2022 (8) TMI 881 - AT - Insolvency and Bankruptcy

Appeal Dismissed: Financial Assistance Not Debt under Insolvency Law

PEC Ltd. Versus M/s. Phulchand Exports Pvt. Ltd.

The Tribunal dismissed the appeal as the financial assistance provided did not qualify as financial debt under the Insolvency and Bankruptcy Code (IBC). ... Maintainability of application - initiation of CIRP - Corporate Debtor failed to make repayment of its dues - Financial Creditors - Financial Debt or not - existence of debt and dispute or not - whether the amount given by the so-called Financial Creditor (Appellant) to the Corporate Debtor (Respondent) is a financial debt under the IBC, and if it is so, then is the repayment of the debt in respect of the claim in default and due and payable to the Appellant? - HELD THAT:- It is clear from the pleadings and documents submitted by the parties that the Foreign Contract was entered into between the buyer Networth Trading Pte Limited and seller PEC Ltd. on 2.11.2010. Thereafter, for fulfillment of this contact, an agreement (referred as ‘Associate Buyer Agreement’) was signed on the next day i.e. 3.11.2010 between the Appellant and Respondent. The Foreign Contract is regarding procurement and shipment of 1,00,000 WMTS ± 5% at seller’s option of iron ore fines from Mormugao Port, India to a port in China. The payment condition included on the contract mentions that the buyer shall arrange payment within 7 days from the date of dispatch of documents from seller bank. Thus, payment is to be made by the buyer Networth Trading Pte Ltd. to the seller PEC Ltd. after shipment from Mormugao Port in India - The Foreign Contract also stipulates that the Associate Supplier shall abide by the terms and conditions of the foreign contract and foreign contract shall form an integral and inseparable part of this agreement i.e. Associate Supplier agreement (reference clause 4 of the Associate Supplier Agreement). Thus, it is abundantly clear that a buyer-seller contract was entered into between the Networth Trading Pte Limited, Singapore and PEC Limited on 2.11.2010 and in furtherance of contract, PEC entered into an agreement with the Associate Supplier Phulchand Exports Pvt. Ltd. (Respondent) through a separate agreement dated 3.11.2010. The financial assistance provided to the Associate Supplier by PEC Ltd. is to fulfill, perform and discharge the obligations and responsibilities of PEC under the foreign contract. It is clear that the amount provided by PEC as financial assistance, and claimed by it as financial debt under IBC, is basically for purchase, shipment and export of iron ore fines in fulfilment of the foreign contract. This amount is certainly not an amount given by PEC Ltd. as a financial creditor to a corporate entity M/s Phulchand Exports to ensure its overall financial viability. An examination of the debt given as advance by PEC Ltd. in the light of the definitions provided in sub-section 11 of section 3 and clause (f) of sub-section 8 of section 5 of the IBC makes it clear that while the amount advanced by PEC to M/s. Phulchand Exports Pvt. Ltd. would be a debt under the definition given section 3(11) of the IBC, it should have the commercial effect of borrowing, and more so a borrowing that helps in ensuring financial viability of the corporate debtor for it to qualify as ‘financial debt’ under the IBC. Therefore, the amount provided by PEC Ltd. as interest-bearing advance to the Respondent does not qualify to be a ‘financial debt’ as defined under the IBC. The amount as claimed by the Appellant does not fall in the category of ‘financial debt’ as defined in the IBC - the Adjudicating Authority has not erred in passing the Impugned Order, whereby the Section 7 application of the Appellant has been dismissed. Appeal dismissed. Issues Involved:1. Classification of the debt as financial debt under the Insolvency and Bankruptcy Code (IBC).2. Determination of default and due payment.3. Applicability of the force majeure clause.4. Relevance of previous judgments in similar cases.Issue-wise Detailed Analysis:1. Classification of the Debt as Financial Debt under the IBC:The primary issue in this appeal was whether the amount provided by PEC Limited (Appellant) to the Corporate Debtor (Respondent) qualifies as a financial debt under the IBC. The Appellant argued that the financial assistance provided in the form of packing credit to the Respondent for procurement of iron ore should be considered financial debt. The Appellant cited previous judgments where similar financial assistance was classified as financial debt.However, the Tribunal examined the Associate Supplier Agreement and the Foreign Contract, noting that the financial assistance was for the specific purpose of buying, shipping, and exporting iron ore fines to fulfill the foreign contract. The Tribunal emphasized that financial debt under the IBC is intended to ensure the financial viability of the corporate debtor. The Tribunal referred to the Supreme Court judgments in Swiss Ribbons Pvt. Ltd. vs. Union of India and Anuj Jain, Interim Resolution Professional for Jaypee Infratech Ltd. vs. Axis Bank Ltd., which clarified that financial creditors are involved in assessing the viability of the corporate debtor and restructuring loans to ensure financial stability.The Tribunal concluded that the financial assistance provided by PEC Ltd. was not intended to ensure the financial viability of the Respondent but was limited to the performance of a specific contract. Therefore, the amount did not qualify as financial debt under the IBC.2. Determination of Default and Due Payment:The Appellant argued that the Respondent had acknowledged the debt and agreed to repay it in installments, which constituted a default when payments were not made. However, the Tribunal noted that the Associate Supplier Agreement did not include a repayment schedule or a clear event of default. The payment was to be received by PEC Ltd. after the shipment of iron ore fines, which did not occur due to the confiscation of the iron ore by government authorities.The Tribunal found that in the absence of a clear repayment schedule and a defined date of default, it could not be established that the debt was in default.3. Applicability of the Force Majeure Clause:The Respondent argued that the shipment did not take place due to the confiscation of iron ore by government authorities, which constituted a force majeure event under the Foreign Contract. The Tribunal examined the force majeure clause, which covered acts of government as valid causes for non-performance of the contract.The Tribunal agreed that the confiscation of iron ore was a force majeure event, and thus, the Respondent was not liable for non-performance of the contract. Consequently, no payment was received from the foreign buyer, and there was no default in payment by the Respondent to the Appellant.4. Relevance of Previous Judgments in Similar Cases:The Appellant cited previous judgments where financial assistance provided by PEC Ltd. was classified as financial debt. However, the Tribunal noted that these judgments were delivered before the Supreme Court's clarification on the definition of financial debt in the Swiss Ribbons and Anuj Jain cases. The Tribunal emphasized that the Supreme Court's interpretation of financial debt under the IBC takes precedence.The Tribunal concluded that the amount advanced by PEC Ltd. to the Respondent did not qualify as financial debt under the IBC based on the Supreme Court's interpretation.Conclusion:The Tribunal held that the amount claimed by the Appellant did not fall within the definition of financial debt under the IBC. Since the debt was not classified as financial debt, the Appellant's application under Section 7 of the IBC was dismissed. The appeal was accordingly dismissed, with no order as to costs.