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TMI Blog2025 (2) TMI 905X X X X Extracts X X X X X X X X Extracts X X X X ..... ssarily culminate into interest being paid in respect of money that has been borrowed. The nature of underlying transaction is therefore a determinative factor in deciding whether infusion of funds can be classified as financial debt or not. To find out whether any element of commercial borrowing for time value of money is noticeable in the transactions which have taken place in the present facts of the case, it is required to study the various relevant clauses of the MoA since it is the MoA which constitutes the underlying edifice of the transactions. Whether money disbursed by the Appellant to the Corporate Debtor to operationalize its business can be treated as a financial debt? - HELD THAT:- In the present facts of the case, there is sufficient material on record to prove that there was disbursal of funds by the Appellant to the Corporate Debtor in their account. The bank transaction details have been placed at page 248-284 of Appeal Paper Book (APB) to substantiate their contention that money was actually disbursed to the Corporate Debtor, which was in dire financial straits, towards working capital to make the Corporate Debtor operational - an abstract of commission on sale ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cial borrowing. The disbursals clearly display commercial effect of borrowing. In our considered opinion the Adjudicating Authority committed an error in holding the transaction to be a business arrangement and non-suiting of the Appellant on the ground of not being a financial creditor. The Appellant has been wrongfully ousted by the Adjudicating Authority on the ground that the Appellant was not a financial creditor and the infusion of fund was not in the nature of financial debt. There are no hesitation to observe that this is a case of financial debt and the Appellant is clearly a financial creditor in terms of statutory provisions of IBC. The Appellant has brought on record the Section 7 application filed by them. In Part-IV of the Section 7 application, the amount claimed to be in default as well as date of default has been clearly depicted therein. Part-IV also contains the pleadings and submissions made pertaining to debt and default. In Form-1 filed by the Appellant under Section 7 of IBC read with Rule 4 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016, the principal amount of loan advanced as 'Financial Assistance' by the Appellant i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nstraints and want of working capital. The Appellant and the Respondent entered into an agreement dated 18.05.2015 by which the Appellant through one of its sister concerns-Adhunik Industries Limited provided financial assistance. Later a fresh Memorandum of Agreement ('MoA' in short) was executed on 23.06.2020 for a further period of five years which was entered into between Adhunik Corporation Limited, Shivam India Limited and promoters of Shivam India Limited. In terms of the MoA, the Appellant provided a sum of Rs. 27.85 crore to the Respondent out of which Rs.23.49 crore was direct financial assistance and another sum of Rs.4.36 crore was towards raw material. The financial assistance was also secured by depositing 69.42% equity shares of the Respondent with Trans Scan Securities Pvt. Ltd., a depository participant on behalf of the Appellant. The Appellant in return of the financial assistance was to also receive sales commission. However, since the Appellant did not receive back the financial assistance given to the Respondent and there was an outstanding amount due in respect of sales commission due from the Respondent, the financial creditor issued a notice dated 11.10.2021 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onsideration of time value of money stood met. The Appellant clearly fell in the category of Financial Creditor under Section 5(7) of IBC and therefore been wrongly non-suited by the Adjudicating Authority. Assailing the impugned order, it was submitted that the Adjudicating Authority had wrongly held that the financial assistance advanced to the Respondent was in the nature of business arrangement and not a financial debt. 4. Submission was also pressed that the time value of money covers any other form of benefit/value accruing in return of providing financial assistance. In support of their contention, it was asserted that the Hon'ble Supreme Court has clearly held that provision of credit facility without charging of any interest can be considered to be a financial debt in Orator Marketing Pvt. Ltd. Versus Samtex Desinz Pvt. Ltd. 2021 SCC Online SC 513. Similarly, this Tribunal in the matter of Sanjay D. Kakade Vs. HDFC Ventures Trustee Co. Ltd. in CA (AT)(Ins) No. 481/2023 has also held that interest free loans advanced to finance the business operations of a corporate body can as well be construed to be treated as financial debt. Thus, even if the credit advanced was not int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unds infused was not in the form of a debt or loan since the Appellant was entitled to recover the same from the sale proceeds of the finished goods. The infusion of funds was therefore not in the nature of financial debts. The MoA therefore could not be termed as a loan agreement. There was no consideration of time value for money. Since the proceedings under IBC are not supposed to be recovery proceedings, Section 7 could not have been initiated in the absence of debt. Reliance was placed on the judgment of this Tribunal in Mukesh N. Desai Vs. Piyush Patel in CA (AT)(Ins) No.780 of 2020 to assert that a Section 7 application is not maintainable when the MoU entered between parties contains reciprocal rights and obligation in which the parties are involved profit sharing. In the present case too, the Appellant was the owner of the finished products as per terms of the MoA, hence, the investment was not a financial debt. 6. Submission was made that the alleged dues claimed by the Appellant was barred by Section 10A of the IBC. The alleged demand of the Appellant was w.e.f. 01.03.2021 which period clearly fell during the Section 10A period. The Appellant has shown date of default a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reement or arrangement in writing for the transfer of assets, or funds, goods or services, from or to the corporate debtor; 5(7) "financial creditor" means any person to whom a financial debt is owed and includes a person to whom such debt has been legally assigned or transferred to; 5(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 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 b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 money. Thus far, it is clear that an allottee "disburses" money in the form of advance payments made towards construction of the real estate project. We were shown the Dictionary 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sion. 3. Having profit as the main aim: commercial music. 4. (of chemicals, etc.) unrefined and produced in bulk for use in industry. 5. A commercially sponsored advertisement on radio or television." 77. A perusal of these definitions would show that even though the petitioners may be right in stating that a "borrowing" is a loan of money for temporary use, they are not necessarily right in stating that the transaction must culminate in money being given back to the lender. The expression "borrow" is wide 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....." ( Emphasis supplied ) 12. Another seminal judgment made by the Hon'ble Supreme Court delineating the essential ingredients and characteristic of financial debt and financial creditor is the judgment of Jaypee Inf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... become financial creditor for the purpose of Part II of the Code, there must be a financial debt which is owed 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 third 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. 49. Expounding yet further, in our view, the peculiar elements of these expressions "financial creditor" and "financial debt", as occurring in Sections 5(7) and 5(8), when visualised and compared with the generic expressions "creditor" and "debt", respectively, as occurring in Sections 3(10) and 3(11) of the Code, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is involved right from the beginning while assessing the viability of the corporate debtor; who would engage in restructuring of the loan as well as in reorganization of the corporate debtor's business when there is financial stress. In other words, the financial creditor, by its own direct involvement in a functional existence of corporate debtor, acquires unique position, who could be entrusted with the task of ensuring the sustenance and growth of the corporate debtor, akin to that of a guardian. In the context of insolvency resolution process, this class of stakeholders, namely, financial creditors, is entrusted by the legislature with such a role that it would look forward to ensure that the corporate debtor is rejuvenated and gets back to its wheels with reasonable capacity of repaying its debts and to attend on its other obligations. Protection of the rights of all other stakeholders, including other creditors, would obviously be concomitant of such resurgence of the corporate debtor. ( Emphasis supplied ) 13. We also notice the findings of the Hon'ble Apex Court in the matter of Phoenix ARC Pvt. Ltd. Vs Spade Financial Services Ltd. (2021) 3 SCC 475 in which the ter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e clause (f) of Section 5(8), in terms whereof "financial debt" includes any amount raised under any other transaction, having the commercial effect of borrowing. 23. Furthermore, sub-clauses (a) to (i) of sub-section (8) of Section 5 IBC are apparently illustrative and not exhaustive. Legislature has the power to define a word in a statute. Such definition may either be restrictive or be extensive. Where the word is defined to include something, the definition is prima facie extensive. 29. In Jaypee Infratech Ltd., the debts in question were in the form of third-party security, given by the corporate debtor to secure loans and advances obtained by a third party from the respondent lender and, therefore, held not to be a financial debt within the meaning of Section 5(8) IBC. There was no occasion for this Court to consider the status of a term loan advanced to meet the working capital requirements of the corporate debtor, which did not carry interest. Having regard to the Aims, Objects and Scheme of the IBC, there is no discernible reason, why a term loan to meet the financial requirements of a corporate debtor for its operation, which obviously has the commercial effect of bor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nds mandatorily required to make the said Unit operative. And Whereas Shivam has suggested that some amount of funding would be immediately required to recommence the operations of the said Unit. And Whereas Adhunik has, on an Interim basis, agreed to infuse the said funds and to facilitate operations of the said Unit by effecting supply of the raw materials during the period of this MoA, all on the clear understanding of the Parties that the entire funds so infused by Adhunik is fully refundable. And Whereas the Parties are now desirous of recording their understanding in this regard. NOW, THEREFORE, THIS MEMORANDUM OF AGREEMENT WITNESSETH and it is hereby agreed by and amongst the Parties hereto as follows: 1. Shivam shall forthwith, upon receipt of the first instalment of fund as mutually decided from Adhunik take immediate steps to recommence the operations of the said Unit and shall make the said Unit fully operative as soon as possible but not beyond 15 days from the date of such first infusion of fund. In case Shivam is unable to make the said Unit fully operative within the said period, the Parties shall jointly discuss the way forward failing which the total amou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... led to remove By-products like Mis-rolls and end-cutting etc. 9. Subject to the above, the raw-materials supplied by Adhunik and the finished products as stated in paragraphs 6 and 7 above made out of such materials shall at all times be the property of Adhunik, and Adhunik shall be entitled to take all decisions over the raw-materials, any others materials and the finished products. 11. Till such sums are fully repaid by Shivam to Adhunik, Adhunik shall be entitled to exercise lien over all raw-materials supplied by Adhunik to Shivam and also on all finished products manufactured at the said factory of Shivam including stores, and accordingly the parties do hereby agree and undertake that during the term of this MoA all goods, materials and inventory at all the factory of Shivam shall remain hypothecated to Adhunik and Shivam shall be under an obligation not to effect sale of any finished goods made at the factory of Shivam durlng the term of this MoA without specific written permission of Adhunik. The shares in Shivam held in separate Demat Account in terms of this MoA shall also be continued to be held as collateral by Adhunik till sum sums are fully repaid by Shivam to Adhu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sent facts of the case, there is sufficient material on record to prove that there was disbursal of funds by the Appellant to the Corporate Debtor in their account. The bank transaction details have been placed at page 248-284 of Appeal Paper Book ("APB" in short) to substantiate their contention that money was actually disbursed to the Corporate Debtor, which was in dire financial straits, towards working capital to make the Corporate Debtor operational. Receipt of this amount has also not been denied by the Corporate Debtor. Further, invoices have been placed on record from pages 287 to 365 of APB to prove that Rs 4.35 Cr was paid towards direct supply of raw material by the Appellant to the Corporate Debtor. Details have also been furnished at page 376 of APB for an amount of Rs 11.78 Cr. towards outstanding amount to be paid by Corporate Debtor to third party vendor for supply of raw material. Besides this, an abstract of commission on sales received by the Appellant from the Corporate Debtor for Rs 2.95 Cr. along with tax invoices have been placed from pages 366 to 375 of APB. It has also been indicated that an amount of Rs 11.54 lakhs was still due from the Corporate Debtor t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion by the borrower and that such disbursal is in the nature of financial debt as long as it is disbursed against consideration for time value of money even if it is not interest-bearing. It is the case of the Appellant that the commercial effect of the borrowing against disbursal of funds can be noticed from the charges/commissions which was to be received by the Appellant from the sale proceeds of the finished product from the Corporate Debtor which find mention at Clause 7 of the MoA at page 143 of APB. Moreover, the funds were infused in a manner that they were to be fully refundable as may be seen at Clause 1 of the MoA at page 142 of the APB. Since the MoA was for a period of five years, the Appellant was entitled to demand the payment of the outstanding debt from the Corporate Debtor at any point of time within the period of five years. Further Clause 9 and 11 of the MoA provided an enabling framework for the Appellant to exercise lien besides placing the shares of the Corporate Debtor held by their promoters as collateral and specific security till the amount infused was fully repaid. The right to exercise lien and pledging of shares of the Corporate Debtor as collateral wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s disbursed and if so then the sum advanced would qualify to entail time value of money and acquire the colour and character of commercial borrowing. 26. The MoA is a matter of record. When we look at the MoA, it clearly provides for the Appellant to supply raw material and also the disposal of finished products. Merely because the MoA allowed the Appellant to monitor the production of the unit does not in any manner show that they were in control of the unit and were not entitled to receive back the funds infused by them. This in way diminished the obligation of the Corporate Debtor to discharge their debt liability. It is further clear from the terms of the MoA that the Appellant was required to infuse funds to the Corporate Debtor to render the Corporate Debtor operational from its dysfunctional state. Moreover, the credit so provided was in the form of working capital and the entire amount was fully refundable. Even the funds provided for purchase of raw material at prevailing market prices was towards operationalization of the Corporate Debtor. The right of the Appellant to enjoy sales commission was also a form of return for the amount financed. From the judgment of the Hon' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ers at price higher than the prevailing market price. The Appellant had allegedly benefitted themselves by clandestinely making profits while increasing the liability of the Corporate Debtor. Moreover, the invoices relied upon by the Appellant show that they fell due for payment within the period excluded by Section 10A of the IBC. The Appellant had also acted in complete breach of their obligations having stopped the supply of raw materials and infusion of funds though the agreement was for a period of five years. All this had led to the erratic functioning of the Corporate Debtor causing damages to the Respondent which became the subject matter of arbitration proceedings. It has been pointed out by the Respondent that they had invoked clause 21 of the MoA on 23.09.2021 for resolution of their interse disputes which eventually led to the filing of Arbitration Petition No. 360 of 2022 under Section 11 of the Arbitration and Conciliation Act before the Hon'ble High Court of Calcutta. It is also the case of the Respondent that the Appellant had filed the application under Section 7 as a counterpoise. Further, as the Appellant was supplying raw material under Clause 5 of the MoA, the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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