Advance under agreement to sell treated as financial debt where transaction had the commercial effect of borrowing.

Advance paid under an agreement to sell was treated as financial debt where the arrangement had the commercial effect of borrowing and the money was advanced for acquisition of property, to be adjusted through execution of the sale deed. The tribunal reasoned that a transaction need not be a conventional loan if funds are paid for a specific purpose and the corporate debtor receives them in a manner resembling borrowing. On those facts, M/s. Versatile Commotrade Private Limited was treated as a financial creditor in the insolvency proceedings.

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Issues: Whether the advance paid under the agreement to sell constituted a financial debt so as to justify treating M/s. Versatile Commotrade Private Limited as a financial creditor in the insolvency proceedings.

Analysis: The advance was examined in the light of the definition of financial debt and the residuary limb covering transactions having the commercial effect of borrowing. The reasoning proceeded on the basis that a transaction need not be a conventional loan if money is paid for a particular purpose and the arrangement results in the corporate debtor obtaining funds with the commercial effect of borrowing. On the facts, the sale transaction was treated as one entered into for profit, with advance money paid for acquisition of property and to be returned through execution of the sale deed, thereby reflecting the essential indicia of financial debt.

Conclusion: The advance was held to be financial debt, and M/s. Versatile Commotrade Private Limited was held to be a financial creditor.

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