2021 (10) TMI 644 - AT - Insolvency and Bankruptcy

Tribunal reclassifies debt as 'Financial Debt,' stresses timely decisions.

Sach Marketing Pvt. Ltd. Versus Resolution Professional of Mount Shivalik Industries Ltd., Ms. Pratibha Khandelwal

The tribunal allowed the appeal, setting aside the impugned order and holding that the debt in question should be treated as 'Financial Debt.' The ... CIRP process - security deposit and/or intercorporate deposit - Whether this ‘Security Deposit’ and the interest thereon would fall within the ambit of the definition of ‘Financial Debt’ as defined under Section 5(8)(f) of the Code? - HELD THAT:- For a debt to be termed as ‘Financial Debt’, the basic elements that are to be seen is whether (a) there is disbursal against consideration for time value of money and (b) whether it has a commercial effect of borrowing. The definitions provided in Sections 5(7) and 5(8) show that a ‘Financial Creditor’ refers to a person to whom ‘Financial Debt’ is owed and includes even a person to whom such a debt has been legally assigned or transferred to. A ‘Financial Debt’ is a debt alongwith interest which is disbursed against the consideration for the time value of money and it may include any of the events specified in sub-Clause (a) to (i). The Legislature has included any financial transaction in the definition of ‘Financial Debt’ which are usually for a sum of money received today to be paid over a period of time in instalments, or in a single payment in future. In the instant case, the word ‘Security Deposit’ mentioned in Clause 10 of the MoU has to be given the correct interpretation as specified by the Hon’ble Supreme Court in ‘V.E.A Annamalai Chettiar and Anr.’ [1952 (12) TMI 37 - SUPREME COURT]. The true effect of the transaction ought to be determined from the terms of the Agreement, keeping in view, the facts and circumstances of the case. In the instant case, the ‘Sales Promotion Agreement’ mandated a ‘Security Deposit’ carrying interest at 21% per annum. It is not in dispute that the ‘Corporate Debtor’ did not adhere to the payment of interest and that there was a default. In other words, neither the ‘Debt’ nor the ‘Default’ is disputed. The ‘Corporate Debtor’ had accepted the ‘Security Deposit’ from the Appellant and credited the interest for some time against such amounts for the period 2014-15, and bearing in mind the payment of interest on the amounts borrowed by the ‘Corporate Debtor’ is nothing but a consideration for the time value of money and the interest is being paid to the Appellant for using the money belonging to the Appellant over a period of time and hence we arrive at the conclusion that the status of Appellant is that of a Financial Creditor vis-à-vis the amount of ‘Security Deposit’ as per Section 5(7) read with Section 5(8) of the Code - the said amount of debt herein is to be treated as a ‘Financial Debt’. Appeal allowed - decided in favor of appellant. Issues Involved:1. Whether the security deposit and interest thereon qualify as 'Financial Debt' under Section 5(8)(f) of the Insolvency and Bankruptcy Code, 2016.2. The classification of the appellant's claim by the Resolution Professional.3. The nature of the agreements between the appellant and the corporate debtor.4. The treatment of the appellant's claim in the Resolution Plan.Detailed Analysis:Issue 1: Whether the Security Deposit and Interest Thereon Qualify as 'Financial Debt' under Section 5(8)(f) of the Insolvency and Bankruptcy Code, 2016.The primary question in this appeal is whether the security deposit and the interest thereon fall within the ambit of the definition of 'Financial Debt' as defined under Section 5(8)(f) of the Code. The tribunal analyzed the agreements executed between the appellant and the corporate debtor, particularly focusing on the clauses related to the security deposit and the interest payable.The tribunal noted that the agreements mandated a security deposit carrying interest at 21% per annum, which the corporate debtor failed to pay, leading to a default. The tribunal emphasized that for a debt to be termed as 'Financial Debt,' it must involve disbursal against consideration for the time value of money and have the commercial effect of borrowing. The tribunal referred to the Hon'ble Supreme Court's judgment in 'M/s. Orator Marketing Pvt. Ltd. Vs. M/s. Samtex Desinz Pvt. Ltd.' to support its conclusion that the debt in question is a 'Financial Debt.'Issue 2: The Classification of the Appellant's Claim by the Resolution Professional.The Resolution Professional (RP) classified the appellant's claim as 'Operational Debt' based on the order dated 28.09.2018. The tribunal, however, found that the RP's classification was incorrect. The tribunal noted that the financial statements of the corporate debtor showed the security deposit under other financial liabilities and treated the amounts as long-term loans and advances. The tribunal concluded that the security deposit, carrying interest at 21% per annum, had the commercial effect of borrowing and thus should be classified as 'Financial Debt.'Issue 3: The Nature of the Agreements Between the Appellant and the Corporate Debtor.The tribunal examined the agreements dated 01.04.2014 and 01.04.2015, which appointed the appellant as a sales promoter for the corporate debtor's beer. The agreements included a clause requiring the appellant to deposit a minimum security amount with the corporate debtor, which would carry interest at 21% per annum. The tribunal found that the true effect of the transaction, as specified by the Hon'ble Supreme Court in 'V.E.A Annamalai Chettiar and Anr. Vs. S.V.V.S. Veerappa Chettiar & Ors.,' should be determined from the terms of the agreement, keeping in view the facts and circumstances of the case. The tribunal concluded that the security deposit had an element of interest payable and thus had the commercial effect of borrowing.Issue 4: The Treatment of the Appellant's Claim in the Resolution Plan.The tribunal noted that the resolution plan had already been accepted by the Committee of Creditors (CoC) and was pending before the National Company Law Tribunal (NCLT) for approval. The appellant had filed an interim application challenging the rejection of its claim as 'Financial Debt,' but the application was kept pending while the RP sought approval of the resolution plan. The tribunal observed that the appellant was not pressing for the reconstitution of the CoC or opposing the resolution plan but only sought to have its debt treated as 'Financial Debt.'Conclusion:The tribunal allowed the appeal, set aside the impugned order, and held that the debt in question should be treated as 'Financial Debt.' The tribunal requested the adjudicating authority to decide the matter expeditiously, emphasizing the importance of maintaining timelines as observed by the Hon'ble Supreme Court in 'Ebix Singapore Pvt. Ltd. Vs. Committee of Creditors of Educomp Solutions Ltd. & Anr.'