TaxTMI 
TaxTMI 
2026 (8) TMI 22
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....e Ld. Adjudicating Authority has dismissed the application for direction filed by the Appellant to be treated as a Financial Creditor in relation to a credit facility extended to the Corporate Debtor under Trade Receivables Discounting System ("TReDS"). Brief relevant facts are as follows: 2. The Reserve Bank of India issued guidelines on 02.07.2018 to set up the Trade Receivables Discounting System ("TReDS"). TReDS lets MSMEs convert trade receivables into cash. It works through an electronic bidding platform. Many financiers compete on this platform to discount invoices. The Appellant/Bank signed a Master Financier Agreement with Mynd Solutions Pvt. Ltd on 07.04.2018. Mynd Solutions hosts the TReDS platform -which is called 'M1 Exchange'. The Corporate Debtor registered on this platform as a buyer. It signed a Master Buyer's Agreement with Mynd Solutions on 21.12.2018. 3. The mechanism of reverse factoring worked as described herein after. The Corporate Debtor's suppliers sold goods in the ordinary course of business. They uploaded their invoices on the M1 platform. The Corporate Debtor, as buyer, confirmed these invoices. Financiers, including the Appell....
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....ed in I.A. No. 1990 of 2023, in the matter of Mudraksh Investfin Pvt. Ltd. v. Brijesh Singh Bhadauriya. It concerned an identical TReDS claim and related to the very same Corporate Debtor. This Appellate Tribunal had affirmed that order on 05.01.2024 in Company Appeal (AT)(Ins) No. 1671 of 2023. 6. While the appeal was pending, the Adjudicating Authority, on 09.10.2025, approved the SRA's resolution plan. It is not disputed that the plan has since been fully implemented. Payments have been made to creditors under the plan. The Monitoring Committee has been dissolved. 7. It is also on record that the Bank filed a fresh claim in Form B on 12/13.03.2025 as an Operational Creditor. This happened after I.A. No. 3206 of 2023 was dismissed. It also happened after the CoC had approved the plan. Submissions of the Appellant/South Indian Bank 8. The present appeal is preferred against the order dated 13.02.2025 passed by the Ld. National Company Law Tribunal, New Delhi, Court-III, by which, the Appellant's application for directions under Section 60(5) of the Insolvency and Bankruptcy Code, 2016 ("IBC") was dismissed. Through the said application, the Appellant sought reclass....
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....the application on an incorrect presumption that the Appellant's counsel had conceded to being covered by Mudraksh. 12. Aggrieved by the same, the Appellant filed the underlying appeal before this Appellate Tribunal on 28.03.2025, which was admitted on 08.05.2025. However, while the matter was pending before this Appellate Tribunal, on 09.10.2025, the Ld. NCLT approved the resolution plan submitted by the Respondent No. 2/ SRA without considering the status of credit extended by the Appellant under TReDS- either as a financial or operation debt- leaving it completely out of consideration. 13. The Appellant is a scheduled commercial bank and its activities are regulated by sectoral regulators such as the Reserve Bank of India ("RBI"). As a scheduled commercial bank, the service provided by the Appellant is limited to providing lending facilities to various borrowers. Accordingly, the facility extended by the Appellant to the Corporate Debtor was in the nature of a loan i.e. a financial debt. 14. The Guidelines for Trade Receivables Discounting System (TReDS) issued by the RBI dated 02.07.2018, ("RBI Guidelines") provide clarity on the nature of transactions undertaken on th....
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....porate Debtor is obligated to pay the due amounts on the stipulated day with expenses and interest. 7.5 of the MBA The Corporate Debtor has to pay interest amount computed by the Appellant on any delay or dishonour of payment under a Factoring Unit in accordance with the Penal Interest Rate 7.11 of the MBA The Corporate Debtor has also authorized the financier to provide notification to the Central Registry of Securitization Asset Reconstruction and Security Interest in respect of any Transaction which has been discounted by the Appellant. 16. The above clauses governing the relationship between the Appellant and the Corporate Debtor, demonstrate the following: a. Time value of money is built in: The MBA obligates the Corporate Debtor to pay due amounts with expenses and interest, and separately provides interest/penal interest on delay/dishonour. b. The transaction is structurally buyer-led finance: Reverse factoring is initiated by/anchored to the buyer, and repayment is from the buyer's account on the due date. c. Commercially, the Financier disburses on behalf of the Corporate Debtor to discharge its supplier obligations, hence the disb....
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....mited [2023 SCC Online NCLT 91]) Somesh A. Naik vs Isinox Limited [2023 SCC Online NCLT 91] also holds that payments made to suppliers on behalf of a Corporate Debtor would be deemed to be a financial debt as it is covered under S.5(8)(e) of the IBC which specifically deals with "Receivables Sold or Discounted". [4.6.2, 4.6.4]. 23. Further, the flaw in the reasoning in Mudraksh is that the sale and purchase transaction between the Corporate Debtor and the supplier was considered, and this Appellate Tribunal based its findings on the purchase transaction being the primary transaction between the parties. This Appellate Tribunal did not consider the nature of the independent financing/lending transaction between the Corporate Debtor and the financier. The financier, like the Appellant in the present case, has an independent right under the TReDS agreements to demand payment from the buyer and an independent obligation to pay the supplier on behalf of the buyer. This transaction is purely financial between the Appellant and the Corporate Debtor wherein funds have been disbursed by the Appellant at the behest of the Corporate Debtor to enable it to pay its suppliers. It has no conne....
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....editors had approved the resolution plan submitted by Respondent No. 2 and the same was also later confirmed by the Ld. NCLT vide its order dated 09.10.2025. Therefore, the resolution plan doesn't consider the claim by the Appellant made under the TReDS under either of the heads- financial or operational. This is contrary to the law laid down in (Greater Noida Industrial Development Authority vs Prabhjit Singh Soni [2024 SCC OnLine SC 122] ) Greater Noida Industrial Development Authority vs Prabhjit Singh Soni [2024 SCC OnLine SC 122] wherein it has been held that where a claim is submitted by a creditor, which is otherwise verifiable, even if in the wrong class, the same must be accorded due consideration [¶30]. The same hasn't been done herein. 30. Aside from the above, the decision by the Respondent and confirmed by the Ld. NCLT has heavily prejudiced the interests of all financial institutions acting upon the guidelines issued by RBI for setting up and operating TReDS for facilitating the financing of trade receivables of MSMEs from corporates through multiple financiers. The same would move them lower in the liquidation waterfall and negatively impact not just the fina....
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....of the amount underlying the Factoring Unit on the Due Date and shall also include all the processes for the rediscounting of an already discounted Factoring Unit;" 34. On perusal of the above stated definitions, it can be clearly seen that the definition of the "Transaction" in the present case and in the Mudraksh judgment is exactly the same. This Hon'ble Tribunal gave the following finding in the case of Mudraksh, which is reproduced herein below for ready understanding: - "21. It was held that Section 5 (8) does not expressly exclude an interest free loan. The above judgment of the Hon'ble Supreme Court was on entirely different facts, where Lender had advanced a loan without any interest. The present is not a case of financing any loan, rather present is a case of transaction of M1 Platform, on which Platform, both Seller, Buyer and Financers are registered and transaction takes place for sale and purchase of goods and discounting of invoices, payments and recoveries of payment by Financers. The transaction emanates from sale and purchase of goods in the present case. No disbursement was made to the Corporate Debtor, hence, the transactions cannot be held to be a f....
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....lly owed by the Corporate Debtor to its suppliers. Thus, debt is operational in nature and does not qualify as a financial debt under the code. 39. The debts claimed arise entirely from supply of goods and are therefore operational in nature as defined under Section 5(21) of the Code. Section 5(20) further clarifies that an assignee of such debt also qualifies only as an "Operational Creditor." The mere assignment of these dues to the Appellant does not alter their character from operational to financial. On the other hand, a "Financial Debt" under Section 5(8) of the Code necessarily requires disbursement to the Corporate Debtor against consideration for the time value of money, which is absent in this case. The Appellant only financed the suppliers and not the Corporate Debtor. Accordingly, the Ld. Adjudicating Authority has rightly held that the Appellant cannot be treated as a Financial Creditor and that the debt in question is operational in nature, consistent with the statutory scheme of the Code. 40. Furthermore, the resolution professional claims that the assignment of operational debt does not alter its nature. The Appellant's claim arises from trade receivables ....
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....y raised herein stands conclusively settled by the judgment of this Hon'ble Appellate Tribunal in Mudraksh. In that case, an NBFC engaged in factoring through the TREDS platform had raised an identical plea that amounts due under discounted invoices constituted "Financial Debt" by virtue of the assignment of receivables. This Hon'ble Appellate Tribunal, after examining the substance of the transaction, categorically held that no disbursement was ever made to the Corporate Debtor and that the underlying liability emanated from supply of goods. It was accordingly held that such claims constitute "Operational Debt" only and assignment does not alter their character. The facts of the present case are on all fours with the Mudraksh matter: (i) the claim arises from invoice discounting on the TREDS platform, (ii) no loan or disbursement was made to the Corporate Debtor, (iii) the liability is traceable to trade payables owed to suppliers, and (iv) the claim was filed under Form C asserting Financial Creditor status, which was rightly rejected. The Ld. Adjudicating Authority has therefore correctly applied the ratio of Mudraksh and rejected the Appellant's claim as financial d....
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....re the Ld. Adjudicating Authority. Once the matter is sub judice, no authority can alter its position on the same issue, as doing so would violate judicial discipline and the doctrine of sub judice. The Resolution Professional's role under the Code is administrative and non-adjudicatory, and he cannot override or interfere with matters pending before the Adjudicating Authority under Section 60(5). 47. In view of the above submissions, it is prayed to dismiss the captioned Appeal being devoid of any merit. Analysis and evaluation 48. We have heard the counsels of both sides and also perused the material placed on record. The principal issue that falls for determination in this appeal is whether the credit facility extended by the Appellant/South Indian Bank to the Corporate Debtor/RCI Industries on the TReDS platform, on a reverse-factoring basis - under which the Appellant discounted and paid the Corporate Debtor's suppliers' invoices and took assignment of the underlying trade receivables - constitutes 'financial debt' within the meaning of Section 5(8) of the Code, or is 'operational debt' within the meaning of Section 5(21) of the Code. 49. Ancill....
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.... (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 and real estate project shall have the meanings respectively assigned to them in clauses (d) and (zn) of section 2 of the Real Estate (Regulation and Development) Act, 2016 (16 of 2016);] (g) any derivative transaction entered into in 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-clauses (a) to (h) of this clause; XXX 51. We observe that Section 5(8) of the Code defines "financial debt" as a debt disbursed against the consideration for the time value of money, and includes, by way of illustration, spec....
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....d this is ordinary compensation, a compensation a financier earns for paying a trade receivable early. It is not a consideration for a loan. It is not money given to let the Corporate Debtor raise funds it did not otherwise have. This is the very distinction Sections 5(20) and 5(21) draw. An assignee of an operational debt remains an Operational Creditor. The fact that the assignee agreed to pay early, at a discount, does not change this. If the law were otherwise, every factoring arrangement would convert operational debt into financial debt. That cannot be right. Section 5(20) prevents such situations. 56. An important judgment on factoring services is Mudraksh, which has been relied upon by the adjudicating authority and is also relied upon by the respondents. In Mudraksh this appellate tribunal held as follows: "21. It was held that Section 5 (8) does not expressly exclude an interest free loan. The above judgment of the Hon'ble Supreme Court was on entirely different facts, where Lender had advanced a loan without any interest. The present is not a case of financing any loan, rather present is a case of transaction of M1 Platform, on which Platform, both Seller, Bu....
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....onal therein and held as follows: - "13 In this transaction, the money was never disbursed much less for the time value as a financial debt to the Corporate Debtor and by virtue of discounting the invoice of the Seller of an amount of Rs. 3,42,03,903/- for amount of Rs. 1,75,23,133/- the Financiers/Appellants entered into shoes of the Seller and had become Operational Creditors in terms of Section 5(20) as well as 21(5) and Section 5(7) and 5(8)(e) of the Code is not at all applicable." 60. Thus, we find that the finding in 6Minions - that TReDS-type financiers' step into the shoes of sellers and become Operational Creditors, such that recourse under Section 7 is unavailable to them - independently reinforces the same conclusion. 61. We do not find the distinctions sought to be drawn by the Appellant to be substantial. First, the submission that Mudraksh proceeded only under Section 5(8)(f) and not Section 5(8)(e) does not assist the Appellant: whichever illustrative sub-clause is invoked, the overriding requirement of Section 5(8) - disbursal against consideration for the time value of money, to the Corporate Debtor - remains unmet on these facts for the reasons not....
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....character of the debt. 66. We accordingly hold that the transaction between the Appellant and the Corporate Debtor under the TReDS mechanism does not constitute 'financial debt' within the meaning of Section 5(8) of the Code, that the Appellant, upon assignment of its suppliers' receivables, correctly falls to be treated as an Operational Creditor under Sections 5(20) and 5(21), and that the Resolution Professional's communication dated 18.12.2022 and the Impugned Order upholding that classification are correct in law. 67. The Appellant/Bank says the Impugned Order proceeded on a wrong basis that its counsel had conceded to being covered by Mudraksh (supra) and thus vitiates the Impugned Order. Appellant/Bank contends that the Adjudicating Authority wrongly recorded a concession by its counsel. We need not decide if this is true. Even if we assume it is true, it makes no difference as we have examined the merits ourselves, independently and have reached the very same result the Adjudicating Authority reached. And we find that the claim is operational, not financial. An order that reaches the right result cannot be set aside for a small error in its reasoning. This....
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....t very time, sub judice before the Adjudicating Authority in I.A. 3206/2023; judicial discipline required that the question abide the outcome of that proceeding, which is precisely what occurred. 70. Independently of our findings on the merits of the classification issue, we note that the resolution plan of the SRA was approved by the Adjudicating Authority on 09.10.2025, during the pendency of this appeal, and admittedly stands fully implemented. We are informed payments have been made to creditors in terms of the plan and the Monitoring Committee has been dissolved. It is well settled that a resolution plan, once approved and implemented, attains a binding and largely irreversible character. It cannot ordinarily be reopened or unsettled at the instance of a claimant except within the narrow limits of Section 61(3) of the Code. The Appellant/Bank has not brought its case within those limits, for the reasons noted here in earlier. To now direct reclassification would upset a completed insolvency resolution process. It would also prejudice creditors who acted in good faith and would also prejudice the SRA too. We will not take this course, especially so where the underlying claim....