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2025 (5) TMI 580 - AT - IBCAdmission of Section 7 application - no financial debt owed by the Corporate Debtor - HELD THAT - For a transaction to be treated as financial debt within the meaning of Section 5 Sub-section (8) of I B Code the law is well settled. The Hon ble Supreme Court in Anuj Jain IRP for Jaypee Infratech Ltd. vs. Axis Bank Limited 2020 (2) TMI 1259 - SUPREME COURT while dealing with Section 5(8) of the I B Code has laid down that a debt to be financial debt needs to be disbursed for time value of money. The question to be answered in the present case is as to whether the transaction amount claimed in Section 7 application can be accepted as financial debt within the meaning of Section 5 (8). On looking into the real nature of transaction it is amply clear that the transaction was for sale and purchase of assets of the Corporate Debtor; plot at Surajpur Industrial Area and amounts were paid by the Respondent only for purchase of assets. The present is thus transaction for sale and purchase of plot of Corporate Debtor and the amount transferred to the Corporate Debtor was towards part payment of consideration and the mere fact that agreement between the parties contain a stipulation for 2% p.m. interest cannot make the transaction to be a financial debt. The amount disbursed by the Respondent No.1 was towards part consideration of sale of asset. Amount admittedly was paid to the account of the Corporate Debtor - It is not necessary to answer the question as to whether the transaction was entered with the approval of the Corporate Debtor or not. Suffice it to say that amounts having transferred to the Corporate Debtor which amounts were basis for Section 7 application the nature of transaction need to be looked into for ascertaining whether there was any financial debt or not. Conclusion - The amounts were transferred by the Respondent No.1 to the Corporate Debtor towards sale consideration which was fixed in the agreement dated 08.02.2016 the amount cannot be held disbursement for time value of money. The amount transferred for purchase of assets cannot be treated to be a financial debt. Thus the Adjudicating Authority committed error in admitting Section 7 application filed by Respondent No.1. The order of the Adjudicating Authority admitting Section 7 application dated 27.05.2022 is not upheld. The CIRP against the Corporate Debtor is stand closed - appeal disposed off.
1. ISSUES PRESENTED and CONSIDERED
The core legal questions considered by the Tribunal in this appeal are:
2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Whether the amount paid by Respondent No.1 can be treated as financial debt under Section 5(8) of the I&B Code Relevant legal framework and precedents: Section 5(8) of the I&B Code defines "financial debt" as a debt along with interest, if any, which is disbursed against the consideration for the time value of money. The Supreme Court in multiple judgments, including Anuj Jain IRP for Jaypee Infratech Ltd. vs. Axis Bank Ltd. and Pioneer Urban and Infrastructure Ltd. vs. Union of India, has emphasized that for a debt to qualify as financial debt, the disbursement must be made for the time value of money. The Court clarified that the real nature of the transaction must be examined to determine whether it is a financial debt or merely an operational debt or a transaction for sale of assets. Court's interpretation and reasoning: The Tribunal analyzed the agreement to sell dated 08.02.2016 and the subsequent cancellation agreement dated 25.03.2017, both executed by the Director of the Corporate Debtor. The payments made by Respondent No.1 were part payments towards the purchase of property owned by the Corporate Debtor. The stipulation of 2% interest per month was included as a consequence of the failure to transfer the property and was not a loan transaction per se. Key evidence and findings: The agreement to sell explicitly described the transaction as a sale of property for Rs. 3.65 crores, with advance payments of Rs. 51 lakhs and Rs. 50 lakhs made by the Respondent. The cancellation agreement acknowledged the failure to transfer the property and provided for return of the amount with interest. The Corporate Debtor's balance sheet reflected the amount as an unsecured loan. Post-dated cheques issued by the Director were dishonored except for two cheques. Application of law to facts: The Tribunal held that the real nature of the transaction was a sale and purchase of property, not a loan or financial advance for time value of money. The mere presence of an interest clause does not convert the transaction into financial debt. The amount paid was consideration for the property, and the failure to transfer the property led to the cancellation agreement with interest as compensation, not as a loan disbursed for time value of money. Treatment of competing arguments: The Appellant argued that the transaction was not a financial debt as there was no disbursement for time value of money and no corporate authorization for the sale. The Respondent contended that the amount was reflected as a loan in the balance sheet, and the interest clause indicated financial debt. The Tribunal rejected the Respondent's contention, emphasizing the substance over form and the real nature of the transaction. Conclusion: The amount paid by Respondent No.1 does not qualify as financial debt under Section 5(8) of the I&B Code. Issue 2: Whether the admission of the Section 7 application by the Adjudicating Authority was legally sustainable Relevant legal framework and precedents: Section 7 of the I&B Code allows a financial creditor to initiate CIRP upon default. The admission depends on the existence of a financial debt and default. The Supreme Court has repeatedly underscored the importance of correctly classifying the debt before admitting such applications. Court's interpretation and reasoning: The Adjudicating Authority admitted the Section 7 application on the basis that the Corporate Debtor had failed to repay Rs. 1.31 crores, which was reflected as an unsecured loan in its balance sheet, and there was no genuine dispute. However, the Tribunal found that the Adjudicating Authority erred in not examining the real nature of the transaction and in mechanically admitting the application based on balance sheet entries and interest clauses. Key evidence and findings: The Tribunal noted the agreements and the circumstances of the payments, including the fact that the transaction was for sale of property and not a loan. It also observed that the amounts were paid as part consideration for property, and the interest clause was a penalty for delay rather than a borrowing cost. Application of law to facts: The Tribunal applied the legal tests from Supreme Court precedents and held that the admission of Section 7 application was not justified because the transaction did not constitute a financial debt. Treatment of competing arguments: The Respondent argued that the Corporate Debtor's balance sheet classification and the interest clause sufficed to establish financial debt. The Tribunal rejected this, reiterating that the real nature of the transaction governs classification. Conclusion: The Adjudicating Authority's admission of the Section 7 application was in error and not sustainable. Issue 3: Whether the stipulation of interest at 2% per month converts the transaction into financial debt Relevant legal framework and precedents: The Supreme Court in Anuj Jain and Pioneer Urban clarified that the presence of interest alone does not convert a transaction into financial debt unless the disbursement was for the time value of money. Court's interpretation and reasoning: The Tribunal found that the interest clause was a contractual penalty for failure to transfer property and not an interest on a loan. Hence, it does not convert the transaction into a financial debt. Key evidence and findings: The cancellation agreement explicitly provided for 2% interest per month in case of delayed return of the amount, indicating a compensation for breach rather than a borrowing cost. Application of law to facts: The Tribunal applied the legal principle that the substance of the transaction overrides the presence of an interest clause. Treatment of competing arguments: The Respondent relied on the interest clause to argue financial debt status; the Tribunal rejected this reliance. Conclusion: The interest clause does not transform the transaction into financial debt. Issue 4: Whether the Corporate Debtor was liable as a financial creditor considering the transaction was a sale of property Relevant legal framework and precedents: The classification of a creditor as financial or operational depends on the nature of the debt. The Supreme Court has held that only debts disbursed for time value of money qualify as financial debt. Court's interpretation and reasoning: The Tribunal held that the Respondent was not a financial creditor but an operational creditor or other creditor since the transaction was for purchase of property and not a loan. Key evidence and findings: The agreements and payments clearly indicated a sale transaction. The Corporate Debtor's balance sheet classification was not determinative. Application of law to facts: The Tribunal applied the test of real nature of transaction and concluded that the Respondent did not qualify as financial creditor. Treatment of competing arguments: The Respondent argued financial creditor status based on balance sheet and interest; the Tribunal rejected this. Conclusion: Respondent does not qualify as financial creditor. Issue 5: Whether the amount reflected as unsecured loan in balance sheet is determinative of financial debt Relevant legal framework and precedents: The Supreme Court has held that balance sheet classification is not conclusive; the real nature of the transaction must be examined. Court's interpretation and reasoning: The Tribunal observed that the balance sheet entry alone cannot convert a sale transaction into financial debt. Key evidence and findings: Despite the amount being shown as unsecured loan, the underlying agreement was for sale of property. Application of law to facts: The Tribunal applied the principle that substance prevails over form. Treatment of competing arguments: The Respondent relied on balance sheet entries; the Tribunal rejected this as determinative. Conclusion: Balance sheet classification is not determinative of financial debt. Issue 6: Whether the appeal challenging admission of Section 7 application should be allowed and CIRP closed Court's interpretation and reasoning: Given the findings that the transaction does not constitute financial debt, the Tribunal held that the admission of Section 7 application was erroneous. Key evidence and findings: The appeal was filed by Suspended Director; the Appellant offered to deposit Rs. 1.5 crores, which was deposited from his personal account. The Tribunal noted that the amounts were paid to the Corporate Debtor but the real dispute was with the Director personally. Application of law to facts: The Tribunal directed closure of CIRP and refund of the deposited amount to the Respondent. Conclusion: The appeal is allowed, Section 7 admission set aside, CIRP closed, and deposit refunded. 3. SIGNIFICANT HOLDINGS The Tribunal established the following core principles and final determinations: "The real nature of the transaction reflected in the writing has to be dealt with for deciding whether the debt is a financial debt or not." "The amount transferred for purchase of assets cannot be treated to be a financial debt." "The mere fact that the agreement contains a stipulation for 2% per month interest cannot make the transaction a financial debt." "Balance sheet classification of amounts as unsecured loan is not determinative of the existence of financial debt." "The Adjudicating Authority committed an error in admitting the Section 7 application filed by Respondent No.1." "The CIRP against the Corporate Debtor is hereby closed." "The amount deposited by the Appellant, which was from the personal account of the Director who entered into the agreements and issued cheques, shall be refunded to the Respondent."
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