TMI Blog2022 (9) TMI 488X X X X Extracts X X X X X X X X Extracts X X X X ..... ion between the Creditor and Debtor which is applicable in business organization where either sale or purchase involved or construction activities involved or in Real Estate Project, multiple agencies with multiple terms and conditions are involved and each is supposed to gain or lose based on the performance of the business. In order to meet the time schedule whether in purchase or sale or development agreement or in any Real Estate project, there is always a clause for liquidated damages and the same may be either in the percentage form or sometime even other form of penal interest. Accretion of penal interest emerging from clause 4 of the Agreement dated 20.03.2012 - HELD THAT:- There must be a disbursal of fund by the Creditor to the Debtor purely in the form of release of fund as a borrowing and must have a time value of money . The method may be different but the nature must be borrowing and in extended terminology even the liability in respect of guarantee is also covered. There must be a Financial Debt which is owed by the other side i.e. the Debtor. It should be amply clear that the CD owe the Financial Debt to the Creditor. There is a difference between the le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bserved the followings: 6. We have heard the parties at length. We have also perused the documents submitted by them. Both the parties in IA 2129/2020 have raised various allegations and counter allegations against each other. The intervenors in IA 2300/2020 have also advanced their arguments. In the light of the rival contentions on both the sides the following issues fall for consideration: 1. Whether the amount claimed by the applicant is a financial debt within the definition of the Code? 2. Whether the RP has committed any illegality in rejecting the claim of the petitioner as a Financial Debt? The observations and findings on the first issue is an answer to the second issue also. In order to decide the first issue, it is important to look at the definition of Financial debt in Section 5(8) of the Code. The definition of Financial debt cannot be read in isolation without considering some other relevant definitions particularly the definition of claim in Section 3(6) and the definition of creditor in Section 3(10) and the definition of Financial Creditor and Financial Debt under the Code which are extracted hereunder: Section 5(8) Financial debt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... secured or unsecured; Section 3() creditor: creditor means any person to whom a debt is owed and includes a financial creditor, an operational creditor, a secured creditor, an unsecured creditor and a decree-holder; 7. It is very clear from the above definition that a mere right to payment, whether or not such right is reduced to judgment, fixed, disputed, undisputed, legal, equitable, secured or unsecured; and a right to remedy for breach of contract under any law for the time being in force, if such breach gives rise to a right to payment, whether or not such right is reduced to judgment, fixed, matured, unmatured, disputed, undisputed, secured or unsecured is enough to qualify as an Operational Debt. However, a mere right to recovery or entitlement does not qualify as a Financial Debt unless the debt falls within any one of the categories mentioned under the definition Financial Debt . 8. It is very clear from the submissions of both sides as well as from the record that the applicant is claiming the interest amount as a Financial Debt as a penalty for the alleged breach of the various terms and conditions of number of agreements entered into between the applic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me in case the categorization is wrong or incorrect. However, the Applicant s interpretation of Regulation 13 i.e., that the Resolution Professional has to merely collate claims without application of mind and thereafter proceed to admit the claim regardless, is contrary to the intent of the Code as well as the regulations framed thereunder to govern the functions of an Insolvency Professional. The said interpretation would lead to unintended consequences and absurd result. Further the applicant had also contended that it would be in a better position to assess the viability of any proposed Resolution Plan to be submitted by the Prospective Resolution Applicants and the impact thereof on the rights and entitlements flowing from the said Project. He submitted that the applicant lies in a much better position to assess possible revival of the Corporate Debtor than most of the members of the CoC, especially owing to the fact of its being intrinsically interested and interwoven in the performance of the obligations by the Corporate Debtor under the Project Agreements and in light of the rejection of claim by the respondent, the prospective resolution applicant would also not be i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... into various agreements which is enumerated herein below: Development Agreement dated 24th February, 2007 executed between the CD and Adani Developers Pvt. Ltd (subsequently de-merged into the Appellant) ADPL. Development Agreement dated 01.03.2008 executed by and between the CD and ADPL, registered vide a Deed of Confirmation dated 04.11.2009 with the office of sub-Registrar of Assurances under Serial No. BDR-15/10226/2009. Supplemental Development Agreement dated 14.10.2008 executed between the CD and ADPL. Supplemental Agreement dated 20.03.2012 executed by and between the CD and ADPL. Development Agreement dated 05.04.2018 executed by and between the CD and the Appellant Agreement dated 09.04.2018 executed by and between the CD and the Appellant. The aforesaid Agreements are hereinafter collectively referred to as the Project Agreements . c) The Ld Sr. Counsel for the Appellant has also stated that the total consideration payable by the Appellant to the CD is Rs. 1192 Crore which was structured as payable periodically to finance the CD in order to enable the CD/Respondent to construct and develop the rehabilitation component of the said project. The agr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... served to enable the Corporate Debtor to carry on its business. (b) Even at the time of providing such advance payments as aforesaid to the Corporate Debtor, the Appellant in fact undertook detailed enquiry and study into the viability and feasibility of undertaking the said Project and the consequences flowing from the Corporate Debtor s inability to complete the same. Owing to the aforesaid, it is submitted that it is also demonstrable that the Appellant is in a good position to evaluate successful resolution of the Corporate Debtor s business especially owing to it being intrinsically involved in the Corporate Debtor s well-being and ability to complete the said Project. (c) Financial creditor for the purposes of Section 5(7) of the Code is one whose stakes are intrinsically inter-woven with the well-being of the Corporate Debtor. It is submitted that in the present case, as is manifest from the transaction undertaken by the Corporate Debtor and the Appellant, in order for the Appellant to successfully construct and develop the free sale component of the said Project, the Corporate Debtor was obligated to perform certain crucial and fundamental roles and for it to b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e real estate project so being developed. He further went on to clarifying that there is no commercial effect of borrowing involved in the present case. e. The Ld Counsel for the Respondent even went on to say that the Respondent fails to perform its obligation and has forfeited the security deposit of Rs. 340 crores, which was advanced in return for free sale and saleable area. However, the construction of rehabilitation purchase of free sale component has not taken place within the said timeline and the Appellant has forfeited security deposit and as a result, they assumed the rights/obligations of the CD to construct the rehabilitation component and purchase saleable area. f. All this reflects as per the Ld counsel for the Respondent that a routine commercial transaction between the parties without having any commercial effect of borrowing and hence it justified the order passed by the Adjudicating Authority. 5. We have carefully gone through the pleadings of the parties and extant provisions of the Code including their written submissions and we are having the following observations: a. Let us first deal with IA No. 1739/2020 wherein Ld counsel for the Applicant i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... L was never entitled for any payment from the Corporate Debtor except the development rights after the corporate debtors had developed the land. The payments made by the BBPL wherein fact requires to be adjusted against the land provided by the Corporate Debtor. It has also been pointed out by the Applicant that the debt is time barred. The amount even if it is assumed otherwise it is resulting from delayed fulfilment of reciprocal promise and is merely in the nature of penalty. b. At the very outset, this Tribunal made it clear that the IA No. 1557 of 2021 in present appeal was filed before this Appellate Tribunal by inter alia seeking for staying the operation of the impugned order dated 02.08.2021 under challenge by submitting almost all the issues that has been raised herein as also restraining the Respondent from proceedings in furtherance of the impugned order etc. and the same was heard by this Appellate Tribunal on 27.08.2021 where they have touched upon all the relevant issues raised by the Appellant herein and the only issue that was left open i.e. para 15 of the order dated 27.08,2021 and the same is reproduced below . 15. Considering the averments being made and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt and Infrastructure Limited , who had taken up development of various parcels of lands and had applied to the Slum Rehabilitation Authority (SRA) in Mumbai for amalgamation of the slum rehabilitation schemes. The Corporate Debtor wanted to appoint a third party developer/ financier/ investor to assist the Corporate Debtor to develop the said project and construct the free sale component. It is claimed that with such intention various agreements as recorded in Para 7.2 of Amended Appeal were entered into and the material clause is reproduced in Para 7.3 of the Amended Memo of Appeal, which reads as under: 4. Without prejudice to any other right which the Developer may have under this Agreement or under the Project Agreements or any other agreement/deeds entered into between the Parties or under law or otherwise, in the event of default by the Transferor to perform the Transferor s Obligations in accordance with the Timelines, then in such a case, the Transferor shall cure such breach/default within the period of 60 days from the date of occurrence of such event of default, failing which the Transferor shall be liable to pay interest to the Developer at the rate of 2% per month ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cations and further orders. The Hon ble NCLT pronounced order on 2nd August, 2021 dismissing the application filed by M/s BBPL. The Hon ble NCLT also pronounced that the oral directions passed during the course of hearing stand vacated. The written order in the matter is awaited. The CoC Members are requested to take note of the same. 7. To discuss and consider the filing of application with the Hon ble National Company Law Tribunal, Mumbai Bench under Section 33(2) of Insolvency and Bankruptcy Code, 2016, (Code) for the initiation of liquidation and/or dissolution of Corporate Debtor. As members of the Committee of Creditors (CoC) are aware that after considering the extension granted by Hon ble NCLT for 90 days, CIRP period comes to an end on 28th April, 2021. CoC Members are also aware that the RP had filed an application with Hon ble NCLT seeking exclusion of the period from 14th April, 2021 to 28th April, 2021 (period of commencement of lockdown due to COVID-19) and from 28th April, 2021 till date of disposal of Application filed by M/s BBPL from the CIRP period for the CD and to allow the RP to conduct the corporate insolvency resolut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment does not qualify as a Financial Debt unless the debt falls within any one of the categories mentioned under the definition Financial Debt . 8. It is very clear from the submissions of both sides as well as from the record that the applicant is claiming the interest amount as a Financial Debt as a penalty for the alleged breach of the various terms and conditions of number of agreements entered into between the applicant M/s Budhpur Buildcon Pvt. Ltd. and the Corporate Debtor HDIL which is a mere right for the alleged breach by the Corporate Debtor. It is appropriate to mention here that the Corporate Debtor is denying any breach on its part and on the other hand raised lapses on the side of the applicant. Therefore, the respondent RP has rightly rejected the claim of the applicant as Financial Debt as it is a mere claim. This Bench did not find any illegality or irregularity committed by the RP. 12. At this stage we note Amended Appeal Para 7.11 which reads as under: 7.11.That in the aforesaid circumstances, the Appellant submitted the said Claim for financial debt whereby it claimed an amount of Rs.14,391,00,00,000/- (Rupees Fourteen Thousand Crore Three Hundre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ould be treated as the Financial Creditor looking to the Agreements which are more of Development Agreements, would require consideration. 16. As regards staying further progress before the CoC, we take note that CIRP started on 20th August, 2019 and already two years are over. Senior Counsel, Mr. Krishnendu Datta, intervened to submit that the intervenor wanted to file a Resolution Plan for part resolution of the Corporate Debtor with regard to one of the projects of SRA. The application on that count is also pending with the Adjudicating Authority. The Learned Counsel for the Resolution Professional submitted that the CoC did not agree to accept the resolution of the Corporate Debtor in parts. It is stated that the Corporate Debtor had about 70 projects in hand and thus there were applicants who wanted to give offers of Resolution Plans project-wise, which CoC did not find practicable. 17. When the application of Appellant was pending before the Adjudicating Authority, the Adjudicating Authority had only orally asked the CoC to delay taking decision on the question of liquidation. Now, the Adjudicating Authority has applied its mind and taken a conscious decision not ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a mechanism to release payment at various stages and the recoupment of such payments including the management of project land in consideration, failure of which will result into forfeiture of deposit, penal interest, liquidated damages etc. (ii) Clause 4 of the Supplemental Agreement dated 20.03.2012 leads largely to this claim. Hence, for reiterating the same are specifically mentioned herein below: Clause 4 Without prejudice to any other right which the Developer may have under this Agreement or under the Project Agreements or any other agreement/deeds entered into between the Parties or under law or otherwise, in the event of default by the Transferor to perform the Transferor s Obligations in accordance with the Timelines, then in such a case, the Transferor such cure such breach/default within the period of 60 days from the date of occurrence of the such event of default, failing which the Transferor shall be liable to pay interest to the Developer at the rate of 2% per month on all the amounts (including the Paid Consideration). (iii) Based on above input, now we have looked at the provisions of Section 5(7) (8) of the Code, which is depicted below: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... yment of interest /time value of money. It means, the transactions require to be purely in borrowing nature. This does not cover the business transaction between the Creditor and Debtor which is applicable in business organization where either sale or purchase involved or construction activities involved or in Real Estate Project, multiple agencies with multiple terms and conditions are involved and each is supposed to gain or lose based on the performance of the business. In order to meet the time schedule whether in purchase or sale or development agreement or in any Real Estate project, there is always a clause for liquidated damages and the same may be either in the percentage form or sometime even other form of penal interest. Even in the international business scenario to ensure timely completion of the business deal/ the project, some type of monetary punishments in the form of liquidated damages by way of deduction from bill or payment or by way of interest is incorporated. The ultimate objective of any business deal, time is the essence and each party is to meet that time schedule. What we have observed in this case is that the element of interest which has been put as 2% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eproduced below: 68.Thus, in order to be a debt , there ought to be a liability or obligation in respect of a claim which is due from any person. Claim then means either a right to payment or a right to payment arising out of breach of contract, and this claim can be made whether or not such right to payment is reduced to judgment. Then comes default , which in turn refers to non-payment of debt when whole or any part of the debt has become due and payable and is not paid by the corporate debtor. Learned counsel for the Petitioners relied upon the judgment in Union of India v. Raman Iron Foundry (1974) 2 SCC 231, and, in particular relied strongly upon the sentence reading: 11....Now the law is well settled that a claim for unliquidated damages does not give rise to a debt until the liability is adjudicated and damages assessed by a decree or order of a court or other adjudicatory authority. 69.It is precisely to do away with judgments such as Raman Iron Foundry (supra) that claim is defined to mean a right to payment or a right to remedy for breach of contract whether or not such right is reduced to judgment. What is clear, therefore, is that a debt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ude the kind of financing arrangement by allottees to real estate developers when they pay instalments at various stages of construction, so that they themselves then fund the project either partially or completely. 76. Sub-clause (f) Section 5(8) thus read would subsume within it amounts raised under transactions which are not necessarily loan transactions, so long as they have the commercial effect of a borrowing. We were referred to Collins English Dictionary Thesaurus (Second Edition, 2000) for the meaning of the expression borrow and the meaning of the expression commercial . They are set out hereinbelow: borrow-vb 1. to obtain or receive (something, such as money) on loan for temporary use, intending to give it, or something equivalent back to the lender. 2. to adopt (ideas, words, etc.) from another source; appropriate. 3. Not standard. to lend. 4. (intr) Golf. To putt the ball uphill of the direct path to the hole: make sure you borrow enough. commercial. -adj. 1. of or engaged in commerce. 2. sponsored or paid for by an advertiser: commercial television. 3. having profit as the main aim: commercial music. 4. (of chemicals, etc.) unrefined and pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ave debtors who owe money solely from financial transactions cannot possibly have the effect of negating the plain language of Section 5(8)(f) of the Code. In fact, what is important is that the threshold limit to trigger the Code is purposely kept low at only one lakh rupees making it clear that small individuals may also trigger the Code as financial creditors (as financial creditors include debenture holders and bond holders), along with banks and financial institutions to whom crores of money may be due. 79. That this amendment is in fact clarificatory is also made clear by the Insolvency Committee Report, which expressly uses the word clarify , indicating that the Insolvency Law Committee also thought that since there were differing judgments and doubts raised on whether home buyers would or would not be included within Section 5(8)(f), it was best to set these doubts at rest by explicitly stating that they would be so covered by adding an explanation to Section 5(8)(f). Incidentally, the Insolvency Law Committee itself had no doubt that given the financing of the project by the allottees, they would fall within Section 5(8)(f) of the Code as originally enacted. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion that the rate of interest sued for in this case comes within section 74 of the Contract Act and must be held to be penal notwithstanding the fact that only one rate of interest is mentioned in the bond. An ingenious argument was advanced on behalf of the Appellant with the object of showing that, in the particular circumstances of this case, that rate ought not to be deemed to be penal. It is true, it is said, that 150 per cent or even 75 per cent p.a may at first sight appear to be exorbitant and, therefore, penal, but if the circumstances are taken into consideration, it will be apparent that in reality it was not so. The terms of the loan were generous providing for repayment of the principal in equal instalments extending over a period of no less than six years without any interest if payment was made on the due dates. Interest was only to be paid in the event of default and then too not from the date of bond but from the date of default. Therefore, it is argued, if the defendants failed to take advantage of this liberal terms and did not pay up within the time stipulated they have only themselves to blame and the rate of interest claimed ought not to be considered to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tipulated for is to be payable from the date of the loan; but this circumstance does not, in our opinion, take the case out of the purview of Section 2 of Act XXVIII of 1855; because there is only one rate of interest stipulated to be paid here. The bond does not provide for the payment of two rates of interest, one lower and the other higher, the latter being payable under certain circumstances. In this case it cannot be therefore held that a lower rate is the stipulated rate of interest agreed to be paid by the debtor under Section 2, Act XXVIII of 1855, and that a higher rate is named in order to determine the amount of compensation to be paid under Section 74 of the Contract Act in case of a breach. The agreement in this case, is that no interest would be payable if the money covered by the bond be paid within the time mentioned in it, but if it be not paid within that time, interest at the rate of 2 annas per rupee per mensem would be payable. This agreement falls, in our opinion, under Section 2 of Act XXVIII of 1855. 6. We may point out here that the authority of the cases in which a higher rate of interest has been considered to be in the nature of a penalty has been m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such essential elements in the principal clause. In yet other words, the essential element of disbursal, and that too against the consideration for time value of money, needs to be found in the genesis of any debt before it may be treated as financial debt within the meaning of Section 5(8) of the Code. This debt may be of any nature but a part of it is always required to be carrying, or corresponding to, or at least having some traces of disbursal against consideration for the time value of money. l. The Appellant has cited the Judgment of Hon ble Supreme Court in Feteh Chand Vs. Balkishan Dass, (1964) 1 SCR 515: AIR1963SC 1405 para 8: 8. The claim made by the plaintiff to forfeit the amount of Rs. 24,000/- may be adjudged in the light of s. 74 of the Indian Contract Act, which in its material part provides :- When a contract has been broken, if a sum is named in the contract as the amount to be paid in case of such breach, or if the contract contains any other stipulation by way of penalty, the party complaining of the breach is entitled, whether or not actual damage or loss is proved to have been caused thereby, to receive from the party who has broken the contrac ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
