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2023 (5) TMI 934
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....he 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 repayment. Following execution of the MoU-1, the Co....
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....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. 7. Advancing arguments on behalf of the Corporate Deb....
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....s 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 entered into an Amnesty Scheme with the lender bank. Since t....
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....s.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) "corporate debtor" means a corporate person who owes a debt to any person; 3(10) "creditor" means any person to whom a debt is....
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....(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 Seller will complete all formalities and obtain requisite permission from SIDCUL for transferring the said Plot in favour of the Buyer and the Seller acknowledges that the Buyer has entered into this MoU only on the reliance of the promise of the Seller to obtain approval ....
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....r 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 clause 3 sub-clause 1.1, has expired and the parties are desirous to enter into new Memorandum of Understanding in continuation of the previous Memorandum of Understanding with revised terms and condition as are mentioned hereto as per clause 17 sub-clause 1.2. SALE AND TRANSFER OF THE UNIT 4.1 Sale and Purchase: 4.1.1. The Second Party agrees to sell and transfer to the First Party and the First Party agrees to purchase fr....
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....ng 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 ASSIGNORS shall assign and transfer the said Industrial Property in favour of the ASSIGNEE for a total consideration of R.15,00,00,000/- (Fifteen Crore Only) as per & within rules of concerned authorities. 1. That the aforesaid consideration amount shall be paid/deposited by the ASSIGNEE to/in the account of ASSIGNOR as maintained with its secured creditor i.e. State Bank of India. 5. The ASSIGNORS shall be responsible to complete all the requirements and formalities necessary for obtaining transfer order / permission of SIDCUL for transferring the said ....
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.... 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 into an amnesty scheme with SBI and after paying certain sum to SBI got the possession of the subject property released to themselves. 19. Given this conspectus of above facts, it is clear that the MoU-2 was in continuation of the MoU-1. The MoU-2 provided that the Corporate Debtor had agreed to sell and transfer the subject property to the Appellant on fulfillment of conditions precedent. From the clauses of the MoU-1 under the caption 'Definitions and Interpretations', we find that purchase price has also been defined. Further, the clauses under the caption 'Purchase Price and Payment' in MoU-2 st....
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....t. 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 relevant excerpts are as extracted under: "70. The definition of "financial debt" in Section 5(8) then goes on to state that a "debt" must be "disbursed" against the consideration for time value of money. "Disbursement" is defined in Black's Law Dictionary (10th Edn.) to mean: "1. The act of paying out money, commonly from a fund or in settlement of a debt or account payable. 2. The money so paid; an amount of money given for a particular purpose." 71. In the present context, it is clear that the expression "disburse" would refer to the payment of instalments by the allottee to the real estate dev....
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....y 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 (2nd Edn., 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.) from another source; appropriate. 3. Not standard. to lend. 4. (intr) Golf. To putt the ball uphill of the direct path to the hole : make sure you borrow enough." *** "commerci....
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....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 of the items referred to in clauses (a) to (h). The requirement of existence of a debt, which is disbursed against the consideration for the time value of money, in our view, remains an essential part even in respect of any of the transactions/dealings stated in clauses (a) to (i) of Section 5(8), even if it is not necessarily stated therein. In any case, the definition, by its very frame, cannot be read so expansive, rather infinitely wide, that the root requirements of "disbursement" against "the consideration for the time value of money" could be forsaken in the manner that any transaction could stand alone to become a financial debt. In other words, any of the transactions stated in the said clauses (a) to ....
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....tion 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 same includes, inter alia, financial debt. The definition of "financial debt" in Section 5(8) IBC does not expressly exclude an interest free loan. "Financial debt" would have to be construed to include interest free loans advanced to finance the business operations of a corporate body." (Emphasis supplied) 26. Briefly stated, we see that in Pioneer Urban (supra) it has been held that any debt to be treated as financial debt, there must happen disbursal of money and the disbursal must be against consideration for time value of money. The concept of time value of money has been further explained to also include a transaction which does not necessarily culminate into money being returned to the lender or interest being paid in respect of money that h....
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.... 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 by the Hon'ble Supreme Court in Orator (supra). We are, therefore, not able to accept the misconceived finding of the Adjudicating Authority that simply because the instant transaction was bereft of loan component and no time was fixed for repayment, it did not qualify to be a financial debt. 29. We now proceed to examine whether in the present case, disbursement of money has taken place against the consideration for time value of money and whether commercial effect of borrowing is found to underpin the transaction. At the outset, we acknowledge that the concept of time value of money has not been expressly defined in the IBC. Undoubtedly, the most typical illustration of time value is in the form of interest on the principal amount that has been borrowed. However, it is n....
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....ayment 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 to find out whether in this case debt was due and payable. 34. There is sufficient material on record to prove that there was disbursal of funds by the Appellant to the Corporate Debtor in their account with SBI towards loan repayment. Admittedly the amount so disbursed is Rs.10.46 crore and this fact finds clear mention at Clause 5.5 of MoU-2. The bank transaction details are at Annex-A/6 of the Appeal Paper Book ("APB" in short) besides Balance Sheet of the Corporate Debtor for FY 2016-17 till 2020-2021 at Annex-A/11 of APB acknowledging receipt of this disbursal as "other long term liabilities". 35. The modality of payment by the Appellant by way of direct deposit to the Corporate Debtor's account with SBI was clearly laid down in Clause 5.7 of the MoU-2. There is also no dispute ....
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....perty. 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 was asserted that the A2S which was a sequel to the MoUs had superseded the MoUs. It was asserted that the A2S provided the total consideration amount at Rs.15 crore for assignment and transfer of the subject property. 39. Even if we agree with the contention of the Appellant that the A2S had subsumed the MoUs and therefore the consideration amount for the subject property was Rs.15 crore and not Rs.27.16 crore, it still remains undisputed that the balance consideration amount was yet payable by the Appellant. We also cannot overlook that both the A2S at Clause 1 and MoU-2 at Clause 5.8 stipulated that the consideration amount was entirely payable by the Appellant. The Learned Counsel for the Appellant has failed to adduce any material on record to establish that this amount was payable by th....
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.... 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 by the Appellant having admittedly paid only Rs.10.46 crore, we agree with the finding of the Adjudicating Authority that unless the entire payment was made, no right would accrue to the Appellant to enter into the shoes of SBI and have right to title and possession of the subject property. 42. At this juncture, it would be appropriate to add that the applicability of the ratio of Kolla (supra) in the present case as claimed by the Learned Counsel for the Appellant also fails since in the present case, the distinguishing fact is that SIDCUL had held back permission to allow lease transfer of subject property not on their own, but it was occasioned by non-payment of final consideration amount by the Appellant. On the other hand, in Kolla case, CIRP had to be initiated because the permission granted by....