TMI Blog2021 (3) TMI 1120X X X X Extracts X X X X X X X X Extracts X X X X ..... e same was paid by the first Respondent to the Lender Bank only on behalf of the Corporate Debtor and furthermore in the event of the failure on the part of the Corporate Debtor to adhere to the terms of the Agreement, the said consideration amount was to be repaid by the Corporate Debtor alongwith interest in the event the transaction did not materialize. It is seen from the record that a Right to Payment accrued to the first Respondent in terms of Clause 11 of the Agreement. The consideration for the purchase of the Scheduled Property structure together with the plant and machinery standing thereon shall move to the Lender from the first Respondent, at the instance of the Corporate Debtor . Hence, it is seen from the clauses that the Agreement to Sell emanates from the One Time Settlement entered into between the Corporate Debtor and the Lender Bank and it is only in lieu of the consideration paid by the first Respondent to the Lender Bank on behalf of the Corporate Debtor , that the Agreement of Sale for the subject property was executed. Therefore, the contention of the Learned Counsel appearing for the Appellant that the money was not utilized by the Corporate De ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rate Debtor , deposited ₹ 83,60,000/-(5% of the OTS amount) and a further amount of ₹ 1,50,96,000/- (20% of the OTS amount) in December 2017. Subsequently on 10.12.2017, the first Respondent and the Corporate Debtor entered into an Agreement of Sale whereby and whereunder the Corporate Debtor had agreed to sell to the first Respondent the land allotted by Telangana State Industrial Infrastructure Corporation ( TSIIC ) together with the structure standing on the property and the plant and machinery, for the same consideration that was agreed between the parties to be the OTS amount payable to the Lender. 3. As per the key terms of the Agreement of Sale, it is stated that the Corporate Debtor shall obtain all the necessary permissions, including obtaining an NOC from TSIIC, the statutory authority, which had allotted the said land to the Corporate Debtor . It is stated that in the event of not obtaining the NOC, (as per Clause 6-A of the Agreement) the Corporate Debtor had to indemnify the first Respondent under Clause 11 of the Agreement by refunding the amount paid together with interest @ 24% per annum. It was averred that as the Corporate Debtor had fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7 as is the case with an Operational Debt. Therefore, this contention cannot be taken to be a ground for rejection of the instant application. 16 . In view of the discussions in the foregoing paragraphs this Adjudicating Authority is satisfied that the Petitioner herein is a Financial Creditor to the Corporate Debtor. The Corporate Debtor has not disputed the receipt of the impugned amounts including interest, but has only taken a legal argument, which has found to be not acceptable by this Adjudicating Authority. On the other hand, the Petitioner has established the existence of a Financial Debt which the Corporate Debtor was liable to pay, but failed to do so. Considering these facts and circumstances, this Adjudicating Authority is inclined to admit the instant Petition. (Emphasis Supplied) Submissions of the Learned Counsel for the Appellant: 5. Learned Counsel appearing for the Appellant vehemently contended that the first Respondent does not fall within the meaning and definition of a Financial Creditor ; that the first Respondent did not disburse the money against consideration of time value for money , that the word disbursed assumes special ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... efore, the Transaction cannot be said to have a Commercial effect of borrowing and therefore was not in the nature of a Financial Debt . 7. It is further submitted that no Notice was issued prior to filing of the Section 7 Application and that the first Respondent did not implead Dr. Mrs. Krishnaveni, though some of the amount was admittedly paid by her and hence the petition was bad for non-joinder of parties. Submissions of the Learned Counsel for the first Respondent: 8. Learned Counsel for the first Respondent strenuously argued that a Financial Debt is a debt , against consideration for time value of money , and debt includes a claim which is a Right to Payment or a Right to Remedy for breach of contract; that in the present case though money has been paid under an Agreement of Sale, the same was paid by the first Respondent to the Lender Bank on behalf of the Corporate Debtor which was to be repaid by the Corporate Debtor alongwith interest in the event the transaction did not materialize and hence it is in the nature of a debt which is disbursed for the time value of money ; that a Right to Payment accrued to the Financial Creditor in te ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the present case the entire Agreement is a nullity if the Corporate Debtor Company failed to either get NOC or sell the land. Learned Counsel placed reliance on Section 32 of the Indian Contract Act, 1872, in support of his contention that the Contingent Contract mandatorily requires NOC from TSIIC and since the first limb of the Contract dated 10.12.2017 is impossible to perform as the allotment was cancelled, the same is void ab initio; that Section 35 of the Indian Contract Act, 1872, is squarely applicable as the Corporate Debtor had failed in performing its reciprocate promises and cannot now seek shelter stating that the debt which has the commercial effect of borrowing is not a Financial Debt . Assessment: 11. The main point for consideration in this Appeal is:- Whether the amounts paid by the first Respondent on behalf of the Corporate Debtor to the Lender Bank for compliance of the terms of the OTS would fall within the definition of Financial Debt under the Code. Whether the first Respondent being a Purchaser under an Agreement to Sell, executed pursuant to an OTS can claim to be a Financial Creditor as defined under Section 5(7) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecessary permissions including NOC from TSIIC and in the event, the Corporate Debtor had failed to do so, under Clause 11 of the Agreement, the Corporate Debtor had to indemnify the Financial Creditor . TSIIC cancelled the allotment vide letter dated 09.02.2018 and the OTS offer letter expired on May 2018. A Notice was issued by the first Respondent to the Financial Creditor in October, 2018 seeking repayment of the amount of ₹ 2.35/- Crores paid by the first Respondent to the Lender on behalf of the Corporate Debtor alongwith interest @ 24% per annum. 14. At the outset, we do not find any illegality or infirmity in the observation made by the Learned Adjudicating Authority that issuance of Notice prior to Section 7 Application is not mandatory as per the provisions of the Code as noted by the Hon ble Supreme Court in Innoventive Industries Ltd. Vs. ICICI Bank and Anr. (2018) 1 SCC 407. Further, the first Respondent has got issued a legal Notice in October, 2018 prior to filing of the Section 7 Application and the same has not been denied by the Appellant herein. With regard to the second objection raised by the Appellant that Dr. Mrs. Krishnaveni has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... endor. The Purchaser shall also be entitled for refund of amount along with 24% of interest p.a. from the date of payment along with the amounts specified in Clause 10 above . (Emphasis Supplied) 16. It is evident that though money has been paid under an Agreement to Sell, it is seen that the same was paid by the first Respondent to the Lender Bank only on behalf of the Corporate Debtor and furthermore in the event of the failure on the part of the Corporate Debtor to adhere to the terms of the Agreement, the said consideration amount was to be repaid by the Corporate Debtor alongwith interest in the event the transaction did not materialize. It is seen from the record that a Right to Payment accrued to the first Respondent in terms of Clause 11 of the Agreement. 17. The Hon ble Supreme Court in Pioneer Urban Land and Infrastructure Ltd. Anr. (Supra) while dealing with the scope of Section 5(8)(f) of the Code held as follows; 75. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing equivalent to money back to the home buyers. The something equivalent in these matters is obviously the flat/apartment. Also of importance is the expression commercial effect . Commercial would generally involve transactions having profit as their main aim. Piecing the threads together, therefore, so long as an amount is raised under a real estate agreement, which is done with profit as the main aim, such amount would be subsumed within Section 5(8)(f) as the sale agreement between developer and home buyer would have the commercial effect of a borrowing, in that, money is paid in advance for temporary use so that a flat/apartment is given back to the lender. Both parties have commercial interests in the same the real estate developer seeking to make a profit on the sale of the apartment, and the flat/apartment purchaser profiting by the sale of the apartment. Thus construed, there can be no difficulty in stating that the amounts raised from allottees under real estate projects would in fact, be subsumed within Section 5(8)(f) even without adverting to the explanation introduced by the Amendment Act. 18. The Hon ble Supreme Court in the aforenoted Judgement h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... admitted fact that the amount was paid by the first Respondent on behalf of the Corporate Debtor to the Lender Bank pursuant to the time bound OTS Settlement and further Clause 12 of the Agreement to Sell stipulates that the Corporate Debtor shall refund the amount with 24% interest per annum in case of failure on their behalf to execute and register the sale deed, establishes that the debt in the instant case satisfies the threefold criteria:- a) disbursal b) time value of money c) commercial effect of borrowing and therefore the ratio laid down by the Hon ble Apex Court with respect to Financial Debt in Pioneer Urban Land and Infrastructure Ltd. Anr. (Supra) is squarely applicable to the facts of this case. 20. As regarding the argument of the Learned Appellant Counsel that there was no Profit involved, it is only because of the One-Time Settlement entered into between the Lender Bank and the Corporate Debtor , that the Corporate Debtor had benefitted in terms of waiver of interest, payment of a lesser amount of ₹ 11.70/- Crores as against the ledger outstanding amount of ₹ 16.72/- Crores and therefore it has to be safely cons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd simultaneously be interested in rejuvenation, revival and growth of the corporate debtor. Thus understood, it is clear that if the former i.e. a person having only security interest over the assets of the corporate debtor is also included as a financial creditor and thereby allowed to have its say in the processes contemplated by Part II of the Code, the growth and revival of the corporate debtor may be the casualty. Such result would defeat the very objective and purpose of the Code, particularly of the provisions aimed at corporate insolvency resolution. 22. In the aforenoted case, Anuj Jain, IRP for Jaypee Infratech Ltd. (Supra) the Corporate Debtor Jai Prakash Infrastructure Ltd. (JIL) mortgaged some of its assets in favor of the Lender Banks/Financial Institutions for loans advanced to the Parent Company Jai Prakash Associates Infrastructure Ltd. (JAL) thereby constituting third party security. The borrower and the security provider bore a parent and Subsidiary relationship. In this third party security, the Creditor has not disbursed any funds to the person creating the security, but instead has disbursed the funds to the Parent entity of the Corporate Debtor . ..... X X X X Extracts X X X X X X X X Extracts X X X X
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