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TMI Blog2024 (4) TMI 118X X X X Extracts X X X X X X X X Extracts X X X X ..... hich does not necessarily culminate into money being returned to the lender or interest being paid in respect of money that has been borrowed. Holding Section 5(8) to be 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. The Hon ble Supreme Court while dilating on this subject in the matter of PROFESSIONAL FOR JAYPEE INFRATECH LIMITED VERSUS AXIS BANK LIMITED ETC. ETC. [ 2020 (2) TMI 1259 - SUPREME COURT ] propounded that in terms of Section 5(8) of the IBC, the essential condition of financial debt is disbursement against the consideration for time value of money. Having taken cognizance of the statutory provisions of IBC and the reigning judgements of the Hon ble Apex Court, it can be safely concluded that it is settled law that for any debt to be treated as financial debt, the pre-requisite is disbursal of money to the borrower for utilization by the borrower and that the disbursal must be against consideration for time value of money even if it is not interest bearing. When a Financial Creditor who has disburs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... IBC. Time value of money is not only a regular or timely return received for the duration for which the amount is disbursed as an amount in addition to the principal, but also covers any other form of benefit or value accruing to the creditor as a return for providing money for a long duration - Once the Adjudicating Authority is subjectively satisfied that there is a debt and a default has been committed by the Corporate Debtor and the Section 7 application is complete in all respects, the Adjudicating Authority in the exercise of summary jurisdiction has to admit the Section 7 application - this is a case where all the pre-requisites for filing a Section 7 stood fulfilled and the Adjudicating Authority cannot be held to have committed an error in admitting the Corporate Debtor into CIRP for having defaulted in repaying a financial debt which was above the threshold limit. The Adjudicating Authority has rightly come to the conclusion that the Respondent No.1 has successfully proved the financial debt and default on part of the Corporate Debtor in admitting the Section 7 application and initiating the CIRP process - there are no reason to interfere in the impugned order passed by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the account of Corporate Debtor. It was further submitted that due to persisting financial difficulties of SKIL, the balance amount of Rs. 40 crore was not paid and the joint venture could not proceed. Subsequently, due to estrangement of marital relations between daughter of Mr. Nikhil Gandhi and the son of the ex-Director of the Corporate Debtor company and consequential discord between them, it was stated that the Respondent No. 1, in retaliation, sent a Demand Notice on 20.02.2018 followed by a lawyer s notice on 30.05.2018 to the Corporate Debtor. The Demand Notice was replied to on 26.02.2018. Thereafter, Respondent No. 1 proceeded to file a Section 7 petition on 24.10.2018 which was wrongly admitted by the Adjudicating Authority on 06.03.2022. 4. It has been contended by the Appellant that Respondent No. 1 has falsely treated the amount of Rs. 5 crore as a loan carrying an alleged interest of 15% p.a. The Learned Counsel for the Appellant contended that there are no documents on record to either show that the amount of Rs. 5 crore given by Respondent No. 1 to the Corporate Debtor was a loan or that the said alleged loan was interest-bearing as has been claimed by Responden ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Corporate Debtor by adverting reference to an unexecuted MOU was trying to mislead the Adjudicating Authority by linking this transaction with some other purported transaction proposed to be entered into between the Corporate Debtor and SKIL. It was asserted that Respondent No. 1 was not even a party to this draft MOU and hence it was not binding on them. This ploy was resorted to by the Corporate Debtor with the ulterior motive of denying the financial debt so as to evade the liability of payment of outstanding dues and escape CIRP proceedings. Asserting that this loan transaction of Rs. 5 crore between Respondent No. 1 and Corporate Debtor was an independent transaction and unrelated with SKIL and SKIL was not in the picture at all. It has also been pointed out that the ledger of the Corporate Debtor maintained in the books of account of Respondent No. 1 clearly establishes that an amount of Rs. 5 crore was given to Corporate Debtor through RTGS transfer. It was also contended that Corporate Debtor has not denied admission of the receipt of Rs. 5 crore either. The said loan had been given on interest terms and hence the closing balance of the books of account reflected the out ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der 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 fluctuation in any rate or price and for calculating the value of any derivative transaction, only the market value of such transaction shall be taken into account; (h) any counter-indemnity obligation in respect of a guarantee, indemnity, bond, documentary letter of credit or any other instrument issued by a bank or financial institution; (i) the amou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd 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 residuary provision which is catch all in natur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se 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 projects would, in fact, be subsumed within Section 5(8)(f) even without adverting to the Explanation introduced by the Amendm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t is always required to be carrying, or corresponding to, or at least having some traces of disbursal against consideration for the time value of money. (Emphasis supplied) 12. Equally important to note is the judgment of Hon ble Supreme Court in Orator Marketing (P) Ltd. v. Samtex Desinz (P) Ltd. (2023) 3 SCC 753, wherein it has been clearly held that financial debt does not expressly exclude an interest-free loan. The Hon ble Supreme Court in this judgment 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e whole amount or even part thereof. This has been elaborately discussed by the Hon ble Supreme Court in the case of Swiss Ribbons Private Limited and Anr. Versus Union of India and Ors. (2019) 4 SCC 17 as under: 23. A perusal of the definition of financial creditor and financial debt makes it clear that a financial debt is a debt together with interest, if any, which is disbursed against the consideration for time value of money. It may further be money that is borrowed or raised in any of the manners prescribed in Section 5(8) or otherwise, as Section 5(8) is an inclusive definition. On the other hand, an operational debt would include a claim in respect of the provision of goods or services, including employment, or a debt in respect of payment of dues arising under any law and payable to the Government or any local authority. 24. A financial creditor may trigger the Code either by itself or jointly with other financial creditors or such persons as may be notified by the Central Government when a default occurs. The Explanation to Section 7(1) also makes it clear that the Code may be triggered by such persons in respect of a default made to any other financial creditor of the co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The RTGS bank transfer details as well as a letter from the Bank authorities testifying that an amount of Rs. 5 crore was paid from the account of Respondent No. 1 to Corporate Debtor on 01.01.2014 has been placed at page 55-56 of the Appeal Paper Book ( APB in short). That this money was received by the Corporate Debtor has also not been denied by the Corporate Debtor. Neither has any claim been made that any part of this sum was repaid by the Corporate Debtor. Respondent No. 1 has thus produced incontrovertible and unimpeachable evidence to prove the existence of debt liability on the part of the Corporate Debtor. 18. In the present case, the Respondent No. 1 has submitted a bank certificate to substantiate the disbursal of funds to the Corporate Debtor and validated the same with the Annual Reports and Balance Sheets of the Corporate Debtor to show that it was a loan. Respondent No. 1 has placed on record the Balance Sheet of the Corporate Debtor wherein this amount has been shown under the head of Long Term Borrowings - Unsecured loan from Related Parties . This clearly evidences that the disbursal was a loan. Even the notice sent by the Respondent No. 1 on 20.02.2018 as placed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o controvert the alleged self-created books of their accounts by the Corporate Debtor. That being so it does not behove of the Appellant to now cry hoarse that the Adjudicating Authority had wrongly shifted the onus on them to refute the claim of debt and default raised by the Financial Creditor. 21. This brings us for our consideration the tenability of the contention raised by the Appellant that the transaction was not in the nature of a loan but a part payment deposit for developing a land project. To substantiate their contention, it has been stated that this amount was transferred by the Corporate Debtor, since in terms of an MOU, SKIL had to transfer Rs. 45 crore to the Corporate Debtor, which it was unable to do, on account of financial difficulties which made the Corporate Debtor step in to make part payment deposit of Rs. 5 crore. Hence it was contended that the disbursal was not made against the consideration of time value of money. 22. When we look at the impugned order, we find that the Adjudicating Authority has painstakingly noted the contents of the email of 12.10.2013 basis which email the Appellant has premised his case of draft MOU between SKIL and the Corporate D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1 was that of a joint venture collaborator and not that of a Corporate Debtor and financial creditor. Thus, to link the transfer of Rs. 5 crore by Respondent No. 1 to the Corporate Debtor as an outcome of a draft MOU, which at best was a lame duck document, is neither convincing nor does it appeal to sound reason. We therefore find no cogent grounds to find any error in the above finding of the Adjudicating Authority in the preceding paragraph. 24. The essential ingredients of financial debt in the context of IBC consists of disbursal accompanied by consideration for time value of money. We now proceed to examine whether in the present case, disbursement of money took place against the consideration for time value of money and whether commercial effect of borrowing is found to underpin the transaction. The concept of time value of money has nowhere been defined in the IBC. Time value of money is not only a regular or timely return received for the duration for which the amount is disbursed as an amount in addition to the principal, but also covers any other form of benefit or value accruing to the creditor as a return for providing money for a long duration. We find merit in the a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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