The core legal questions considered by the Tribunal in this appeal were:
1. Whether the transaction between the appellant and the respondent constituted a "financial debt" under Section 5(8) of the Insolvency and Bankruptcy Code, 2016 (IBC), thereby qualifying the appellant as a "financial creditor" under Section 5(7) of the IBC.
2. Whether the impugned order of the Adjudicating Authority dismissing the Section 7 application on the ground that the transaction was a sale/purchase transaction and not a financial debt was legally sustainable.
3. The true nature and intention of the parties in executing the agreements and Memorandum of Understanding (MoU) relating to the loan disbursal and the sale of the immovable property.
4. The applicability of relevant precedents and statutory provisions in determining the nature of the debt and the rights of the appellant under the IBC.
Issue-wise Detailed Analysis
Issue 1: Whether the transaction constituted a "financial debt" under the IBC, making the appellant a "financial creditor."
The relevant legal framework includes Sections 3 and 5 of the IBC, 2016. Section 5(7) defines a "financial creditor" as a person to whom a financial debt is owed. Section 5(8) defines "financial debt" as a debt along with interest, disbursed against consideration for the time value of money, including any amount raised under any other transaction having the commercial effect of borrowing.
Precedents such as the Tribunal's decision in Shivam Agrioils Pvt Ltd and Kolla Kotswara Rao were heavily relied upon. These decisions emphasize that the absence of explicit interest or a fixed repayment schedule does not exclude a debt from being a financial debt if the transaction has the commercial effect of borrowing and involves the time value of money.
The Court examined the agreements dated 09.04.2019, 01.04.2020, and the MoU dated 09.04.2020. The agreements acknowledged the disbursal of funds by the appellant to the respondent, with the respondent agreeing to repay the amounts with interest at 18% per annum or 30% of profit, whichever was higher, on a compounding basis. The agreements also provided for the respondent to mortgage the subject property to repay the loan, indicating the commercial intent of borrowing rather than a straightforward sale.
The Court noted that the appellant had paid the One Time Settlement (OTS) amount directly to the State Bank of India on behalf of the respondent, which was undisputed. The respondent's failure to repay the loan and the acknowledgment of interest payable on the outstanding amount further supported the characterization of the transaction as a financial debt.
In applying the law to facts, the Court observed that the transaction satisfied the threefold criteria for financial debt: disbursal of money, consideration for the time value of money (evidenced by the agreed interest), and the commercial effect of borrowing (demonstrated by the security interest in the property and the intent to repay the loan).
The Court rejected the argument that the absence of a fixed repayment date or non-payment of interest negated the existence of financial debt, relying on Supreme Court precedents that interest is not a sine qua non for financial debt classification.
Competing arguments from the respondent that the transaction was a sale/purchase were considered and rejected. The Court found that the agreements' provisions allowing the respondent to mortgage the property to repay the loan negated the respondent's claim of a sale transaction. The respondent's unauthorized mortgage of the property to a third bank further supported the appellant's position.
Conclusion: The Court held that the transaction was a financial debt under Section 5(8) of the IBC, and the appellant was a financial creditor under Section 5(7).
Issue 2: Whether the impugned order dismissing the Section 7 application was erroneous.
The Adjudicating Authority had dismissed the Section 7 application on the ground that the transaction was a sale/purchase and not a financial debt. The Court analyzed the factual matrix and the legal definitions under the IBC to determine the correctness of this finding.
The Court observed that the Adjudicating Authority failed to appreciate the true intention of the parties, which was to secure a loan transaction rather than effect a sale. The agreements explicitly provided for repayment of the loan with interest and the use of the property as security, which are hallmarks of a financial debt.
The Court also noted that the respondent's ledger accounts treated the transactions as loans, further supporting the appellant's claim.
Applying the principles from the precedents, the Court found the Adjudicating Authority's conclusion that the transaction was a sale/purchase to be a misconstruction of the facts and law.
Conclusion: The impugned order was set aside, and the Section 7 application was admitted.
Issue 3: The true nature and intention behind the executed agreements and MoU.
The Court undertook a detailed examination of the agreements and MoU. The first agreement dated 09.04.2019 recognized the disbursal of Rs. 48,36,540 and a further Rs. 1 crore to be paid towards the OTS amount with a repayment date. The respondent agreed to execute a sale deed for the plots if repayment failed.
The second agreement dated 01.04.2020 extended the repayment timeline and reiterated the security interest in the property. The MoU dated 09.04.2020 included explicit interest terms on a compounding basis.
The Court emphasized that the agreements allowed the respondent to mortgage the property to repay the loan, which would be unnecessary if the transaction were a genuine sale. The respondent's failure to repay and unauthorized mortgage of the property to a third party further indicated the transaction was not a bona fide sale.
The Court also noted the absence of any fixed sale consideration or transfer of possession consistent with a sale. The interest terms in the MoU demonstrated the commercial effect of borrowing.
Conclusion: The real intention of the parties was to create a loan transaction secured by the property, not a sale/purchase.
Issue 4: Applicability of precedents and statutory provisions.
The Court extensively relied on the definition clauses of the IBC, particularly Sections 3(6), 3(8), 3(10), 3(11), 3(33), 5(7), and 5(8). It also referred to the Supreme Court ruling in Pioneer Urban Land and Infrastructure Ltd., which clarified that transactions having the commercial effect of borrowing are financial debts under Section 5(8)(f).
The Court cited the Tribunal's decisions in Shivam Agrioils Pvt Ltd and Kolla Kotswara Rao, which held that the commercial effect of borrowing and time value of money could be inferred from the transaction's substance rather than its form. Interest is not an absolute requirement to characterize a financial debt.
The Court also noted that the Adjudicating Authority had erred in narrowly interpreting the transaction as a sale/purchase without considering the commercial realities and the parties' intention as reflected in the agreements and ledger accounts.
Conclusion: The precedents and statutory provisions supported the appellant's claim that the transaction was a financial debt and the appellant was a financial creditor entitled to initiate insolvency proceedings under Section 7.
Significant Holdings
"The component of interest is not a sine qua non for bringing a debt within the fold of financial debt."
"As long as the lender visualizes an element of profit and enhancement of economic prospect in return for the money advanced for certain time period, the loan in question entails time value of money and acquires the colour of commercial borrowing."
"The real intention of the parties was to treat the transaction as a loan transaction. The respondent always acknowledged the receipt of loan and advances in all its three agreements in its ledger statements and never disputed it."
"The financial assistance is duly covered within the definition of financial debt as prescribed under Section 5(8) of the Code."
"The impugned order dated 09.02.2023 thus is liable to be set aside."
The Tribunal established the principle that the substance and commercial effect of a transaction must be examined to determine whether it constitutes a financial debt under the IBC. It reaffirmed that the presence of interest and a fixed repayment schedule, while relevant, are not mandatory conditions. The intention of the parties and the transaction's commercial effect are decisive.
Accordingly, the Tribunal set aside the Adjudicating Authority's order, admitted the appellant's Section 7 application, and directed the parties to appear before the National Company Law Tribunal for further proceedings.
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