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TMI Blog2023 (5) TMI 934X X X X Extracts X X X X X X X X Extracts X X X X ..... money that has been borrowed. Holding Section 5(8) as a residuary provision which has a catch-all nature, it held that it can include anything which is equivalent to the money that has been loaned as long as commercial effect of borrowing or profit as the aim is discernible - In the matter of Anuj Jain [ 2020 (2) TMI 1259 - SUPREME COURT ], the Hon ble Supreme Court articulated that the essential condition of financial debt is disbursement against the consideration for time value of money - Further in the most recent judgment of Hon ble Supreme Court in Orator [ 2021 (8) TMI 314 - SUPREME COURT ], it has been clearly held that financial debt does not expressly exclude an interest free loan. It has also emphasized that financial debt includes any amount raised under any other transaction having the commercial effect of borrowing. The impugned order has observed that the disbursal made by the Appellant is not in the nature of financial debt on the grounds that there is no interest payable on the loan advanced by the Appellant and that there is no time value of money since there is no time fixed for repayment of the loan. In the present facts of the case, that money had been di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... actorized as time value of money. As long as the lender visualizes an element of profit and enhancement of economic prospect in return for the money advanced for certain time period, the loan in question entails time value of money and acquires the colour of commercial borrowing which is clearly borne out from the facts of the present case. It has all the trappings of a financial debt and squarely falls within the purview of Section 5(8) of IBC. Thus, the disbursal made by the Appellant in the present case is in the nature of a financial debt and to that extent disagree with the Adjudicating Authority. Whether there was debt, if any, which had become due and payable on the part of the Corporate Debtor and default thereof qua the Appellant? - HELD THAT:- It is trite law that under the IBC once a debt which becomes due or payable, in law and in fact, and there is incidence of non-payment of the said debt in full or even part thereof, CIRP may be triggered by the financial creditor as long as the amount in default is above the threshold limit. It is also well accepted that debt means a liability in respect of a claim and claim means a right to payment even if it is disputed. V ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the debt had not become due and therefore was not payable. The Corporate Debtor is entitled to point out that a default has not occurred in the sense that the debt is not due. In the present facts, the debt had not become due in the sense that it was payable only after receipt of full agreed amount of Rs.27.16 crore and which not having occurred, there was no event of default and that being so the debt had not become payable and hence Section 7 of the IBC does not get attracted. The impugned order is upheld - appeal dismissed. - Company Appeal (AT)(Insolvency) No. 982 of 2022 - - - Dated:- 22-5-2023 - [ Justice Ashok Bhushan ] Chairperson And [ Barun Mitra ] Member ( Technical ) For the Appellant : Mr. Gaurav Mitra , Mr. Akash Bajpai and Mr. Ishan Roy Chowdhury , Advocates For the Respondent : Mr. Aadhar Nautiyal and Mr. Prashant Kumar , Advocates JUDGMENT [ Per : Barun Mitra , Member ( Technical ) ] The present appeal filed under Section 61 of Insolvency and Bankruptcy Code, 2016 ( IBC in short) by the Appellant arises out of the Order dated 20.06.2022 (hereinafter referred to as Impugned Order ) passed by the Adjudicating Authority (National Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ke payment of Rs.10.21 crore as their part of the contribution. It was contended that a fresh MoU ( MoU-2 in short) was therefore entered between the Appellant and the Corporate Debtor again on 02.03.2016 wherein the Corporate Debtor agreed to pay their part of contribution on or before 31.03.2016 to enable transfer of subject property in the name of the Appellant. 4. It has been further submitted that with a view to complete the process of sale of the subject property, an Agreement to Sell (hereinafter referred to as A2S ) was entered into between the Appellant and Respondent on 19.03.2016 which superseded both the MoUs. In terms of the provisions of the A2S, the Corporate Debtor had agreed to sell the subject property to the Appellant for Rs.15 cr besides agreeing to comply to requisite procedural formalities including obtaining of necessary approval of SIDCUL to enable sale of the subject property and corresponding transfer of title and possession. 5. However, the Corporate Debtor failed to discharge their end of the agreement by failing to contribute their part of loan repayment and failure to secure necessary approvals from SIDCUL. Hence SBI took back the possession of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Appellant by or before 31.03.2016. However, the MoU-2 also could not be implemented on account of failure on the part of the Appellant, hence liabilities of SBI remained unpaid and proceedings under SARFAESI Act were initiated by the SBI. 8. It has also been submitted that an application under Section 7 of IBC can be invoked only if the alleged default is within a period of 3 years. In view of the fact that payments were made by the Appellant between 2014 and 2016, and also that the Appellant had admitted that the date of default had arisen on 19.04.2016, in their own complaint made before RoC, it was contended that the instant proceedings were barred by limitation having been filed beyond the period of three years. It was also contended that the Appellant had deliberately failed to mention the date of default in its application under Part IV to escape the fact that the present default was hit by limitation. 9. It has been further submitted that one of the essential ingredients for initiation of proceedings under Section 7 of IBC is that the applicant must be a Financial Creditor. To buttress their contention, it was pointed out that in the present case the Appellant had ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urchase of subject property. The transaction was a pure sale agreement for the transfer of subject property and does not fall under the definition of Section 5(8) of IBC and does not fulfil the pre-requisite of commercial effect of borrowing. 12. It was vehemently contended by the Learned Counsel for the Respondent that the Appellant had initiated the proceedings purely with the intention of recovery of debt. The Appellant has thus been coercing the respondent to release the subject property after having paid a mere Rs.10.46 cr as against an agreed sum of Rs.27.16 cr. It was further submitted that the Appellant had been allowed to take possession of the subject property and that profits were reaped by them for almost two years. Hence, the debt in dispute is liable to be set off against the profits so made by the Appellant and that such set offs cannot be adjudicated and ascertained either by the Adjudicating Authority or in the exercise of appellate jurisdiction. It was also contended that the alleged dispute raised by the Appellant are in the nature of contractual disputes for which remedy lies in the civil law or arbitration mechanism and cannot be adjudicated under Section 7 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or its de-materialised equivalent; (c) any amount raised pursuant to any note purchase facility or the issue of bonds, notes, debentures, loan stock or any similar instrument; (d) the amount of any liability in respect of any lease or hire purchase contract which is deemed as a finance or capital lease under the Indian Accounting Standards or such other accounting standards as may be prescribed; (e) receivables sold or discounted other than any receivables sold on nonrecourse basis; (f) any amount raised under any other transaction, including any forward sale or purchase agreement, having the commercial effect of a borrowing; [Explanation. -For the purposes of this sub-clause,- (i) any amount raised from an allottee under a real estate project shall be deemed to be an amount having the commercial effect of a borrowing; and (ii) the expressions, allottee and real estate project shall have the meanings respectively assigned to them in clauses (d) and (zn) of section 2 of the Real Estate (Regulation and Development) Act, 2016 (16 of 2016);] (g) any derivative transaction entered into in connection with protection against or benefit from flu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m of Rs. 27.16 crore (Rupees Twenty Seven Crore Sixteen lacs only). The purchase price can be segregated as below: Land : Rs.9.16 Crore Building : Rs.4.00 Crore Plant Machinery : Rs.14.00 Crore Total : Rs.27.16 Crores 3. CONDITIONS PRECEDENT 1.1 This MoU shall be conditional on the fulfillment or accomplishment of the conditions precedent set out in this Clause 3.1 within 240 days from the execution hereof or such other extended period, unless any of the following are waived in writing by the Buyer ( Conditions Precedent ): 4. SALE AND TRANSFER OF THE UNIT 1.1 Sale and Purchase 1.1.1. Subject to satisfactory fulfillment or accomplishment of the Conditions Precedent, the Seller agree to sell and transfer to the Buyer, and the Buyer agrees to purchase from the Seller, on the Completion Date, the Unit, free from all Encumbrances. 1.1.2 With effect from the Completion Date, the Buyer shall be fully and legally entitled to carry on business in the Unit in its own name and for its sole benefit and shall have the ability to run and operate the business and provide any services it may deem necessary in its own name and for its own acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... end the title documents directly to SIDCUL. 5.1.3 Arrange for cancellation of the Existing Lease Deed and execution and registration of a lease deed by SIDCUL in respect of the Land in favour of the First Party for period of remaining term of the Lease Deed; in addition, the Second Party shall arrange for execution and registration of the factory buildings in favour of the First Party. PURCHASE PRICE AND PAYMENT 5.4 The First Party has agreed to purchase the unit at a price of Rs.27,16,00,000/- (Rupees Twenty seven Crores and Sixteen Lakhs Only) 5.5 The First Party as per the terms and conditions agreed between the First Party and Second Party under the Memorandum of Understanding dated 25th November 2014 has made a payment of Rs.10,46,00,000/- (Rupees Ten Crores and Forty six Lakhs Only) 5.7 The First Party, under no circumstances unless otherwise agreed in written, shall make any payment directly to the Second Party. All the payments made by the First Party shall be deposited in State Bank of India. 5.8 The balance consideration, which as of today is Rs.16,70,00,000/- (Sixteen Crores Seventy Lakhs Only), shall also be paid by the First Party to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent of the arbitrator who may be mutually agreed upon. 18. Coming to the admitted facts, we notice that the Corporate Debtor had been allotted land by SIDCUL on lease on which it was running its edible oil factory referred to as subject property. The Corporate Debtor secured a loan facility from SBI and had mortgaged the subject property. The Corporate Debtor admittedly defaulted in loan repayment to SBI and lost physical possession over the subject property to SBI. To service the loan repayment, the Corporate Debtor entered into a MoU with the Appellant on 25.11.2014. In terms of this MoU-1, the Appellant agreed to pay certain consideration amount in advance and balance consideration later in return of transfer of title of subject property in their favour. The MoU-1 terms also provided that the consideration amount would be paid by the Appellant in the Corporate Debtor s account with SBI towards loan repayment. It is also an undisputed fact that following this MoU, the Corporate Debtor entered into an OTS with SBI on 12.01.2015 which entailed total payment of Rs.25.21 crore by 31.03.2015 to SBI for release of subject property under mortgage. Initial payments having been receiv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ining lease term besides arranging for execution and registration of factory buildings in favour of the Appellant. 20. This now brings us to the rival contentions of the two parties as to whether the present transaction of disbursal of Rs 10.46 cr is in the nature of financial debt. The contention of the Learned Counsel of the Respondent is that the amount of Rs.10.46 cr paid by the Appellant does not fulfil the two tests laid down under Section 5(8) of IBC to qualify as financial debt. It has been strongly argued that the two essential ingredients, namely, debt along with interest and disbursal against time value of money is absent and that this transaction is only the outcome of a simpliciter sale/purchase agreement. Reliance has been placed on the judgment laid down by the Hon ble Supreme Court in Anuj Jain (supra), in support of their contention. 21. It is the case of the Appellant that payment was made to the SBI in the account of the Corporate Debtor in pursuance to the OTS proposal. It was also contended that the Appellant had agreed to finance the OTS of the Corporate Debtor with the SBI since the Corporate Debtor had agreed to transfer the title and possession of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tionary of Banking Terms (2nd Edn.) by Thomas P. Fitch in which time value for money was defined thus: present value : today's value of a payment or a stream of payment amount due and payable at some specified future date, discounted by a compound interest rate of DISCOUNT RATE. Also called the time value of money. Today's value of a 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. 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, is 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 instalments than he would if he were to pay for the ultimate price of the flat/apartment). 75. And now to the precise language of Section 5(8)(f). First and foremost, the sub-clause does appear to be a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e enough to include an advance given by the homebuyers to a real estate developer for temporary use i.e. for use in the construction project so long as it is intended by the agreement to give something equivalent to money back to the homebuyers. The something equivalent in these matters is obviously the flat/apartment. Also of importance is the expression commercial effect . Commercial would generally involve transactions having profit as their main aim. Piecing the threads together, therefore, so long as an amount is raised under a real estate agreement, which is done with profit as the main aim, such amount would be subsumed within Section 5(8)(f) as the sale agreement between developer and home buyer would have the commercial effect of a borrowing, in that, money is paid in advance for temporary use so that a flat/apartment is given back to the lender. Both parties have commercial interests in the same the real estate developer seeking to make a profit on the sale of the apartment, and the flat/apartment purchaser profiting by the sale of the apartment. Thus construed, there can be no difficulty in stating that the amounts raised from allottees under real estate p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng to, or at least having some traces of disbursal against consideration for the time value of money. (Emphasis supplied) 25. Expanding further on the ambit and scope of financial debt in terms of Section 5(8) of IBC, we notice that the Hon ble Supreme Court in Orator Marketing (P) Ltd. v. Samtex Desinz (P) Ltd., (2023) 3 SCC 753 ( Orator in short) has observed: 21. The definition of financial debt in Section 5(8) IBC has been quoted above. Section 5(8) defines financial debt to mean a debt along with interest if any which is disbursed against the consideration of the time value of money and includes money borrowed against the payment of interest, as per Section 5(8)(a) IBC. The definition of financial debt in Section 5(8) includes the components of sub-clauses (a) to (i) of the said Section. 22. NCLT and NCLAT have overlooked the words if any which could not have been intended to be otiose. Financial debt means outstanding principal due in respect of a loan and would also include interest thereon, if any interest were payable thereon. If there is no interest payable on the loan, only the outstanding principal would qualify as a financial debt. Bot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s not expressly exclude an interest free loan. It has also emphasized that financial debt includes any amount raised under any other transaction having the commercial effect of borrowing. 27. With the derivatives of the above seminal judgments as guiding lights, we next come to the findings of the Adjudicating Authority on how it has treated the loan advanced by the Appellant. The impugned order has observed that the disbursal made by the Appellant is not in the nature of financial debt on the grounds that there is no interest payable on the loan advanced by the Appellant and that there is no time value of money since there is no time fixed for repayment of the loan. The relevant portions of the impugned order is reproduced below: 10. It is also settled position that the amount to be constituted under 'financial debt' should be disbursed against time value of money and must have commercial effect as per the law laid by the Hon'ble Supreme Court in the matter of lnnoventive Industries Ltd. v. ICICI Bank and Another, AIR 2017 SC 4084. The definition of Financial Debt as laid down under the code and the above case laws relied upon by the Corporate Debtor makes it c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y for a long duration. 30. We also notice that the Adjudicating Authority in the impugned order has held that in the absence of time fixed for repayment, it cannot be said that the loan was advanced for time value of money. Even if the loan extended was not interest-bearing and no time was fixed for repayment, it would be both skewed and misconstrued to hold that the loan was disbursed without time value of money. The Appellant had advanced the payment with an intent to gain from the land, plant and machinery and factory building changing hands from the Corporate Debtor to the Appellant as borne out from Clause 4.1.2 of MoU-2. The expectation to benefit from acquiring the entire right, title and interest over the subject property at a lesser rate compared to the market value has to be factorized as time value of money. As long as the lender visualizes an element of profit and enhancement of economic prospect in return for the money advanced for certain time period, the loan in question entails time value of money and acquires the colour of commercial borrowing which is clearly borne out from the facts of the present case. It has all the trappings of a financial debt and squarely ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... had neither returned the money nor did they transfer the possession of the property even after it was discharged by the SBI pursuant to an Amnesty Scheme. Further the Corporate Debtor had failed to obtain prior permission of SIDCUL which led to failure of the A2S. It was contended that in terms of the A2S, the Corporate Debtor was therefore liable to compensate the Appellant. Further it has been contended that in Kolla (supra), this Tribunal had held that the lender was entitled to claim repayment of debt even though full payment was not yet made and given the identical facts herein, it is therefore squarely covered by the said judgment of this Tribunal. It was pointed out that in that case the approval of the competent authority (TSIIC) could not be secured and hence the debt had become payable. 37. This therefore brings us down to the question as to whether the debt had actually become due and payable on the part of the Corporate Debtor. To find the answer, we notice the recitals of the MoU-2 at Clauses 5.4, 5.5 and 5.8 which clearly stipulate that the purchase price of the subject property is Rs.27.16 crore. The Appellant having already paid Rs.10.46 crore was still required ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 40. It was also contended by the Learned Counsel for the Appellant that Clause 10(h) of the A2S clearly provided that the Corporate Debtor was to accept all liabilities to compensate the Appellant in case of non-completion of deal by the Corporate Debtor. It was also contended that the Corporate Debtor was responsible for completion of all formalities for obtaining permission of SIDCUL for transfer of the subject property as per Clause 5 of the A2S which it had failed to perform. There is no quarrel over this proposition that the A2S unquestionably provided these safeguards. But what needs to be analyzed at this stage is whether the Corporate Debtor can be squarely held responsible for the non-completion of deal and whether the Corporate Debtor had breached in its obligation to obtain prior permission of SIDCUL to enable transfer of subject property. 41. We notice that Conditions Precedent as laid down in MoU-1 and Completion Arrangements laid down in MoU-2 clearly laid down that the Corporate Debtor was obligated to take up with SIDCUL for transfer of subject property. Be that as it may, this obligation was made conditional upon the receipt of final payment from the Appel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs.27.16 crore and which not having occurred, there was no event of default and that being so the debt had not become payable and hence Section 7 of the IBC does not get attracted. While we agree with the impugned order that the Section 7 application deserves to be dismissed, we would like to clarify that our basis for affirming this decision is differently grounded from the reasons cited by the Adjudicating Authority. 44. Having recorded our findings on both the questions, we would like to emphasize the oft repeated tenet that the primary legislative intent behind the IBC is insolvency resolution so as to bring the corporate debtor to its feet. It would militate against this legislative fiat if we allow the IBC forum to be used as a substitute for money recovery proceedings. Having said that we also affirm the impugned order in that the Appellant shall have the liberty to move the appropriate forum of law to seek remedial action as permissible in law to recover their debt and it would be open for them to them to raise these pleas and contentions. 45. In view of the foregoing discussions, the appeal is dismissed. No order as to costs. - - TaxTMI - TMITax - Insolvency & B ..... X X X X Extracts X X X X X X X X Extracts X X X X
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