TaxTMI 
TaxTMI 
2022 (9) TMI 488
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....nsolvency and Bankruptcy Code 2016' (the Code) against the impugned order dated 02.08.2021 passed by the 'National Company Law Tribunal, Mumbai Bench, Mumbai (the Adjudicating Authority) in I.A No. 2129 of 2020 in C.P. No. 27 of 2019. The Appellant has sought the followings reliefs: To quash and set aside the impugned order passed by the Adjudicating Authority in IA No. 2129 of 2020, in the matter of Budhpur Buildcon Pvt. Ltd. (for short 'BBPL') Vs. Mr. Abhay Narayan Manudhane; To quash and set aside the impugned letter dated 28.09.2020 issued by the Respondent to the Appellant rejecting the Appellant's claim for 'financial debt'; To stay the effect and operation of the impugned order etc. 2. The Adjudicating Authority, while passing the impugned order dated 02.08.2021 has observed the followings: "6. We have heard the parties at length. We have also perused the documents submitted by them. Both the parties in IA 2129/2020 have raised various allegations and counter allegations against each other. The intervenors in IA 2300/2020 have also advanced their arguments. In the light of the rival contentions on both the sides the following issues fall for consideration: 1. Whe....
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....ity obligation in respect of a guarantee or indemnity for any of the items referred to in sub-clauses (a) to (h) of this clause; Section 5(7) Financial Creditor: "Financial Creditor" means any person to whom a financial debt is owed and includes a person to whom such debt has been legally assigned or transferred to; Section 3(6) Claim: "claim" means (a) a right to payment, whether or not such right is reduced to judgment, fixed, disputed, undisputed, legal, equitable, secured or unsecured; (b) right to remedy for breach of contract under any law for the time being in force, if such breach gives rise to a right to payment, whether or not such right is reduced to judgment, fixed, matured, unmatured, disputed, undisputed, secured or unsecured; Section 3() creditor: "creditor" means any person to whom a debt is owed and includes a financial creditor, an operational creditor, a secured creditor, an unsecured creditor and a decree-holder; 7. It is very clear from the above definition that a mere right to payment, whether or not such right is reduced to judgment, fixed, disputed, undisputed, legal, equitable, secured or unsecured; and a right to remedy for breach of contract u....
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....has been provided in the said provision for non-compliance thereof. 10. The respondent proceeded with the verification as per the provisions of the Code. However, the said verification was further delayed by the onset of the COVID-19 pandemic. Therefore, it cannot be said that it was the respondent RP who had caused any delay. It is to further mention that Regulation 13 also empowers the Resolution Professional to decide the amount to be admitted, which implies that the Resolution Professional has the power to 'not admit' any sum under a claim. Therefore, from this it is clear that the Resolution Professional is expected to apply its mind to the facts and nature of the claim filed, and thereafter, reject the same in case the categorization is wrong or incorrect. However, the Applicant's interpretation of Regulation 13 i.e., that the Resolution Professional has to merely collate claims without application of mind and thereafter proceed to admit the claim regardless, is contrary to the intent of the Code as well as the regulations framed thereunder to govern the functions of an Insolvency Professional. The said interpretation would lead to unintended consequences and absurd result.....
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....ty to take a call about the further course of action." 3. The submission made by the Learned Senior Counsel for the Appellant/ Pleadings and Written Submission available on record are stated herein below in a summarized manner: a) It is the case of the Appellant that 'Letters of intents' were issued by the Slum Rehabilitation Authority in favour of the Corporate Debtor (CD) -Housing Development and Infrastructure Limited /Respondent and the Respondent was undertaking the development of various parcels of lands. b) The Ld Sr. Counsel for the Appellant has stated that the CD/Respondent was in need of funds for development of the said project. Accordingly, the Appellant and the CD/Respondent entered into various agreements which is enumerated herein below: Development Agreement dated 24th February, 2007 executed between the CD and Adani Developers Pvt. Ltd (subsequently de-merged into the Appellant) ADPL. Development Agreement dated 01.03.2008 executed by and between the CD and ADPL, registered vide a Deed of Confirmation dated 04.11.2009 with the office of sub-Registrar of Assurances under Serial No. BDR-15/10226/2009. Supplemental Development Agreement dated 14.10.2008 ex....
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....rt in Swiss Ribbons Pvt. Ltd. & Anr. vs. Union of India & Ors., 2019 SCC OnLine SC 73, inter-alia determined the following characteristics of "financial debt" and "financial creditors", which are present in the instant case: (a) "Financial debt" for the purposes of Section 5(8) of the Code is categorized as one that enables the Corporate Debtor to either set up and/ or operate its business. In the present case, as is clear from the aforesaid facts, the said Consideration payable under the Project Agreements was so structured so as to provide periodical finances to the Corporate Debtor for undertaking the construction and development of the rehabilitation component of the said Project and served to enable the Corporate Debtor to carry on its business. (b) Even at the time of providing such advance payments as aforesaid to the Corporate Debtor, the Appellant in fact undertook detailed enquiry and study into the viability and feasibility of undertaking the said Project and the consequences flowing from the Corporate Debtor"s inability to complete the same. Owing to the aforesaid, it is submitted that it is also demonstrable that the Appellant is in a good position to evaluate succ....
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....m is solely in the nature of interest/ penal interest for breach of the main contract and the entire claim is merely an accretion of Penal interest as per clause 4 of the Supplemental Agreement 20.03.2012. d. It was amply made clear by the Respondent/RP that parties to a Joint Developmental Agreement cannot be a Financial Creditor. The Ld counsel for the Respondent went on to further elaboration by explaining that the Appellant is not an 'allottee' under the Code. Clause 6 of the Development agreement dated 05.04.2018 explicitly records that the appellant/Developer would alone be considered as Promoter under the Real Estate Regulations and Development Act, 2016 (RERA) for the real estate project so being developed. He further went on to clarifying that there is no commercial effect of borrowing involved in the present case. e. The Ld Counsel for the Respondent even went on to say that the Respondent fails to perform its obligation and has forfeited the security deposit of Rs. 340 crores, which was advanced in return for free sale and saleable area. However, the construction of rehabilitation & purchase of free sale component has not taken place within the said timeline and the ....
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....f default. It has also been pointed by the ld counsel for the Applicant that at no point of time prior to Insolvency of the Corporate Debtor, any legal proceedings were initiated or a dispute claiming interest was brought to the notice of the Corporate Debtor. The alleged claim has submitted by BBPL and is a time barred Operational Debt and needs adjudication by a trial court based on collection of evidences. The Agreement in question is a Development Agreement with reciprocal promises and is in the nature of damage which requires adjudication by a trial court. It has also been submitted that the nature of transactions was contingent upon enumerable factors and the BBPL was never entitled for any payment from the Corporate Debtor except the development rights after the corporate debtors had developed the land. The payments made by the BBPL wherein fact requires to be adjusted against the land provided by the Corporate Debtor. It has also been pointed out by the Applicant that the debt is time barred. The amount even if it is assumed otherwise it is resulting from delayed fulfilment of reciprocal promise and is merely in the nature of penalty. b. At the very outset, this Tribuna....
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....s the Committee of Creditors may proceed to take a decision with regard to liquidation and the Appellant who claims to be Financial Creditor will be deprived of its right to participate in the CIRP. 6. Counsel for the Appellant submits that the Resolution Professional rejected the claim of the Appellant to be a Financial Creditor and the Appellant had filed I.A. No. 2129 of 2020 before the Adjudicating Authority. Reference is made to the impugned order Annexure A-1 (Page 63) of the Amended Memorandum of Appeal, where the Appellant had prayed to quash letter dated 28th September, 2020 of the Resolution Professional. The Corporate Debtor is 'Housing Development and Infrastructure Limited', who had taken up development of various parcels of lands and had applied to the Slum Rehabilitation Authority (SRA) in Mumbai for amalgamation of the slum rehabilitation schemes. The Corporate Debtor wanted to appoint a third party developer/ financier/ investor to assist the Corporate Debtor to develop the said project and construct the free sale component. It is claimed that with such intention various agreements as recorded in Para 7.2 of Amended Appeal were entered into and the material claus....
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....ill the order on application filed by M/s BBPL and also other applications are decided. Further, at the hearing held on 30th April, 2021, the Hon'ble NCLT had directed all the parties to submit their written submissions within a week's time and the matter was reserved for orders and the order was awaited. Since no order was passed by Hon'ble NCLT subsequent to 30th April, 2021, the RP requested his legal advisors to move Hon'ble NCLT. Accordingly, the advocates or FP, M/s Crawford Bayley & Co., filed a praecipe in Hon'ble NCLT on 20th July, 2021 with a request for necessary clarifications and further orders. The Hon'ble NCLT pronounced order on 2nd August, 2021 dismissing the application filed by M/s BBPL. The Hon'ble NCLT also pronounced that the oral directions passed during the course of hearing stand vacated. The written order in the matter is awaited. The CoC Members are requested to take note of the same. 7. To discuss and consider the filing of application with the Hon'ble National Company Law Tribunal, Mumbai Bench under Section 33(2) of Insolvency and Bankruptcy Code, 2016, (Code) for the initiation of liquidation and/or dissolution of Corporate Debtor. As members of the....
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.... from the above definition that a mere right to payment, whether or not such right is reduced to judgment, fixed, disputed, undisputed, legal, equitable, secured or unsecured; and a right to remedy for breach of contract under any law for the time being in force, if such breach gives rise to a right to payment, whether or not such right is reduced to judgment, fixed, matured, unmatured, disputed, undisputed, secured or unsecured is enough to qualify as an Operational Debt. However, a mere right to recovery or entitlement does not qualify as a Financial Debt unless the debt falls within any one of the categories mentioned under the definition 'Financial Debt'. 8. It is very clear from the submissions of both sides as well as from the record that the applicant is claiming the interest amount as a Financial Debt as a penalty for the alleged breach of the various terms and conditions of number of agreements entered into between the applicant M/s Budhpur Buildcon Pvt. Ltd. and the Corporate Debtor HDIL which is a mere right for the alleged breach by the Corporate Debtor. It is appropriate to mention here that the Corporate Debtor is denying any breach on its part and on the other hand r....
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....n Private Limited, the above oral direction is no longer necessary and accordingly the CoC is at liberty to take a call about the further course of action." 15. Considering the averments being made and the findings recorded by the Adjudicating Authority read with part of Appeal reproduced above, prima facie it appears that there is an issue to be dealt with and decided in this Appeal. The observations of the Adjudicating Authority also cannot be out right ignored. Whether or not the Appellant could be treated as the Financial Creditor looking to the Agreements which are more of Development Agreements, would require consideration. 16. As regards staying further progress before the CoC, we take note that CIRP started on 20th August, 2019 and already two years are over. Senior Counsel, Mr. Krishnendu Datta, intervened to submit that the intervenor wanted to file a Resolution Plan for part resolution of the Corporate Debtor with regard to one of the projects of SRA. The application on that count is also pending with the Adjudicating Authority. The Learned Counsel for the Resolution Professional submitted that the CoC did not agree to accept the resolution of the Corporate Debtor in....
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....the 'Financial Creditor' looking to the Agreements which are more of Development Agreements. Accordingly, would require consideration? We have gone through the Supplemental Agreement dated 20.03.2012 (appearing at page no. 51 of the Appeal paper book) executed by and between the CD/ Respondent and Adani Developer Pvt. Ltd (ADPL). (i) From the perusal of the above agreement, it is very much clear that these are all business agreements where each party has a role and there is a mechanism to release payment at various stages and the recoupment of such payments including the management of project land in consideration, failure of which will result into forfeiture of deposit, penal interest, liquidated damages etc. (ii) Clause 4 of the Supplemental Agreement dated 20.03.2012 leads largely to this claim. Hence, for reiterating the same are specifically mentioned herein below: "Clause 4 - Without prejudice to any other right which the Developer may have under this Agreement or under the Project Agreements or any other agreement/deeds entered into between the Parties or under law or otherwise, in the event of default by the Transferor to perform the Transferor's Obligations in accord....
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....t issued by a bank or financial institution; (i) the amount of any liability in respect of any of the guarantee or indemnity for any of the items referred to in sub-clauses (a) to (h) of this clause" (iv) It is not in dispute that this is an inclusive definition of "financial debt" but certain conditions must be complied with to be a financial debt i.e the CD must have borrowed the money from the Creditor against the payment of interest /time value of money. It means, the transactions require to be purely in borrowing nature. This does not cover the business transaction between the Creditor and Debtor which is applicable in business organization where either sale or purchase involved or construction activities involved or in Real Estate Project, multiple agencies with multiple terms and conditions are involved and each is supposed to gain or lose based on the performance of the business. In order to meet the time schedule whether in purchase or sale or development agreement or in any Real Estate project, there is always a clause for liquidated damages and the same may be either in the percentage form or sometime even other form of penal interest. Even in the international busin....
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....of the provisions of the Code, we are not in a position to sustain the claim of the Appellant to consider its case as a Financial Debt. g. Now let us examine the case with reference to cited judgment by the parties: 1) Both the parties have cited - Pioneer Urban Land and Infrastructure Pvt. Ltd & Anr. Vs. Union of India & Ors. (2019) 8 SCC 416, para 68, 69, 70, 74 to 79 of this judgment and the same are reproduced below: "68.Thus, in order to be a "debt", there ought to be a liability or obligation in respect of a "claim" which is due from any person. "Claim" then means either a right to payment or a right to payment arising out of breach of contract, and this claim can be made whether or not such right to payment is reduced to judgment. Then comes "default", which in turn refers to non-payment of debt when whole or any part of the debt has become due and payable and is not paid by the corporate debtor. Learned counsel for the Petitioners relied upon the judgment in Union of India v. Raman Iron Foundry (1974) 2 SCC 231, and, in particular relied strongly upon the sentence reading: "11....Now the law is well settled that a claim for unliquidated damages does not give....
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....lows: (33) "transaction" includes an agreement or arrangement in writing for the transfer of assets, or funds, goods or services, from or to the corporate debtor; As correctly argued by the learned Additional Solicitor General, the expression "any other transaction" would include an arrangement in writing for the transfer of funds to the corporate debtor and would thus clearly include the kind of financing arrangement by allottees to real estate developers when they pay instalments at various stages of construction, so that they themselves then fund the project either partially or completely. 76. Sub-clause (f) Section 5(8) thus read would subsume within it amounts raised under transactions which are not necessarily loan transactions, so long as they have the commercial effect of a borrowing. We were referred to Collins English Dictionary & Thesaurus (Second Edition, 2000) for the meaning of the expression "borrow" and the meaning of the expression "commercial". They are set out hereinbelow: "borrow-vb 1. to obtain or receive (something, such as money) on loan for temporary use, intending to give it, or something equivalent back to the lender. 2. to adopt (ideas, words, etc....
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.... "solely" financial transaction. This Committee report, which led to the enactment of the Code, is an important guide in understanding the provisions of the Code. However, where the provisions of the Code, as construed in the light of the objects of the Code, are clear, the fact that from a huge report one word is picked up to indicate that all financial creditors must have debtors who owe money "solely" from financial transactions cannot possibly have the effect of negating the plain language of Section 5(8)(f) of the Code. In fact, what is important is that the threshold limit to trigger the Code is purposely kept low - at only one lakh rupees - making it clear that small individuals may also trigger the Code as financial creditors (as financial creditors include debenture holders and bond holders), along with banks and financial institutions to whom crores of money may be due. 79. That this amendment is in fact clarificatory is also made clear by the Insolvency Committee Report, which expressly uses the word "clarify", indicating that the Insolvency Law Committee also thought that since there were differing judgments and doubts raised on whether home buyers would or would not be....
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....imate price of the flat/apartment)." What it is abundantly clear that the claim is an accretion of penal interest emerging from clause 4 of the Agreement dated 20.03.2012. i. The Appellant also cited the Judgment in Mahammad Raja Mia Vs. Naderjjama Mia, AIR1932 Cal 53 last para of this judgment is reproduced below: "For the reason given, I am of opinion that the rate of interest sued for in this case comes within section 74 of the Contract Act and must be held to be penal notwithstanding the fact that only one rate of interest is mentioned in the bond. An ingenious argument was advanced on behalf of the Appellant with the object of showing that, in the particular circumstances of this case, that rate ought not to be deemed to be penal. It is true, it is said, that 150 per cent or even 75 per cent p.a may at first sight appear to be exorbitant and, therefore, penal, but if the circumstances are taken into consideration, it will be apparent that in reality it was not so. The terms of the loan were generous providing for repayment of the principal in equal instalments extending over a period of no less than six years without any interest if payment was made on the due dates....
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..... It is a fresh sum becoming due month by month, i.e., as the case may be, for a new consideration. And in my opinion the case falls under the first rule of law abovementioned, not under the second. This view of the, law was acted upon by this Court In Mackintosh v. Hunt I.L.R. 2 Cal. 202." 5. It is true that in this case the rate of interest stipulated for is to be payable from the date of the loan; but this circumstance does not, in our opinion, take the case out of the purview of Section 2 of Act XXVIII of 1855; because there is only one rate of interest stipulated to be paid here. The bond does not provide for the payment of two rates of interest, one lower and the other higher, the latter being payable under certain circumstances. In this case it cannot be therefore held that a lower rate is the stipulated rate of interest agreed to be paid by the debtor under Section 2, Act XXVIII of 1855, and that a higher rate is named in order to determine the amount of compensation to be paid under Section 74 of the Contract Act in case of a breach. The agreement in this case, is that no interest would be payable if the money covered by the bond be paid within the time mentioned in it, ....
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....ny transaction could stand alone to become a financial debt. In other words, any of the transactions stated in the said sub- clauses (a) to (i) of Section 5(8) would be falling within the ambit of 'financial debt' only if it carries the essential elements stated in the principal clause or at least has the features which could be traced to such essential elements in the principal clause. In yet other words, the essential element of disbursal, and that too against the consideration for time value of money, needs to be found in the genesis of any debt before it may be treated as 'financial debt' within the meaning of Section 5(8) of the Code. This debt may be of any nature but a part of it is always required to be carrying, or corresponding to, or at least having some traces of disbursal against consideration for the time value of money." l. The Appellant has cited the Judgment of Hon'ble Supreme Court in Feteh Chand Vs. Balkishan Dass, (1964) 1 SCR 515: AIR1963SC 1405 para 8: 8. The claim made by the plaintiff to forfeit the amount of Rs. 24,000/- may be adjudged in the light of s. 74 of the Indian Contract Act, which in its material part provides :- "When a contract has been b....