AI Drafter 
TaxTMI 
TaxTMI 
2023 (5) TMI 934
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....erein). Aggrieved by this impugned order, the present appeal has been preferred by the Appellant. 2. The Learned Counsel for the Appellant has submitted that Shree Krishna Vanaspati Industries Pvt. Ltd. - the present Respondent/Corporate Debtor had taken a loan from SBI mortgaging their factory premises (hereinafter referred to as 'subject property'). The Corporate Debtor having defaulted in payment of the said loan, the possession of the subject property was taken over by SBI. The Appellant agreed to repay the loan on behalf of the Corporate Debtor for which the Corporate Debtor had assured that the physical possession and title of the subject property would be transferred to the Appellant. The Appellant and Corporate Debtor executed a Memorandum of Understanding ('MoU-1' in short) on 25.11.2014. The MoU-1 had noted that the subject property was under charge and mortgaged with the SBI which the Corporate Debtor was willing to sell with due permission from State Industrial Development Corporation of Uttarakhand Limited ('SIDCUL' in short) to the Appellant subject to the Appellant making payment of certain sums of money on behalf of the Corporate Debtor to SBI towards loan repaym....
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....wever, in spite of release of property by SBI, the Corporate Debtor failed to conclude the sale/purchase transaction of the subject property in favour of the Appellant. Furthermore, though the balance sheet of the Corporate Debtor evidences debt to the tune of Rs.10.46 cr payable to the Appellant, the Corporate Debtor neither returned the money to the Appellant nor transferred the subject property. It was also submitted that in terms of Clause 10 of the A2S, the Corporate Debtor had admitted liability to compensate the Appellant if the sale of subject property did not get effectuated. Since the Appellant was not compensated, hence a Section 7 application was filed by the Appellant to initiate Corporate Insolvency Resolution Proceedings ('CIRP' in short) against the Corporate Debtor. 6. It was contended that the Adjudicating Authority erroneously dismissed the Section 7 application on the grounds that there was no interest component payable on the loan advanced by the Appellant to the Corporate Debtor; that the loan was not lent for time value of money and that in the absence of a tripartite agreement between the Appellant, Corporate Debtor and SBI, there was no financial debt. ....
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.... Alleging that the Appellant had failed to perform the terms and conditions of MoU-2 of paying the agreed consideration amount in a time bound manner, the MoU-2 stood frustrated and no further MoUs having been executed thereafter between the two parties, there was no justified cause of action on the part of the Appellant to claim the status of being a financial creditor. 10. It has also been contended that the Appellant has tried to create a misconception that the sale consideration amount agreed between the two parties was Rs.15 cr of which Rs.10.46 cr had already been paid by them. It was asserted that the correct fact is that in terms of both the MoUs as agreed upon by both parties, the sale consideration was 27.16 cr of which Rs.16 cr was not yet paid by the Appellant. In the instant case, there is no payment of the debts due on the part of the Corporate Debtor as the MoU had got frustrated due to breach of obligation on the part of the Appellant. It was only on account of their failure to abide by the terms of the MoU that SBI took re-possession of the subject property. The subject property was subsequently released only after the Corporate Debtor paid an exorbitant sum and....
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....t consideration are as outlined below: (a) Whether the payment of Rs.10.46 crore by the Appellant to the SBI on behalf of the Corporate Debtor during 2014-2016 in terms of the two MoUs and OTS qualifies to be a 'financial debt' within the meaning and scope of Section 5(8) of the IBC; and (b) Whether there was debt, if any, which had become due and payable on the part of the Corporate Debtor and default thereof qua the Appellant. 15. Before we proceed to answer the questions as delineated above, a prefatory glance at certain definition clauses which find place in Section 3 under Part I Preliminary and in Section 5 under Part II Chapter I Preliminary of the IBC would be constructive: - Sections 3(6) "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; 3(8) "corpora....
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....ch transaction shall be taken into account; (h) any counter-indemnity obligation in respect of a guarantee, indemnity, bond, documentary letter of credit or any other instrument 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; 16. Now coming to answer the first question, we need to notice in precise terms the sequence of events and nature of transaction which has taken place between the Appellant and the Respondent pursuant to the two MoUs which have been entered into between them in the background of OTS proposal as well as the contemporaneous execution of A2S. 17. For better appreciation of the factual matrix, it may be useful at this stage to notice the salient clauses of the MoUs and A2S as reproduced hereunder: - MoU of 25.11.2014 (MoU-1) WHEREAS: B. One of the terms of the Lease Deed is that the Seller shall not transfer, assign or otherwise part with possession of the Plot except with the prior permission of SIDCUL; C. The Seller has represented to the Buyer that the Se....
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.... 1.3 That within 120 days from the date of signing of this MoU, the Buyer agrees to pay a sum of Rs.5,00,00,000/- (Rupees Five Crore Only) to Seller towards Advance Consideration, which shall directly deposited by the Buyer to the Seller's account with State Bank of India's. 1.4 Balance Consideration as defined above shall be paid by the Buyer to Seller in following manner as agreed: 1.4.1 Within 240 days after obtaining approval from the SIDCUL and Bank (State Bank of India) for transfer of the Property the Buyer shall pay a sum of Rs.20,00,00,000/- (Rupees Twenty Crore Only) to the Seller which shall be directly deposited by the Buyer in seller's Account with State Bank of India. 1.4.2 Within ten days from the date of Registration of Lease Deed in favor of Buyer a sum of Rs.2,16,00,000/- (Rupees Two Crore Sixteen Lacs Only) shall be paid by the Buyer to the Seller. MoU of 02.03.2016 (MoU-2) In continuation with the previous Memorandum of Understanding's clause 17 sub-clause 1.2 dated 25th November 2014 WHEREAS C. That however, the previous memorandum of understanding as was entered between the parties, as per c....
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.... be paid by the First Party to the State Bank of India, by or before 31st March, 2016 as per the terms and conditions of the One Time Settlement agreement entered by and between the Second Party and the State Bank of India. SPECIFIC PERFORMANCE 19.6.2 In the event that either party fails or refuses to consummate the transactions contemplated by this Memorandum of Understanding or if any default under, or breach of, any representation, warranty or covenant of this Memorandum of Understanding by either Party (the "Defaulting Party") shall have occurred that results in the failure to consummate the transactions contemplated hereby, then in addition to the other remedies provided in this Memorandum of Understanding, the non-Defaulting Party may seek to obtain an order of specific performance thereof against the Defaulting Party from a court of competent jurisdiction. In addition, the non-Defaulting Party shall be entitled to obtain from the Defaulting Party court costs and reasonable attorney's fees incurred by it in enforcing its rights hereunder. Agreement to Sell/Assignment Dated 19.03.2016 NOW THIS AGREEMENT WITNESSETH AS FOLLOWS That the ASSI....
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....ject property under mortgage. Initial payments having been received; the physical possession of the subject property was released to the Appellant. However, as the terms of the MoU-1 had run aground, a fresh MoU was signed between the Appellant and the Corporate Debtor on 02.03.2016 in continuation of the earlier MoU. The MoU-2 of 02.03.2016 also got grounded leading to frustration of the OTS proposal following which SBI initiated SARFAESI proceedings and the Appellant got divested of the physical possession of the subject property. It is an undisputed fact that the Appellant had paid an amount of Rs.10.46 crore on behalf of the Respondent to the SBI by the time the OTS collapsed. It is also an accepted fact that shortly after the MoU-2 was signed, an A2S was executed between the two parties on 19.03.2016. In terms of the A2S, the Corporate Debtor had agreed to sell to the Appellant the subject property after clearance of charge from the SBI and requisite permission from SIDCUL. The Appellant in turn had agreed to buy the subject property for a total consideration of Rs.15 crore to be paid in the account of the Corporate Debtor in SBI. In June 2019, the Corporate Debtor entered int....
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....ate Debtor had agreed to transfer the title and possession of the subject property on completion of OTS proposal. It was therefore argued that this transaction squarely satisfied the three-fold criteria of financial debt of disbursal, time value of money and commercial effect of borrowing as laid down in the judgment of this Tribunal in Kolla Koteswara Rao v. Dr. S.K. Srihari Raju in CA (AT) (Ins.) No.717/2020 ("Kolla" in short). 22. For a proper appreciation of the matter at hand, we therefore need to examine as to what are fundamental and essential conditions for treating a debt to be a financial debt. Since the Hon'ble Supreme Court has had the occasion to consider this matter at length, we feel it would be opportune to be illumined by those judgments. 23. One such relevant judgment delivered by the Hon'ble Supreme Court is in Pioneer Urban Land and Infrastructure Ltd. v. Union of India (2019) 8 SCC 416, ("Pioneer Urban" in short) where the concept of 'financial debt' has been elaborately discussed in the light of several earlier judgments including Innoventive Industries Ltd. v. ICICI Bank (2018) 1 SCC 407 and Swiss Ribbons (P) Ltd. v. Union of India (2019) 4 SCC 17. The ....
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....ecise language of Section 5(8)(f). First and foremost, the sub-clause does appear to be a residuary provision which is "catch all" in nature. This is clear from the words "any amount" and "any other transaction" which means that amounts that are "raised" under "transactions" not covered by any of the other clauses, would amount to a financial debt if they had the commercial effect of a borrowing. The expression "transaction" is defined by Section 3(33) of the Code as follows: 3. (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 transact....
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....ment. Thus construed, there can be no difficulty in stating that the amounts raised from allottees under real estate projects would, in fact, be subsumed within Section 5(8)(f) even without adverting to the Explanation introduced by the Amendment Act. (Emphasis supplied) 24. Next, we note that Section 5(8) of the IBC which deals with financial debt has also been exhaustively discussed in Anuj Jain case (supra) by the Hon'ble Apex Court and the relevant paragraph is to the effect: "46. Applying the aforementioned fundamental principles to the definition occurring in Section 5(8) of the Code, we have not an iota of doubt that for a debt to become "financial debt" for the purpose of Part II of the Code, the basic elements are that it ought to be a disbursal against the consideration for time value of money. It may include any of the methods for raising money or incurring liability by the modes prescribed in clauses (a) to (f) of Section 5(8); it may also include any derivative transaction or counter-indemnity obligation as per clauses (g) and (h) of Section 5(8); and it may also be the amount of any liability in respect of any of the guarantee or indemnity for any....
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....were payable thereon. If there is no interest payable on the loan, only the outstanding principal would qualify as a financial debt. Both NCLAT and NCLT have failed to notice clause (f) of Section 5(8), in terms whereof "financial debt" includes any amount raised under any other transaction, having the commercial effect of borrowing. 23. Furthermore, sub-clauses (a) to (i) of sub-section (8) of Section 5 IBC are apparently illustrative and not exhaustive. Legislature has the power to define a word in a statute. Such definition may either be restrictive or be extensive. Where the word is defined to include something, the definition is prima facie extensive. 31. At the cost of repetition, it is reiterated that the trigger for initiation of the corporate insolvency resolution process by a financial creditor under Section 7 IBC is the occurrence of a default by the corporate debtor. "Default" means non-payment of debt in whole or part when the debt has become due and payable and debt means a liability or obligation in respect of a claim which is due from any person and includes financial debt and operational debt. The definition of "debt" is also expansive and the sam....
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....r, AIR 2017 SC 4084. The definition of Financial Debt as laid down under the code and the above case laws relied upon by the Corporate Debtor makes it clear that a debt will not become financial debt, if it was not advanced for time value money. MoUs entered between the parties on two occasions i.e. 25.11.2014 and 02.03.2016 and various other documents and balance sheets relied upon by the Applicant makes it abundantly clear that there is no interest payable on the loan advanced by the Applicant. Apart from the above, no time is fixed for repayment in the absence of which it cannot be said that the loan was lent for time value money. Further, the applicant himself failed to fulfil its own obligation and did not make the payment of the amount as settled." (Emphasis supplied) 28. In the present facts of the case, that money had been disbursed by the Appellant on behalf of Corporate Debtor to SBI towards loan repayment is undisputed. It is also an admitted fact that no interest was either claimed by the Appellant nor paid by the Corporate Debtor. That the component of interest is not a sine qua non for bringing a debt within the fold of financial debt has been clearly held....
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....the colour of commercial borrowing which is clearly borne out from the facts of the present case. It has all the trappings of a financial debt and squarely falls within the purview of Section 5(8) of IBC. 31. In view of the above, we answer the first question in the affirmative in holding that the disbursal made by the Appellant in the present case is in the nature of a financial debt and to that extent disagree with the Adjudicating Authority. 32. This now brings us to the second question as to whether the financial debt qua the Appellant had become due and payable and whether a default in payment had arisen on the part of the Corporate Debtor. 33. It is trite law that under the IBC once a debt which becomes due or payable, in law and in fact, and there is incidence of non-payment of the said debt in full or even part thereof, CIRP may be triggered by the financial creditor as long as the amount in default is above the threshold limit. It is also well accepted that debt means a liability in respect of a claim and claim means a right to payment even if it is disputed. Viewed against this broad backdrop of the IBC framework, we now dwell upon the facts of the present case t....
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....ch clearly stipulate that the purchase price of the subject property is Rs.27.16 crore. The Appellant having already paid Rs.10.46 crore was still required to pay the balance consideration of Rs.16.70 crore by or before 31.03.2016. Further, it is significant to note that Clause 5.1 of the "Completion Arrangements" in MoU-2 expressly provided that only after final payment is made by the Appellant to the Corporate Debtor's account in SBI that Corporate Debtor was to take further steps for execution of lease deed in respect of land and registration of factory building in favour of the Appellant. The recitals of the MoU make it amply clear that the Appellant was required to remit the full payment of Rs.27.16 crore and until then he was not entitled to acquire rights and title over the subject property. In other words, the debt qua the Corporate Debtor would have become payable only on the full amount having been remitted to the Corporate Debtor's account and this stage was yet to be reached. 38. The Learned Counsel for the Appellant however stated that the balance consideration amount beyond Rs.10.46 crore was to be paid by the Corporate Debtor and not by the Appellant. Secondly, it....
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....e up with SIDCUL for transfer of subject property. Be that as it may, this obligation was made conditional upon the receipt of final payment from the Appellant. Without going into the controversy as to whether the consideration amount was Rs.15 crore or Rs. 27.16 crore, we find that even the lesser amount of Rs. 15 crore had remained unpaid. Both the MoUs and A2S clearly provided that only on full payment of consideration amount by the Appellant that the Corporate Debtor was liable for cancellation of existing lease deed and registration of fresh lease deed by SIDCUL. Breach of obligation on the part of the Corporate Debtor would arise only after the Appellant fulfilled the pre-condition of making final payment and that having not taken place, the Corporate Debtor cannot be held liable for any breach of obligation and to provide for attendant compensation. Thus, the MoUs and A2S had been frustrated due to non-payment by the Appellant of the agreed consideration amount contained therein and for this breach the Corporate Debtor cannot be held responsible as that would tantamount to allowing the Appellant to take advantage of his own wrong. The full payment had clearly not been made b....