2024 (9) TMI 1814 - AT - IBC

Asset sale with balance-price guarantee is not a loan; no financial debt under Section 5(8), Section 7 petition not maintainable

Sandeep Mittal and Ravi Mittal Versus M/s ASREC (India) Ltd., M/s Shree Industries Ltd., Mr. Gaurav Singhal, Delhi

NCLAT (PB) allowed the appeal and set aside the impugned order, holding the transaction to be a sale of assets with a guarantee for the balance purchase ... Admission of section 7 application - financial debt or not - agreement for sale of assets, on which Financial Institutions have pari pasu charge, or the transaction can be treated to be a loan transaction extended by Financial Institutions in favour of the Corporate Debtor - HELD THAT:- It is well settled position of law that ‘financial debt’ means a debt disbursed against consideration for time value and money and includes the transactions as enumerated in sub-clause (8) of Section 5. The ‘financial debt’, came for consideration before the Hon’ble Supreme Court in large number of cases. We may first notice judgment of the Hon’ble Supreme Court in Pioneer Urban and Infrastructure Ltd. vs. Union of India and ors. [2019 (8) TMI 532 - SUPREME COURT]. The Hon’ble Supreme Court in the above judgment held that definition of ‘financial debt’ goes on to state that a “debt” must be “disbursed” against the consideration of time value of money. It was further held that the expression “disbursed” refers to money, which has been paid against the consideration for the “time value of money”. The Hon’ble Supreme Court in Global Credit Capital Limited and Anr. vs. Sach Marketing Pvt. Ltd. & Anr. [2024 (4) TMI 1067 - SUPREME COURT] has clearly laid down that for deciding as to whether the debt is a ‘financial debt’ the real nature of the transaction reflected in the writing has to be dealt with. It needs no emphasis that real nature of transaction need to be found out by the Court, when the issue is raised before the Court that transaction is not a ‘financial debt’. The Deed of Guarantee dated 12.12.1990 clearly proves that transaction in question was sale and purchase transaction of the assets of GPPL and the Corporate Debtor was the purchaser and it has to make balance payment of purchase price in the time allowed and the guarantee was given for payment of the balance purchase price by the Corporate Debtor. The guarantee by the Corporate Debtor for payment of purchase price, cannot in any manner be read as any financial debt owned by the Corporate Debtor. The letter dated 07.11.1990, Agreement dated 27.11.1990 and Guarantee Deed dated 12.12.1990 are part of the same transaction of sale purchase of the assets of GPPL to the Corporate Debtor and all the three documents clearly indicate and prove that transaction was sale and purchase transaction and in no manner can be said to be a financial transaction under which financial debt was undertaken to be paid by the Corporate Debtor to the Financial Creditor - from the perusal of letter dated 07.11.1990, Agreement dated 27.11.1990, Guarantee Deed dated 12.12.1990, it is amply clear that transaction between parties was transaction of sale and purchase of the assets of GPPL and the proceedings initiated by Financial Creditor – Respondent No.1 were for recovery of balance purchase price, which do not involve any financial debt. The Hon’ble Supreme Court in Pioneer Urban and Infrastructure Ltd. has categorically held that the disbursement as contemplated in Section 5, sub-section (8) is disbursement of money, which has been paid against the consideration for time value and money. In paragraphs 70 and 71 of the judgment, the Hon’ble Supreme Court has categorically held that the “expression ‘disbursed’ refers to money which has been paid against consideration for the ‘time value of money’ ”. The above pronouncement of the Hon’ble Supreme Court is clear and disbursal of property as suggested by learned Counsel for Respondent No.1, cannot be accepted to be covered by definition of ‘financial debt’ under Section 5, sub-section (8). The nature of transaction is to be determined from the documents reflecting the transaction and any subsequent letter or subsequent pleadings of the parties cannot be considered in the facts of the present case. In the present case, there was no financial debt, on the basis of which Respondent No.1 could have filed Section 7 Application for initiating CIRP against the Corporate Debtor. The Adjudicating Authority committed error in returning a finding that there was disbursement in favour of the Corporate Debtor, whereas it categorically held that transaction in question was Sale Agreement and not a Loan Agreement. The impugned order is set aside - appeal allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether the transaction evidenced by the November 27, 1990 agreement and related documents constituted a 'financial debt' within the meaning of Section 5(8) of the Insolvency and Bankruptcy Code, or was merely an agreement for sale/purchase of assets entitling the vendor-lenders to recovery remedies. 2. Whether disbursement for the purposes of Section 5(8) requires payment of money into the account of the corporate debtor, or whether transfer/disbursement of property (or other non-monetary consideration) can qualify as a 'disbursement' giving rise to financial debt, including under clause (f) of Section 5(8). 3. Whether contemporaneous documents and conduct of parties (including sale letter, sale agreement, guarantee deed, account maintenance letter) or later pleadings/admissions determine the true nature of the transaction for classification as financial debt. ISSUE-WISE DETAILED ANALYSIS Issue 1: Nature of the November 27, 1990 transaction - financial debt vs. sale agreement Legal framework: Definition of 'financial debt' under Section 5(8) requires a debt, along with interest if any, which is 'disbursed against the consideration for the time value of money', and includes categories (a)-(i) (including residuary clause (f)). Precedent treatment: The Tribunal relied on authoritative pronouncements that the term 'disbursed' contemplates payment of money against the time value of money, and that the real nature of the transaction must be ascertained from the written instruments (including the requirement in prior decisions that the character of the transaction be determined from the documents reflecting it). Interpretation and reasoning: The Tribunal analysed the sequence and terms of the letter dated November 7, 1990, the agreement dated November 27, 1990 and the guarantee deed dated December 12, 1990. Those documents: (a) record an offer and acceptance for sale of specified immovable and movable assets; (b) set out a purchase price of Rs. 3.88 crores with a down payment of Rs. 50 lakhs and balance payable in 20 quarterly instalments over five years; (c) provide for guarantees, equitable mortgage/charge to secure payment of the balance; and (d) expressly preserve vendor-lenders' right to revoke sale and resell the assets under statutory recovery provisions on default. The contemporaneous account-maintenance letter showed bifurcation of the net sale price and maintenance of purchaser accounts in the sharing ratio of the financial institutions. Ratio vs. Obiter: Ratio - where written instruments of the transaction, read together and considered with contemporaneous conduct, unequivocally evidence a sale with deferred purchase price secured by charge and guarantees, such transaction does not ipso facto convert into a 'financial debt' merely because payment of the purchase price is deferred or secured; the guarantee does not create a separate financial debt owed by the guarantor absent disbursement of money to the corporate debtor. Obiter - observations on remedial options available to vendor-lenders on default. Conclusion: The Tribunal concluded (ratio) that the transaction was a sale/purchase arrangement and not a loan/financial debt. The guarantee was for payment of purchase price; the documents do not evidence any disbursement of money to the corporate debtor that would meet the statutory test for a financial debt. Issue 2: Meaning of 'disbursed' and whether non-monetary transfer (property) or later admissions can constitute disbursement under Section 5(8) Legal framework: Section 5(8) requires disbursement 'against the consideration for the time value of money'; dicta in earlier supreme authority interpret 'disbursed' as payment of money which moves from lender to borrower for the borrower's use, constituting time value of money. Precedent treatment: The Tribunal applied precedent holding that 'disbursal' refers to money paid against time value of money and that the residuary clause (f) has a broad scope but must still satisfy the initial test of disbursal against time value of money. Interpretation and reasoning: The Tribunal rejected the submission that transfer of property (possession handed over) or other non-monetary acts could qualify as 'disbursal.' It emphasised the distinction between (i) an advance/payment made to the corporate debtor for its use (disbursal of money) and (ii) deferred payment obligations under a sale where the purchaser owes balance purchase price secured by charge and guarantees. The Tribunal held that clause (f), while residuary and wide, does not supplant the core requirement that the transaction must have the commercial effect of borrowing involving disbursal against time value of money; a mere sale with deferred payment secured by charge/guarantee does not automatically become a financial debt absent disbursal to the corporate debtor. Ratio vs. Obiter: Ratio - disbursal in Section 5(8) denotes monetary disbursement against the time value of money; transfer of property in lieu of money does not satisfy that requirement in the facts of this case. Obiter - clarification that clause (f) remains broad but cannot be read to convert all deferred-payment sales into financial debt when contemporaneous documents show a sale. Conclusion: The Tribunal held (ratio) that non-monetary transfer (possession/title arrangements) in the present facts did not amount to disbursal of money as required for financial debt; consequently clause (f) could not be invoked to treat the sale as having the commercial effect of a borrowing. Issue 3: Evidentiary weight of contemporaneous documents and later admissions/pleadings in determining true nature of transaction Legal framework: Judicial approach requires discerning the true nature of a transaction from the terms of the written instruments and the contemporaneous conduct of the parties; subsequent pleadings or admissions decades later carry limited weight if inconsistent with the original documents. Precedent treatment: Tribunal relied on precedent that the nomenclature used by parties and later assertions cannot alter the substance recorded in the operative documents; contemporaneous documents and conduct are primary for classification. Interpretation and reasoning: The Tribunal gave primacy to the sale letter, the sale agreement and the guarantee deed executed in immediate sequence, and to the account-maintenance letter reflecting bifurcation and allocation of sale proceeds. It treated the later letter (dated decades after) that purportedly admitted conversion of sale consideration into a loan as inadmissible to alter the transaction's nature where contemporaneous materials contradicted that admission. The Tribunal also noted that prior adjudicatory fora expressly refrained from deciding merits and did not determine the transaction's nature definitively. Ratio vs. Obiter: Ratio - contemporaneous documents and conduct govern characterization; later inconsistent pleadings/admissions cannot override original written instruments in determining whether a financial debt exists. Obiter - comment that transfer of proceedings to a different forum does not amount to a pronouncement on merits of claims. Conclusion: The Tribunal concluded (ratio) that the contemporaneous documents demonstrate a sale transaction; later admissions did not change that legal characterization. Final Conclusion on Admissibility of Section 7 Petition Legal framework & reasoning cross-reference: Applying the definition of 'financial debt' and the requirement of disbursal against time value of money (Issues 1-2), and applying evidentiary principles preferring contemporaneous documents over later statements (Issue 3), the Tribunal found no financial debt owed by the corporate debtor to the creditor under the 1990 transaction. Outcome: The Section 7 petition predicated on that supposed financial debt was unsustainable. The Tribunal set aside the admission order, dismissed the Section 7 Application, and ordered costs against the petitioner. This holding is the operative ratio on the admissibility of insolvency proceedings where the claim is founded on deferred sale consideration and the documents reflect a sale rather than a loan.