2019 (5) TMI 331 - AT - Insolvency and Bankruptcy

Appellant's Financial Creditor Status Upheld in Insolvency Case

The Tribunal determined that the Appellant was a financial creditor, not an operational creditor, due to the transformation of a construction project ... Initiation of Corporate Insolvency Resolution Process - financial creditor - default in discharging the financial debt - Section 7 of the Insolvency and Bankruptcy Code, 2016 - The Appellant and the Respondent entered into an agreement for construction of a residential building on a turnkey basis which was abandon - advance money was given in pursuant to agreement - Respondent retained the money received from the Appellant as loan and started paying interest - HELD THAT:- Respondent has not denied the transaction which initially related to execution of a construction project for which the Appellant had disbursed amount of ₹ 1.5 Crores as advance money but on the project becoming commercially unviable got transformed into a ‘financial debt’ and was treated so. Payment of interest thereon, as admitted by the Respondent is compatible with this proposition and speaks of no exception. The money disbursed by the Appellant cannot be said to have been bestowed upon the Respondent as largesse nor as alms. It was disbursed in pursuance of an agreement in the nature of a financial transaction against consideration of time value of money as the building raised in pursuance of such agreement would fetch fortunes for the Appellant. The project however fell through on account of market considerations. If there were any doubt in the nature of transaction, same got cleared as even according to Respondent interest was paid on the advance money. There is no impediment in holding that the debt in question fell within the purview of ‘financial debt’ and the Appellant’s status was that of a ‘financial creditor’ and not an ‘operational creditor’ as erroneously held by the Adjudicating Authority. Once we hold that the Appellant was a ‘financial creditor’ qua the Respondent – Corporate Debtor and the application under Section 7 being in the prescribed format and not being defective was required to be admitted on proof of default, we find that the Respondent has failed to discharge onus of proof of discharge of debt. The impugned order holding the Appellant as ‘operational creditor’ and declining to initiate Insolvency Resolution Process on account of pre-existence of dispute is unsustainable - Application admitted. Issues Involved:1. Status of the Appellant as a financial creditor or operational creditor.2. Initiation of Corporate Insolvency Resolution Process (CIRP) under Section 7 of the Insolvency and Bankruptcy Code, 2016 (I&B Code).3. Existence of a dispute between the parties impacting the CIRP.Issue-wise Detailed Analysis:1. Status of the Appellant as a Financial Creditor or Operational Creditor:The primary question was whether the Appellant, who sought the initiation of CIRP against the Respondent, was a financial creditor or an operational creditor. The Appellant had entered into an agreement with the Respondent for constructing a residential building and transferred Rs. 1.5 Crore as an advance. The project was later abandoned, and the Respondent retained the money, treating it as a loan and paying interest on it. The Appellant argued that this transaction constituted a financial debt. The Adjudicating Authority had previously classified the Appellant as an operational creditor, citing the existence of disputes due to pending civil suits. However, the Appellate Tribunal found that the transaction, which initially related to a construction project, transformed into a financial debt when the project was abandoned, and interest payments were made. Consequently, the Appellant was deemed a financial creditor.2. Initiation of Corporate Insolvency Resolution Process (CIRP) under Section 7 of the I&B Code:The Appellant filed an application under Section 7 of the I&B Code, which pertains to financial creditors initiating CIRP. The Tribunal noted that the Adjudicating Authority had not adequately considered whether the transaction met the definition of 'financial debt' under Section 5(8) of the I&B Code. The Tribunal emphasized that a financial debt includes money disbursed against the consideration for the time value of money, which can include interest but is not a mandatory component. The Tribunal concluded that the Appellant's disbursement of Rs. 1.5 Crore, which was later treated as a loan with interest payments, constituted a financial debt. Therefore, the Appellant's application under Section 7 was valid and should have been admitted.3. Existence of a Dispute Between the Parties Impacting the CIRP:The Adjudicating Authority had rejected the Appellant's application, citing the existence of disputes, including pending civil suits and a quashed FIR. The Tribunal, however, found that these disputes were not relevant to the initiation of CIRP under Section 7. The Tribunal noted that the Respondent had admitted to paying interest on the disbursed amount and had issued balance confirmations and cheques, some of which were dishonored. The Tribunal held that the existence of disputes did not preclude the initiation of CIRP, as the Respondent had failed to discharge the debt. The Tribunal also highlighted that the pendency of cross suits did not bar the CIRP under the I&B Code, given its overriding mandate under Section 238.Conclusion:The Tribunal concluded that the Appellant was a financial creditor and that the application under Section 7 of the I&B Code was wrongly rejected by the Adjudicating Authority. The Tribunal set aside the impugned order and directed the Adjudicating Authority to admit the Appellant's application after giving the Respondent a limited notice to settle the claim if it chose to do so. The appeal was allowed, and there were no orders as to costs.