9911796707
TMI Blog2024 (4) TMI 1067X X X X Extracts X X X X X X X X Extracts X X X X ..... yable to the first respondent. Apart from the sum of Rs.4,000/- per month, there is no commission payable to the first respondent on the quantity of sales. Clause (6) provides for termination of the appointment by giving thirty days notice. Though clause (10) provides for the payment of the security deposit by the first respondent, it is pertinent to note that there is no clause for the forfeiture of the security deposit. As there is no clause regarding forfeiture of the security deposit or part thereof, the corporate debtor was liable to refund the security deposit after the period specified therein was over with interest @21% per annum. Since the security deposit payment had no correlation with any other clause under the agreements, as held by the NCLAT, the security deposit amounts represent debts covered by subsection (11) of Section 3 of the IBC. The reason is that the right of the first respondent to seek a refund of the security deposit with interest is a claim within the meaning of subsection (6) of Section 3 of the IBC as the first respondent is seeking a right to payment of the deposit amount with interest. Therefore, there is no manner of doubt that there is a debt in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T ABHAY S. OKA, J. 1. These appeals take exception to the separate impugned judgments and orders dated 7th October 2021 and 29th October 2021 passed by the National Company Law Appellate Tribunal (for short, the NCLAT ). In Civil Appeal no.1143 of 2022, the issue involved is whether the first respondent is a financial creditor within the meaning of sub-section (7) of Section 5 of the Insolvency and Bankruptcy Code, 2016 (for short, the IBC ). The corporate debtor, in this case, is M/s. Mount Shivalik Industries Limited. The impugned judgment and order dated 7th October 2021 holds that the first respondent is a financial creditor. As far as Civil Appeal nos.6991-6994 of 2022 are concerned, the issue is whether the 1st to 4th respondents therein are financial creditors of the same corporate debtor - M/s. Mount Shivalik Industries Limited. The impugned judgment dated 29th October 2021 follows the impugned judgment in Civil Appeal no.1143 of 2022. FACTUAL ASPECTS 2. A brief reference to the factual aspects of Civil Appeal no.1143 of 2022 must be made to understand the controversy. There were two agreements of 1st April 2014 and 1st April 2015 between the corporate debtor and the first ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... NCLT rejected the application made by the first respondent. Aggrieved by the said order, the first respondent preferred an appeal before the NCLAT. By the impugned judgment and order dated 7th October 2021, the NCLAT held that the first respondent was a financial creditor and not an operational creditor. The NCLT, on 13th October 2021 approved the resolution plan of M/s. Kals Distilleries Pvt. Ltd. (Respondent no.6 in Civil Appeal nos.6991-6994 of 2022) in the CIRP of the corporate debtor. 4. In Civil Appeal nos.6991-6994 of 2022, the second respondent is the resolution professional. The corporate debtor is the same as in the other appeal. The fifth respondent had provided financial assistance to the corporate debtor of Rs.75,00,000/-. The fourth respondent provided financial assistance to the corporate debtor of Rs.1,62,00,000/-. The first respondent advanced a sum of Rs.25,00,000/- to the corporate debtor. The third respondent advanced a sum of Rs.1,00,000/- to the corporate debtor. The Resolution Professional rejected the claims of the four creditors as financial creditors. Therefore, they filed separate applications before the NCLT by invoking sub-section (5) of Section 60 of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the view taken by the NCLAT in the impugned judgment is entirely fallacious. He submitted that the NCLAT has virtually rewritten the concepts of financial and operational debts incorporated in the IBC. 6. On facts, the learned senior counsel submitted that the payment of the security deposit by the first respondent is a condition precedent for being appointed as a Sales Promoter of the corporate debtor. The intent of the agreements is to appoint the first respondent as the Sales Promoter and not to avail any financial facilities from the first respondent. The amount paid by the first respondent does not constitute financial facilities extended to the corporate debtor. There was no intention to raise finance from the first respondent, who was appointed as a Sales Promoter. The learned senior counsel also relied upon the decisions of this court in the cases of Anuj Jain, Interim Resolution Professional for Jaypee Infratech Limited v. Axis Bank Limited Ors. (2020) 8 SCC 401 , Phoenix ARC Private Limited v. Spade Financial Services Limited Ors. (2021) 3 SCC 475 and New Okhla Industrial Development Authority v. Anand Sonbhadra (2023) 1 SCC 724 . Lastly, it is submitted that in the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... b of security deposit under various services agreements. The learned counsel, therefore, submitted that no fault can be found with the impugned judgment. 9. The learned counsel appearing for the second respondent-Resolution Professional, supported the appellants by contending that the money advanced by the first respondent cannot be categorised as a financial debt. Therefore, the first respondent was an operational creditor. He relied upon the definition of operational debt under subsection (21) of Section 5 of the IBC. He submitted that the security deposit was not meant to reorganize the corporate debtor's debts. He submitted that the agreements are service agreements by which the corporate debtor agreed to take services from the first respondent for consideration. Therefore, the security deposit was obviously to ensure the performance of the terms of the agreements by the first respondent. He submitted that accounting treatment cannot override the law and the definition of operational debt under the IBC. He submitted that none of the ingredients of clauses (a) to (f) of sub-section (8) of Section 5 are present in the case at hand. In this case, there is no disbursal of debt. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in respect of a claim covered by sub-section (6) of Section 3 of the IBC. 12. Sub-section (8) of Section 5 of the IBC defines financial debt , which reads thus: 5. In this Part, unless the context otherwise requires,- .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. (8) financial debt means a debt alongwith 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 dematerialised 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; [Explanatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deration for time value of money. It may include any of the methods for raising money or incurring liability by the modes prescribed in clauses (a) to (f) of Section 5(8); it may also include any derivative transaction or counter-indemnity obligation as per clauses (g) and (h) of Section 5(8); and it may also be the amount of any liability in respect of any of the guarantee or indemnity for any of the items referred to in clauses (a) to (h). The requirement of existence of a debt, which is disbursed against the consideration for the time value of money, in our view, remains an essential part even in respect of any of the transactions/dealings stated in clauses (a) to (i) of Section 5(8), even if it is not necessarily stated therein. In any case, the definition, by its very frame, cannot be read so expansive, rather infinitely wide, that the root requirements of disbursement against the consideration for the time value of money could be forsaken in the manner that any transaction could stand alone to become a financial debt. In other words, any of the transactions stated in the said clauses (a) to (i) of Section 5(8) would be falling within the ambit of financial debt only if it car ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the expression means and includes in these clauses, on the very same principles of interpretation as indicated above, makes it clear that for a person to become a creditor, there has to be a debt i.e. a liability or obligation in respect of a claim which may be due from any person. A secured creditor in terms of Section 3(30) means a creditor in whose favour a security interest is created; and security interest , in terms of Section 3(31), means a right, title or interest or claim of property created in favour of or provided for a secured creditor by a transaction which secures payment for the purpose of an obligation and it includes, amongst others, a mortgage. Thus, any mortgage created in favour of a creditor leads to a security interest being created and thereby, the creditor becomes a secured creditor. However, when all the defining clauses are read together and harmoniously, it is clear that the legislature has maintained a distinction amongst the expressions financial creditor , operational creditor , secured creditor and unsecured creditor . Every secured creditor would be a creditor; and every financial creditor would also be a creditor but every secured creditor may not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erest over the assets of the corporate debtor is also included as a financial creditor and thereby allowed to have its say in the processes contemplated by Part II of the Code, the growth and revival of the corporate debtor may be the casualty. Such result would defeat the very objective and purpose of the Code, particularly of the provisions aimed at corporate insolvency resolution. 50.2. Therefore, we have no hesitation in saying that a person having only security interest over the assets of corporate debtor (like the instant thirdparty securities), even if falling within the description of secured creditor by virtue of collateral security extended by the corporate debtor, would nevertheless stand outside the sect of financial creditors as per the definitions contained in sub-sections (7) and (8) of Section 5 of the Code. Differently put, if a corporate debtor has given its property in mortgage to secure the debts of a third party, it may lead to a mortgage debt and, therefore, it may fall within the definition of debt under Section 3(10) of the Code. However, it would remain a debt alone and cannot partake the character of a financial debt within the meaning of Section 5(8) of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssion disburse would refer to the payment of instalments by the allottee to the real estate developer for the particular purpose of funding the real estate project in which the allottee is to be allotted a flat/apartment. The expression disbursed refers to money which has been paid against consideration for the time value of money . In short, the disbursal must be money and must be against consideration for the time value of money , meaning thereby, the fact that such money is now no longer with the lender, but is with the borrower, who then utilises the mone y. 47. The report of the Insolvency Law Committee dated 26-3-2018 has discussed the interpretation of the term time value of money and stated: 1.4. The current definition of financial debt under Section 5(8) of the Code uses the words [Ed. : The matter between two asterisks has been emphasised in original.] includes [Ed. : The matter between two asterisks has been emphasised in original.] , thus the kinds of financial debts illustrated are not exhaustive. The phrase [Ed. : The matter between two asterisks has been emphasised in original.] disbursed against the consideration for the time value of money [Ed. : The matter between ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ount 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 Amendment Act. ( emphasis added ) FINDINGS ON FACTUAL ASPECTS 13. In light of the interpretation put by this Court to the definition of financial debt, it is necessary to come back to the facts of the case. The relevant agreements for our consideration are in the form of letters dated 1st April 2014 and 1st April 2015. The corporate debtor addressed the letters to the first respondent. The relevant part of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ths ending on 31st March 2015. Therefore, on 1st April 2015, another letter was issued by the corporate debtor to the first respondent, incorporating identical terms and conditions. The only difference is that the agreement's duration was up to 31st March 2016. Clause (10) of the agreement/letter dated 1st April 2015 reads thus: .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. #10 You have to deposit minimum security of Rs.53,15,000/- with the Company which will carry interest @21% per annum. We will provide you interest on Rs.32,85,850/- @21% per annum. Please acknowledge receipt and as a token of your acceptance of above terms and conditions. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. . 14. Where one party owes a debt to another and when the creditor is claiming under a written agreement/arrangement providing for rendering 'service', the debt is an operational debt only if the claim subject matter of the debt has some connection or co-relation with the service subject matter of the transaction. The written document cannot be taken for its face value. Therefore, it is necessary to determine the real nature of the transaction on a plain ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f a contract of service, there must be a correlation between the service as agreed to be provided under the agreement and the claim. The reason is that the definition uses the phraseology a claim in respect of the provision of goods or services . Assuming that both the agreements are genuine in the sense that they reflect the true nature of the transaction, the only claim under the agreements which will have any connection with the services rendered by the first respondent will be the claim of Rs.4,000/- per month as provided in clause (1) of both the agreements. Only this claim can be said to be concerning the provision of services. Therefore, by no stretch of imagination, the debt claimed by the first respondent can be an operational debt. We are conscious of the fact that the provision for payment of interest by the corporate debtor by itself is not the only material factor in deciding the nature of the debt. But, in the facts of the case, the payment of the amount mentioned in clause (10) of the letter has no relation with the service supposed to be rendered by the first respondent. 16. Now, coming back to the definition of a financial debt under sub-section (8) of Section 5 of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he corporate debtor are considered, it is evident that the amount raised under the said two agreements has the commercial effect of borrowing as the corporate debtor treated the said amount as borrowed from the first respondent. CONCLUSION 18. Therefore, we have no hesitation in concurring with the NCLAT's view that the amounts covered by security deposits under the agreements constitute financial debt. As it is a financial debt owed by the first respondent, sub-section (7) of Section 5 of the IBC makes the first respondent a financial creditor. 19. The contracts subject matter of the Civil Appeal Nos. 6991 to 6994 of 2022 are in the form of letters, which provide for similar clauses as in the case of agreements subject matter of Civil Appeal No. 1143 of 2022. SUMMARY 20. Subject to what is held above, we summarize our legal conclusions: a. There cannot be a debt within the meaning of subsection (11) of section 5 of the IB Code unless there is a claim within the meaning of sub-section (6) of section 5 of thereof; b. The test to determine whether a debt is a financial debt within the meaning of sub-section (8) of section 5 is the existence of a debt along with interest, if any, ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
