TaxTMI 
TaxTMI 
2023 (11) TMI 1219
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....he Respondent - HDFC Ventures Trustee Company Ltd. Brief facts of the case necessary to be noticed for deciding the Appeal are: (i) A Share Subscription and Shareholders Agreement was entered on 14.05.2008 between the Promoters, the Appellant Sanjay D. Kakade being one of them and IL&FS Trust Company Ltd. Promoters as 'First Part', IL&FS Trust Company Ltd. as 'Second Part', IIRF Holdings XIV Limited as 'Third Part', Edward Mauritius Limited as 'Fourth Part', HDFC Ventures Trustee Company Limited as 'Fifth Part' and Kakade Estate Developers Private Limited as 'Sixth Part'. The Kakade Estate Developers was referred to as 'Company' under the Agreement. The Agreement contained various clauses dealing with shareholding and Subscription Shares. Clause 16.4 provides for 'Put Option'. Clause 17 dealt with 'Events of Default'. Clause 18 dealt with 'Consequences of Events of Default'. Clause 19 dealt with 'Consequences of Termination of Agreement vis-à-vis IL&FS Investors'. Clause 21 deals with 'Indemnity'. It also dealt with the rights of convertible preference shares. A sum of Rs....
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....e Corporate Debtor filed a reply in Section 7 application. The Corporate Debtor also filed an IA No. 2740 of 2022. Both the parties were heard and by impugned order dated 29.03.2023 the Adjudicating Authority has admitted Section 7 application and has appointed Mr. Jayesh Natvarlal Sanghrajka as Interim Resolution Professional. Aggrieved by the order this Appeal was filed. 2. When the Appeal was heard by this Tribunal on 29.04.223, the following order was passed: "ORDER 19.04.2023: Learned counsel for the Appellant submits that the Appellant is endeavouring to take steps to abide by the consent terms dated 25.11.2020. Learned counsel appearing for the CoC submits that no Expression of Interest shall be issued till the next date. As prayed, list this Appeal on 06.07.2023." 3. Appeal was heard by this Tribunal on various occasions. On 09.08.2023 submission was advanced on behalf of the Appellant that the Appellant for obtaining the finance from 'Kotak Investment Advisory Limited' has started due-diligence and Appellant shall be able to make the payment to the Respondent. On 09.08.2023 following order was passed: "ORDER 09.08.2023: Learne....
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.... value of money involved in the transaction. The underlying transaction is that the Respondent Investors will be paid money and in turn they will transfer shares which they own of the Corporate Debtor, to the Promoters or their nominees. The transaction is therefore one of consideration for exchange and sale/purchase of shares. Such a transaction does not constitute a financial debt under the IBC nor does it have a commercial effect of a borrowing not it is disbursement for time value of money. A shareholder cannot wear the hat(sic) of a financial creditor by buy back option or exit route for his own shares. The Respondent Nos. 1 and 2, who hold 98.98% of the total equity and preference share capital cannot be treated as Financial Creditors. They are in fact liable to be treated as Promoters of the Corporate Debtor. The Adjudicating Authority erred in construing the provisions of the Consent Award to be a guarantee or indemnity by the Corporate Debtor. The guarantee is not by the Corporate Debtor but only by the Promoters i.e. Respondent Nos.2 to 5. The Corporate Debtor has assumed joint and several liability under the Consent Decree but not as a Guarantor and further this liabilit....
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....ime to fulfil its obligations vide email dated 27.08.2021 and 06.09.2021. On failure of the Corporate Debtor to comply with its obligations, the Financial Creditor has filed Section 7 application. The Adjudicating Authority has considered the agreement and notices which impose an obligation on the Promoters of the Corporate Debtor to provide an exit route to the Financial Creditors, which obligation has the commercial effect of a borrowing as per Section 5(8)(f) of the IBC as the Corporate Debtor raised funds under the transaction for its project, repayable upon a specified tenure. The Corporate Debtor did not honour its promise of repayment in spite of several opportunities. The Expression of Interest has been issued on 02.11.2023. It is submitted that definition of Section 5(8)(f) is of wide import. The transactions subsumed under the provision were those having profit as their main aim. The transaction fulfills the test of 'commercial effect of a borrowing' under Section 5(8)(f) of the IBC. The Corporate Debtor had provided indemnity under the ARSSHA to the Financial Creditors against the breaches of the Promotes. The Corporate Debtor has unequivocally accepted liability....
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....f any of the Promoters of the Corporate Debtor desires to transfer his shares. Clause-16 of the Agreement provided for 'Exit Mechanism' to the Investors. Put Option was also contained in Clause 16.4. As per Clause-16.4, Promoters were under unconditional obligation to buy shares on an as if converted basis at the Fair Market Value as determined under Clause 19.9. Clause 16.4, is as follows: "16.4 Put Option (a) In the event the Promoters and the Company are unable to provide an exit to the IL&FS Investors and/ or the HIREF Investors and/ or their Affiliates before March 31, 2015 in any manner as specified in Clauses 16.1 to 16.2 above, without prejudice to any other rights or remedies available to the IL&FS Investors and/or the BIREF Investors, the IL&FS Investors and/or the HIREF Investors shall have the option to require the Promoters to buy their Shares and the Promoters shall be under an unconditional obligation to buy such Shares on an as if converted basis at the Fair Market Value as determined under clause 19.9 below. For this purpose the IL&FS Investors and/or the HIREF Investors and/or their Affiliates shall serve to the Promoters as put option no....
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....nd *** *** *** 19.6 The Non-defaulting HIREF Shareholders shall, without prejudice to any other rights they may have under this Agreement or otherwise, have the right, at their sole discretion to either: (a) require the Defaulting Shareholders Group to purchase from the Non-defaulting HIREF Shareholders all the Shares held by the Non- defaulting HIREF Shareholders at a price that provides the Non-defaulting HIREF Shareholders an Internal Rate of Return of 15% per annum compounded annually, or the Fair Market Value, whichever is higher, subject applicable laws. Provided if the Non- defaulting Shareholders have also exercised their similar right under Clause 19.1(a), the Defaulting Shareholders Group shall purchase either all the Shares held by the Non-defaulting HIREF Shareholders and the Non-defaulting Shareholders; and" 13. Clause-21 provided for 'Indemnity', which was given by the Company and the Promoters to indemnify the IL&FS Investors and the HIREF Investors. The Agreement contained other details of terms and conditions. 14. The Supplementary Share Subscription-Cum-Shareholders Agreement was again entered on 12.07.2008, which clearly m....
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....Consideration including Carrying Cost Exit Consideration including Carrying Cost (vii) KP-SK LLP (defined herein below) to undertake the obligation of facilitating an exit to IL&FS and HIREF if the Promoters and/ or the Company fail to provide exit as contemplated herein. (viii) Exit Consideration paid to IL&FS and HIREF to be in proportion to their respective Exit Consideration." 16. It was further provided in the Clause that any breach under the Binding Term Sheet shall be considered a breach by the Promoters, the Company and KP-SK and any breach under the Term Sheet shall be considered as breach under the SSHA and IL&FS SSHA. 17. The Promoters and the Company having not been able to comply with the Terms of Share Subscription and Shareholders Agreement and Binding Term Sheet, dispute between the parties was referred to Arbitrator appointed by the Bombay High Court. Before the Arbitrator a Consent Term was entered between the parties on 25.11.2020. On the basis of which Consent Terms a Consent Award was passed by Arbitrator on 19.01.2021. The Consent Terms noticed in detail the investments made under different Agreements by the Investors. Both, th....
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....s further provided the payment of interest, in event the payment is not paid within time. The Consent Terms contained a stipulation that Company and the Promoters jointly and severally liable to pay the Decretal Amount. Clause-9 (ix), (x) and (xi), which are relevant are as follows: "(ix) In the event (a) the First Tranche Amount is not paid in full (along with accrued interest, if any) on or before the First Tranche Due Date and as provided herein, subject to the proviso below, and/or (b) there is breach of any of the terms, other obligations, covenants, undertakings and/or representations made/ given by the Promoter Respondents under these Consent Terms ("Other Bench"), the entire Decretal Amount shall become immediately due and payable, an event of default shall be deemed to have occurred, and the Claimants and HIREF Investors shall in sch case be entitled to exercise all rights and remedies available to them under law or in contract to enforce their rights under these Consent Terms and Respondent Nos.1 to 5 and/or their affiliates/ nominees, shall be jointly and/or severally liable to pay the Decretal Amount along with an interest of 15% per annum, calculated from the ....
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.... HIREF Investors shall be entitled to exercise all rights and remedies available to them under law or in contract to enforce their rights under these Consent Terms, including but not limited to execution of the present Consent Terms/ award against the Respondent Nos.1 to 5, jointly and/ or severally, against any of their assets. This is without prejudice to other rights of the Claimants and HIREF Investors, whether under contract, law or otherwise. (x) In the event the Second Tranche amount (along with accrued interest if any) is not paid in full on or before the Second Tranche Due Date or there is breach of any of other terms, obligations, covenants, undertakings and/or representations made/ given by the Respondents under these Consent Terms, the Second Tranche Amount shall become immediately due and payable, an event of default shall be deemed to have arisen and the Claimants and HIREF Investors shall in such case be entitled to exercise all rights and remedies available to them under law or in contract to enforce their rights under these Consent Terms and Respondent Nos.1 to 5 and/or their affiliates/ nominees, shall be jointly and/or severally liable to pay, the Second....
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....undred and Twenty only) to the Corporate Debtor, for the implementation of the real estate development project at Village Bhugaon, District Pune, based on the representations, covenants, terms and conditions as stated therein. A copy of the said ARSSHA is annexed hereto and marked as Exhibit "B"; (ii) Under the Supplementary Subscription Cum Shareholders Share Agreement of 11th July 2008 executed between (i) the Financial Creditors; (ii) IIRF Holdings XIV Limited; (iii) IL &FS Trust Company Limited; (vi) the Corporate Debtor (v) Mr. Sanjay Dattatray Kakade; (vi) Mrs. Usha Sanjay Kakade; (vii) Kharadi Properties Private Limited; (viii) Kakade Retailing Private Limited. ("Supplementary SSHA"), the Financial Creditors gave a further sum of Rs. 15,00,00,000/- (Rupees Fifteen Crores only) to the Corporate Debtor, for the implementation of the real estate development project at Village Bhugaon, District Pune, based on the representations, covenants, terms and conditions as stated therein. A copy of the Supplementary SSHA is annexed hereto and marked as Exhibit "C". The manner in which the amounts were given by the Financial Creditors as mentioned in the aforesaid documents is set o....
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....er would come to an end. Consequent to the failure of the Corporate Debtor to fulfill the said Obligation under the said Agreements, the Financial Creditors invoked the remedies under Clause 16.4(a) read with 19.6(a) of the ARSSSHA inter-alia against the Corporate Debtor vide their Legal Notice dated 1st August 2019 and the resultant disputes were referred to arbitration before the Learned Sole Arbitrator, Justice CK Thakker (Retd.), Former Chief Justice of the Hon'ble Supreme Court of India. In the said arbitral proceedings, the parties arrived at a settlement, signed consent terms dated 25th November 2020 ("Consent Terms") and the consent award dated 19th January 2021 ("Consent Award") came to be passed in terms of the Consent Terms. By and under Consent Award passed in terms of the Consent Terms executed between the parties hereto on 25th November 2020 passed in the Arbitration proceedings before the Learned Sole Arbitrator Justice CK Thakker (Retd.), Former Chief Justice of the Hon'ble Supreme Court of India, a total sum of Rs. 72,85,71,429/- (Rupees Seventy Two Crores Eighty Five Lakhs Seventy One Thousand Four Hundred and Twenty Nine only) ("First Tranche Amount")....
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.... of Rs. 72,85,71,429/- (Rupees Seventy Two Crores Eighty Five Lakh Seventy One Thousand Four Hundred and Twenty Nine). Since the said event of default remained uncured at the end of the Corporate Debtor, the Financial Creditors, in accordance with the Consent Award, vide notices dated 27th August 2021 called upon, inter alia, the Corporate Debtor to pay the entire amount due under the Consent Award, i.e. the sum of Rs.120,00,00,000 (Rupees One Hundred and Twenty Crores) along with 15% interest thereon calculated from 25th August 2021 to the date of payment thereof to the Financial Creditors. However, the Corporate Debtor has failed to pay the aforesaid sum and accordingly a payment default has occurred on 25th August 2021 and the entire amount due and payable under the Consent Award has become due and payable forthwith. The total amount in default to the Financial Creditors by the Corporate Debtor as on 31st May 2022 is Rs.133,75,89,041 (Rupees One Hundred Thirty Three Crore Seventy Five Lakh Eight Nine Thousand and Forty One only). The computation is annexed hereto and marked as Exhibit "H". Copy of the 'Event of Default' notices issued by the Financial Creditors dated 27....
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.... connection with protection against or benefit from fluctuation in any rate or price and for calculating the value of any derivative transaction, only the market value of such 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-clause (a) to (h) of this clause;" 24. The Hon'ble Supreme Court in 2019:INSC:889 : (2019) 8 SCC 416 - Pioneer Urban Land and Infrastructure Limited and Anr. vs. Union of India and Ors. had occasion to consider the concept of 'financial debt' and the meaning of the 'financial debt' as contained in the IBC. Hon'ble Supreme Court had occasion to consider sub-clause (f). We may reproduce paragraphs 72 to 77 of the judgment, which are as follows: "72. Shri Krishnan Venugopal took us to ACT Borrower's Guide to the LMA's Investment Grade Agreements by Slaughter and May (5th Edn., 2017). In this book "financial indebtedness....
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....said to fit within any of the categories mentioned in Section 5(8). He relied strongly on the passage in Slaughter and May's book which is extracted hereinbelow: "Any amount raised having the "commercial effect of a borrowing" A wide range of transactions can be caught by Para (f), including for example forward purchases and sales of currency and repo agreements. Conditional and credit sale arrangements could also be covered here as could certain redeemable shares. The precise scope of this limb can be uncertain. Ideally, from the borrower's perspective, if there are additional categories of debt which should be included in "financial indebtedness", these should be described specifically and this catch-all paragraph, deleted. A few strong borrowers do achieve that position. Most, however are required to accept the "catch all" and will therefore need to consider which of their liabilities might be caught by it, and whether specific exclusions might be required." 74. What is clear from what Shri Venugopal has read to us is that a wide range of transactions are subsumed by para (f) and that the precise scope of para (f) is uncertain. Equally....
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....ed advertisement on radio or television." 77. A perusal of these definitions would show that even though the petitioners may be right in stating that a "borrowing" is a loan of money for temporary use, they are not necessarily right in stating that the transaction must culminate in money being given back to the lender. The expression "borrow" is wide enough to include an advance given by the homebuyers to a real estate developer for "temporary use" i.e. for use in the construction project so long as it is intended by the agreement to give "something equivalent" to money back to the homebuyers. The "something equivalent" in these matters is obviously the flat/apartment. Also of importance is the expression "commercial effect". "Commercial" would generally involve transactions having profit as their main aim. Piecing the threads together, therefore, so long as an amount is "raised" under a real estate agreement, which is done with profit as the main aim, such amount would be subsumed within Section 5(8)(f) as the sale agreement between developer and home buyer would have the "commercial effect" of a borrowing, in that, money is paid in advance for temporary use so that a fla....
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....e of money" are followed by the words "and includes". Thereafter various Categories (a) to (i) have been mentioned. It is clear that by employing the words "and includes", the legislature has only given instances, which could be included in the term "financial debt". However, the list is not exhaustive but inclusive. The legislative intent could not have been to exclude a liability in respect of a "claim" arising out of a recovery certificate from the definition of the term "financial debt", when such a liability in respect of a "claim" simpliciter would be included in the definition of the term "financial debt". 54. In any case, we have already discussed hereinabove that the trigger point for initiation of CIRP is default of claim. "Default" is non-payment of debt by the debtor or the corporate debtor, which has become due and payable, as the case may be, a "debt" is a liability or obligation in respect of a claim which is due from any person, and a "claim" means a right to payment, whether such a right is reduced to judgment or not. It could thus be seen that unless there is a "claim", which may or may not be reduced to any judgment, there would be no "debt" and conseque....
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....is clearly demonstrated by the above statements contained in the Supplementary Agreement. The use of expression "further funding" indicates that transaction has commercial effect of borrowing. Now the question remains to be considered is as to whether the investment by the Financial Creditors can be said to be an investment by disbursal against consideration of time value of money? The expression 'time value of money' encompasses in itself the concept of time value of the disbursement. We have already noticed the various clauses of amended and restated Share Subscription-cum-Shareholders Agreement dated 14.05.2008 and we have extracted the relevant clauses, where Company and Promoters were obliged to purchase all the shares held by the non-defaulting Shareholders at a price that provides the non-defaulting Shareholders at an internal rate of return of 15% per annum compounded annually or the Fair Market Value, whichever is higher. Clauses 19.1(a) and 19.6(a) as extracted above, contains clear indication that investment was with an eye to earn profits and the investment was for consideration for the time value of money. Binding Term Sheet, which we have also noticed above al....
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....ent 2 confirmed that she had requested the appellant Company to allot shares in the name of the said Mr. M. Krishnan against her share application money, which the said M. Krishnan had agreed to treat as his personal loan from Respondent 2 and pay her the amount at a later date. 11. The appellant Company claims to have issued shares of the value of Rs 90,00,000 in the name of Mr. M. Krishnan in 2008. According to the appellant Company, there is thus, no further liability to be discharged by the appellant Company to the respondents. After 23-3-2006, there had been no financial transaction between the appellant Company and the respondents. 12. However, by a legal notice dated 19-11-2012, the respondents called upon the appellant Company to repay to the respondents a sum of Rs 1,49,60,000 alleged to be the outstanding debt of the appellant Company, repayable to the respondents as on 19-7-2004. 13. By a letter dated 5-12-2012, the appellant Company refuted the claim of the respondents, whereupon the respondents filed petition being CP No. 335 of 2013 in the High Court of Madras under Sections 433(e) & (f) and 434 of the Companies Act, 1956, for winding up of ....
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....financial debt' means debt along with interest, if any disbursed against the consideration for time value of money. The present is not a case regarding allocation of shares by payment of money on the basis of which money, Section 7 Application is filed. The transactions, which have come up for consideration contains several clauses which makes it clear that it is not a case of simple allotment of shares against payment of money. Hence, we are of the view that judgment in Radha Exports cannot help the Appellant in the present case. 31. The learned Counsel for the Appellant relied on judgment of this Tribunal in Company Appeal (AT) (Insolvency) No.452 of 2020 - Sushil Ansal vs. Ashok Tripathi and Ors., which Appeal arose out of an order of admission passed by Adjudicating Authority on an Application filed by one Mr. Ashok Tripathi and Saurabh Tripathi claiming to be Financial Creditors. Ashok Tripathi and Saurabh Tripathi were allotted a dwelling unit under a Real Estate Project. In the above case, the Ashok Tripathi and Saurabh Tripathi has filed an Application before the Uttar Pradesh Real Estate Regulatory Authority, which Authority passed an order in favour of the Applican....
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....39; and leading to passage of Recovery Certificate needs to be rejected outright. Respondent Nos. 1 and 2 neither asserted nor sought triggering of Corporate Insolvency Resolution Process in a purported capacity as allottees of Real Estate Project but sought initiation of Corporate Insolvency Resolution Process against the Corporate Debtor on the strength of being 'decree-holders' which owed its genesis to the Recovery Certificate issued by the 'UP RERA'. It is, therefore, required to be determined whether in their projected capacity as 'decree-holders' Respondent Nos.1 and 2 could maintain an application under Section 7 as 'Financial Creditors'. 20. A 'decree-holder' is undoubtedly covered by the definition of 'Creditor' under Section 3(10) of the 'I&B Code' but would not fall within the class of creditors classified as 'Financial Creditor' unless the debt was disbursed against the consideration for time value of money or falls within any of the clauses thereof as the definition of 'financial debt' is inclusive in character. A 'decree' is defined under Section 2(2) of the Code of Civil Procedu....
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....zed in the form of a Decree, outside the ambit of Section 5, sub-section (8). Paragraphs 53 and 54 of the judgment we have already extracted above. In view of the clear pronouncement of the Hon'ble Supreme Court as noted above, we are of the view that Appellant cannot take any benefit from the above judgment of this Tribunal. 33. We may also notice one another recent judgment of the Hon'ble Supreme Court, which may have some bearing on the issue, i.e., judgment of the Hon'ble Supreme Court in Civil Appeal No.3806 - Vishal Chelani & Ors. vs. Debashis Nanda decided on 06.10.2023. The issue raised in the Hon'ble Supreme Court was that a beneficiary of Decree by the Uttar Pradesh Real Estate Regulatory Authority cannot be treated differently from allottees to real estate project. In the above case, the Resolution Professional has taken a view that once an allottee seeks remedies under RERA, and opts for return of money in terms of the order made in her favour, it is not open for her to be treated in the class of home buyer, as the said allottees, who had Decree from RERA were kept in a separate class, which classification was not upheld by the Hon'ble Supreme Cou....
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....on judgment of the Hon'ble Supreme Court in Anuj Jain vs. Axis Bank 2020:INSC:227 : (2020) 8 SCC 401, in which Hon'ble Supreme Court explained the meaning of concept of 'financial debt' under Section 5, sub-section (8). When we look into the judgment of this Tribunal in the above case, the basis of the judgment of this Tribunal is that Section 7 Application was filed on the basis of breach of Settlement Agreement, which is not permissible under Section 7. Paragraph 25 (xi), (xii) and (xiii) are as follows: "(xi) The Arbitral Award/Decree cannot be enforced by invoking Section 7 of the Code. A decree/Award holder is not a Financial Creditor and any obligation arising there under will not amount to a financial debt as held in the following cases: a. In Shubankar Bhowmik v. Union of India W.P. (C) (PIL) No. 4/2022, Division Bench, Hon'ble Tripura High Court has held that Decree Holder, although recognized as Creditor under S. 3(10), are a different class of creditor and cannot be treated as Financial Creditor or an Operational Creditor under I &B Code, 2016 as follows: "[11] The interest recognized is that in the decree and not in the dis....
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....ecree-holder" to initiate CIRP in Part II. We accept the submissions made by the Learned Counsel for the Appellant" (xii) It is very much clear that the Respondent no.1 cannot be said to be a financial creditor of the Corporate debtor. Simply, relying on the consent award CIRP cannot be invoked .The Code/Adjudicating Authority is not the executing authority for enforcing the Arbitral Award under the provisions of Arbitration & Conciliation Act, 1996. (xiii) It is abundantly clear that the Respondent no.1 investment of debentures & unsecured loans to the Joint Venture Company are evidently not a disbursement made to the Corporate Debtor. This Appellate Tribunal has already prevented in the following Judgments the enforcement of a decree/Arbitral Award using the provisions of IBC. (i) G Eswara Rao v. SASF, Judgment dtd. 7.2.2020 - internal para. 26, pg. 22 (ii) Sushil Ansal v. Ashok Tripathy, Judgment dtd. 14.08.2020- internal para. 23, pg.29 (iii) HDFC Bank v. Bhagwan Das Auto Finance Ltd. Judgment dtd. 9.12.2019. (iv) C. Shivakumar Reddy v. Dena Bank, Judgment dated 18.12.2019 (v) IARCL v. Jayant Vitamins, Judgment date....
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.... view of aforesaid facts & Circumstances we are not in a position to sustain the order of Adjudicating Authority & accordingly we are allowing the Appeal." 37. The ratio of the judgment of this Tribunal as noted above was that since Section 7 Application was filed alleging breach of Settlement Agreement, the Application was not maintainable. The basis of judgment is that Settlement Agreement, which resulted into Decree cannot be made basis for Section 7 Application. We have noticed the judgment of Hon'ble Supreme Court in Kotak Mahindra Bank, which clearly says that mere fact that a Decree had been obtained by the Financial Creditor, shall not take him out of Section 7 proceedings and if ingredients of 'financial debt' are in existence, Section 7 Application is maintainable. This Tribunal in Raj Singh Gehlot has noticed the amendment made in the Shareholder Agreement. As per the judgment of this Tribunal, there was no consideration for time value of the debentures. Paragraph 12 of the judgment is as follows: "12. The SHA was amended for the first time on 3 September 2011, wherein it was inter alia agreed between the parties that the Debentures issued by JV C....