TaxTMI 
TaxTMI 
2024 (4) TMI 118
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.... Company Law Tribunal, Mumbai Bench, Court-III) in C.P. No. 4076/IBC/MB/2018. By the impugned order, the Adjudicating Authority has admitted the Section 7 application filed by Awaita Properties Private Limited - Financial Creditor/Respondent No. 1 against Tarapur Textile Park Ltd. - Corporate Debtor for a default amount of Rs. 8,56,30,137/-. Aggrieved by this impugned order, the present appeal has been preferred by the ex-Director of the Corporate Debtor. 2. We have heard Shri Dhruba Mukherjee, Learned Sr. Counsel appearing for the Appellant, Shri Krishnendu Dutta, Learned Sr. Counsel for Respondent No. 1 and Shri Kunal Godhwani, Learned Counsel for the Resolution Professional. 3. Making his submissions, the Learned Sr. Counsel for the Appellant submitted that Mr. Nikhil Gandhi, Director of Respondent No. 1 Company who exercised control over some other associated companies also had shown interest in the development of a land project, namely, 'Boisar Project Land' in which the land was owned by the Appellant. Towards development of the said project on the land belonging to the Appellant, Shri Nikhil Gandhi decided to join as a joint venture partner through a company controlled by ....
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....d by Respondent No. 1 is not in the nature of 'financial debt' in terms of the statutory construct of IBC, basis which Section 7 application could not have been admitted. 5. Submission was pressed that there is no agreement or document which established that the amount of Rs. 5 crore given by Respondent No. 1 to Corporate Debtor was towards a working capital loan. It was stressed that Respondent No. 1 had produced self-created books of account of the Corporate Debtor to claim the outstanding amount as financial debt. It was also contended that the onus clearly lay on the Respondent No. 1 to show that the Corporate Debtor had received a loan and had committed a default in the repayment of the above amount which fact the Respondent No. 1 has failed to effectively demonstrate. Assailing the impugned order, the Learned Counsel for the Appellant submitted that the Adjudicating Authority had wrongly shifted the onus on the Corporate Debtor to prove that said amount was not due. The Adjudicating Authority had erred in proceeding to admit the Section 7 application without proper adjudication as to whether the debt was due and payable. 6. Refuting the submissions made by the Appellant, th....
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....ry issue before our consideration is whether in the backdrop of the statutory provisions of IBC, the outstanding amount of Rs. 5 crore disbursed by Respondent No. 1 to Corporate Debtor is in the nature of financial debt, and, whether in the facts of the present case, there has been a default in the re-payment of the said loan by the Corporate Debtor which entitled the Respondent No. 1 to file a Section 7 application in the capacity of a Financial Creditor qua the Corporate Debtor. 9. Before we proceed to answer the question as outlined above, it would be constructive for us to run our eyes through some of the relevant definition clauses which find place in Sections 3 and 5 under Part II Chapter I Preliminary of the IBC: 3(11) "debt" means a liability or obligation in respect of a claim which is due from any person and includes a financial debt and operational debt. 5(7) "financial creditor" means any person to whom a financial debt is owed and includes a person to whom such debt has been legally assigned or transferred to. 5(8) "financial debt" means a debt alongwith interest, if any, which is disbursed against the consideration for the time value of money and includes- (a....
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....t necessarily culminate into money being returned to the lender or interest being paid in respect of money that has been borrowed. Holding Section 5(8) to be a residuary provision which has a catch-all nature, it held that it can include anything which is equivalent to the money that has been loaned as long as commercial effect of borrowing or profit as the aim is discernible. The relevant excerpts of this judgment 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 developer for the particular purpose of funding the real estate project in which the allottee is to be allotted a flat/apartment. The expression "disbursed" refers to money which has been ....
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....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." *** "commercial.-adj. 1. of or engaged in commerce. 2. sponsored or paid for by an advertiser : commercial television. 3. having profit as the main aim : commercial music. 4. (of chemicals, etc.....
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....urpose 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 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....
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....ve. 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 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) 13. Having taken cognizance of the statutory provisions of IBC as reproduced above and the reigning judgements of the Hon'ble Apex Court, we can safely conclude that it is settled law that for any debt to be treated as financial debt, the pre-requisite is disbursal of money to the borrower for utilization by the borrower and that the disbursal must be against consid....
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....has not occurred. On the other hand, under Sections 8 and 9, an operational creditor may, on the occurrence of a default, deliver a demand notice which must then be replied to within the specified period. What is important is that at this stage, if an application is filed before the adjudicating authority for initiating the corporate insolvency resolution process, the corporate debtor can prove that the debt is disputed. When the debt is so disputed, such application would be rejected." 15. Given this backdrop, we may now analyse the rival submissions made by both parties to find out whether a case of financial debt and default thereof has been effectively made out in the facts of the present case. 16. While admitting that a sum of Rs. 5 crore was disbursed to the Corporate Debtor, it has been emphatically asserted by the Appellant that a financial contract is a must between the Corporate Debtor and the Financial Creditor to establish that the disbursal made was in the form of a loan. The letter from the bank produced by Respondent No. 1 only shows that transfer of the sum of Rs. 5 crore took place but does not show it as a loan. It is contended that only a contract between the p....
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....nt which shows that the disbursal made was in the nature of loan wherein interest was specifically payable. Be that as it may, we are of the considered opinion that the IBC does not provide for any prescriptive requirement for the Financial Creditor to place on record formal written agreements/documents between the parties to establish that the disbursal made was in the form of loan with interest. Given this background we therefore find that the Adjudicating Authority committed no error in holding that there was a financial debt owed by the Corporate Debtor to Respondent No. 1. 19. As long as there are clear acknowledgments of such debts in the statements of accounts of the Corporate Debtor, the Financial Creditor is not impeded in filing a Section 7 application and the Adjudicating Authority is required to look into the evidence of default as furnished in Part-V of Form-1 of the application filed by the Financial Creditor. Both these requirements have been met in the present case. In terms of Section 7 of IBC, a financial creditor is entitled to file an application for initiation of CIRP of the Corporate Debtor when a default is committed by the Corporate Debtor. The Financial Cr....
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....It is settled position of law that a party cannot be bound by such terms and conditions which is not executed between the parties and thus we fail to understand the veracity of the MOU relied upon by the Corporate Debtor....... 30. Further, we observe that the disputes raised by the Corporate Debtor pertaining to SKIL are not relevant to be considered while adjudicating this present Company Petition, since the said company SKIL, is an entirely separate legal entity and involving the same in the present Company Petition, is of no relevance. In addition the MOU which is being referred by the Corporate Debtor remains as a mere draft and the parties cannot be held accountable for the same. In these circumstances we are not inclined to consider the disputes raised by the Corporate Debtor, since the same do not hold goodon our view due to the reasons elaborated hereinabove...." 23. We have perused the material on record placed before us. From the said material placed on record, it is clear that the alleged MOU entered between SKIL and the Corporate Debtor was merely a draft MOU and there is nothing to evidence that the same was signed, executed or acted upon between them. In any case,....
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....f the present case. It has all the trappings of a financial debt and squarely falls within the purview of Section 5(8) of IBC. It is trite law that under the IBC once a debt which becomes due or payable, in law and in fact, and if 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. Once the Adjudicating Authority is subjectively satisfied that there is a debt and a default has been committed by the Corporate Debtor and the Section 7 application is complete in all respects, the Adjudicating Authority in the exercise of summary jurisdiction has to admit the Section 7 application. In our considered view, this is a case where all the pre-requisites for filing a Section 7 stood fulfilled and the Adjudicating Authority cannot be held to have committed an error in admitting the Corporate Debtor into CIRP for having defaulted in repaying a financial debt which was above the threshold limit. 25. The Learned Counsel for the Resolution Professional submitted that due to non-cooperation from the Appellant, difficulties and challenges are being faced with ....