2023 (7) TMI 157 - AT - Insolvency and Bankruptcy

Adjudicating Authority Upholds Insolvency Order against Corporate Debtor

The Adjudicating Authority upheld the order admitting the Section 7 Application under the Insolvency and Bankruptcy Code, 2016, filed by the Financial ... Initiation of CIRP - Financial Debt or not - Creditors were providing factoring services - Loan against Bill of exchange - amount which is subject matter of Section 7 Application is a Financial Debt within the meaning of Section 5(8)(e) of I&B Code, or not - HELD THAT:- The client as per Factoring Agreement is Arcons Infrastructures and Constructions Pvt. Ltd. The clause 12 in the definition of recourse clearly indicates that agreement between the parties was not any agreement which may be called as agreement of non recourse basis. Thus, the Financial Debt which is covered by Factoring Agreement is clearly covered within meaning of Section 5(8)(e) of the Code and the Financial Creditor was entitled to being recourse - there are no substance in the submission of Learned Counsel for the Appellant that Factoring Agreement was non-recourse agreement. The amount of Rs. 4,52,13,711/- was amount as due on 28.01.2019. The Adjudicating Authority found the said amount due and payable, there are no reason to take any different view - Financial Creditor will be entitled for payment of debt due along with interest at least till the insolvency commencement date i.e. 11.11.2022. The amount of Rs. 4,52,13,711.60/- under order of this Tribunal dated 07.12.2022 deposited, be paid to Respondent No. 1 - In addition to aforesaid payment of Rs. 4,52,13,711.60/-, the Appellant shall also make payment of simple interest at the rate of 14.50% p.a. till insolvency commencement date i.e. 11.11.2022 which payments shall be made to Respondent No. 1 within a period of 3 months from today. Appeal disposed off. 1. ISSUES PRESENTED AND CONSIDERED 1. Whether the amounts claimed under the Factoring Agreement constitute a 'financial debt' within the meaning of Section 5(8)(e) of the Code where the agreement was alleged to be on a non-recourse basis. 2. Whether the admission of the Section 7 application was vitiated by the corporate debtor's subsequent offer to deposit the claimed amount and, if not, what relief (including interest) is appropriate where the appellant deposits the principal but disputes liability for interest accrued until the insolvency commencement date. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Characterisation of receivables under the Factoring Agreement as 'financial debt' (Section 5(8)(e)) Legal framework: Section 5(8)(e) defines 'financial debt' to include 'receivables sold or discounted other than any receivables sold on nonrecourse basis.' The Code thereby excludes receivables sold on a non-recourse basis from the definition of financial debt. Precedent treatment: No specific judicial precedents were relied upon or applied in the reasoning; determination proceeded from statutory language and contract construction. Interpretation and reasoning: The Tribunal examined the Factoring Agreement's definitions and recourse provisions. The Agreement defined 'Recourse' as the financier's right to require the client to pay the prepayment amount remaining unpaid and specified 'Recourse Date.' Clause 12 (recourse and credit protection) stated that where creditor protection is zero, the financier shall have the right of recourse against the client for receivables remaining unpaid after the Recourse Date. The Tribunal held that these provisions demonstrate an express right of recourse against the client (the corporate debtor), and therefore the arrangement was not a non-recourse purchase of receivables. Ratio versus obiter: Ratio - the Factoring Agreement's express recourse clause places the receivables within the exclusion from the non-recourse exception, thereby falling within Section 5(8)(e)'s definition of 'financial debt.' This finding directly supports the admission of the Section 7 petition. Obiter - none material to the core holding. Conclusion: The amounts claimed under the Factoring Agreement constitute financial debt under Section 5(8)(e) because the agreement contains an express right of recourse; the non-recourse contention is rejected. Issue 2 - Effect of deposit of claimed amount on maintainability/admission and entitlement to interest up to the insolvency commencement date Legal framework: Section 7 permits a financial creditor to file for initiation of CIRP where a financial debt in default exists. The Code does not automatically render admission void because a debtor subsequently offers or tenders payment; admission depends on existence of debt and default at the time of filing and the merits of the petition. Remedies and directions on deposit and interest are within appellate discretion where payment is tendered during appeal. Precedent treatment: No precedents were cited. The Tribunal exercised its equitable and statutory powers to address the practical consequences of a deposit made during appeal and the creditor's entitlement to interest up to the insolvency commencement date. Interpretation and reasoning: The Tribunal noted that the corporate debtor had admitted the debt and default and had tendered payment of the principal during the appeal. However, the Tribunal emphasized that the financial creditor is entitled to interest on the debt at the contractual rate (14.50% p.a.) at least up to the insolvency commencement date (date of admission by the Adjudicating Authority). The admitted default date and the ledger in the Part IV statement established the amount due as on 28.01.2019; the Adjudicating Authority's admission on 11.11.2022 fixed the insolvency commencement date. Given the appellant's willingness to pay principal, the Tribunal directed payment of the deposited principal to the financial creditor and ordered the appellant to pay additional simple interest at 14.50% p.a. up to 11.11.2022 within three months, failing which the Adjudicating Authority may proceed with the insolvency resolution process. Ratio versus obiter: Ratio - tender of the principal during appeal does not automatically negate the admitted default or preclude the creditor's entitlement to contractual interest up to the insolvency commencement date; the appellate forum may direct payment of deposited principal and require payment of interest as a condition to avoid continuation of insolvency proceedings. Obiter - procedural observations about parties' conduct (e.g., that the debtor could have paid prior to filing) are ancillary and not essential to the legal holding. Conclusion: The deposit of principal does not render the Section 7 admission unlawful; the Court directed payment of the deposited principal to the financial creditor and required payment of contractual simple interest at 14.50% p.a. until the insolvency commencement date, to be paid within three months, failing which insolvency proceedings may continue. Parties to bear their own costs. Cross-references and operative effect The conclusions on Issue 1 (contract construed as permitting recourse) directly support the holding on Issue 2: because the debt was a financial debt and default was admitted, mere post-petition deposit of principal does not cure the admitted default for the period prior to the insolvency commencement date and does not negate the creditor's right to contractual interest through that date. The Tribunal's directions thereby reconcile contract construction with appropriate monetary remedies while preserving the Adjudicating Authority's power to proceed if the appellant fails to pay ordered interest.