the I B Code, 2016 provides a carve out to a Financial Service Provider for its credit facility to be regarded as extortionate . Likewise, section 167 of the I B Code, 2016 provides that any debt extended by a person regulated for the provision of Financial Services shall not be considered as an extortionate credit transaction - As matter of fact, the definition of Corporate Person in section 2(7) of the I B Code, 2016 excludes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sel for the Appellant, the Lease Agreement does not indicate the Liability thereunder is in consideration for the time value of money and further that there is no indication in the Lease Agreement that it is deemed as a Financial or Capital Lease . 5. It is represented on behalf of the Appellant that the Second Respondent understood the transaction as an ordinary leasing transaction and issued Demand Notices under the I B Code which reaffirms the fact that the Second Respondent/Petitioner was not a Financial Creditor and a suitable reply was issued by the First Respondent/Corporate Debtor. However, the Second Respondent filed an application under section 7 of the Code as a Financial Creditor , instead of following up the Demand Notice with a petition under section 8 of the Code. 6. The Learned Counsel for the Appellant projects an argument that whether or not the Lease Agreement is a Finance or Capital Lease under the Indian Accounts Standards is a factual issue required to be pleaded and proved by the Second Respondent and further that the Second Respondent had not pleaded this issue and failed to adduce any proof. 7. The Learned Counsel for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be answered. The definition of financial debt as contained in Section 5(8) contains the expressions means and includes . The definition begins with the words financial debt means a debt alongwith interest, if any, which is disbursed against the consideration for the time value of money and includes The main part of the definition, thus, provides that financial debt means a debt which is disbursed against the consideration for the time value of money . The definition in the second part gives instances which also includes financial debt, Learned Counsel for the appellant in his submission has relied on Section 5(8)(i) to support his claim that the appellant is the financial creditor. Learned Counsel for the appellant has referred both sub-clause (b) and sub-clause (i) and submits that credit facility which was extended to the borrower is referable to Section 5(8) (b) and the corporate debtor pledged his share to sense of guarantee. The debt is a financial debt within the meaning of Section 5(8)(i) and the appellant is the financial creditor. There can be no dispute that credit facility given by the Assignor to borrower by Facility Agreement dated 12.05.2011 is a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iced, the root requirement for a creditor to become financial creditor for the purpose of Part II of the Code, there must be a financial debt which is owned to that person. He may be the principal creditor to whom the financial debt is owed or he may be an assignee in terms of extended meaning of this definition but, and nevertheless, the requirement of existence of a debt being owed is not forsaken. 48. It is also evident that what is being dealt with and described in Section 5(7) and in Section 5(8) is the transaction vis-a -vis the corporate debtor. Therefore, for a person to be designated as a financial creditor of the corporate debtor, it has to be shown that the corporate debtor owes a financial debt to such person. Understood this way, it becomes clear that a party to whom the corporate debtor does not owe a financial debt cannot become its financial creditor for the purpose of part II of the Code. 11. It is the emphatic stand of the Appellant that in the instant case, the disbursal is against the supply of Assets and against the usage of Assets (Furnitures and Fixtures) and not against the time value for money . In short it is the submissions of the Le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Appellant brings to the notice of the Tribunal that the Second Respondent/Petitioner/Financial Creditor issued two notices under I B Code for the payment of ₹ 94.81 lakhs and they were issued under Section 8 of the Code, although the notices were not in the prescribed form. In reality, it is the stand of the Appellant that the Second Respondent would issue a notice under the I B Code if it was really a Financial Creditor . Also that, a reply notice was issued by the First Respondent disputing the claim of the Second Respondent. 15. The Learned Counsel for the Appellant contends that the Second Respondent cannot plead a new case in appeal nor introduced new documents and the new documents filed along with the reply of the Second Respondent were not before the Adjudicating Authority . In short, the Second Respondent is building up a new case that it is a Non-Banking Finance Company and therefore that the alleged debt is Financial Debt and this is impermissible at the Appellate Stage. 16. The Learned Counsel for the Appellants submits that ₹ 17,25,697/- became ₹ 94,81,209/- in one month as Lease Rental Due and this is impermissible. In this co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oday s value of stream of cash flows is worth less than the sum of the cash flows to be received or saved over time. Present value accounting is widely used in DISCOUNTED CASH FLOW analysis. (emphasis supplied) That this is against consideration for the time value of money is also clear as the money that is disbursed is no longer with the allottee, but, as has just been stated, it with the real estate developer who is legally obliged to give money s equivalent back to the allottee, having used it in the construction of the project, and being at a discounted value so far as the allottee is concerned (in the sense of the allottee having to pay less by way of installments that he would if he were to pay for the ultimate price of the flat/apartment.) 19. It is represented on behalf of the Appellant that the disbursement is against the supply and there is no pleading in the application (filed under section 7 of the Code) by the Second Respondent/Financial Creditor that it is a time value of money and further that merely saying Lease Agreement is not good enough. As a matter of fact, it is the stand of the Appellant that a decision of a case cannot be based on the groun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s I Ltd (Respondent 2) ₹ 1,35,42,577 ₹ 1,05,96,714 Later the suspended Directors personally paid Karur Vysya Bank and closed the vehicle loan account. Name of the Operational Creditor Amount claimed Amount Admitted CTO Audit Bangalore ₹ 39,84,024 ₹ 39,84,024 25. The Learned Counsel for the First Respondent points out that the Second Respondent submitted its claim in Form C for ₹ 1,35,42,577/- which was collated and verified by the Insolvency Resolution Professional as per Section 18(b) read with Regulation 13 Insolvency and Bankruptcy Board of India (Fast Track Insolvency Resolution Process for Corporate Persons) Regulation, 2017 and admitted the claim of ₹ 1,05,96,714/-. Further, based on the Lease Agreement dated 3.4.2017, between the Second Respondent and the Corporate Debtor read with Section 5(7), 5(8)(d) of the Code and the Indian Accounting Standards , the claim was admitted for ₹ 1,05,96,714/-. 26. According to the First Respondent, the Resol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... them . As such, the Resolution Professional filed an application under Sections 43,44,45,46, 48,49,66,70(c) and 236 of Insolvency and Bankruptcy Code read with Regulation 35A of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 before the Adjudicating Authority on 16.2.2021. 30. The Learned Counsel for the First Respondent points out that the Committee of Creditors in its nineth meeting that took place on 4.2.2021 decided not to extend CIRP period (ending on 20.2.2021) and to file necessary application for liquidation of the Corporate Debtor and further that an application for Liquidation of Corporate Debtor was filed on 18.2.2021 before the Adjudicating Authority . In short, the Appellant has filed this present Appeal at the fag end of CIRP to avoid the consequences resulting from the aforesaid applications filed before the Adjudicating Authority (National Company Law Tribunal, Hyderabad Bench). Second Respondent s Pleas: 31. It is the submission of the Learned Counsel for the Second Respondent that the Corporate debtor on numerous occasions confirmed that Lease is a Financial Lease and further that the Se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r sub-section (1) of Section 8 of the I B Code, an Operational Creditor on occurrence of a default, is required to deliver the notice of payment of unpaid debt or get copy of the invoice payment of the defaulted amount served on the Corporate Debtor. This is the condition, precedent under Section 8 9 of the I B Code, unlike Section 7 before making an application to the adjudicating authority under Section 9 of the I B Code. Under subsection (1) of Section 9 of the Code, the right to file an application accrues after expiry of ten days from the delivery of Demand Notice or copy of invoice, as the case may be. If the Operational Creditor does not receive payment from the Corporate debtor or notice of dispute under sub Section (2) of Section 8, the Operational Creditor only thereafter may file an application before the Adjudicating authority for the initiation of corporate insolvency resolution process. Paragraph 18. An application under Section 9 of I B Code is required to be filed in such format and manner and accompanied by such fee, as may be prescribed .etc. Paragraph 19. it is clear that unlike Section 7, a notice under Section 8 is to be issued by an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ual value of ₹ 21,65,190/- that was already received as a Security Deposit by the Second Respondent . 38. The Learned Counsel for the Second Respondent contends that as per the Indian Accounting Standards both (IAS 116 and IAS 17) Lease is classified as Financial Lease if it transfers substantially all the risks and rewards incidental to ownership of an underlying asset while a lease is classified as an Operating Lease if it does not transfer substantially all the risks and rewards incidental to ownership of an underlying asset. 39. The Learned Counsel for the Second Respondent submits that a Financial Creditor in the matter of Section 7 of Insolvency Bankruptcy Code, r.w. Rule 4 of the Insolvency Bankruptcy (Application to Adjudicating Authority) Rules, 2016, is to file an application in Form 1 and to fill up the particulars mentioned in Part I to V and an application to initiate CIRP is not like a filing of a plaint and in short, only the requisite particulars prescribed in the Form under Rules are to be filled up with necessary details. Also that, it is represented on behalf of the Second Respondent that an Application under Section 7 of the Cod ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orate Debtor (First Respondent) as per the running statement of accounts maintained by the Second Respondent/Applicant Company in the name of First Respondent/Corporate Debtor. 45. The stand of the Appellant is that there is no indication in the Lease Agreement dated 3.4.2017 that the said agreement is deemed as a Financial or Capital Lease and that the Second Respondent/Financial Creditor had not pleaded the factual issue as to whether or not the Lease Agreement is a Finance or Capital Lease under Indian Accounting Standards . 46. It comes to be known that the Second Respondent/Financial Creditor had disbursed a sum of ₹ 64,95,569/- on 5.4.2017 and ₹ 42,8,245/- on 28.11.2017 to the First Respondent/Corporate Debtor s architects M/s Interio and Architecture, Bangalore . According to the Second Respondent, the First Respondent/Corporate Debtor was irregular in repaying the monthly Rentals from February 2018 and totally stopped making the payments and further that the First Respondent/Corporate Debtor had admitted its liability in response to the requests made for the payment made by the Second Respondent. In short, the First Respondent/Corporat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d Respondent/Financial Creditor without prejudice to its rights under law had called by the First Respondent/Corporate Debtor and Another to pay a sum of ₹ 94,81,209/- only within 14 days from the receipt of the Demand Notice by any one of them or both of them, failing which the First Respondent/Corporate Debtor and Another were informed that the Second Respondent/financial Creditor would be constrained to proceed against them as per Law, including, but not limited to initiate Insolvency Proceedings under the Insolvency Bankruptcy Code against the First Respondent/Corporate Debtor. 50. For the Demand Notice of the Second Respondent/Financial Creditor, the First Respondent/Corporate Debtor through an Advocate on 10.8.2018 had stated that it had not issued Post Dated Cheques against the lease rentals and security cheques to the Second Respondent and that the Second Respondent had collected blank cheques, but those cheques were given by the First Respondent/Corporate Debtor not towards discharging of any liability to repay the lease amount or liability from it. In short, an averment was made in the First Respondent/Corporate Debtor s Lawyer Notice dated 10.8.2018 to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... satisfying the requirements of Section 5(8)(d) of the Insolvency Bankruptcy Code , it is to be pointed out by this Tribunal that the Lease Agreement dated 3.4.2017 entered into between the Second Respondent/Financial Creditor and the First Respondent/Corporate Debtor clearly envisages that the Lessor (Second Respondent) had offered to provide Lease Finance Assistance to the Lessee (First Respondent/Corporate Debtor) in respect of Furniture and Fixture ( Asset ) and which the Lessee (First Respondent/Corporate Debtor) was desirous to take for its business purposes on lease basis from the Lessor (Second Respondent) on the basis of offer made. And also that, in Part IV of the Application Particulars of Financial Debt it is mentioned that the Corporate Debtor had entered in to a Lease Agreement with the applicant company to avail financial assistance of ₹ 1, 07, 76, 815/- to carry out interior work on 03.04.2017 and further that, the amount of default was mentioned as ₹ 1, 16, 98, 242. 60 which was not paid by the Corporate Debtor, as per the computation and statement of accounts annexed along with the application. Therefore, it cannot be said that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee /First Respondent, this Tribunal without any haziness holds that the Lease in the instant case, is a Financial Lease and comes to an irresistible conclusion that there is Financial Debt as per section 5(8) of the Code, 2016 and the default being committed by the First Respondent/Corporate Debtor in terms of the ingredients of section 3(12) of the Code, 2016. Further, that the debt in question as per section 3(11) of the Code, 2016 cannot be termed as an Operational Debt as per section 5(21) of the Code, 2016. Also that, it cannot be forgotten that the Second Respondent/Financial Creditor had not issued the demand notice in such form and manner as prescribed by the I B Code. Looking at from any angle, the impugned order of the Adjudicating Authority dated 19.03.2020 (National Company Law Tribunal, Hyderabad Bench) in admitting the section 7 application of I B Code, 2016 (filed by the Second Respondent/Financial Creditor) is free from any legal flaws. Resultantly the Appeal fails. RESULT: In fine, the instant Comp App (AT) (CH) (Ins) No. 2/2021 is dismissed, but without costs. I A No. 06/2021 07/2021 are closed. - - TaxTMI - TMITax - Insol ..... X X X X Extracts X X X X X X X X Extracts X X X X
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