Introduction

The case of Minions Ventures Pvt Ltd v. TDT Copper Limited was adjudicated by the National Company Law Appellate Tribunal (NCLAT) in New Delhi on March 28, 2023. This case revolves around the classification of creditors under the Insolvency and Bankruptcy Code, 2016 (IBC), specifically addressing whether entities involved in invoice discounting should be treated as Financial Creditors or have assumed the role of Operational Creditors. The primary parties involved are Minions Ventures Pvt Ltd (Appellant) and TDT Copper Limited (Respondent), along with other financiers who participated in the invoice discounting arrangement.

Summary of the Judgment

The NCLAT dismissed two appeals filed by Minions Ventures Pvt Ltd and other financiers against an order of the National Company Law Tribunal (NCLT). The appeals sought to initiate the Corporate Insolvency Resolution Process (CIRP) against TDT Copper Limited under Section 7 of the IBC, positioning themselves as Financial Creditors. However, the NCLAT held that these financiers had effectively stepped into the shoes of the Operational Creditor (the Seller) rather than acting as Financial Creditors. Consequently, their applications under Section 7 were deemed not maintainable, and they were advised to pursue their remedies under Section 9 of the IBC instead.

Analysis

Precedents Cited

The Tribunal heavily relied on two key precedents:

• Jaypee Infratech Ltd. Interim Resolution Professional vs. Axis Bank Ltd. (2020) 8 SCC 401 - This Supreme Court decision emphasized that for a transaction to be classified as a financial debt under the IBC, there must be a disbursement of funds against the consideration for the time value of money.
• Cooperative Rabobank W.A. Singapore Branch vs. Shalindra Ajmera (2019) SCC Online NCLAT 812 - In this NCLAT case, it was held that similar engagements where receivables were discounted did not qualify as financial debts if the funds were not disbursed to the debtor for the time value of money.

These precedents were instrumental in the Tribunal’s reasoning to differentiate between Financial and Operational Creditors in the context of invoice discounting.

Legal Reasoning

The core legal issue was the classification of the financiers under the IBC. The Tribunal examined:

• Section 5(7) and 5(8)(e) of the IBC define Financial Creditors and Financial Debts. Financial Creditors are those to whom a financial debt is owed, which includes debts disbursed against the consideration for the time value of money.
• The arrangement between the parties involved invoice discounting where financiers provided funds against invoices raised by the Seller. However, the funds were disbursed directly to the Seller via an escrow account, not to the Corporate Debtor.
• The Tribunal found that since the monies were not provided to the Corporate Debtor as a loan or for the time value of money, the financiers did not qualify as Financial Creditors but rather assumed the role of Operational Creditors as per Section 21(5) of the IBC.
• Moreover, the execution of the "Creation of Rights" (COR) agreements facilitated the transfer of receivables from the Seller to the financiers, thereby embedding them deeper into the operational framework rather than maintaining a financial creditor-debtor relationship.

The Tribunal concluded that the financiers were essentially operational creditors, and thus, their applications under Section 7 were not maintainable.

Impact

This judgment sets a significant precedent in the interpretation of creditor classification under the IBC. It clarifies that:

• Financiers engaged in invoice discounting who do not receive funds for the time value of money but instead facilitate the payment to sellers retain their status as Operational Creditors.
• Such financiers cannot initiate CIRP under Section 7 as Financial Creditors and must seek redressal under Section 9.

This distinction is crucial for financial institutions and fintech platforms offering invoice discounting services, influencing how they structure their agreements and pursue insolvency remedies.

Complex Concepts Simplified

Financial Creditor: An entity to whom money is owed, typically arising from financial instruments like loans, where the creditor has provided funds with an expectation of repayment along with interest.

Operational Creditor: A supplier or service provider to whom money is owed for goods or services provided in the normal course of business operations.

Invoice Discounting: A financial transaction where a company sells its invoices (accounts receivable) to a third party (a financier) at a discount, providing immediate cash flow.

Section 7 of the IBC: Pertains to initiating the corporate insolvency resolution process (CIRP) against a debtor when a default is evident.

Section 9 of the IBC: Deals with corporate insolvency resolution for operational creditors.

Conclusion

The NCLAT’s decision in Minions Ventures Pvt Ltd v. TDT Copper Limited underscores the nuanced distinctions between Financial and Operational Creditors under the IBC. By holding that financiers involved in invoice discounting, who operate without providing funds for the time value of money, are categorized as Operational Creditors, the Tribunal has provided clarity on the appropriate legal pathways for insolvency proceedings. This judgment not only aligns with established precedents but also offers essential guidance for financial entities in structuring their engagements to maintain desired creditor classifications.