Nitin Rekhan vs MP Promoters Private Limited

M.M. Kumar, CJ

Mr. Nitin Rekhan claiming to be 'financial creditor' has filed the instant petition under Section 7 of the Insolvency and Bankruptcy Code, 2016 (for brevity 'the Code') with a prayer to trigger the Corporate Insolvency Resolution Process in the matter of MP Promoters Private Limited, who is claimed to be the corporate debtor.

The Corporate Debtor-MP Promoters Private Limited (CIN U45201DL2005PTC136998) was incorporated on 01.06.2005 under the provisions of the Companies Act, 1956. The registered office of the respondent corporate debtor is situated at 6A/14WEA, Karol Bagh, New Delhi-110015.

Facts which are material to the controversy raised may first be noticed. The pleaded case of the Petitioner is that the Respondent approached the Petitioner and borrowed a sum of Rs. 58,00,000/-(Fifty Eight Lacs) for a period of one year with an assurance that same would be repaid along with interest @ 15% per annum. The reason for borrowing the money was for business purpose and that the Respondent had to discharge its obligations arising out of criminal complaint (Annexure A-3) lodged by one Mr. Vishal Goel alleging forgery and cheating. The said money was paid by the Petitioner on 31.08.2017 through RTGS in the account of the Respondent (Annexure A-4).

It is then submitted that since 16.09.2017 Petitioner made every effort to ensure the return of the money from the Respondent but all gone in vain.

It is stated that the default occurred on 31.08.2018 because of the failure of the Respondent to repay the borrowed money as committed by it and the same is continuing even as on date.

The Petitioner has thus claimed that the total interest amount in default due to the Petitioner on the date of filing of the present petition is Rs. 72,50,000/-.

In response to the notice of the petition the respondent has filed reply. In paras 6, 8 & 10 of the reply the assertions made are set out below for facility of reference:-

"6.............

a. Absence of Agreement: The applicant has approached this tribunal without any documentary evidence proving that there was any interest that was payable towards the amount of Rs. 58,00,000/- paid by the applicant to the Corporate Debtor.

b. That no agreements/arrangements have been entered into with the Creditor and therefore, as on date the conclusive arrangement between the parties. That on the basis of this ground alone, the application filed by the creditor should be dismissed.

c.............

i..............

ii. That there is no specific agreement between the parties specifying the date for repayment of the debt. That the Debtor under the bona fide belief that no amounts towards interest is payable to the creditor.

d..............

e. In the present case, no document has been produced on the part of the applicant by way of any loan agreement or demand promissory note or such other document to establish that the money is payable on demand and there has been default and that the Corporate Debtor is also bound to pay interest on the amount given by the applicant to the Corporate Debtor.

8.....................However, there is no written agreement between the parties regarding the instant transactions.

9...............

That in the preceding paragraphs, the Respondent has amply established that the Financial Creditor has provided no documentary proof of any agreement between the parties to establish the existence of financial debt strictly as defined under the provisions of IBC, 2016 and consequent default in the payment of the same at the time when it was due to be paid."

Subsequently an additional affidavit dated 04.09.2019 has been filed by the Petitioner. In the additional affidavit it is pleaded that in pursuance of the order passed by this Hon'ble Court dated 22.08.2019, the Respondent has not filed the balance sheets for the year 2016-17 & 2018-19, to ascertain the nature of receipt of money. It has been submitted that as per Section 2(31) of the Companies Act read with Rules, 2014 the amount paid to the Respondent is "Deposit". Reliance has been placed on the provisions of Section 73 & 74 of the Companies Act, 2013 to argue that the Respondent is liable to repay the said amount being deposit along with interest.

Thereafter another additional affidavit dated 25.09.2019 has been filed by the Petitioner along with a balance sheet for the financial year 2017-2018 of the Respondent Company. In sum and substance, the submission was that the Respondent has accepted 'deposits' from the Petitioner amounting to Rs. 58,00,000/-including various other unrelated entities during the financial year 2017-2017. It has also been submitted that the Respondent has not filed any document to deny the payment of aforesaid amount of Rs. 58,00,000/-.

To substantiate its contentions that the money received by the Respondent has been treated as deposits, balance sheet for the financial years 2016-17 & 2017-2018 have been filed by the Respondent with an application for permission to file additional documents being C.A. No. 2287(PB)/2019.

In the order dated 27.09.2019 we have added a note that there is no explanation forthcoming with regard to showing a sum of Rs. 58,00,000/- paid by the Petitioner as deposit in the accounts of the Corporate Debtor.

The objections raised are not supported by any document on record either with the petition or thereafter with none of two aforesaid additional affidavits to show that interest is payable on the amount and the loan is a 'financial debt' within the meaning of Section 5(8) of the Insolvency & Bankruptcy Code.

We have heard Ld. Counsels at a considerable length.

In order to find out as to whether the petitioner would be covered by the expression 'Financial Creditor' and the expression 'Financial Debt' within the meaning of the term used in Section 7 and Section 5(7) & (8) of the Insolvency & Bankruptcy Code, it would be profitable to read the provisions of Sections 5(7) & (8) and Section 7 of IBC which are set out below:

Definitions: In this Part, unless the context otherwise requires-

"financial creditor" means any person to whom a financial debt is owed and includes a person to whom such debts has been legally assigned or transferred to;

(8) "financial debt" means a debt alongwith interest, if any, which is disbursed against the consideration for the time value of money and includes--

(a) money borrowed against the payment of interest;

(b) any amount raised by acceptance under any acceptance credit facility or its de-materialised equivalent;

(c) any amount raised pursuant to any note purchase facility or the issue of bonds, notes, debentures, loan stock or any similar instrument;

(d) the amount of any liability in respect of any lease or hire purchase contract which is deemed as a finance or capital lease under the Indian Accounting Standards or such other accounting standards as may be prescribed;

(e) receivables sold or discounted other than any receivables sold on non-recourse basis;

(f) any amount raised under any other transaction, including any forward sale or purchase agreement, having the commercial effect of a borrowing;

(g) any derivative transaction entered into in connection with protection against or benefit from fluctuation in any rate or price and for calculating the value of any derivative transaction, only the market value of such transaction shall be taken into account;

(h) any counter-indemnity obligation in respect of a guarantee, indemnity, bond, documentary letter of credit or any other instrument issued by a bank or financial institution;

(i) the amount of any liability in respect of any of the guarantee or indemnity for any of the items referred to in sub-clauses (a) to (h) of this clause;

..............

Initiation of Corporate Insolvency Resolution Process by financial creditor-(1) A financial creditor either by itself or jointly with other financial creditors, or any other person on behalf of the financial creditor, as may be notified by the Central Government, may file an application for initiating corporate insolvency resolution process against a corporate debtor before the Adjudicating Authority when a default has occurred.

Explanation - For the purposes of this sub-section, a default includes a default in respect of a financial debt owed not only to the applicant financial creditor but to any other financial creditor of the corporate debtor.

(2) The financial creditor shall make an application under subsection (1) in such form and manner and accompanied with such fee as may be prescribed.

(3) The financial creditor shall, along with the application furnish--

(a) record of the default recorded with the information utility or such other record or evidence of default as may be specified;

(b) the name of the resolution professional proposed to act as an interim resolution professional; and

(c) any other information as may be specified by the Board

From a bare perusal of Section 7 of the IBC, it is patent that the insolvency process can be triggered at the instance of a "Financial Creditor" individually or jointly against a corporate debtor when default has occurred. The first question that arises for consideration is as to who is a 'Financial Creditor'. The meaning of that expression has to be ascertained from the definition as provided by Section 5(7) & 5(8) (supra). Section 5(7) of IBC defines the expression "Financial Creditor" and Section 5(8) of IBC defines the expression "Financial Debt" which has been used in Section 5(7) of IBC.

A perusal of definition of expression 'Financial Creditor' would show that it refers to a person to whom a financial debt is owed and includes even a person to whom such debt has been legally assigned or transferred to. In order to understand the expression 'Financial Creditor', the requirements of expression 'financial debt' have to be satisfied which is defined in Section 5(8) of the IBC. The opening words of the definition clause would indicate that a financial debt is a debt along with interest which is disbursed against the consideration for the time value of money and it may include any of the events enumerated in sub-clauses (a) to (i). Therefore the first essential requirement of financial debt has to be met viz. that the debt is disbursed against the consideration for the time value of money and which may include the events enumerated in various sub-clauses. A Financial Creditor is a person who has right to a financial debt. The key feature of financial transaction as postulated by section 5(8) is its consideration for time value of money. In other words, the legislature has included such financial transactions in the definition of 'Financial debt' which are usually for a sum of money received today to be paid for over a period of time in a single or series of payments in future. It may also be a sum of money invested today to be repaid over a period of time in a single or series of instalments to be paid in future. In Black's Law Dictionary (9th edition) the expression Time Value' has been defined to mean "the price associated with the length of time that an investor must wait until an investment matures or the related income is earned". In both the cases, the inflows and outflows are distanced by time and there is a compensation for time value of money. It is significant to notice that in order to satisfy the requirement of this provision, the financial transaction should be in the nature of debt and no equity is to be implied by the opening words of Section 5(8) of the IBC. It is true that there are complex financial instruments which may not provide a happy situation to decipher the true nature and meaning of a transaction. It is pertinent to point out that the concept 'Financial Debt' as envisaged under Section 5(8) of the IBC is distinctly different than the one prevalent in England as provided in its Insolvency Act, 1986 and the 'Rules' framed thereunder. It appears that in England there is no exclusive element of disbursement of debt laced with the consideration for the time value of money. However, forward sale or purchase agreement as contemplated by Section 5(8)(f) may or may not be regarded as a financial transaction. A forward contract to sell product at the end of a specified period is not a financial contract. It is essentially a contract for sale of specified goods. It is true that some time financial transactions seemingly restructured as sale and repurchase. Any repurchase and reverse repo transaction are sometimes used as devices for raising money. In a transaction of this nature an entity may require liquidity against an asset and the financer in return sell it back by way of a forward contract. The difference between the two prices would imply the rate of return to the financer. (See Taxman's Law Relating to IBC, 2016 by Vinod Kothari & Sikha Bansal) When we examine the nature of transactions in the present case, it is not possible to conclude that any loan was advanced with interest. Certainly, there was no element of time value for money.

In paras 6, 8 & 10 of the reply as quoted verbatim in preceding para No. 7, the respondent has made categorical assertion which goes unrebutted establishing that no element of time value for money is attracted and it is a simple friendly loan. There is no document on record to prove that element of interest.

Therefore, such a transaction would not acquire the status of a 'financial debt' as the transaction does not have consideration for the time value of money, which is a substantive ingredient to be satisfied for fulfilling requirements of the expression 'Financial Debt'.

It is also relevant to note that under Section 7(3)(C) of the Code, 2016 at the time of filing an application by the Financial Creditor before this Tribunal, along with such application the applicant is required to furnish any other information as may be specified by the IBBI. The Ministry of Corporate Affairs has framed Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 where under the form to be adopted by different categories of creditors have been specified and in relation to a Financial Creditor the form prescribed being form 1. A perusal of clause 5 of part V of form 1 shows that the Financial Creditor is required to place a latest and complete copy of the financial contract reflecting all amendments and waivers up to date and a copy is required to be attached. 'Financial Contract' has been defined under clause (d) of sub rule (1) of Rule 3 as follows:-

'Financial Contract' means a contract between a Corporate Debtor and a Financial Creditor setting out the terms of the financial debt, including the tenure of debt, interest payable and the date of repayment.

In the instant case no such financial contract has also been produced in compliance with the provisions of the Code or of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 either in the petition or additional affidavits.

As a sequel to the above discussions, we are unable to persuade ourselves to accept that the petitioner is covered by the expression "Financial Creditor" in term. Therefore, the petitioner does not answer the description of Section 7 read with Section 5(7) & 5(8) of IBC. The petition is accordingly dismissed.

Before parting we may clarify that any observations made in this order shall not be construed as an expression of opinion on the merit of the controversy as we have refrained from admitting the petition at the initial stage itself. Therefore, the right of the petitioner before any other forum shall not be prejudiced on account of dismissal of instant petition.