Starlog Enterprises Ltd. v. Avil Menezes

2. The Appellant has prayed to set aside the impugned order dated 15.12.2020 as stated above passed by the 'Adjudicating Authority' apart from related reliefs to recognize the Appellant as 'Financial Creditor' and also to recognize Appellant's claim of principal amount alongwith interest etc.

3. The Adjudicating Authority has observed the followings:

a. The Appellant has paid through three cheques dated 25-29^thOctober, 2007 Rs.10 Crore to the Respondent; out of which it reflects that Rs.5 Crore was repaid in the year 2013;

b. That the amount of claim accepted by IRP is Rs.5 Crore; c. As per the 'Books of the Accounts' of the Corporate Debtor (Respondent) only Rs. 5 Crore is due to the Appellant and the same has been considered by the IRP as claimed as other than 'Operational Creditor' and 'Financial Creditor' in terms of the document available on record with the Corporate Debtor /IRP;

d. No documents substantiate, the Appellant's claim of Rs.16,35,25,444/- save and accept Rs.5 Crore claim;

e. Amount paid in 2007 stands time barred as per Section 18 of the Limitation Act as no acknowledgement is available of the Corporate Debtor of recent times;

f. There is nothing in writing to substantiate that it is a financial debt. In view of the above the 'Adjudicating Authority' has rejected the Application of the Applicant to classify the claim as Financial Creditor apart from other related prayers and has also asserted that the due of

2

Rs. 5 Crore which is acknowledged by the Corporate Debtor is to be considered by the IRP as claims other than Operational Creditors and Financial Creditors.

4. The Learned Counsel for the Appellant has stated the followings:

a. The amount of Rs.10 Crores was disbursed to the Corporate Debtor and a part of the amount i.e. 5 crores remains unpaid till date. This is a loan and it is not always possible to have written agreement as the same is not mandatory for a debt to qualify as a 'Financial Debt'. b. There is no requirement of a 'Board Resolution' under the Companies Act to disburse inter corporate loan as per relevant provisions, particularly, Section 372 A of the 'Companies Act, 1956'. c. The amount given to the Corporate Debtor is not for a defined period and was recalled by the Appellant in the year 2018 vide its notice dated 30^thNovember, 2018 and hence the claim submitted in Form -C vide email dated 16.09.2020 is within the 'limitation period'. This is a case of intercorporate loan / deposit in business and is carrying an interest element.

d. The Appellant has also cited the following judgments:

 Swiss Ribbons (P) Ltd. Vs. Union of India, (2019) 4 SCC 17 Para

42

"Para 42 - A perusal of the definition of "financial creditor" and

"financial debt" makes it clear that a financial debt is a debt together with interest, if any, which is disbursed against the

3

consideration for time value of money. It may further be money that is borrowed or raised in any of the manners prescribed in Section 5(8) or otherwise, as Section 5(8) is an inclusive definition. On the other hand, an "operational debt" would include a claim in respect of the provision of goods or services, including employment, or a debt in respect of payment of dues arising under any law and payable to the Government or any local authority."  Pioneer Urban Land & Infrastructure Ltd Vs. Union of India, (2019) 8 SCC 416, Para 17

"Para 17- 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 money. Thus far, it is clear that an allottee "disburses" money in the form of advance payments made towards construction of the real estate project. We were shown the 'Dictionary of Banking Terms' (Second edition) by Thomas P. Fitch in which "time value for money" was defined thus:

"present value: today's value of a payment or a stream of payment amount due and payable at

4

some specified future date, discounted by a compound interest rate of DISCOUNT RATE. Also called the time value of money. Today's value of a stream of cash flows is worth less than the sum of the cash flows to be received or saved over time. Present value accounting is widely used in DISCOUNTED CASH FLOW analysis." That this is against consideration for the time value of money is also clear as the money that is "disbursed" is no longer with the allottee, but, as has just been stated, is with the real estate developer who is legally obliged to give money's equivalent back to the allottee, having used it in the construction of the project, and being at a discounted value so far as the allottee is concerned (in the sense of the allottee having to pay less by way of instalments than he would if he were to pay for the ultimate price of the flat/apartment)."

 Ludhiana Scrips Pvt. Ltd. Vs. K.C.Land & Finance Ltd, 2019 SCC Online NCLAT 355.

 M/s. Orator Marketing Pvt. Ltd. Vs. M/s. Samtex Desinz Pvt. Ltd in Civil Appeal No. 2231 of 2021 held in paragraphs 22-23 and

31

"Para 22 - The NCLT and NCLAT have overlooked the words "if any" which could not have been intended to be otiose. 'Financial debt' means outstanding principal due in respect of a loan and would also include interest thereon, if any interest were payable thereon. If there is no interest payable on the loan, only the outstanding principal would qualify as a financial debt. Both NCLAT and NCLT have failed to notice clause(f) of Section 5(8), in terms whereof 'financial debt' includes any amount raised under any other transaction, having the commercial effect of borrowing.

5

Para 23. Furthermore, sub-clauses (a) to (i) of Sub-section 8 of Section 5 of the IBC are apparently illustrative and not exhaustive. Legislature has the power to define a word in a statute. Such definition may either be restrictive or be extensive. Where the word is defined to include something, the definition is prima facie extensive.

Para 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 of the 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) of 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".

e. The List of dates and events as provided by the Appellant in the Appeal paper book is also extracted hereunder:

24.10.2007: A Rs. 10 crore inter-corporate deposit/loan was disbursed by the Appellant to the Corporate Debtor by way of 3 cheques numbered 001291, 001276 and 001292.

6

16.11.2013: An amount of Rs. 5 crore was paid by the Corporate Debtor to the Appellant by way of RTGS to the Appellant's HDFC Bank Account.

13.03.2015: E-mail of the Corporate Debtor to the Appellant requesting for a balance confirmation alongwith a letter for said balance confirmation as to the amount due on account of the Inter- corporate Deposit (ICD).

16.03.2015: Follow up e-mail by the Corporate Debtor to the Appellant for the balance confirmation on account of ICD. 30.11.2018: Letter of Appellant to the Corporate Debtor recalling the loan with interest @ 18% per annum.

2018: CP (IB) No. 184 of 2018 filed by Indian Overseas Bank against the Corporate Debtor under S. 7 of the Insolvency and Bankruptcy Code (IBC).

01.09.2020 : Order of the Hon'ble NCLT Ahmedabad Bench admitting the petition under Section 7 of the IBC for and appointing the Respondent as the IRP.

3.09.2020 : Public notice issued by the Respondent calling for claims from interested parties.

16.09.2020: Appellant submitted its claim for Rs. 16,35,25,444 which included the principal amount of Rs. 5 Crores alongwith interest @ 12% in Form C to the Respondent IRP

24.09.2020 : Email of the Respondent IRP while accepting the principal amount of Rs. 5 Crores as debt which is owed by the Corporate debtor denied the status of Financial Creditor to the Appellant without assigning any reasons.

7

24.09.2020 : Response of the Appellant to the Respondent stating that it is an admitted position that the loan was an ICD and thus a financial debt under Section 5(8) of the IBC.

29.09.2020: Notice issued by the Appellant to the Respondent objecting to the constitution of the CoC

30.09.2020: IA No. 730 of 2020 filed by the Appellant in Company Petition *(IB) No. 184 od 2018 seeking direction against Respondent to classify the Appellant as a Financial Creditor. 15.12.2020: Impugned order passed by the NCLT rejecting the IA filed by the Appellant without providing any reason for the same. 12.02.2021: Hence the present appeal under section 61(1) of the IBC.

5. The Learned counsel for the Respondent has submitted the followings and the same are chronologically stated hereunder:

a. It is submitted that the limited issue arising in the present appeal is not whether the amount claimed (Rs. 5 Crore) by the Appellant is owed to it by the Respondent Corporate Debtor, but is to the legal issue of whether such amount as claimed by the Appellant is a Financial Debt as defined under the IBC or as debt other than Financial Debt as held by the Adjudicating Authority in the impugned order. b. It is stated that the Appellant has claimed that the amount is to be classified as a "Financial Debt" under the Code, it has failed to produce any agreement, or even specified pleadings or argued the specific clause

8

under section 5(8) of the Code under which the amount can be classified as a Financial Debt. In fact, the Appellant has in its ledger account stated that the amount disbursed was towards purchase of trucks, therefore, there was admittedly no element of 'disbursal against the consideration for time value of money'. Secondly, the Appellant has been using the term "loan and deposit" interchangeably in its pleadings to bring it within the ambit of Section 5(8) of the Code. It is pertinent to note that the Appellant has used different terms to define the amount in different correspondence. In this regard, it is pertinent to highlight that Appellant has used "advance for purchased of truck" in response to the Corporate Debtor's Balance confirmation letter dated 13.03.2015 used the term "Inter Corporate Advance". Secondly in the form C filed by the Appellant, the Appellant referred to the amount is referred to as

"Inter Corporate Deposit". Therefore, it is clear that the Appellant itself is not sure of the nature of the transaction. The Appeal will not stand on this count itself.

c. It is also stated that the Appellant's argument that they are covered by the Hon'ble Supreme Court's judgment in the matter of Orator Marketing Applicant Pvt. Ltd. v. Samtex Desinz Pvt. Ltd. 2021 SCC OnLine SC 513 ("Orator"), is incorrect, as in Orator, the only point of contention was whether a person who bases a written agreement gives a term loan to a corporate person, free of interest, on account of its working capital requirements is a Financial Creditor. It was in this

9

context that the Hon'ble Supreme Court held that the term "if any" used in section 5(8) W qualifies that interest is not a necessary for a debt to be considered a financial debt, provided the debt falls within the sub- clauses of section 5(8). However, the facts of the present case make it very clear that the amount transferred herein does not fall within Section 5(8), as in the present case there was no underlying written agreement itself (which was not the case in Orator) to substantiate the Appellant's contention.

Distinguishing Hon'ble Supreme Court's Judgment in Orator from the present case

 The Respondent seeks to highlight the material differences between the present case and Orator to establish that the present case is not covered by the Hon'ble Supreme Court's holdings in Orator.

10

d. To classify as a Financial Creditor under the Code, the Debt owed must be

Financial Debt" which has commercial effect of borrowing and is "disbursed

against the consideration for the time value of money and there must be

documents to substantiate the same. This has been upheld time and again in

several judgments. For instance, in the matter of the Sanaya Tea Pvt. Ltd Vs.

Vinergy International Pvt. Ltd., CP 3006/IB/NCLT/MB/MAH/2018, by an

order dated 08.02.2019, the Adjudicating Authority denied admission of a

petition filed by the Petitioner who had given a private loan to the Corporate

Debtor (without a written agreement) and was claiming to be a Financial

Creditor under Section 7 of the Code, on the following ground -

11

"Para -12 The Petitioner has not filed any document to substantiate its claim of being a Financial Creditor and debt as Financial Debt. Petitioner's claim is totally based on the oral submission that he has given a credit to the CD, which is evidentfom the statement of account of Financial Creditor, from which amount has been transferred to the Operational Creditor's account. It is pertinent to mention that only by transferring amount to the account of Corporate Debtor, a person cannot claim to be a Financial Creditor. There are no documents to prove a financial debt".

It is stated that the Appellant wrongfully contends that the aforementioned order is not applicable to the first case as the Hon'ble Adjudicating Authority held that a financial debt has to be proved by way of documents and not specifically agreement. It is pertinent to note that the Hon'ble Adjudicating Authority in this case Specifically mentioned that the documents have to be inter-se parties reflecting the purported loan and that a person cannot claim to be a financial creditor by merely transferring the amount to the Corporate Debtor.

6. We have carefully perused the pleadings of the parties and extant provisions of the Code and the law on the issue and we have the following observations:

12

a. It is not in dispute that Rs.10 Crore was paid by the Appellant to the Corporate Debtor and it is also not in dispute that the Appellant has not received Rs. 5 Crore.

b. It is also not in dispute that as on 1^stApril, 2020 Rs. 5 Crore is due from the Corporate Debtor.

c. The dispute is limited to the fact that Rs.5 Crore is to be considered as Financial Debt or otherwise.

d. At page 21 of the Appeal Paper book i.e. Annexure A-2 it is stated as follows:

This reflects that the Corporate Debtor was paid by Appellant towards on account payment for the purchases of AMW Truck.

13

e. As per page 25 of the Appeal Paper Book confirmation of balance for the year 31^stMarch, 2012 is given as follows:

f. At Page 62 of the Appeal paper book is given below:

14

g. We have also gone through the Annual Report of the Appellant Company for the year 2015, 2016 & 2021 through their website and is observing as follows:

15

16

17

18

h. Ongoing through the balance sheet as on 31^stmarch, 2011 from the website of the Appellant current assets, Loans and Advances reflects as follows:

19

This does not reflect that the Company has given any loan to any outsider. If anything has been given it is only advance which is recoverable in cash or in time or for value to receipt.

i. The various provisions of the Code related to the applicability of the case are stated below:

Section 3(6) "claim" means—

(a) a right to payment, whether or not such right is reduced to judgment, fixed, disputed, undisputed, legal, equitable, secured or unsecured;

20

(b) right to remedy for breach of contract under any law for the time being in force, if such breach gives rise to a right to payment, whether or not such right is reduced to judgment, fixed, matured, unmatured, disputed, undisputed, secured or unsecured;

Section 3(10) - "creditor" means any person to whom a debt is owed and includes a financial creditor, an operational creditor, a secured creditor, an unsecured creditor and a decree holder;

Section 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;

Section 3 (12) "default" means non-payment of debt when whole or any part or instalment of the amount of debt has become due and payable and is not repaid by the debtor or the corporate debtor, as the case may be.

Section 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;

Section 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;

21

(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;

(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;

Section 5 (20) "operational creditor" means a person to whom an operational debt is owed and includes any person to whom such debt has been legally assigned or transferred;

22

Section 5 (21) "operational debt" means a claim in respect of the provision of goods or services including employment or a debt in respect of the repayment 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;

7. All these as stated lead us to believe the followings:

a. It is not a 'Financial Debt' as the 'Debt' is not disbursed against the consideration for the time value of the money and does not meet any of the criteria as stated under the Code, the various provisions as stated above.

b. The Appellant is not in the business of providing any banking or financial services rather it is engaged in crane rental and in infrastructure solutions providers. Even assuming everything in favour of the Appellant it can be maximum be considered as 'operational creditor' and in no way it can come under 'Financial Debt'. c. All the citations have furnished by both the sides also lead us to the conclusion that it is not a 'Financial Debt'. Hence, we do not find any legal infirmity in the impugned order dated 15.12.2020 of the Adjudicating Authority (National Company Law Tribunal), Ahmedabad Bench at Ahmedabad in I.A No. 730 of 2020 Company Petition (IB) No. 184 of 2018, which had not considered the Appellant as 'Financial Creditor'.

23

Hence, the Appeal is devoid of merits and is accordingly dismissed. No order as to costs.

All pending connected IAs are closed.

[Justice M.Venugopal] Acting Chairperson (Dr. Ashok Kumar Mishra) Member(Technical) 07^th October, 2021 New Delhi

Raushan.K

24