Derivatives Segment of "NSEIL" and was required to 'clear and settle' the deals executed by it, either by itself, by becoming a clearing member of "NSCCL" or by entering into an arrangement with other Clearing Member, through whom the deals could be cleared and settled in accordance with the Rules, bye Laws and Regulations of "NSCCL" [Currency Derivatives Segment]. Consequently, an Agreement between Trading Member and Clearing Member (TM-CM Agreement) dated 28.08.2008 was executed in writing between the Respondent and the Applicant. The subsequent events in terms of the "List of Dates" annexed by the Applicant are as follows:

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4. The particulars of the total unpaid financial amount debt and the date of default are mentioned by the Applicant in Part IV of its application, which is reproduced below, for the immediate reference:

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5

6

7

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5. Thus, as per Part IV of the Application, the Applicant has claimed a debt of Rs.13,08,04,389.69/- including interest. Further, the Applicant has relied on 23.12.2021 as 'the date of default'.

6. The Applicant has annexed and relied upon the following documents in support of the existence of the debt so claimed -

i) Copy of the Board Resolution dated 08.06.2022.

ii) Copy of the Agreement dated 28.08.2008.

iii) Copy of the Agreement dated 09.03.2017.

iv) Copy of the Arbitration Award dated 29.04.2021.

v) Copy of the Notice 13.07.2022 along with a copy of the postal receipts as well as the delivery status reports retrieved from the official website of India Post.

vi) Copy of the e-mail dated 18.07.2022.

vii) Certificate under Section 65B of the Indian Evidence Act.

viii) Statement of dues as per the Arbitration Award.

7. Based on the aforesaid facts and documents, the Applicant has prayed for the initiation of CIRP against the Respondent.

8. On issuance of the notice, Mr. Ramesh Chandra, Director of the Respondent appeared on 19.01.2023, admitted the debt, and submitted that the Respondent does not wish to file any reply. In the wake, on the issuance of direction by this Bench, both parties have filed their respective Affidavits stating that they are not related to each other and that the present application is not collusive.

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9. Though the Respondent admitted the default during the course of hearings, we would still like to examine, Whether the debt claimed by the Applicant is a Financial Debt. Accordingly, we visit the definition of

"Financial Debt" as given in Section 5(8) of IBC 2016, which reads thus:

On perusal of the abovesaid definition, it is observed that "Financial Debt" has the following 03 necessary ingredients:

a) debt along with interest if any;

b) disbursement

c) time value of money Further, the Financial Debt also includes transactions as stipulated under Section 5(8)(a) to 5(8)(i) of IBC 2016.

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10. On perusal of the application, we find that the Applicant, in Column 1 of Part-IV of the application where particulars of the total amount of debt along with the date(s) disbursement are to be given, has mentioned: "As per Arbitration Award dated 24.09.2021".

11. Accordingly, we would like to examine whether the Arbitration Award dated 24.09.2021 will bring the claim of the Applicant within the ambit of Financial Debt. We are aware that the Hon'ble Supreme Court in its judgment dated 04.08.2021 in the matter of "Dena Bank (now Bank of Baroda) vs. C. Shivakumar Reddy and Anr. in Civil Appeal No.1650 of 2020", has held that a "Decree" will give a fresh cause of action to a Financial Creditor to initiate Section 7 proceedings. The relevant extract of the judgment is reproduced below:

"143. Moreover, a judgment and/or decree for money in favour of the Financial Creditor, passed by the DRT, or any other Tribunal or Court, or the issuance of a Certificate of Recovery in favour of the Financial Creditor, would give rise to a fresh cause of action for the Financial Creditor, to initiate proceedings under Section 7 of the IBC for initiation of the Corporate Insolvency Resolution Process, within three years from the date of the judgment and/or decree or within three years from the date of issuance of the Certificate of Recovery, if the dues of the Corporate Debtor to the Financial Debtor, under the judgment and/or decree and/or in terms of the Certificate of Recovery, or any part thereof remained unpaid." (Emphasis supplied)

12. On perusal of the Judgement (Supra), it is observed that a judgment and/or a decree for money in favour of the Financial Creditor would give rise to a fresh cause of action for the Creditor to initiate Section 7 proceedings.

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13. However, when we come to the case in hand, the mere fact the Decree/Award is in favour of the Applicant, will not decide the nature of the debt of the Applicant. We are conscious of the fact that a Decree Holder is a 'Creditor' within the meaning of Section 3(10) of IBC, 2016. However, a Creditor can be an "Operational Creditor" or a "Financial Creditor". Here we refer to the Judgement of Hon'ble NCLAT dated 14.08.2020 passed in the matter of "Sh. Sushil Ansal v. Ashok Tripathi & Ors. in Company Appeal (AT) (Insolvency) No. 452 of 2020", wherein the following was held:

"20. A 'decree-holder' is undoubtedly covered by the definition of 'Creditor' under Section 3(10) of the 'I&B Code' but would not fall within the class of creditors classified as 'Financial Creditor' unless the debt was disbursed against the consideration for time value of money or falls within any of the clauses thereof as the definition of 'financial debt' is inclusive in character. A 'decree' is defined under Section 2(2) of the Code of Civil Procedure, 1908 ("CPC" for short) as the formal expression of an adjudication which conclusively determines the rights of the parties with regard to the matters in controversy in a lis. A 'decreeholder', defined under Section 2(3) of the same Code means any person in whose favour a decree has been passed or an order capable of execution has been made. Order XXI Rule 30 of the CPC lays down the mode of execution of a money decree. According to this provision, a money decree may be executed by the detention of judgment-debtor in civil prison, or by the attachment or sale of his property, or by both. Section 40 of the 'Real Estate (Regulation and Development) Act, 2016' lays down the mode of execution by providing that the RERA may order to recover the amount due under the Recovery Certificate by the concerned Authority as an arrear of land revenue. In the instant case, RERA has conducted the recovery proceedings at the instance of Respondent Nos.1 & 2 against the Corporate Debtor which culminated in issuance of Recovery Certificate and passing of order

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under Section 40 of the 'Real Estate (Regulation and Development) Act, 2016' directing the concerned Authority to recover amount of Rs.73,35,686.43/- from the Corporate Debtor as an arrear of land revenue. As already stated elsewhere in this Judgment, Respondent Nos.1 & 2 instead of pursuing the matter before the Competent Authority sought triggering of Corporate Insolvency Resolution Process against the Corporate Debtor resulting in passing of the impugned order of admission which has been assailed in the instant appeal. The answer to the question whether a decree-holder would fall within the definition of 'Financial Creditor' has to be an emphatic 'No' as the amount claimed under the decree is an adjudicated amount and not a debt disbursed against the consideration for the time value of money and does not fall within the ambit of any of the clauses enumerated under Section 5(8) of the 'I&B Code". (Emphasis supplied)

From the aforesaid Judgement of the Hon'ble NCLAT, it can be inferred that mere holding of a Decree/Award per se by an individual will not make its debt fall within the ambit of "Financial Debt".

14. At this stage, we consider it appropriate to refer to the Judgement of the Hon'ble High Court of Madras dated 01.12.2022 in the matter of

"Cholamandalam Investment and Finance Company Ltd. Vs. Navrang Roadlines Private Limited O.S.A.(CAD) No.115 of 2022", wherein the Hon'ble Court observed the following as regards to what determines the categorization of an amount payable under the final decree:

"12 ……Consequently, the nature of the underlying claim of the creditor, would determine the categorisation of the amount payable under the final decree passed adjudication of the same claim. The liability arising out of an arbitral award or a court decree would be

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categorised as either financial or operational debt depending on the nature of the underlying claim which stands crystallised through the arbitral or court proceedings. (Emphasis supplied)

Further, the Principal Bench of NCLT in the matter of "M/s Jones Lasalle Building Operations Pvt. Ltd. Vs Celebration City Projects Pvt. Ltd." (IB) -652(PB)/2019 dated 26.09.2022 observed the following while referring to the Judgment of Hon'ble NCLAT passed in the matter of "Mukul Agarwal Vs Royale Resinex Pricate Limited" in Company Appeal (AT) (Insolvency) No. 777 of 2020:

"……… In this case, the Hon'ble NCLAT had held that a decree of the civil court will not alter the basic nature of the transaction. The transaction prima facie has to be considered for the purpose of adjudicating the claim and the decree of the court is a measure of debt and that would be the manner in which it should be heard."

15. From the conjoint reading of the aforesaid Judgements, it can be observed that -

a) a Decree/Award of the Court/Tribunal is a measure of debt,

b) mere holding of a Decree per se by an individual will not make its debt fall within the ambit of "Financial Debt",

c) it is the underlying claim under a decree that will decide the nature of the debt, whether it is Financial or Operational debt.

16. Further, from the perusal of Part IV of the application and the Arbitration Award dated 24.09.2021, it is observed that the Applicant and the Respondent were involved in the derivative transactions.

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17. Accordingly, we would like to examine Whether the claim underlying the Arbitral Award dated 24.09.2021, is arising out of the transaction as specified under Section 5(8)(g) of IBC, 2016. The contents of Section 5(8)(g) of IBC 2016 read thus:

"(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;" (Emphasis supplied)

On perusal of the above, it is observed that under Section 5(8)(g) of IBC 2016, the Financial Debt would include any derivative transaction entered into for protection or seeking benefit from fluctuation in any rate or price. Further, for calculating the value of derivative transactions, only the market value of such transactions has to be taken into account.

18. On search, we find that the term "Derivative" is not defined under IBC 2016. In order to understand more about derivative transactions, we refer to Section 2(ac) of the Securities Contracts (Regulation) Act, 1956 in terms of Section 3(37) of IBC 2016, which reads thus:

"(ac)] "derivative" includes—

(A) a security derived from a debt instrument, share, loan, whether secured or unsecured, risk instrument or contract for differences or any other form of security;

(B) a contract which derives its value from the prices, or index of prices, of underlying securities;"

(Emphasis provided)

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Since the term "Derivative" includes contract and security, therefore, we would like to refer to their definitions given under Section 2(a) and 2(h) of the Securities Contracts (Regulation) Act, 1956.

"Definitions.

2. In this Act, unless the context otherwise requires, —

(a) "contract" means a contract for or relating to the purchase or sale of securities;

….

….

(h) "securities" include— (i) shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature in or of any incorporated company or other body corporate; (ia) derivative;

(ib) units or any other instrument issued by any collective investment scheme to the investors in such schemes;] (ic) security receipt as defined in clause (zg) of section 2 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002;

(id) units or any other such instrument issued to the investors under any mutual fund scheme;]

(ii) Government securities; (iia) such other instruments as may be declared by the Central Government to be securities; and

(iii) rights or interest in securities"

19. Now, having gone through the definitions of "Derivative" and related terms, we would like to examine whether the Arbitral Award is arising on account of any "Derivative Transaction" specifically in terms of Section 5(8)(g)

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of IBC, 2016. Accordingly, we refer to the Arbitral Award dated 24.09.2021 as annexed by the Applicant, which reads thus:

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19

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On perusal of the abovesaid Award, it is observed that the Arbitral Award was passed for the claim arising out of the Trading Agreement dated 28.08.2008, which was executed with respect to Currency Derivative Segments. In terms of the Agreement, the Respondent was obliged to pay certain fee, charges, brokerages, commission etc., Besides, other amounts toward the daily mark- to-market settlement, final settlement etc. Further, the claim was also raised on account of loss of amount caused by closing/liquidation of open position, by the Applicant being clearing Member in the event of non-payment of dues by the respondent towards margins, daily mark to market settlement, final settlement, fees, charges, brokerage, commission, penalties, and expenses.

20. As we have already noted above in para 17, in order to classify a

"Derivative Transaction" as a "Financial Debt" under Section 5(8)(g) of IBC 2016, it is necessary that such a transaction is entered into in connection with protection against or benefit from fluctuation in any rate or price. On perusal of the Arbitral Award, we observe that it has not been passed for any such Derivative Transaction entered between the parties to seek any protection or benefit from fluctuation in any rate or price. Rather, the Arbitral Award has been passed for claim towards certain fees, charges, brokerages, commission etc., and for the loss caused to the Applicant on account of non-payment of dues by the respondent towards margins, daily mark-to-market settlement, final settlement, fees, charges, brokerage, commission, penalties, and expenses. Hence, in view of the above, we find that the underlying transactions between the parties are outside the ambit of Section 5(8)(g) of IBC, 2016 and therefore, the claim based on the Arbitral Award dated

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24.09.2021 raised by the Applicant is not covered within the ambit of Financial Debt.

21. However, during the course of the hearing on 10.05.2023, the Ld. Counsel appearing for the Applicant also relied upon the Judgement of the Hon'ble Supreme Court in "Pioneer Urban Land and Infrastructure & Anr. Vs Union of India & Ors." Writ Petition (Civil) No. 43 of 2019 to substantiate that the claim of the Applicant falls within the ambit of Financial Debt. Hence, we would like to visit the relevant paragraph of the Judgement (supra), which reads thus:

"65. And now to the precise language of Section 5(8)(f). First and foremost, the sub-clause does appear to be a residuary provision which is "catch all" in nature. This is clear from the words "any amount" and "any other transaction" which means that amounts that are "raised" under

"transactions" not covered by any of the other clauses, would amount to a financial debt if they had the commercial effect of a borrowing. The expression "transaction" is defined by Section 3(33) of the Code as follows:

(33) "transaction" includes an agreement or arrangement in writing for the transfer of assets, or funds, goods or services, from or to the corporate debtor;

As correctly argued by the learned Additional Solicitor General, the expression

"any other transaction" would include an arrangement in writing for the transfer of funds to the corporate debtor and would thus clearly include the kind of financing arrangement by allottees to real estate developers when they

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pay instalments at various stages of construction, so that they themselves then fund the project either partially or completely."

(Emphasis placed)

In the instant case, the Applicant has failed to clearly demonstrate that the transaction entered between the parties was having any commercial effect of borrowing. Rather, as we have already noted above in Para 19, the claim of the Applicant is that owing to the agreement Trading Agreement dated 28.08.2008, the Respondent was obliged to pay certain fee, charges, brokerages, commission, amounts toward the daily mark-to-market settlement, final settlement and on account of loss of amount caused by closing/liquidation of open position, by the Applicant being clearing Member in the event of non-payment of dues by the respondent towards margins, daily mark to market settlement, final settlement, fees, charges, brokerage, commission, penalties, and expenses. Hence, in our considered view, the amount claimed by the Applicant out of the Arbitral Award dated 24.09.2021 is neither based on any transaction having the time value of money nor the commercial effect of borrowing. At the most, the claims of the Applicant (other than brokerage, fee, etc.) could be in the nature of "damages" which do not fall within the ambit of Financial Debt.

22. Even otherwise, an application under Sections 7, 9, or 10 of IBC 2016 can only be filed against a "Corporate Debtor" as defined under Section 3(8) of IBC 2016. As per the aforesaid definition, a "corporate person", who owes a debt to any person is called a Corporate Debtor. The term "Corporate Person"

is defined under Section 3(7) of IBC 2016, which recognizes a Company and

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an LLP as a Corporate person. However, it is noticed that as per this definition, the "Corporate Person" does not include a "Financial Service Provider".

23. The term "Financial Service" is defined under Section 3(16) of IBC 2016 and the term "Financial Service Provider" and "Financial Sector Regulator" are defined under Section 3(17) and 3(18) respectively. The contents of Sections 3(16), 3(17) and 3(18) read thus -

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24. Since Section 3(16)(b) and (d) of IBC 2016 contains the word "Financial Products", therefore, we also refer to Section 3(15) of IBC 2016, which reads thus:

25. It is a matter of record that the Applicant in Part IV of the application has specifically stated that -

"The Corporate Debtor aforenamed had been admitted as the

"Trading Member" of the Currency Derivatives Segment of "NSEIL" and were required to 'clear and settle' the deals executed by it, either by itself, by becoming a clearing member of "NSCCL" or by entering into an arrangement with other Clearing Member, through whom the deals could be cleared and settled in accordance with the Rules, bye Laws and Regulations of "NSCCL" [Currency Derivatives Segment]."

26. In view of the abovementioned averment, it won't be wrong to say that the Respondent was dealing with "Financial Product" as defined under Section 3(15) of IBC 2016. Hence, we conclude that the Respondent was providing

"Financial Services" in terms of Section 13(d) of IBC 2016.

27. Further, from the record it is seen that the Respondent was registered with SEBI, which is evident from the "Clearing Member - Trading Member Agreement dated 09.03.2017". The relevant contents of the Agreement are reproduced overleaf:

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28. Since, the Respondent was registered with SEBI, the Services of the Respondent could be regulated by SEBI, which is covered under the definition of "Financial Sector Regulator" under Section 3(18) of IBC 2016.

29. In view of the aforesaid discussion, we conclude that Respondent is a

"Financial Service Provider" in terms of Section 3(17) of IBC 2016 and as a consequence of that, it cannot be considered a "Corporate Person" as defined under Section 3(7) of IBC 2016. Accordingly, no application under Sections 7 (and for that matter under Section 9 or 10) of IBC 2016 can be filed against a "financial service provider" to initiate its CIRP.

30. In view of the aforesaid findings, we have no other option but to dismiss the Application.

Sd/- Sd/-

(L. N. GUPTA) (ASHOK KUMAR BHARDWAJ)

MEMBER (T) MEMBER (J)

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