TaxTMI 
TaxTMI 
2024 (4) TMI 1067
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..... The impugned judgment and order dated 7th October 2021 holds that the first respondent is a financial creditor. As far as Civil Appeal nos.6991-6994 of 2022 are concerned, the issue is whether the 1st to 4th respondents therein are financial creditors of the same corporate debtor - M/s. Mount Shivalik Industries Limited. The impugned judgment dated 29th October 2021 follows the impugned judgment in Civil Appeal no.1143 of 2022. FACTUAL ASPECTS 2. A brief reference to the factual aspects of Civil Appeal no.1143 of 2022 must be made to understand the controversy. There were two agreements of 1st April 2014 and 1st April 2015 between the corporate debtor and the first respondent. The agreements were in the form of letters addressed by the corporate debtor to the first respondent. By the agreement/letter dated 1st April 2014, the corporate debtor appointed the first respondent as a 'Sales Promoter' to promote beer manufactured by the corporate debtor at Ranchi (Jharkhand) for twelve months. One of the conditions incorporated by the corporate debtor in the said letter/agreement was that the first respondent should deposit a minimum security of Rs.53,15,000/- with the corporate d....
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....peal nos.6991-6994 of 2022, the second respondent is the resolution professional. The corporate debtor is the same as in the other appeal. The fifth respondent had provided financial assistance to the corporate debtor of Rs.75,00,000/-. The fourth respondent provided financial assistance to the corporate debtor of Rs.1,62,00,000/-. The first respondent advanced a sum of Rs.25,00,000/- to the corporate debtor. The third respondent advanced a sum of Rs.1,00,000/- to the corporate debtor. The Resolution Professional rejected the claims of the four creditors as financial creditors. Therefore, they filed separate applications before the NCLT by invoking sub-section (5) of Section 60 of the IBC. The NCLT rejected the applications. In the appeals preferred by them before the NCLAT, the NCLAT allowed the appeals by relying upon its judgment, which is the subject matter of challenge in Civil Appeal no.1143 of 2022. SUBMISSIONS 5. The learned senior counsel appearing for the appellants in support of Civil Appeal no. 1143 of 2022 submitted that the first respondent is an operational creditor going by the agreements dated 1st April 2014 and 1st April 2015. The reason is that the agreemen....
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.... Promoter and not to avail any financial facilities from the first respondent. The amount paid by the first respondent does not constitute financial facilities extended to the corporate debtor. There was no intention to raise finance from the first respondent, who was appointed as a Sales Promoter. The learned senior counsel also relied upon the decisions of this court in the cases of Anuj Jain, Interim Resolution Professional for Jaypee Infratech Limited v. Axis Bank Limited & Ors. (2020) 8 SCC 401, Phoenix ARC Private Limited v. Spade Financial Services Limited & Ors. (2021) 3 SCC 475 and New Okhla Industrial Development Authority v. Anand Sonbhadra (2023) 1 SCC 724. Lastly, it is submitted that in the case of an invoice involving any transaction, the delay in payment attracts interest liability. Therefore, the payment of interest is not the sole criterion for ascertaining whether a debt is a financial debt. He would, thus, submit that the appeals deserve to be allowed. 7. The learned senior counsel appearing for the first respondent submitted that the true nature of the agreements will have to be examined for deciding the nature of the debt. He pointed out several factu....
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....erational debt" under subsection (21) of Section 5 of the IBC. He submitted that the security deposit was not meant to reorganize the corporate debtor's debts. He submitted that the agreements are service agreements by which the corporate debtor agreed to take services from the first respondent for consideration. Therefore, the security deposit was obviously to ensure the performance of the terms of the agreements by the first respondent. He submitted that accounting treatment cannot override the law and the definition of "operational debt" under the IBC. He submitted that none of the ingredients of clauses (a) to (f) of sub-section (8) of Section 5 are present in the case at hand. In this case, there is no disbursal of debt. He submitted that there was no financial contract between the corporate debtor and the first respondent. Lastly, he submitted that in view of the judgment dated 29th September 2018 of the NCLAT on an application filed by M/s. New View Consultants Pvt. Ltd., the second respondent categorised the first respondent as operational creditor. He would, therefore, submit that the view taken by the NCLAT was not correct. CONSIDERATION OF SUBMISSIONS ON THE CONCE....
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....means a debt alongwith interest, if any, which is disbursed against the consideration for the time value of money and includes- (a) money borrowed against the payment of interest; (b) any amount raised by acceptance under any acceptance credit facility or its 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 is deemed as a finance or capital lease under the Indian Accounting Standards or such other accounting standards as may be prescribed; (e) receivables sold or discounted other than any receivables sold on nonrecourse basis; (f) any amount raised under any other transaction, including any forward sale or purchase agreement, having the commercial effect of a borrowing; [Explanation. -For the purposes of this sub-clause,- (i) 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; and (ii) the expressions, "allottee"....
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....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 (i) of Section 5(8) would be falling within the ambit of "financial debt" only if it carries the essential elements stated in the principal clause or at least has the features which could be traced to such essential elements in th....
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....ame principles of interpretation as indicated above, makes it clear that for a person to become a creditor, there has to be a debt i.e. a liability or obligation in respect of a claim which may be due from any person. A "secured creditor" in terms of Section 3(30) means a creditor in whose favour a security interest is created; and "security interest", in terms of Section 3(31), means a right, title or interest or claim of property created in favour of or provided for a secured creditor by a transaction which secures payment for the purpose of an obligation and it includes, amongst others, a mortgage. Thus, any mortgage created in favour of a creditor leads to a security interest being created and thereby, the creditor becomes a secured creditor. However, when all the defining clauses are read together and harmoniously, it is clear that the legislature has maintained a distinction amongst the expressions "financial creditor", "operational creditor", "secured creditor" and "unsecured creditor". Every secured creditor would be a creditor; and every financial creditor would also be a creditor but every secured creditor may not be a financial creditor. As noticed, the expressions "fina....
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....porate debtor is also included as a financial creditor and thereby allowed to have its say in the processes contemplated by Part II of the Code, the growth and revival of the corporate debtor may be the casualty. Such result would defeat the very objective and purpose of the Code, particularly of the provisions aimed at corporate insolvency resolution. 50.2. Therefore, we have no hesitation in saying that a person having only security interest over the assets of corporate debtor (like the instant thirdparty securities), even if falling within the description of "secured creditor" by virtue of collateral security extended by the corporate debtor, would nevertheless stand outside the sect of "financial creditors" as per the definitions contained in sub-sections (7) and (8) of Section 5 of the Code. Differently put, if a corporate debtor has given its property in mortgage to secure the debts of a third party, it may lead to a mortgage debt and, therefore, it may fall within the definition of "debt" under Section 3(10) of the Code. However, it would remain a debt alone and cannot partake the character of a "financial debt" within the meaning of Section 5(8) of the Code." ....
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....aid; 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 paid against consideration for the "time value of money". In short, the "disbursal" must be money and must be against consideration for the "time value of money", meaning thereby, the fact that such money is now no longer with the lender, but is with the borrower, who then utilises the mone y." 47. The report of the Insolvency Law Committee dated 26-3-2018 has discussed the interpretation of the term "time value of money" and stated: "1.4. The current definition of "financial debt" under Section 5(8) of the Code uses the words " [Ed. : The matter between two asterisks has been emphasised in original.] includes [Ed. : The matter between two asterisks has been emphasised in original.] ", thus the kinds of financial debts illustrated are not exhaustive. The phrase " [Ed. :....
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....alent" 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 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." ( emphasis added ) FINDINGS ON FACTUAL ASPECTS 13. In light of the interpretation put by this Court to the definition of....
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....l carry interest @21% p.a. We will provide you interest on Rs.7,85,850/- @21% per annum. Please acknowledge receipt and as a token of your acceptance of above terms conditions. Please sign duplicate copy of this letter and return the same to us for our records. Thanking you, .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. ." ( emphasis added ) As seen from clause (4), the agreement was only for twelve months ending on 31st March 2015. Therefore, on 1st April 2015, another letter was issued by the corporate debtor to the first respondent, incorporating identical terms and conditions. The only difference is that the agreement's duration was up to 31st March 2016. Clause (10) of the agreement/letter dated 1st April 2015 reads thus: ".. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. #10 You have to deposit minimum security of Rs.53,15,000/- with the Company which will carry interest @21% per annum. We will provide you interest on Rs.32,85,850/- @21% per annum. Please acknowledge receipt and as a token of your acceptance of above terms and conditions. .. .. .. .. .. .. .. ....
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....aim in respect of the provision of goods or services including employment or a debt in respect of the payment of dues arising under any law for the time being in force and payable to the Central Government, any State Government or any local authority; .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. ." The second part of the definition which deals with the payment of dues arising under any law, will not apply. However, for the applicability of the first part, the claim must be concerning the provisions of goods or services. Therefore, in the case of a contract of service, there must be a correlation between the service as agreed to be provided under the agreement and the claim. The reason is that the definition uses the phraseology "a claim in respect of the provision of goods or services". Assuming that both the agreements are genuine in the sense that they reflect the true nature of the transaction, the only claim under the agreements which will have any connection with the services rendered by the first respondent will be the claim of Rs.4,000/- per month as provided in clause (1) of both the agreements. Only this claim can be said to be concer....
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....1 of the impugned judgment, it is held that the financial statement of the first respondent for the Financial Year 2017-2018 shows revenue from the interest on the security deposit. It is also held that the amounts were treated as long-term loans and advances in the financial statement of the corporate debtor for the Financial Year 2015- 2016. Moreover, in the financial statement of the corporate debtor for the Financial Year 2016-17, the amounts paid by the first respondent were shown as "other long-term liabilities". Therefore, if the letter mentioned above and the financial statements of the corporate debtor are considered, it is evident that the amount raised under the said two agreements has the commercial effect of borrowing as the corporate debtor treated the said amount as borrowed from the first respondent. CONCLUSION 18. Therefore, we have no hesitation in concurring with the NCLAT's view that the amounts covered by security deposits under the agreements constitute financial debt. As it is a financial debt owed by the first respondent, sub-section (7) of Section 5 of the IBC makes the first respondent a financial creditor. 19. The contracts subject matter of ....