2024 (11) TMI 551 - AT - IBC

Security deposit by tenant under lease deed constitutes operational debt, not financial debt under Section 5(8) IBC

COROB INDIA PVT. LTD. Versus MR. BIRENDRA KUMAR AGRAWAL, CANARA BANK

COROB INDIA PVT. LTD. Versus MR. BIRENDRA KUMAR AGRAWAL, CANARA BANK - TMI Issues Involved:1. Classification of the Security Deposit as Financial Debt or Operational Debt.2. The status of the Appellant as Financial Creditor, Operational Creditor, or Other Creditor.3. The applicability of Section 18 of IBC regarding control and custody of assets.4. The implications of the Lease Deed terms on the classification of debt.Issue-wise Detailed Analysis:1. Classification of the Security Deposit as Financial Debt or Operational Debt:The core issue was whether the Security Deposit made by the Appellant could be classified as a financial debt under the Insolvency and Bankruptcy Code (IBC). The Appellant argued that the Security Deposit was intended to finance the construction of leased premises and should be treated as a financial debt. However, the Tribunal found that the Security Deposit was not disbursed against consideration for the time value of money, a key element for financial debt under Section 5(8) of IBC. The Tribunal noted that the Security Deposit was equivalent to four months' lease rent and was to be retained without interest, except in case of default in refund. Therefore, it lacked the commercial effect of borrowing, and thus, did not qualify as financial debt.2. The status of the Appellant as Financial Creditor, Operational Creditor, or Other Creditor:The Tribunal examined whether the Appellant could be classified as a financial creditor or operational creditor. It was concluded that the Appellant did not qualify as a financial creditor due to the absence of disbursement for time value of money. However, the Tribunal found that the Security Deposit was an advance for the use of premises, which falls under the provision of services. Therefore, it should be classified as operational debt, making the Appellant an operational creditor. The Tribunal held that the Adjudicating Authority erred in not treating the Appellant as an operational creditor and directed the Resolution Professional (RP) to admit the claim as such.3. The applicability of Section 18 of IBC regarding control and custody of assets:The Tribunal addressed the applicability of Section 18 of IBC, which mandates the RP to take control and custody of assets of the Corporate Debtor, excluding third-party assets. The Appellant argued that the Security Deposit was not an asset of the Corporate Debtor. However, the Tribunal found no fault with the RP including the Security Deposit in the pool of assets under CIRP, as it was part of the contractual arrangement between the parties. The RP's actions were in compliance with Section 18, and the Tribunal upheld the RP's decision to include the Security Deposit in the Corporate Debtor's assets.4. The implications of the Lease Deed terms on the classification of debt:The Tribunal examined the Lease Deed terms, particularly Articles 3.4 and 6, which outlined the conditions for the Security Deposit. The Lease Deed specified that the Security Deposit was to be retained without interest, except in case of failure to refund, where interest would be charged from the due date of refund. The Tribunal emphasized that the Lease Deed did not indicate that the Security Deposit was a loan or had the commercial effect of borrowing. Consequently, the Tribunal concluded that the Security Deposit did not constitute financial debt but was an operational debt due to its nature as an advance for services.Conclusion:The Tribunal directed the RP to classify the Appellant as an operational creditor and to allow the substitution of Form-C with Form-B, reflecting the status of the Appellant as an operational creditor. The appeal was disposed of with these observations, and the impugned order was modified accordingly.