2021 (1) TMI 271 - Tri - Insolvency and Bankruptcy

Tribunal reclassifies debts, denies time exclusion request

Paramount Consultants and Corporate Advisors Private Limited Versus Prabhat Technologies (India) Limited (formerly known as Prabhat Telecom (India) Limited)

The Tribunal partially allowed the application by setting aside the decision to classify debts owed to Respondent Nos. 2 and 3 as financial debts. ... CIRP Proceedings - Operational Debts or Financial Debts - The IRP however, was of the opinion that the Corporate Debtor being a financial guarantor owed a financial debt to the Respondent Nos. 2 and 3. Thus the Respondent Nos. 2 & 3 would have to be regarded as Financial Creditors of the Corporate Debtor. - HELD THAT:- Forward Purchase Agreement may or may not be regarded as a financial transaction for it to be a financial debt. It must have the commercial effect of a borrowing. The recitals of the Forward Purchase Agreement indicated above do not envisage the financial transactions in the nature of financial debt as defined under section 5(8) of the Code. The Agreements do not satisfy the parameters discussed in the cited precedent supra. A forward contract to sell a product at the end of a specified period cannot be regarded as a financial contract. Both the FPAs indicate that they were essentially forward contracts for supply of specified goods (products). The Corporate Debtor or for that matter the purchaser under the Agreement dated 29.09.2018 has not raised any amount thereunder. Under the Agreements they agreed to purchase certain products and pay therefor. The Corporate Debtor executed deeds of guarantee binding itself to pay any shortfall in case of default. Such transactions accordingly may at best amount to an operational debt in terms of section 5(21) of the Code for provision of goods and services and payment in respect thereto. Therefore, the FPAs dated 29.09.2018 and 28.12.2018 cannot be regarded as financial transactions in which a debt was raised or payment was made against the consideration for the time value of money which also had the commercial effect of borrowing - the transactions were essentially simple agreements of sale and purchase. The same would not come within the definition of ‘financial debt’ under section 5(8)(f) of the Code. The principal agreements not being financial transactions and the amount of any liability in respect of the guarantee contemplated under section 5(8)(i) of the Code, would accordingly not come within the purview of the financial debt. The guarantee essentially was for payment against default in the sale consideration of the products agreed to be purchased respectively from Respondent Nos. 2 and 3. The guarantees being not a liability arising out of the transaction in terms of section 5(8)(f) of the Code, would not come within the purview of the financial debt. The Respondent No 2 and Respondent No 3, accordingly cannot find a place in the CoC - decision of the Respondent No. 1 admitting the claims of Respondent Nos. 2 and 3 as financial creditors is set aside - Application is allowed in part on contest. Issues Involved:1. Classification of debts owed to Respondent Nos. 2 and 3.2. Determination of whether the debts qualify as 'financial debt' under Section 5(8) of the Insolvency and Bankruptcy Code, 2016.3. Reworking the list of creditors in the Committee of Creditors (CoC) and their voting percentages.4. Exclusion of time period from the Corporate Insolvency Resolution Process (CIRP).Issue-wise Detailed Analysis:1. Classification of Debts Owed to Respondent Nos. 2 and 3:The primary issue was whether the debts owed to Respondent Nos. 2 and 3 should be classified as financial debts or operational debts. The Applicant argued that the debts should be classified as operational debts, while the Interim Resolution Professional (IRP) classified them as financial debts. The Tribunal noted that the debts arose from Forward Purchase Agreements (FPAs) and deeds of guarantee executed by the Corporate Debtor.2. Determination of Whether the Debts Qualify as 'Financial Debt':The Tribunal examined the definition of 'financial debt' under Section 5(8) of the Insolvency and Bankruptcy Code, 2016. According to Section 5(8), a financial debt is a debt disbursed against the consideration for the time value of money and includes various financial transactions. The Tribunal emphasized that for a debt to qualify as a financial debt, it must have been disbursed against the consideration for the time value of money and have the commercial effect of borrowing.The Tribunal analyzed the FPAs and deeds of guarantee:- The agreement between Respondent No. 2 and Pragat Akshay Urja Limited (a subsidiary of the Corporate Debtor) involved the supply of goods for a fixed price over five years. The Corporate Debtor executed a deed of guarantee to secure payment in case of default.- Similarly, the Corporate Debtor entered into an FPA with Respondent No. 3 for the supply of products, with a guarantee provided by the Corporate Debtor.The Tribunal concluded that the FPAs were essentially forward contracts for the supply of specified goods and did not involve the raising of any debt by the buyers/purchasers. The transactions were simple agreements of sale and purchase, not financial transactions with the consideration for the time value of money. Therefore, the debts owed to Respondent Nos. 2 and 3 did not qualify as financial debts under Section 5(8)(f) of the Code.3. Reworking the List of Creditors in the CoC and Their Voting Percentages:Given that the debts owed to Respondent Nos. 2 and 3 were classified as operational debts, the Tribunal ordered that Respondent Nos. 2 and 3 should be regarded as Operational Creditors. Consequently, the list of creditors in the CoC needed to be redrawn, and their voting percentages reworked to reflect this classification.4. Exclusion of Time Period from the CIRP:The Applicant sought the exclusion of the time period from the CIRP from the day of appointment of the IRP until the conclusion of the Application. However, the Tribunal denied this prayer, stating that the request for exclusion of time was not made under Section 12(2) of the Code.Conclusion:The Tribunal allowed the application in part, setting aside the decision of the IRP to admit the claims of Respondent Nos. 2 and 3 as financial creditors. The Tribunal ordered that Respondent Nos. 2 and 3 be classified as Operational Creditors, and the list of creditors in the CoC be redrawn accordingly. The prayer for exclusion of time from the CIRP was denied, and no costs were awarded.