2021 (1) TMI 931 - Tri - Insolvency and Bankruptcy

Advance payment not a financial debt under Insolvency Code, classified as operational debt. Application dismissed.

The Tribunal determined that the advance payment made by the Applicant to the Corporate Debtor for the supply of goods did not constitute a Financial Debt ... Definition of Financial Debt under section 5(8) of the I&B Code, 2016 - operational debt - time value of money - commercial dispute - jurisdiction of the Commercial Court - buyer-seller transactionDefinition of Financial Debt under section 5(8) of the I&B Code, 2016 - operational debt - time value of money - buyer-seller transaction - Whether the claim of the applicant arising from advance payment against purchase orders constitutes a Financial Debt or an Operational Debt. - HELD THAT: - The Tribunal examined the underlying transaction and the agreement between the parties and noted that the dispute arose from advance payment made by the applicant for purchase orders and non supply of goods, which was adjudicated by the Commercial Court as a commercial dispute (paras 8, 11). The definition of 'financial debt' under section 5(8) requires a debt disbursed against consideration for the time value of money. The purchase orders and related documents did not indicate that the amount paid was disbursed as a loan repayable with interest over time; rather the payments were advances for procurement of goods (para 12). Because the transaction was in substance a buyer seller commercial transaction and not a disbursement for the time value of money, the claim did not fall within the statutory definition of Financial Debt and was properly treated as an operational debt by the Resolution Professional (paras 6, 8, 11, 12, 13). [Paras 8, 11, 12, 13, 14]The applicant's claim is not a Financial Debt but an Operational Debt; the Resolution Professional's classification is upheld and IA No.66/2020 is dismissed.Final Conclusion: The Tribunal upheld the Resolution Professional's classification of the applicant's claim as an operational debt (not a financial debt under section 5(8)), concluding that advance payments under purchase orders did not constitute disbursement for the time value of money; the application seeking recognition as a financial creditor is dismissed. Issues Involved:1. Determination of the nature of debt: Financial Debt vs. Operational Debt.Issue-wise Detailed Analysis:1. Determination of the nature of debt: Financial Debt vs. Operational DebtThe present application was filed under Section 60(5) of the Insolvency and Bankruptcy Code (I&B Code), 2016, seeking to direct the Resolution Professional (RP) to accept the claim of the Applicant as a Financial Creditor and reconstitute the Committee of Creditors accordingly.Applicant's Arguments:- The Applicant Company placed purchase orders with the Corporate Debtor (CD) for procuring yarn and paid the entire amount in advance as mentioned in the proforma invoices.- The Corporate Debtor failed to supply the remaining material and issued a cheque for the advance money, which was dishonored due to insufficient funds.- The Applicant filed a commercial suit and obtained a decree in its favor for the recovery of Rs. 1,68,99,220/- along with future interest at 6% p.a.- The Applicant filed its claim with the Interim Resolution Professional (IRP) in Form C, but the IRP considered the transaction as an operational debt and directed the Applicant to submit the claim in Form B.- The Applicant argued that the advance payment made had the commercial effect of borrowing, satisfying the condition of the time value of money under Section 5(8)(f) of the I&B Code, 2016, and should be treated as a Financial Creditor.Respondent's Arguments:- The Respondent/RP contended that the Applicant is trying to misinterpret the provisions of Sections 5(8)(f), 5(21), and 5(22) of the I&B Code, 2016, to project itself as a Financial Creditor.- The Applicant's transaction with the Corporate Debtor was for the purchase of material and not a financial debt.- The Commercial Court's judgment was based on a transaction involving procurement of goods and services, not a loan transaction.- The RP rightly instructed the Applicant to submit its claim under the category of 'Other Creditors' and not as a Financial Creditor.Tribunal's Analysis:- The Tribunal noted that the dispute is not about the quantum of the amount but the nature of the debt.- The claim arose from the judgment of the Commercial Court regarding the advance payment made by the Applicant for purchase orders placed with the Corporate Debtor and non-supply of goods.- The jurisdiction of the Commercial Court is conferred by Section 6 of the Commercial Courts Act, 2015, which deals with commercial disputes.- The transaction between the Applicant and the Corporate Debtor falls within the definition of a 'commercial dispute' as per Section 2(c) of the Commercial Courts Act, 2015.- The definition of Financial Debt under Section 5(8) of the I&B Code, 2016, requires the debt to be disbursed against the consideration for the time value of money.- The Tribunal observed that the advance payment was made for the supply of goods and not as a disbursement of debt for the time value of money. The Purchase Order did not mention repayment with interest over time.- Hence, the Tribunal concluded that the claim of the Applicant is not a Financial Debt within the meaning of Section 5(8) of the I&B Code, 2016.Conclusion:- The Tribunal found no infirmity in the decision of the RP to classify the Applicant's claim as an operational debt and not a financial debt.- Consequently, the application was dismissed.