TaxTMI 
TaxTMI 
2023 (11) TMI 1219
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....ny 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.72,86,65,720/- was subscribed towards equity shar....
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....n 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: Learned Counsel for the Appellant submits that the Appellant for obtaining the finance from 'Kotak Investment Advisory Limi....
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....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 liability assumed under the Consent Decree is ultimately for sale/purchase of assets, and not for any commercial borrowing. The amount provided by Respondent No. 1....
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....editor 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 to repay the Financial Creditors under the Consent Award. The Corporate Debtor had accepted its liability in the present appeal when it sought time to appro....
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....so 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 notice ("Put Option Notice"), and the Promoters shall be obliged to perform their respective obligation as aforesaid, within 60 days from the date of receipt of the Put Option Notice. (b) If th....
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....quire 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 mentioned that the Company requires further funding to the extent of Rs.50 Crores in order to carry out objectives of the Business Plan. It is useful to extract following relevant portion of the Agreement: "WHEREAS: The parties hereto hav....
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....rtion 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, the Company and Promoters, consented to pay an aggregate amount of Rs.260 crores to the Claimant and HIREF Investors, which Agreement provided the manner of payment. Clause-9 of the Consent Terms is as follows: "9. Exit to the Claimants and HIREF Investors from the Respondent No.1 Company: (i) Respondent Nos. 1 to 5 ("Promoter Respondents") shall pay an aggregate ....
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....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 First Tranche Due Date or the date on which any other breach of this Consent Order occurs (as applicable) till the date of payment thereof ("First Tranche Default Interest") to the Claimants and HIREF Investors respectively and the Claimants and 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 Te....
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....tors, 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 Tranche Amount along with an interest of 15% per annum, calculated from the Second Tranche Due Date or the date on which any other breach of this Consent Order occurs (as applicable) till the date of payment thereof ("Second Tranche Default Interest") to the Claimants and HIREF Investors respectively and the Claimants and HIREF Investors shall in such case be entitled to exercise all rights and remedies avai....
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....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 out in Exhibit "D" hereto. (iii) Given that there was a "Default" under the ARSSHA and Supplementary SSHA and the Corporate Debtor, Mr. Sanjay Dattatray Kakade, Mrs. Usha Sanjay Kakade, Kharadi Properties Private Limited and Kakade Retailing Private Limited had failed in their obligation to develop the Project and provide an exit to the Financial Creditors, a binding term sheet was executed in 2015 ("Term Sheet"). The Corpora....
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....(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") was agreed to be paid inter-alia by the Corporate Debtor to the Financial Creditors on or before the expiry of 9 months from the execution of the aforesaid Consent Terms and further, a sum of Rs. 47,14,28,571/- (Rupees Forty Seven Crores Fourteen Lakhs Twenty Eight Thousand Five Hundred and Seventy One only) ("Second Tranche Amount") was agreed to be paid inter-alia by the Corporate Debtor to the Financial Creditors on or before the....
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.... 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 27th August, 2021 are annexed hereto as Exhibit "I" and "J". 21. In Part-V, the details of particulars of financial debt with documents, records and evidence of default was elaborated. Under Item No.5, which deals with Financial Contract, following were stated: 5. The latest and complete copy of the financial contract reflecting all amendments and waivers to date (Attach a Copy) (i) ARSSHA (Exhibit "B") (ii) Supplementary SSHA (Exhibit "C") (iii) Te....
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..... 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" is defined thus: "Definition of Financial Indebtedness (Investment Grade Agreements) "Financial indebtedness" means any indebtedness for or in respect of: (a) moneys borrowed; (b) any amount raised by acceptance under any acceptance credit facility or dematerialised equivalent; (c) any amount raised pursuant to any note purchase facility or the issue of bonds, notes, debentures, loan stock or any similar instrument; (d) the amount of any liability in respect of any lease or hire purchase contract which would, in accordance with GAAP, be treated as a balance s....
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....edness", 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, para (f) seems to be a "catch all" provision which is really residuary in nature, and which would subsume within it transactions which do not, in fact, fall under any of the other sub-clauses of Section 5(8). 75. And now to the precise 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) ....
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....ommercial" 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 flat/apartment is given back to the lender. Both parties have "commercial" interests in the same-the real estate developer seeking to make a profit on the sale of the apartment, and the flat/apartment purchaser profiting by the sale of the apartment. 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." 25. The ratio of the judgment of the Hon'ble Supreme Court is that sub- clause (f) of Section 5(8) would subsume within it amounts raised under transactions which are not necessarily loan transactions so long as they have the commercial effect of ....
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....ayment 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 consequently no "default" on non-payment of such a "debt". When the "claim" itself means a right to payment, whether such a right is reduced to a judgment or not, we find that if the contention of the respondents, that merely on a "claim" being fructified in a decree, the same would be outside the ambit of clause (8) of Section 5 IBC, is accepted, then it would be inconsistent with the plain language used in the IBC. As already discussed hereinabove, the definition is inclusive and not exhaustive. Taking into consideration the object and purpose of the IBC, the legislature could never have intended to keep a debt, which is crystallised in the form of a decree, outside the ambit of clause (8) of Section 5 IBC. 55. Having held that a liability in respect of a claim ar....
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....rs 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 also contains several clauses, which indicate that proposals were given by the Promoters to develop the Project and provide an exit to the Investors and the Exit Consideration was carrying IRR of 17%. 27. It is further relevant to notice that Section 7 Application filed by the Financial Creditor was not based only on the Consent Award passed by the Arbitrator on 19.01.2021, but all previous transactions were also basis of the Application. The Application filed under Section 7 cannot be said to be an Application for execution of Consent Decree, rather Section 7 Application was filed on account of default committed by the Company in not honouring its obligation under different Agreements as noted above. 28. We now need to notice certain judgments, which have been relied ....
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....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 the appellant Company. The said petition was transferred [K.P. Jayaram v. Radha Exports (India) (P) Ltd. Company Petition No. 335 of 2013, order dated 14-2-2017 (Mad)] to the Chennai Bench of NCLT and renumbered TCP/301/(IB)/2017." 29. In the above background, the Hon'ble Supreme Court made observations in paragraph 42, which is relied by the learned Counsel of the Appellant, which is as follows: "42. The definition of "financial debt" in Section 5(8) makes it clear that "financial debt" means a debt along with interest, if any, disbursed against the consideration for time value of money and would include money raised or borrowed against the payment of interest; amount raised by acceptance under any acceptance credit facility or its dematerialised equivalent; amount raised pursuant to any note purcha....
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..... 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 Applicant and issued a Recovery Certificate. This Tribunal allowed the Appeal and set-aside the order of Adjudicating Authority admitting Section 7 Application and the Application was dismissed. It is relevant to notice paragraphs 19 and 20 of the judgment, which are to the following effect: "19. Sub-clause (f) of sub-section (8) of Section 5 provides that any amount raised under any other transaction, including any forward sale or purchase agreement, having the commercial effect of a borrowing would fall within the ambit of 'financial debt' and the explanation added to sub- section by Act No. 26 of 2018 provides that any amount raised from an allottee under a Real Estate Project shall be deemed to be an amount having the commercial effect of a borrowing. Thus, the relevant consideration for determination of 'fina....
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....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 Procedure, 1908 ("CPC" for short) as the formal expression of an adjudication which conclusively determines the rights of the parties with regard to the matters in controversy in a lis. A 'decreeholder', defined under Section 2(3) of the same Code means any person in whose favour a decree has been passed or an order capable of execution has been made. Order XXI Rule 30 of the CPC lays down the mode of execution of a money decree. According to this provision, a money decree may be executed by the detention of judgment-debtor in civil prison, or by the attachment or sale of his property, or by both. Section 40 of the 'Real Estate (Regulation and Development) Act, 2016' lays down the mode of execution by providing that the RERA may order to recover the amount due under the Recovery Certificate by the concerned Authority as an a....
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....nal 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 Court and the Hon'ble Supreme Court has held following in paragraph 8: "8. The Resolution Professional's view appears to be 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. This Court is unpersuaded by the submission. It is only home buyers that can approach and seek remedies under RERA - no others. In such circumstances, to treat a particular segment of that class differently for the purposes of another enactment, on the ground that one or some of them had elected to take back the deposits together with such interest as ordered by the competent authority, would be highly inequitable. As held in Natwar Agarwal (HUF) (Supra) by the Mumbai Bench of National Company Law Tribunal the underlying claim ....
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...., 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 dispute that leads to the passing of the decree. This is apparent from the fact that decree holders as a class of creditors are kept separate from "financial creditors" and "operational creditors". No divisions or classification is made by the statute within this class of decree holders. The inescapable conclusion from the aforesaid discussion is, that the IBC treats decree holders as a separate class, recognized by virtue of the decree held. The IBC does not provide for any malleability or overlap of classes of creditors to enable decree holders to be classified as financial or operational creditors" This view was affirmed by the Hon'ble Supreme Court of India in SLP (C) 6104/2022 wherein the SLP to challenge the above Order was rejected. b. In Sushil Ansal v. Ashok Tripathy CA (AT) Ins. No. 452 of 2020 this Hon'ble Appellate Tribunal has held that an award....
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....dgment 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 dated 17.12.2019" 35. Paragraphs 26 and 27 of the above judgment, which are also relevant, are as follows: "26. We are making it clear that Investment made in SPV/Joint Venture through Share Subscription & Shareholders Agreement will not come within the purview of Section 7 R/w Section 5(8) of the 'Code'. 27. It is also further stated that to get it covered under Section 7 R/w Section 5 (7) & (8) of the Code that there must be disbursal of fund by the Financial Creditor to the Corporate Debtor or in simple term, if there is no disbursal then even 'Financial Debt' will not attract Section 7 of the Code, as it looks from the bare reading of Section 5(8) of the Code in order to qualify under Section 7 of the Code, the following basic ingredients are a requirement to get covered under Section 7 of the Code: a. The Creditor must be a 'Financial Creditor' and be covered by Section 5(7) & (8) of the Code. b. The Financial De....
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.... 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 Company to Vistra ITCL and Ambience shall not carry any guaranteed coupon payment. It may be noted that the originally the Debentures issued by JV Company was to carry a coupon rate of 15% per annum. After the amendment, even the debentures issued by JV Company did not provide for any consideration for time value of the debentures." 38. This Tribunal, thus, noticing certain clauses has held that since coupon rate of 15% per annum was deleted, there was no consideration for time value of debentures. We in the present case have noticed the various relevant clauses of the Agreement and Binding Term Sheet, which indicate that the investment made by the Financial Creditor was with an eye for consideration for time value and money and the said condition was fulfilled in the facts of the present case. We have also held that the transaction had commercial effect of borrowing. If the Settlement Agreement or Arbitration Award arises out of transactions, which are 'financial debt', the mere fact that 'financial debt'....