2021 (5) TMI 314 - Tri - Insolvency and Bankruptcy

Tribunal dismisses Financial Creditor's application as debt not financial under Insolvency & Bankruptcy Code

The Tribunal dismissed the application filed by the Financial Creditor as the debt claimed did not qualify as a financial debt under the Insolvency and ... Financial debt - Financial creditor - High Seas Sale Agreement - Arbitral award as record of default - Corporate Insolvency Resolution ProcessFinancial debt - Financial creditor - High Seas Sale Agreement - Arbitral award as record of default - Whether the claim arising from the High Seas Sale Agreement and related loan documents constituted a 'financial debt' entitling the applicant to invoke CIRP under Section 7 of the IBC. - HELD THAT: - The Tribunal analysed the nature and characteristics of the High Seas Sale (HSS) transaction and concluded that an HSS is a sale effected while goods are in transit (purchase in the course of import) where title and documents of title are transferred prior to arrival in India. The source document relied upon by the applicant was the HSS agreement, supplemented by loan and renewal agreements and an arbitral award. On that factual and documentary foundation the Tribunal held that the underlying transaction was a commercial sale in the course of import and not a financial transaction which could be re-characterised as a financial debt. Although an arbitral award had been passed and an appeal was dismissed, and despite correspondence and other contentions about payment (including a Letter of Credit), the Tribunal emphasised that the legal character of the source transaction governed by the HSS agreement could not be converted into a financial debt. For these reasons the applicant could not be treated as a financial creditor for the claim made under Section 7 and the petition did not disclose a financial debt constituting a record of default actionable under the IBC. [Paras 12, 13, 14, 16]The application under Section 7 was dismissed on the ground that the claim did not constitute a financial debt and the applicant was not a financial creditor.Final Conclusion: The Insolvency Petition under Section 7 was dismissed as the Tribunal found that the claimed dues arose from a High Seas Sale transaction which could not be treated as a financial debt, and therefore the applicant was not a financial creditor entitled to initiate CIRP; order dismissed without costs. Issues Involved:1. Whether the debt claimed by the Financial Creditor qualifies as a 'financial debt' under Section 7 of the Insolvency and Bankruptcy Code, 2016.2. Validity and enforceability of the High Seas Sale Agreement and subsequent loan agreements.3. Whether the arbitration award constitutes a valid record of default under the Insolvency and Bankruptcy Code.4. Examination of the Corporate Debtor's claims of having settled the debt.Detailed Analysis:1. Qualification of Debt as 'Financial Debt':The Financial Creditor filed an application under Section 7 of the Insolvency and Bankruptcy Code, 2016, seeking initiation of Corporate Insolvency Resolution Process (CIRP) against the Corporate Debtor for defaulting on a payment of Rs. 5,25,00,000. The Financial Creditor argued that the debt arose from a High Seas Sale Agreement and subsequent loan agreements, claiming the total amount due, including interest, was Rs. 11,09,69,769. However, the Tribunal observed that the High Seas Sale Agreement, which involved the import of crude palm oil, did not constitute a 'financial debt' as per Section 2(8) of the Code. The Tribunal noted, 'projecting this High Seas Sale Agreement as the source document by the Applicant their claim as Financial Debt and the Applicant claiming themselves to be the Financial Creditor is misconceived.'2. Validity and Enforceability of Agreements:The Financial Creditor provided details of several agreements, including a High Seas Sale Agreement dated 23.04.2012, a Loan Agreement dated 09.04.2012, and a Loan Renewal and Working Capital Loan Agreement dated 21.03.2013. The Corporate Debtor contended that these agreements did not establish a financial debt. The Tribunal examined these documents and concluded that the nature of the High Seas Sale Agreement did not support the Financial Creditor's claim. The Tribunal stated, 'we cannot treat the Applicant as Financial Creditor and there is no Financial Debt.'3. Arbitration Award as Record of Default:The Financial Creditor initiated arbitration proceedings, resulting in an award on 18.03.2015, which was upheld by the Hon'ble High Court of Bombay on 17.02.2017. The Financial Creditor argued that the arbitration award constituted a valid record of default. The Tribunal acknowledged the arbitration award but emphasized that the underlying transaction (High Seas Sale Agreement) did not qualify as a financial debt. The Tribunal noted, 'an Arbitral Award is a valid record of an event of 'default,'' but in this case, the nature of the transaction did not support the claim.4. Corporate Debtor's Claims of Settled Debt:The Corporate Debtor argued that the debt was settled through payments made under the High Seas Sale Agreement and other transactions. They provided evidence, including a letter from Karur Vysya Bank confirming fund transfers. The Tribunal scrutinized these claims and found inconsistencies in the Financial Creditor's submissions. The Tribunal observed, 'the alleged Ledger Book entries... are totally bogus and highly manipulated.' The Tribunal concluded that the debt claimed by the Financial Creditor was not substantiated by credible evidence.Conclusion:The Tribunal dismissed the application filed by the Financial Creditor, concluding that the debt did not qualify as a financial debt under the Insolvency and Bankruptcy Code, 2016. The Tribunal stated, 'we are of the considered view that as evidenced by the source document namely High Seas Sale Agreement, written submissions and pleadings, we cannot treat the Applicant as Financial Creditor and there is no Financial Debt.' The application IBA/1087/2019 was dismissed without costs.