NCLAT rules trade receivables discounted on M1 platform constitute operational debt not financial debt

The NCLAT held that trade receivables discounted by financers on an M1 platform constituted operational debt, not financial debt. The Corporate Debtor was liable to pay financers after suppliers' invoices were discounted, but since no disbursement was made directly to the Corporate Debtor, the transaction arose from sale of goods rather than financial lending. The NCLAT distinguished the Supreme Court's Orator Marketing judgment, noting it involved actual loan advancement. The Adjudicating Authority's classification of the claim as operational debt was upheld, and the appeal was dismissed.

---

---

Issues Involved:
1. Whether the debt owed to the Appellant qualifies as a 'financial debt' under the Insolvency and Bankruptcy Code, 2016.
2. Whether the Appellant should be recognized as a 'Financial Creditor' or 'Operational Creditor'.

Summary:

Issue 1: Financial Debt Qualification
The primary issue to be determined in this appeal is whether the debt owed to the Appellant qualifies as a 'financial debt' under the Insolvency and Bankruptcy Code, 2016. The Appellant argued that the transactions between the Corporate Debtor and the Financer had a commercial effect of borrowing, thus qualifying as a financial debt within the meaning of Section 5(8)(f) of the Code. The Appellant contended that the reverse factoring services availed by the Corporate Debtor should be recognized as financial debt.

The Respondent, represented by the Resolution Professional (RP), countered that the Corporate Debtor had incurred an operational debt (trade payables) towards the Supplier, which was later assigned to the Financers. The RP maintained that the original liability arose from the purchase of goods, making it an operational debt, and any subsequent assignment of this debt does not alter its nature.

The Tribunal examined the nature of the transactions, noting that the Supplier sold goods to the Corporate Debtor, and the invoices were discounted by the Financers. The Corporate Debtor did not receive any disbursement from the Financers; rather, the Financers paid the Suppliers directly. The Tribunal held that the transactions arose from the sale and purchase of goods, and the discounting of invoices by the Financers did not constitute a financial debt.

Issue 2: Recognition as Financial Creditor or Operational Creditor
The Appellant sought recognition as a Financial Creditor based on the assignment of debts from the original Financers. The RP categorized the Appellant as an Operational Creditor, arguing that the debt originated from operational transactions (purchase of goods).

The Tribunal upheld the RP's categorization, stating that the original transaction was for the sale and purchase of goods, and the subsequent assignment did not change the nature of the debt. The Tribunal referenced Section 5(21) of the Code, which defines 'operational debt' as a claim in respect of the provision of goods or services.

The Tribunal also considered the exclusion clause in Section 5(8)(e) of the Code, which excludes receivables sold or discounted on a non-recourse basis from being classified as financial debt. The Tribunal concluded that the discounting of invoices on the M1 Platform was without recourse, thus falling under the exclusion clause.

Conclusion:
The Tribunal found no merit in the Appellant's claim and upheld the RP's categorization of the debt as operational. The appeal was dismissed, and the Tribunal affirmed that the Appellant is an Operational Creditor, not a Financial Creditor. The Tribunal's decision emphasized that the nature of the original transaction (sale and purchase of goods) determines the classification of the debt, and subsequent assignments do not alter this classification.

---