TaxTMI 
TaxTMI 
2024 (5) TMI 424
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....ng LLP-Financial Creditor seeking initiation of Corporate Insolvency Resolution Process ('CIRP' in short) against the Sankalp Engineering & Services Pvt. Ltd.- Corporate Debtor. Aggrieved by this impugned order, the present appeal has been preferred by the Appellant. 2. Mr. Aman Kacheria, Learned Counsel appeared for the Appellant. Mr. Abhijeet Sinha, Learned Senior Counsel appeared on behalf of the Respondent. 3. The Learned Counsel for the Appellant while making his submissions outlined the factual matrix of the case which are as follows: Sankalp Engineering and Services Pvt Ltd- Corporate Debtor was incorporated as a wholly owned subsidiary of Innovative Industries Ltd. ('IIL' in short) wherein IIL was holding more than 50% of the shares. The Corporate Debtor had approached IIL for financial assistance which assistance was received. On 24.05.2014, the Corporate Debtor had sent an email to IIL confirming an amount of Rs. 5.58 cr as due and payable by them to IIL. The IIL was admitted into CIRP on 23.01.2017. The Information Memorandum dated 15.02.2017 prepared by the Resolution Professional showed Rs. 5.11 cr as receivable from the Corporate Debtor. IIL had sent a let....
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....ended that there is other evidence which show that the Corporate Debtor had admitted the financial assistance provided by IIL which included an email dated 24.05.2014 sent by the Corporate Debtor to the IIL confirming Rs.5.58 cr as due and payable to them. Further there is a balance confirmation letter dated 12.04.2017 sought from the Corporate Debtor for an amount of Rs. 5.16 cr as receivable from the Corporate Debtor. Moreover, the Corporate Debtor in its financial statements for F.Y. 2015-16 and 2016-17 had admitted that there were amounts due and payable to IIL. The debt due and payable is also recorded with the Information Utility. 6. It was further pointed out that the Adjudicating Authority had failed to appreciate that both the liquidator of IIL and the auditor of the Corporate Debtor having categorically stated that the Corporate Debtor had outstanding dues payable to IIL and that the Appellant had the debt assigned from IIL, it shows that it was an undisputed fact that there was a debt and that the debt is due, valid and subsisting. Moreover, the Corporate Debtor has failed to place any material on record to demonstrate repayment to IIL which could have justified their a....
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....C which deal with 'financial creditor' and 'financial debt' as enshrined in Sections 5(7) and 5(8) of the IBC which is to the effect: "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) money borrowed against the payment of interest; (b) any amount raised by acceptance under any acceptance credit facility or its de-materialised 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 standard as may be prescribed; (e) receivables sold or discounted other than any receivables sold on non-recourse basis; (f) any amount raised under any transaction, including any forward sale or purchase agreement, having the commercial ....
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....olution process may be triggered by the corporate debtor itself or a financial creditor or operational creditor. A distinction is made by the Code between debts owed to financial creditors and operational creditors. A financial creditor has been defined under Section 5(7) as a person to whom a financial debt is owed and a financial debt is defined in Section 5(8) to mean a debt which is disbursed against consideration for the time value of money. As opposed to this, an operational creditor means a person to whom an operational debt is owed and an operational debt under Section 5(21) means a claim in respect of provision of goods or services. 28. When it comes to a financial creditor triggering the process, Section 7 becomes relevant. Under the explanation to Section 7(1), a default is in respect of a financial debt owed to any financial creditor of the corporate debtor - it need not be a debt owed to the applicant financial creditor. Under Section 7(2), an application is to be made under subsection (1) in such form and manner as is prescribed, which takes us to the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016. Under Rule 4, the application is mad....
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....erwise". 13. Basis the above-cited definition clauses of 'financial debt' and 'financial creditor' and the guiding legal precepts of the Innoventive judgement supra, we can safely conclude that for any creditor to become financial creditor under Section 5(7) of IBC, there must be a financial debt which is owed to that person and such a person can either be the principal creditor to whom the financial debt is owed or may be a legal assignee to whom such debt has been transferred. Furthermore, for a debt to become financial debt under the various transactions stated in subclauses (a) to (i) of Section 5(8) of IBC, the basic non-negotiable ingredients are that there has to be a disbursal against the consideration for time value of money as carved out in the principal clause which we have already noted above. Further, a Financial Creditor may file an application under Section 7 for initiating CIRP against the Corporate Debtor when the default in respect of the financial debt owed to him has occurred. It is for the Financial Creditor to file an application along with the proof of default. If there is a financial debt, which is more than the prescribed threshold level and there is a de....
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....gnment has been shown as 'trade-receivables' which cannot be held as a loan particularly so when there is no contract/agreement which was entered into between the Corporate Debtor and IIL recording advance of any loan. 16. To find an answer to the question before us, we may begin our analysis by finding out whether there was a disbursal of debt in the first place. The grounds raised by the Appellant in support of their contention to prove debt and default are the Financial Statements of the Corporate Debtor for F.Y. ending on 31.03.2017; the Deed of Assignment assigned the financial debt to the Appellant besides the data available on Information Utility. 17. Coming to the financial statements placed on record in juxtaposition to the confirmation letter of the Corporate Debtor dated 24.05.2014 confirming Rs.5.58 cr as due and payable to IIL, we find that it is an undisputed fact that the dues of the Corporate Debtor figure in the balance sheets of IIL upto 2016- 17 but not thereafter. The financial statements from the year 2017-18 onwards however clearly reflect no debt on the part of the Corporate Debtor qua IIL. 18. When we peruse the impugned order, we find that the Adjudicati....
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....18 in the financial statements of IIL. 20. At this stage we may look at the impugned order to see how it has analysed the findings of the Auditors for the Corporate Debtor and the Liquidator which is as reproduced below: "5.10 This Bench notes that the as per the Auditors affidavit dated 25.09.2023, the auditor has stated that he showed the amount as payable to Innoventive Industries because in the absence of balance confirmation by Innoventive Industries they were not in position to ascertain the position of the outstanding amount (this was also stated by them in the auditor's report which is a part of the Financial Statements of the Corporate Debtor). This bench also takes note of the fact that the said amount was written off through a journal entry in the Corporate Debtor's book on 01.04.2017 and that no amount is shown as payable by the Corporate Debtor to Innoventive Industries as on 31.03.2018. Therefore, in view of the Financial Statements of the year ending on 31.03.2018 showing otherwise, confirmation of loan by the Corporate Debtor in the year 2014 has no bearing. The Bench also takes note of the written submissions of the Liquidator of Innoventive Industries Ltd. stat....
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....m the Corporate Debtor was no longer reflected separately in the balance sheet of IIL from 2017-18 onwards, we are of the view that the Adjudicating Authority has not erred in holding that confirmation letter of 25.05.2014 lacks relevance and cannot be relied upon to establish debt. We find no cogent reasons to differ with the findings of the Adjudicating Authority that debt and default on the part of the Corporate Debtor has not been brought out in clear, precise and specific terms which is the mandate of Section 7 of IBC. 23. This brings us to the contention of the Appellant that being an assignee, the Appellant is not required to prove the existence of the debt specially because the debt was an admitted position between the Corporate Debtor and IIL. The Learned Counsel for the Appellant submitted that the liquidator had assigned trade receivables of IIL amounting Rs.5.10 cr which was due from the Corporate Debtor to the Respondent/Financial Creditor vide a Deed of Assignment. The Appellant had thus acquired the debt of IIL legally as an assignee. The onus to prove that a debt existed cannot fall on the Appellant and the burden of proof should instead lie on the Corporate Debtor....
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....Transferred Assets including in place and stead of the Assignor, to demand, sue for, litigate, compromise, settle and recover all Claims and to take such further actions as may be necessary or desirable to uphold, defend or institute any legal proceedings including its corresponding inherent right of action in respect of the Claims. Assignor hereby transfers upto Assignee full authority to do all things necessary to enforce the Claims and all of Assignor's rights and obligations in respect of the Claims including right to substitute the Assignor in all, pending legal proceedings in respect of the Claims. The Assignee agrees to bear all costs and expenses, including attorney fees, in case the Assignor is required to be represented before or file any applications/pleadings/affidavits etc. in any legal proceedings in respect of the Claims." 25. A plain reading of the Deed of Assignment shows that 'receivables' of IIL were assigned at a sum of Rs.25 lakh only on an 'as is where is', 'as is what is' and 'whatever there is' and 'no recourse' basis. When we look at the Annual Report of IIL for F.Y. 2015-16 as placed at page 1579 of APB the exposure of IIL has been shown under the Head o....