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

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

The tribunal allowed the appeal, setting aside the impugned order and holding that the debt in question should be treated as 'Financial Debt.' The ... Financial debt - operational debt - financial creditor - operational creditor - consideration for the time value of money - commercial effect of a borrowing - Section 5(8)(f) of the Code - any transaction having the commercial effect of a borrowing - Rule 3(1)(d) - requirements of a financial contractFinancial debt - Section 5(8)(f) of the Code - any transaction having the commercial effect of a borrowing - consideration for the time value of money - commercial effect of a borrowing - Whether the amounts received by the Corporate Debtor as a termed 'Security Deposit' together with interest fall within the definition of 'financial debt' under Section 5(8) of the Code (including clause (f)) or constitute an 'operational debt'. - HELD THAT: - The Tribunal applied the statutory test in Section 5(8) - a 'financial debt' is a debt disbursed against consideration for the time value of money and may include any transaction having the commercial effect of a borrowing. The court examined the agreements, bank transfers, accounting treatment and tax deduction entries and relied on authorities emphasising that characterization depends on the intention of parties and surrounding circumstances. The Agreements required the Appellant to deposit specified sums which carried interest at 21% per annum and the Corporate Debtor had credited interest in its books and tax was deducted on interest paid. The Tribunal held that the payment of interest and the acceptance and accounting of the sums by the Corporate Debtor constituted consideration for the time value of money and demonstrated the commercial effect of borrowing. Consequently, the Appellant qualified as a financial creditor in respect of the security deposit and interest, and the debt could not be confined to the label 'security deposit' or treated as purely operational merely because it arose in the context of a sales-promotion arrangement. The Tribunal held the ratio of the Supreme Court in Orator Marketing (regarding clause (f) and commercial effect) to be applicable and decisive on the facts. [Paras 18, 19, 21, 22, 24]The security deposit and interest are 'financial debt' within Section 5(8) of the Code and the Appellant is a Financial Creditor in respect thereof; the Impugned Order classifying the claim as operational debt is set aside.Final Conclusion: The Appeal is allowed. The amounts taken by the Corporate Debtor as 'security deposit' together with interest are held to be a 'financial debt' under Section 5(8) (including clause (f)) of the Code; the Impugned Order treating the claim as an operational debt is set aside and the Adjudicating Authority is requested to proceed expeditiously. 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.'