TMI Blog2022 (8) TMI 881X X X X Extracts X X X X X X X X Extracts X X X X ..... ions that the buyer shall arrange payment within 7 days from the date of dispatch of documents from seller bank. Thus, payment is to be made by the buyer Networth Trading Pte Ltd. to the seller PEC Ltd. after shipment from Mormugao Port in India - The Foreign Contract also stipulates that the Associate Supplier shall abide by the terms and conditions of the foreign contract and foreign contract shall form an integral and inseparable part of this agreement i.e. Associate Supplier agreement (reference clause 4 of the Associate Supplier Agreement). Thus, it is abundantly clear that a buyer-seller contract was entered into between the Networth Trading Pte Limited, Singapore and PEC Limited on 2.11.2010 and in furtherance of contract, PEC entered into an agreement with the Associate Supplier Phulchand Exports Pvt. Ltd. (Respondent) through a separate agreement dated 3.11.2010. The financial assistance provided to the Associate Supplier by PEC Ltd. is to fulfill, perform and discharge the obligations and responsibilities of PEC under the foreign contract. It is clear that the amount provided by PEC as financial assistance, and claimed by it as financial debt under IBC, is basically fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /Appellant to the Corporate Debtor as packing credit. This agreement was preceded by a back to back contract (hereinafter called Foreign Contract ) entered into between M/s. Networth Trading Pte Ltd., Singapore (buyer) and PEC Ltd, New Delhi (seller) for supply of iron ore fines on 2.11.2010. It is stated by the Appellant that before he could export the iron ore fines to the buyer in China, the Hon ble Supreme Court issued directions imposing ban on export of iron ore from Goa and hence the shipment could not be done. 3. It is further claimed by the Appellant that it sent a letter on 8.9.2014 to M/s. Phulchand Exports Pvt. Ltd./Respondent for making payment of the outstanding amount of Rs. 73,84,12,693/- in respect of the above-mentioned six contracts, to which the Respondent sent a reply dated 15.9.2014 admitting that the said amount was due and proposing to repay the outstanding dues in instalments. Since the Respondent failed to make payment of the outstanding amount as promised, he was sent reminders vide e-mail dated 8.10.2014 and letters dated 31.12.2014, 13.1.2015 and 5.2.2015 to the Respondent asking for outstanding payment. Thereafter, both the parties entered into neg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er Agreement ) to argue his case. The Associate Supplier Agreement provided that the Associate Supplier (Respondent) shall perform, fulfill and observe all the obligations, covenants and agreements and observe under, in terms so of or by virtue of the foreign contract, in consultation with the Associate Supplier. He has further argued that financial assistance in the form of interest bearing advance was given by the Appellant to the Respondent in accordance with clause 5 of the Associate Supplier Agreement (attached at pp. 77-78 of the appeal paperbook Vol. I), and, thus, this financial assistance was given for time value of money. 7. He has further referred to the judgment of this tribunal in the matter of PEC Ltd. vs. M/s. Sree Ramakrishna Alloys Ltd. [CA (AT) (INS) 225 of 2017) and PEC Ltd. vs. M/s. Sri Gangadhara Steels Limited [CA (AT) (Ins.) No. 236 of 2017] in which by a common judgment dated 13.12.2017 the financial assistance provided by PEC Ltd. was held to be financial credit. He has also claimed that the agreements under consideration in the aforementioned cases were similar to the agreement in the present appeal and, hence, the financial assistance provided by the A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... p. 77-80 of the appeal paperbook, Vol.I) whereby the Respondent, as Associate Supplier, has undertaken to fulfill, perform and discharge obligations and responsibilities of PEC Ltd. as per aforementioned foreign contract, and therefore, the relationship between the Appellant and Respondent is that of Principal and Agent and not of a Financial Creditor and Corporate Debtor. 10. The Learned Senior Counsel for Respondent has also referred to paragraphs 23 and 24 of the Impugned Order to point out that the Adjudicating Authority has surmised that the contract between the Appellant and Respondent is akin to one between Principal and Agent and the Respondent works as Agent of the Appellant (who is the Principal), who has been given an interest bearing advance to fulfill all obligations and responsibilities of the Principal/PEC Limited. He has further pointed out that in Part-IV of section 7 application (attached at pp.187-220 of the appeal paperbook, Vol.II), no date of default has been explicitly stated in Part IV of this application. He has thus claimed that in the absence of any date of default even the amount claimed as financial debt cannot be said to be due and payable to the Fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he shipment of the iron ore fines, which was not made in the present case, as the iron ore was confiscated by the government authorities and, therefore, no payment was received from the foreign buyer. He has strongly argued that in such a situation when no payment was received from the foreign buyer in the event of force majeure how could PEC Ltd, realise the amount given to the Associate Supplier and so there was no actual default in payment by the Respondent to the Appellant. 13. The main issue that arises in this appeal is whether the said amount given by the so-called Financial Creditor (Appellant) to the Corporate Debtor (Respondent) is a financial debt under the IBC, and if it is so, then is the repayment of the debt in respect of the claim in default and due and payable to the Appellant. 14. We reproduce below the definitions given in IBC which are relevant for the present appeal:- 3. Definitions. In this Code, unless the context otherwise requires, - Xxxx xxxx xxxx (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. (12) default means non-payment of d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any including inspection and fulfilling of warranties/guarantees under the Foreign Contract. Xx xx xx xx 3. TERMS OF FOREIGN CONTRACT: The Associate Supplier shall abide by all the terms and conditions of the foreign contract appended as ANNEXURE I. The Foreign Contact shall form an integral and inseparable part of this agreement contents of foreign contract shall not be disclose to any third party without PEC s written permission to this effect. Xx xx xx xx 5. FINANCIAL ASSISTANCE: 5.1 At the request of Associate Supplier PEC may consider to give an interest bearing advance to Associate Supplier so as to facilitate them to fulfill, perform and discharge all the obligations and responsibilities of PEC under, in terms of and by virtue of the Order, in the matter and on the terms and conditions therein contained and/or by which PEC have imposed. 5.2 In such an event, Associate Supplier shall make payment to various vendors and submit the receipts to PEC. PEC shall make the interest bearing advance payment for such expenses equal to the value for which receipts have been submitted subject to 90% of the contract value as packing credit. Iron O ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... plosions, epidemics, strikes or other labour trouble, embargoes including all natural calamities then the date of fulfillment of any obligation shall be postponed during the time when such circumstances are operative. Any waiver/extension of time in respect of the delivery of any installment or part of the goods shall not be deemed to be waiver/extension of time in respect of the remaining deliveries. If operation of such circumstances exceeds two months, either party will have the right to refuse further performance of the contract in which case neither party shall have the right to claim eventual damages. The party which is unable to fulfill its obligations under the present contract must within 15 days of occurrence of any of the causes mentioned in this clause, shall inform the other party of the existence of the circumstances preventing the performances of the contact. Certificate issued by a Chamber of Commerce or any other competent authority connected with the cause in the country of the Seller or the buyer shall be sufficient proof of the existence of the above circumstances and their duration. Non-availability of material will not be an excuse to the Sellers for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... advanced to the Associate Supplier and if, for any reason, the Associate Supplier is not able to supply the material as per foreign contract, Associate Supplier shall pay to PEC interest @ 11.5% p.a. on monthly rest on the payments already made by PEC on their advice and refund the principal and interest amount immediately. Furthermore, the clause 7 - Terms of Payment - in the Associate Supplier Agreement stipulates that PEC shall receive the payment within seven days from the dispatch of documents and proceeds will be given to Associate Supplier after deducing all the payments made by PEC directly to the Associate Supplier or to the vendors, including PEC s trading margin of 1% of FOB value, taxes, levies, interest, ocean freight, if paid by PEC. The difference in the account will be paid to the Associate Supplier by PEC Ltd. 18. From the above discussion, it is abundantly clear that a buyer-seller contract was entered into between the Networth Trading Pte Limited, Singapore and PEC Limited on 2.11.2010 and in furtherance of contract, PEC entered into an agreement with the Associate Supplier Phulchand Exports Pvt. Ltd. (Respondent) through a separate agreement dated 3.11.2010 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etely different. Contracts with operational creditors can and do have arbitration clauses where dispute resolution is done privately. Operational debts also tend to be recurring in nature and the possibility of genuine disputes in case of operational debts is much higher when compared to financial debts. A simple example will suffice. Goods that are supplied may be substandard. Services that are provided may be substandard. Goods may not have been supplied at all. All these qua operational debts are matters to be proved in arbitration or in the courts of law. On the other hand, financial debts made to banks and financial institutions are well-documented and defaults made are easily verifiable. 28. Most importantly, financial creditors are, from the very beginning, involved with assessing the viability of the corporate debtor. They can, and therefore do, engage in restructuring of the loan as well as reorganization of the corporate debtor s business when there is financial stress, which are things operational creditors do not and cannot do. Thus, preserving the corporate debtor as a going concern, while ensuring maximum recovery for all creditors being the objective of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be used for assessing the financial viability of the corporate debtor and in ensuring the financial strength of the corporate debtor. Moreover, as has been noted earlier, the payment from the buyer is to be received by PEC Ltd. and remaining amount is to be made to M/s Phulchand Exports after making due adjustment of payments already made by PEC Ltd. It is clear that there is no repayment schedule of the financial assistance given nor there is any clear event of default (except in a Force Majeure situation) or a date of default. Thus we find no force in the argument of the Learned Counsel of Appellant that since the amount given by the Appellant to the Respondent is interest bearing, it is a financial debt. 21. An examination of the debt given as advance by PEC Ltd. in the light of the definitions provided in sub-section 11 of section 3 and clause (f) of sub-section 8 of section 5 of the IBC makes it clear that while the amount advanced by PEC to M/s. Phulchand Exports Pvt. Ltd. would be a debt under the definition given section 3(11) of the IBC, it should have the commercial effect of borrowing, and more so a borrowing that helps in ensuring financial viability of the corpor ..... X X X X Extracts X X X X X X X X Extracts X X X X
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