2023 (11) TMI 1219 - AT - Companies Law

NCLAT upholds Section 7 admission for share subscription debt under IBC Section 5(8)(f)

Sanjay D. Kakade Versus HDFC Ventures Trustee Company Ltd and Ors

The NCLAT dismissed an appeal challenging admission of a Section 7 application filed by a financial creditor. The corporate debtor had raised funds ... Admission of Section 7 Application filed by the Financial Creditor - investment made by the Financial Creditor in the Corporate Debtor by means of Share Subscription-cum- Shareholders Agreements, Binding Term Sheet as well as Consent Terms - financial debt in default - HELD THAT:- The Hon'ble Supreme Court in Pioneer Urban Land and Infrastructure Limited and Anr. vs. Union of India and Ors. [2019 (8) TMI 532 - SUPREME COURT] had occasion to consider the concept of 'financial debt' and the meaning of the 'financial debt' as contained in the IBC. The ratio of the judgment of the Hon'ble Supreme Court is that sub- clause (f) of Section 5(8) would subsume within it amounts raised under transactions which are not necessarily loan transactions so long as they have the commercial effect of a borrowing. In paragraph 76, the Hon'ble Supreme Court had quoted with approval the meaning of expression 'borrow' and 'commercial' from Collins English Dictionary. The condition which is essentially required to be fulfilled is disbursement against the consideration for the time value of money. On coming to sub-clause (f), the transaction has to have a commercial effect of a borrowing. It is already noticed the facts and sequence of events of the present case, from which it is clear that Corporate Debtor has time and again acknowledged the debt. It is found that transactions between the parties including the Agreement, Supplementary Agreement and Binding Term Sheet, clearly indicate that there was a debt, due and payable, which debt was in the nature of 'financial debt'. It is further noticed that in the present Appeal, the Appellant has taken several opportunities to make payment to the Corporate Debtor to liquidate his debt, which could not be done by the Appellant. The above is also clear acknowledgement of debt and default on the part of the Corporate Debtor. The Adjudicating Authority has not committed any error in admitting Section 7 Application. There are no good ground to interfere with the impugned order admitting Section 7 Application. The Appeal is dismissed. Issues Involved:1. Whether the investment made by the Financial Creditor in the Corporate Debtor constituted a financial debt in default, allowing the filing of an application under Section 7 of the IBC.2. Whether the Adjudicating Authority erred in admitting the Section 7 application filed by the Financial Creditor.Summary:Issue 1: Financial Debt in DefaultThe investment made by the Financial Creditor in the Corporate Debtor through the Share Subscription and Shareholders Agreement (SSSHA) and subsequent agreements, including the Binding Term Sheet and Consent Terms, was scrutinized to determine if it constituted a financial debt. The agreements included clauses for exit mechanisms, put options, and indemnities, indicating a commercial effect of borrowing. The financial transactions were made with the expectation of returns, including an Internal Rate of Return (IRR) of 15% per annum, compounded annually. The Consent Terms resulted in a Consent Award, which specified the amounts to be paid by the Corporate Debtor and Promoters, further solidifying the financial obligations. The Hon'ble Supreme Court's interpretations in similar cases were considered, affirming that transactions with commercial borrowing effects and time value of money considerations qualify as financial debt under Section 5(8) of the IBC.Issue 2: Admission of Section 7 ApplicationThe Adjudicating Authority's decision to admit the Section 7 application was challenged on the grounds that the Financial Creditor's claim arose from a Consent Award, which the Appellant argued was not a financial debt. However, the Tribunal found that the application was not solely based on the Consent Award but included defaults under previous agreements, establishing a financial debt. The Tribunal referenced multiple judgments, including those from the Hon'ble Supreme Court, to conclude that even crystallized debts in the form of decrees or awards could be considered financial debts if they originated from transactions with the commercial effect of borrowing. The Corporate Debtor's repeated acknowledgments of the debt and failure to make payments further supported the existence of a financial debt and default.Conclusion:The Tribunal upheld the Adjudicating Authority's order admitting the Section 7 application, confirming that the investment and subsequent agreements constituted a financial debt in default, and the Corporate Debtor's obligations were enforceable under the IBC. The appeal was dismissed, affirming the classification of the Financial Creditor's claim as a financial debt.