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TMI Blog2023 (1) TMI 303X X X X Extracts X X X X X X X X Extracts X X X X ..... ebtor has challenged the very nature of the financial debt, the Adjudicating Authority was required to look into the nature of transactions to decide as to whether the transactions falls within the meaning of Section 5 Sub-section (8) of the I B Code. Hon ble Supreme Court in ES KRISHNAMURTHY ORS. VERSUS M/S BHARATH HI TECH BUILDERS PVT. LTD. [ 2021 (12) TMI 683 - SUPREME COURT ] has held that if the Adjudicating Authority is satisfied that default is occurred it has to admit the application. There can be no dispute to the proposition as laid down by the Hon ble Supreme Court in the above case. The present is not a case where default in payment of debt is an issue. The principal issue which was raised by the Corporate Debtor in its Reply was that the transaction itself is not a financial debt. Further, there can be no dispute that in law a Guarantor is a Corporate Person and if the Corporate Debtor committed default in payment of debt, application under Section 7 can very well be filed against the Corporate Guarantor but the question in the Section 7 application before the Adjudicating Authority was very nature of the transaction. The Corporate Debtor has questioned th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... imited (WWRDPL), a 100% subsidiary of WWIL, in a phased manner spanning over five phases between 2010 and 2014. Commercial aspects of the agreement shows the payment by IEDCL SPVs was to be made as per milestones under the purchase orders placed by the IEDCL SPVs on WWIL. (iii) WWIL was entitled to receive full payment from the IEDCL SPVs as and when the project milestones were achieved. (iv) However, the IEDCL SPVs faced challenges in raising long term loans to make the payment to WWIL under the purchase order placed by them on WWIL. Consequently, by way of arrangement, WWIL was asked to and provided with advance in terms of agreement but in the form of loans from IL FS Financial Service Limited (IFIN) the financial lending arm of IL FS group. IFIN and WWIL entered into loan agreements termed as loan agreement from time to time to enable WWIL to receive advance payment in the form of loans in lieu of project related payments to be made to WWIL by the IEDCL SPVs. A clear understanding was that whenever WWIL complete its project/obligations under various contract become entitled to payments. Thus, when the IEDCL SPVs realised that they are not able to organise the projec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l creditor of the Corporate Debtor. It was pleaded that nine coloured Loan Agreements were executed between IFIN (Assignor of the applicant) on one side and WWIL and its subsidiaries on the other side. The execution of the nine transactions coloured as Loan Agreement were at the request and insistence of IL FS Group, which were facing various internal issues within themselves. The underlying transactions were mere book entries at the behest of IL FS Group. The Balance Confirmation letter given by the Corporate Debtor as well as audited financials of the Appellant for the FY 2017-18 establishes the nature of underlying nine transactions, including the last two transactions of Rs.100 Crores and Rs.110 Crores as only capital advances. In the reply, the details of transactions were pleaded. To the reply filed by the Corporate Debtor no rejoinder was filed by the Appellant. 3. The Adjudicating Authority after hearing the parties by order dated 03.06.2022 rejected the Section 7 application holding that the real nature of the transactions between the parties is not of loan transaction. In the financial statements of the applicant the amount was shown as capital advance. The main transa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... functioned as collective through their group companies in order to fulfil the terms of MoU and the transactions as stated by the Petitioner needs to be looked as a part of the transaction under the initial MoU dated 27.07.2010 entered between IL FS Energy Development Company Limited (IEDCL) and Wind World India Limited (WWIL). Thus, the amount that has been disbursed by IFIN do not come within meaning of Financial Debt as defined under Section 5(8) of the IBC as was held in the matter of Anuj Jain IRP of Jaype Infratech Limited Vs. Axis bank Limited Ors. 2020 SSC Online SC 237. Though, the IFIN or Vejas Power Limited may claim to be a creditor of Wind World India Limited; towards the advance as paid by them, but such a claim is clearly not a claim in the nature of a Financial Debt under Section 5(8) of IBC. In the light of above, the applicant cannot be considered as a Financial Creditor and therefore under Section 7 petition is dismissed as not maintainable, and it is filed only for recovery not for Resolution Process as per the objective of the Code. 4. We have heard Shri Gopal Jain, learned senior advocate and Shri Dhruba Mukherjee, learned senior advocate appearin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inancial debt. The Appellant s Balance Sheet having shown the amount as capital advance, it is not open to the Appellant to contend that the real nature of the transaction is loan amount. The Adjudicating Authority in detail examined all submissions of the Appellant and has come to the correct conclusion that there is no financial debt, which may warrant any interference by this Tribunal. It is submitted that email dated 08.07.2015 of IL FS SPVS to WWIL clearly indicates the nature of transactions. Internal documents of IL FS dated 17.09.2014 clearly described and corroborated the fact of transactions being book entry only. Seven out of Nine loans were squared off by way of apportionment letters as was envisaged. The Respondent does not deny the entitlement of the Appellant for the amount received but filing of the application under Section 7 is not in accordance with the I B Code. It was open for the Appellant to seek such remedy as available in law for recovery of its capital advance. It is submitted that proceeding under Section 7 is not a recovery proceeding and the application under Section 7 was liable to the rejected on this ground also. 7. We have considered the submissi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Owner shall pay the interest @ 1.5% per month on the amount due from the date on which the amount became due till the date of actual payment. 9. From the materials brought on the record it is clear that there was difficulty in the IL FS SPVS for making advance payment. An email was sent on behalf of the WWIL for delay in payments for completed Phase-II of project was causing stress on WWIL. The facilitative transactions towards advance payment was entered by IL FS entities with the WWIL and subsidiaries of WWIL since IL FS SPVS were not able to raise funds from its lenders. The IL FS SPVS could not have received loan from IL FS, hence, it was devised by the IL FS Group to ensure payment of advance payment towards supplies and services by way of entering into Loan Agreement with WWIL and its subsidiaries, which loan amounts were to be squared out by receivables towards the advance payment. The Adjudicating Authority in the impugned order has noticed several contemporaneous materials to indicated that the true nature of amount which was disbursed to the Principal Borrower in which the Corporate Guarantee was given by the Corporate Debtor - Respondent was not a disbursal for t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Note No 40 and 41 in FY 2017-18 is reproduced herein below:- Textual information (40) Description of other non-current assets, others Capital advances Note: The Board of directors of the Company in the meeting held on 18 July, 2017 have approved procurement / acquisition of 56 MW of Wind Power assets, being the underlying security, against the settlement of the said advance. Accordingly, the said advance have been classified as Capital advance and presented as Non-Current Assets Textual information (41) Description of other non-current assets, others Capital advances Note: The Board of directors of the Company in the meeting held on 18 July, 2017 have approved procurement / acquisition of 56 MW of Wind Power assets, being the underlying security, against the settlement of the said advance. Accordingly, the said advance have been classified as Capital advance and presented as Non-Current Assets . 12. The submission of learned counsel for the Appellant that the aforesaid mention of Capital Advance was only an inadvertent error which was corrected in 2019-20 and 2020-21, cannot be accepted. The Section 7 application itself was filed by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... res, Wind SPVs will draw down money from the FII Bank and pay IFIN Rs. 110 Crores to be adjusted against the liability of the security deposit. 4. The security deposit will go to 0. 5. At the end of the transaction, IFIN will be paid off. Rs. 100 Cr Transaction: 1. WWIL will deliver an additional Rs. 100 Crores of supplies (in addition to the Rs. 110 Crores specified above) to Wind SPVs. 2. Wind SPVs will pay IFIN Rs. 100 Crores in liue of WWIL to settle this outstanding liability. 3. IFIN outstanding will go to 0. Warm Regards, Akshay Sharma 14. The above email clearly indicate that Rs.110 Crores and Rs.100 Crores were for supplies. The contemporaneous mail which was issued in proximity of time when the coloured loan agreement were executed, indicate that what was the real nature and purpose of the transactions. There are other materials on the record which had been relied by the Adjudicating Authority to come to the finding that financial debt was not there. 15. Learned counsel for the Appellant has relied on the judgment of Hon ble Supreme Court in Innoventive Industries Limited vs. ICICI Bank and Another, (2018) 1 SCC 40 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ancial debt, the Adjudicating Authority has merely to see the records of the information utility or other evidence produced by the financial creditor to satisfy itself that a default has occurred. In the present case, the very nature of the transaction as financial debt has been challenged. When the Corporate Debtor has challenged the very nature of the financial debt, the Adjudicating Authority was required to look into the nature of transactions to decide as to whether the transactions falls within the meaning of Section 5 Sub-section (8) of the I B Code. 17. Learned counsel for the Appellant has also placed reliance on the judgment of Hon ble Supreme Court in E.S. Krishnamurthy Ors. vs. Bharath Hi-Tech Builders Pvt. Ltd., (2022) 3 SCC 161 . The Hon ble Supreme Court in the above judgment has held that if the Adjudicating Authority is satisfied that default is occurred it has to admit the application. In Paras 31 and 34 following has been held: 31. On a bare reading of the provision, it is clear that both, Clauses (a) and (b) of sub-Section (5) of Section 7, use the expression it may, by order while referring to the power of the Adjudicating Authority. In Clause (a) ..... X X X X Extracts X X X X X X X X Extracts X X X X
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