2023 (1) TMI 303 - AT - Insolvency and Bankruptcy

Dismissal of Appeal: Transactions Not Financial Debts under IBC

The appeal against the rejection of a Section 7 application under the Insolvency and Bankruptcy Code (IBC) was dismissed by the tribunal. It was held that ... Rejection of application - initiation of CIRP - Corporate Debtor failed to make repayment of its dues - Financial Creditors or not - real nature of the transactions between the parties is of loan transaction or not - HELD THAT:- The submission of learned counsel for the Appellant that the mention of Capital Advance was only an inadvertent error which was corrected in 2019-20 and 2020-21, cannot be accepted. The Section 7 application itself was filed by the Appellant in the year 2019 and Appellant has contemporaneous records which have their own relevance and value. The Appellant who was Assignee of IFIN when itself described the amount of Rs.210 Crores as Capital Advance, it is clear that it was understood even by the Assignee that the amounts were in the nature of Capital Advance for the purposes of supply and services. The Balance Confirmation which was issued by the Borrower in the year 2017, which is part of the Reply filed by the Corporate Debtor, also mentions the amount as project advance. When the Corporate Debtor has challenged the very nature of the financial debt, the Adjudicating Authority was required to look into the nature of transactions to decide as to whether the transactions falls within the meaning of Section 5 Sub-section (8) of the I&B Code. Hon’ble Supreme Court in ES KRISHNAMURTHY & ORS. VERSUS M/S BHARATH HI TECH BUILDERS PVT. LTD. [2021 (12) TMI 683 - SUPREME COURT] has held that if the Adjudicating Authority is satisfied that default is occurred it has to admit the application. There can be no dispute to the proposition as laid down by the Hon’ble Supreme Court in the above case. The present is not a case where default in payment of debt is an issue. The principal issue which was raised by the Corporate Debtor in its Reply was that the transaction itself is not a financial debt. Further, there can be no dispute that in law a Guarantor is a Corporate Person and if the Corporate Debtor committed default in payment of debt, application under Section 7 can very well be filed against the Corporate Guarantor but the question in the Section 7 application before the Adjudicating Authority was very nature of the transaction. The Corporate Debtor has questioned the very nature of the transaction pleading that it was not a financial debt not disbursed for time value of the money and it was for the purposes of only arranging the advance payment which was to be made by the IL&FS entities in favour of WWIL and its subsidiaries. The Adjudicating Authority has also noticed that the Appellant who had filed Section 7 application has not filed in rejoinder refuting the various pleadings and materials brought on record by the Corporate Debtor in its detailed reply alongwith Annexures. The Adjudicating Authority after considering all the relevant facts and circumstances has rightly come to the conclusion that application under Section 7 did not deserve admission - Appeal dismissed. Issues Involved:1. Rejection of Section 7 application under the Insolvency and Bankruptcy Code (IBC).2. Determination of whether the transactions in question constitute a 'financial debt' under Section 5(8) of the IBC.3. Examination of the nature of transactions between the parties.4. Consideration of financial statements and contemporaneous documents.5. The role and liability of the Corporate Guarantor.Issue-wise Detailed Analysis:1. Rejection of Section 7 application under the Insolvency and Bankruptcy Code (IBC):The appeal was filed against the order dated 03.06.2022 by the National Company Law Tribunal (NCLT), Mumbai Bench, which rejected the Section 7 application under the IBC filed by the appellant. The appellant, aggrieved by this rejection, sought to challenge the decision on the grounds that the debt in question qualifies as a 'financial debt' and that the adjudicating authority should have admitted the application based on the default in payment.2. Determination of whether the transactions in question constitute a 'financial debt' under Section 5(8) of the IBC:The core issue was whether the transactions between IL&FS Financial Service Limited (IFIN) and Wind World India Limited (WWIL) and its subsidiaries were 'financial debts' as defined under Section 5(8) of the IBC. The adjudicating authority concluded that the transactions were not loans disbursed for the time value of money but were instead advance payments for the supply of materials and services. The authority cited various documents, including financial statements and emails, indicating that the transactions were structured to facilitate payments for services and supplies rather than constituting financial loans.3. Examination of the nature of transactions between the parties:The transactions involved IFIN providing advances to WWIL and its subsidiaries, which were later to be squared off against project payments by IEDCL SPVs. The adjudicating authority noted that the essence of the transactions was advance payments for the supply of materials and commissioning of wind turbines, not loans. This conclusion was supported by contemporaneous documents, including emails and financial statements, which described the transactions as capital advances or project advances.4. Consideration of financial statements and contemporaneous documents:The adjudicating authority relied on financial statements of the appellant, which classified the amounts as 'capital advances.' Notably, the financial statements for FY 2016-17 and FY 2017-18 described the amounts as capital advances, indicating that they were not considered financial loans. The authority also referenced emails and other documents that corroborated the nature of the transactions as advance payments for supplies and services.5. The role and liability of the Corporate Guarantor:The appellant argued that the corporate guarantor (respondent) had a coextensive liability with the principal borrower and thus owed a financial debt. However, the adjudicating authority found that since the underlying transactions were not financial debts, the corporate guarantor could not be held liable under Section 7 of the IBC. The authority emphasized that the transactions were part of a broader arrangement to facilitate advance payments for project milestones and not loans disbursed for the time value of money.Conclusion:The adjudicating authority concluded that the transactions did not constitute 'financial debts' under Section 5(8) of the IBC and thus dismissed the Section 7 application. The appeal was dismissed, with the tribunal affirming that the transactions were advance payments for supplies and services, not loans. The appellant's financial statements and contemporaneous documents supported this conclusion, and the authority found no merit in the appeal.