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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 ..... iled by the Appellant seeking initiation of Corporate Insolvency Resolution Proceedings ('CIRP' in short) of the Respondent-Corporate Debtor. Aggrieved by the impugned order, the present appeal has been preferred by the Appellant. 2. Coming to the brief facts of the case, the Appellant-Adhunik Corporation Limited was approached by Shivam India Limited-Respondent for financial assistance towards operationalization of their factory which had been shut down for financial constraints 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 depos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nancial debt was not paid back and which sum was beyond the threshold limit of Rs.1 crore stipulated by the Section 4 of the IBC, this was a fit case for attracting Section 7. Further since the MoA provided for collection of sales commission from the sale of finished products, there was a clear element of commercial effect of borrowing which constituted time value for money. Hence in the present case, the basic ingredients of financial debt of disbursal of money against consideration 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 char ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... overy of the funds infused from the sale proceeds of the finished goods. It was also emphatically asserted that the MoA nowhere depicts the fund infusion by the Appellant to be a loan. Moreover, the Appellant had been collecting sales commission on sale proceeds in return for the sum infused. Hence the sum infused was not in the nature of financial debt. It was therefore contended that it was purely a business arrangement between the Appellant and the Respondent and the funds 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... equitable, secured or unsecured; (b) right to remedy for breach of contract under any law for the time being in force, if such breach gives rise to a right to payment, whether or not such right is reduced to judgment, fixed, matured, unmatured, disputed, undisputed, secured or unsecured; 3(11) "debt" means a liability or obligation in respect of a claim which is due from any person and includes a financial debt and operational debt; 3(33) "transaction" includes a agreement 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 an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Black's Law Dictionary (10th Edn.) to mean: "1. The act of paying out money, commonly from a fund or in settlement of a debt or account payable. 2. The money so paid; an amount of money given for a particular purpose." 71. In the present context, it is clear that the expression "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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ereinbelow: "borrow- vb 1. to obtain or receive (something, such as money) on loan for temporary use, intending to give it, or something equivalent back to the lender. 2. to adopt (ideas, words, etc.) from another source; appropriate. 3. Not standard. To lend. 4. (intr) Golf. To put the ball uphill of the direct path to the hole : make sure you borrow enough." "commercial.- adj. 1. of or engaged in commerce. 2. Sponsored or paid for by an advertiser: commercial television. 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 equival ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent of disbursal, and that too against the consideration for time value of money, needs to be found in the genesis of any debt before it may be treated as "financial debt" within the meaning of Section 5(8) of the Code. This debt may be of any nature but a part of it 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. 47. As noticed, the root requirement for a creditor to 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... olvency and liquidation process of corporate persons, have only been defined in Part II whereas the expressions "secured creditor" and "security interest" are defined in Part I. 50. A conjoint reading of the statutory provisions with the enunciation of this Court in Swiss Ribbons, leaves nothing to doubt that in the scheme of IBC, what is intended by the expression "financial creditor" is a person who has direct engagement in the functioning of the corporate debtor; who 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 deb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. Both NCLAT and NCLT have failed to notice 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 n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hereas the management of Shivam, represented by the Promoters herein, is not in a position to operate the said Unit due to financial constraints and the said Unit is now closed for over 6 (six) months. And Whereas the said management of Shivam has in deference to the desire expressed by Adhunik agreed to recommence the operations of the said Unit with funds in the Interim to be provided by Adhunik since Shivam does not have the ability to infuse any further amount of funds 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 follow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... During the term of this MOA, Adhunik shåll remove the entire finished products, coils and billets made out of the raw materials supplied by Adhunik, for disposal at the prevailing market prices and Adhunik shall be entitled to the following charges/commission out of the sale proceeds:- (I) For Hot-rolled finished products and coils- Rs. 600/- per ton; and (II) For Induction Furnace sale-able Billets - Rs. 300/- per ton. (III) Adhunik shall also be fully entitled 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . We are not inclined to accept the contention of the Financial Creditor with regard to debt or default within the meaning of Section 7 of the Insolvency and Bankruptcy Code, 2016 in view of the above position based on the terms of the agreement and the law. " 19. Coming to our analysis and findings, we would like to examine whether money disbursed by the Appellant to the Corporate Debtor to operationalize its business can be treated as a financial debt. 20. 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" 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. Det ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly not in the nature of financial debt but was an investment. The real nature of transactions entered between the two parties would show that it was not in the nature of financial debt. It was contended that the MoA did not provide for any consideration as time value for money. 23. Per contra, it is the contention of the Appellant 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 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 ent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sation or the price paid for the length of time for which money has been disbursed. 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 need to see if the Appellant had envisioned enhancement of economic prospect in return for the funds 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Appellant is squarely covered by the definition of 'Financial Creditor', on the issue of default, we, however, notice from the pleadings and submissions made by the Respondent that the Appellant had already realised and recovered the funds infused and as such there is no default. Capturing some of their other related submissions, it is their case that the Appellant also made wrongful gains by their illegal act of supply of raw materials through their own chosen suppliers 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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