AI Drafter 
TaxTMI 
TaxTMI 
TaxTMI 
2022 (5) TMI 1478
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....egistered firm with the Registrar of Firms, Lucknow having registration number 168582 with its registered office at Sahara India Bhawan, 1, Kapoorthala Complex, Aliganj, Lucknow. The Appellant has remitted the principal amount of Rs. 39,95,00,000/- in various tranches commencing from April, 2018 to February, 2019 in accordance with the 'Memorandum of Understanding' (MOU) dated 07th March, 2017 with the Corporate Debtor (CD)/Respondent (in CIRP) for supply of future goods in the form of gold coins/Gold ornaments. The golds were supposed to be supplied by the CD any time after January, 2019. As per MoU (appearing at page 67 - Annexure A of the Appeal Paper book) vide para 1 reflects clearly that all such advance payments will not attract any interest. It is also stated at para 3 of the MOU that both the parties have agreed to fix the price of Gold coin/Gold ornaments at the prevailing market rate of the day when Gold coin/Gold Ornaments demanded is physically delivered to the Buyer as per the location(s) specified by the Buyer. The Seller also agrees to give 2% discount on the prevailing market price of Gold and will not charge making charges and delivery charges on the future demand....
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....ordingly, the Appellant has submitted its claim in Form-C. The RP exchanged communication with the Appellant for reconciliation of amount maintained in the books of the CD and apparently there were some difference on the interest account. The Appellant in spite of submitting all the details vide its two emails, the RP still considered the claims of the Appellant, not in the category of the 'Financial Debt' and as a result of the Appellant has challenged the decision of the RP before the Adjudicating Authority vide its I.A No. 991 of 2020 in CP(IB) No. 2556/MB/2019. However, even the Adjudicating Authority vide its impugned order dated 07th January, 2021 has taken a different a stand and dismissed the petition of the Appellant by comparing the facts of the Appellant's case partially with Anuj Jain Case (Anuj jain IRP Vs. Axix bank Ltd.) 2020 8 SCC 401 and refused to classify the claim of the Appellant amounting to Rs.42,61,33,333/- as 'Financial Debt'. 5. The Ld. Counsel for the Appellant has submitted that the Adjudicating Authority has not only rejected the claim of the Appellant but has treated the same as preferential transaction in term of Section 43(2)(a) of the Code. Consi....
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....3 are satisfied, the transaction would be deemed to be of preference(...)" "19. In order to understand and imbibe the provisions concerning preference at a relevant time, it is necessary to notice that as per the charging parts of Section 43 of the Code i.e., sub-sections (4) and (2) thereof a corporate debtor shall be deemed to have given preference at a relevant time if the twin requirements of clause (a) and (b) of sub-section (2) coupled with the applicable requirements of either clause (a) or clause (b) of sub-section (4), as the case may be. are satisfied." 8. The Ld. Counsel for the Appellant has also stated that that Section 44 of the Code provides that it is the RP or the Liquidator who is supposed to file an application for initiation of action under Section 43(1) of the Code and also stated that Transaction to be classified as a 'Preferential transaction' it is sine qua non that the transaction fulfils the Twin Condition of Section 43 and that an avoidance Application has been made to the Adjudicating Authority under Section 43(1) of the Code. The Appellant in a summarized way further presented that the Operational debt was converted to financial debt because....
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.... a guarantor? (ii). As to whether such transfer is for or on account of an antecedent financial debt or operational debt or other liabilities owed by the corporate debtor? (iii). As to whether such transfer has the effect of putting such creditor or surety or guarantor in a beneficial position than it would have been in the event of distribution of assets being made in accordance with Section 53? (iv). If such transfer had been for the benefit of a related party (other than an employee), as to whether the same was made during the period of two years preceding the insolvency commencement date; and if such transfer had been for the benefit of an unrelated party, as to whether the same was made during the period of one year preceding the insolvency commencement date? (v) As to whether such transfer is not an excluded transaction in terms of Sub-section (3) of Section 43? 22. In view of the ratio laid down in Anuj Jain's case and looking at the facts of the present case that the CIRP against the Corporate Debtor commenced on 13.11.2019, the Loan Agreement dated 15.04.2019 executed by the Corporate Debtor, substituting the earlier MOU dated 0....
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....he nature of claim has made by the Appellant vide its proof of claims submitted on 03.03.2020 cannot be categorized in any way as financial debt under Section 5(8) of the Code. The amount entered into through MOU was subsequently mentioned for supply against the provisions of goods and not is a Financial debt per se. They categorically stated that in MOU, it is an advanced payment towards further supply of gold coins and jewelry and the same is to supply after January, 2019. Hence, the disbursement of amount was not against the consideration of time value of money as required under Section 5(8) of the Code and was at best and advance payment for supply of goods and hence, it is an operational debt as per section 5(21) of the Code. They have also cited the Judgment of Hon'ble Apex Court - Swiss Ribbons (P) Ltd. Vs. Union of India, (2019) 4 SCC 17, which held as follows: "42. A perusal of the definition of ―financial creditor‖ and ―financial debt‖ makes it clear that a financial debt is a debt together with interest, if any, which is disbursed against the consideration for time value of money. It may further be money that is borrowed or raised in any ....
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....bts are matters to be proved in arbitration or in the courts of law. On the other hand, financial debts made to banks and financial institutions are well-documented and defaults made are easily verifiable. 51.Most importantly, financial creditors are, from the very beginning, involved with assessing the viability of the corporate debtor. They can, and therefore do, engage in restructuring of the loan as well as reorganization of the corporate debtor's business when there is financial stress, which are things operational creditors do not and cannot do. Thus, preserving the corporate debtor as a going concern, while ensuring maximum recovery for all creditors being the objective of the Code, financial creditors are clearly different from operational creditors and therefore, there is obviously an intelligible differentia between the two which has a direct relation to the objects sought to be achieved by the Code." 11. It was also submitted by the Ld. Counsel for the Respondents that Section 5(8) of the Code does not qualify financial debt resulting from conversion of operational debt into a financial debt at a later date and that too has been done within a very short perio....
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....dulent preference to the Appellant: a. No legal remedy was undertaken by the Appellant to recover its operational debt dues or ask for performance of the MOU, despite such remedy being available in the form of arbitration. This goes against common business sense, and the only plausible reason for this was that the Appellant was aware that the CD was about to go into insolvency, and both parties colluded to improve the position of the Appellant in anticipation of insolvency; b. An extremely long period of 5 years was given for repayment, with the principal of purported interest amount. The loan agreement itself was self-contradictory, in as much as clause 5, which permitted repayment of entire amount in 5th year was contrary to clauses 3.2 and 4 of the Loan Agreement. 13. It is also submitted by the Respondent that the Appellant has mischievously suppressed the email dated 06.05.2020, by which the RP declined to categorize the Appellant as a Financial Creditor. It is submitted that the email dated 06.05.2020 makes a clear reference to the decision of the Hon'ble Supreme Court in Anuj jain, IRP Vs. Axis Bank Ltd, (2020) 8 SCC 401. The said judgment, besides clari....
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....o.1 is clearly erroneous and devoid of merit. It is to be noted show cause notice was issued by the Department of Revenue Intelligence under Section 124 of the Custom Act, 1962 dated 21.11.2019 (ref no. F. No.DRI/MZU/D/INT95/2019/7687) to the CD and several other persons. Subsequently, based on the said DRI show cause notice, an order dated 04.02.2021 was also issued by the Joint Commissioner, Customs, Ahmedabad in File No. FNo.VII/10-94/RRPL/O&A/2019- 20, by way of which orders of confiscation of seized articles and penalty have been imposed inter alia on the CD. The CD was a 'front company' run by one Mr. Manoj Kumar Babulal Punamiya to obtain duty free gold/silver under the Advance Authorization Scheme, pursuant to authorizations granted in favour of the CD. The suspended directors of the CD were recruited by Mr. Punamiya and were working on the directions of Mr. Punamiya to import duty-free gold bars and unlawfully divert the same to domestic market. On May 2019 the office premises of the CD were subjected to raids by the DRI. Search and seizure was conducted by the DRI at 14 locations related to the CD and no stock of Gold Bullion Bars or Silver bars were found in the location....
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.... as requested by the Appellant on 04th February, 2019 and in the month of March, 2019 the Corporate debtor has requested for getting the operational debt/advance payment converted into loan, it was accepted by the appellant in March, 2019 and the CIRP initiated on 13th November, 2019. The CIRP process was started on the Petition of Raksha Bullion, Mumbai against the CD by the Adjudicating Authority on the ground that CD committed a default of Rs. 4.90 Crore under Section 9 of the Code and that CD was having regular business for buying and selling gold bar. The case of the present appellant is that they have paid the advance against the MOU entered into in March, 2017 and advanced payment commenced from 01.04.2018 and ended on 15.02.2019. e. During the submission of the Ld counsels for both the parties that none of them stated that the Appellant and the CD are related party. If they are not related party, then lookout period is a period of one year. If that be the case that in November, 2019 CIRP commenced, so the payment released from 01.04.2018 to 30.06.2018, in any way will not get covered under Section 43 of the Code and hence as per details furnished at page 121 of the....
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.... Explanation.-For the purpose of sub-section (3) of this section, "new value" means money or its worth in goods, services, or new credit, or release by the transferee of property previously transferred to such transferee in a transaction that is neither void nor voidable by the liquidator or the resolution professional under this Code, including proceeds of such property, but does not include a financial debt or operational debt substituted for existing financial debt or operational debt. (4) A preference shall be deemed to be given at a relevant time, if- (a) it is given to a related party (other than by reason only of being an employee), during the period of two years preceding the insolvency commencement date; or (b) a preference is given to a person other than a related party during the period of one year preceding the insolvency commencement date." Section 44: Orders in case of preferential transactions. "The Adjudicating Authority, may, on an application made by the resolution professional or liquidator under subsection (1) of section 43, by an order: (a) require any property transferred in connection with the givin....
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....r commencement of insolvency resolution process of the corporate debtor; (ii) (ii) is a related party, it shall be presumed that the interest was acquired or the benefit was received otherwise than in good faith unless the contrary is shown. Explanation II.-A person shall be deemed to have sufficient information or opportunity to avail such information if a public announcement regarding the corporate insolvency resolution process has been made under section 13." It is abundantly clear from the above provision of the Code that transfer made in the ordinary course of business or financial affairs of the Corporate Debtor shall not be covered under preferential transaction. Hence, this issue goes in favour of the Appellant. f. While hearing the Ld counsels for both the parties that they have cited the catena of the Judgments to supplement their stands and in some of the judgments, both have cited the same judgment. However, for brevity and clarity some of the judgments are analyzed below: • Swiss Ribbons (p) Ltd Vs. Union of India (2019) 4 SCC 17 It is true that that para 37 to 51 of the above judgment held that Financial ....
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....cision of the High Court of Australia in Downs Distributing Co (supra), could be usefully recounted as under:- "As was pointed out in Burns v. McFarlane the issues in sub-s. 2(b) of s. 95 of the Bankruptcy Act 1924-1933 are "(1) good faith; (2) valuable consideration; and (3) ordinary course of business." This last expression it was said "does not require an investigation of the course pursued in any particular trade or vocation and it does not refer to what is normal or usual in the business of the debtor or that of the creditor." It is an additional requirement and is cumulative upon good faith and valuable consideration. It is, therefore, not so much a question of fairness and absence of symptoms of bankruptcy as of the everyday usual or normal character of the transaction. The provision does not require that the transaction shall be in the course of any particular trade, vocation or business. It speaks of the course of business in general. But it does suppose that according to the ordinary and common flow of transactions in affairs of business there is a course, an ordinary course. It means that the transaction must fall into place as part of the undistinguished common....
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....ortgages to secure the loans and facilities obtained by its holding company; and that too at the cost of its own financial health. As noticed, JIL was already reeling under debts with its accounts with some of the lenders having been declared NPA; and it was also under heavy pressure to honour its commitment to the home buyers. In the given circumstances, we have no hesitation in concluding that the transfers in questions were not made in ordinary course of business or financial affairs of the corporate debtor JIL." The above para clearly reflects that it must be identified first whether it is ordinary course of business or otherwise. i. Now in the present case, it is very much clear that the MOU which was entered into long back in the year 2017 was meant for supply of goods in the form of gold coins/gold ornaments and order of initiation of CIRP in Raksha Bullion, Mumbai reflects that the CD was in regular business of buying and selling gold bar. So, the MOU apparently does not look under the grey area when it is also not proved that they are the related party. If they are not related party, then naturally the transactions falling within a period of one year can ....