With the commencement of the Insolvency and Bankruptcy Code, 2016(the ‘Code’) vide notification dated May 28, 2016, scope w.r.t resolution pertaining to Insolvency Proceedings has been immensely increased. The stakeholders have progressively begun availing the remedies under the Code and numerous applications have been filed across different Benches of NCLT for redressal.

In the recent case of Nikhil Mehta and Sons (HUF) V M/s AMR Infrastructures Ltd[1], the Principal Bench of the National Company Law Tribunal (‘NCLT’) – New Delhi, after deliberating at stretch has interpreted the scope of the stipulations i.e. Financial Creditor and Financial Debt as defined under Section 5 of the Code.

Brief facts of the case

Mr. Nikhil Mehta HUF along with others (herein after referred to as ‘Applicant’) has entered into Memorandum of Understanding (‘MOU’) with M/s AMR Infrastructure Limited (herein after referred to as ‘Respondent’) which is engaged in the real estate development of commercial and residential properties. The MOU was entered on  different dates with respect to booking of two commercial and one residential property, for which substantial payments have been made on execution of MOU, possession of which were to be handed over by the Respondent as per the terms agreed in MOU. As per the terms of MOU, a stipulated fixed amount i.e. ‘Assured Return’ was agreed to be paid on monthly basis by the Respondent to Applicant in respect of all the three properties, till  the respective dates of delivering of possession of the booked properties.

Respondent erratically made the payments to Applicant for a certain period and then defaulted in the payment of Assured Return. Applicant issued three legal notices for the demand of Assured Return, due and payable as per terms of signed MOU. Further, none of the projects of the Applicant has been completed by offering possession.

It is also alleged that many other, like Applicants, have been duped to invest their hard earned money in the projects of the Respondent out of which many of them have already initiated the winding up proceedings against the Respondent which are pending in the Hon’ble High Court of Delhi.

Relief sought by the Applicants

The default in the payment of Assured Return, is asserted before the Tribunal as a ground for triggering the Insolvency process by invoking Section 7 of the Code, read with Rule 4 and Rule 9(1) of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016.

 It is asserted before the Tribunal that the aforesaid amount i.e. “Assured Return” is an admitted debt by the Respondent and the default in payment of such debt would be sufficient to satisfy the requirement of Section 7 read with Section 5(7) and (8) of the Code i.e. would be covered by the expression Financial Creditor and Financial Debt for the application to be filed under Section 7 of the Code.

Provisions of the Law

Section 5(7) of the Code defines Financial Creditor to mean: 

any person to whom a financial debt is owed and includes a person to whom such debt has been legally assigned or transferred to. 

Further Section 5(8) of the Code defines Financial Debt to mean:

 a debt along with interest, if any, which is disbursed against the consideration for the time value of money and includes—

1.  money borrowed against the payment of interest;
2. any amount raised by acceptance under any acceptance credit facility or its de-materialised equivalent;
3. any amount raised pursuant to any note purchase facility or the issue of bonds, notes, debentures, loan stock or any similar instrument;
4. 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;
5. receivables sold or discounted other than any receivables sold on nonrecourse basis;
6. any amount raised under any other transaction, including any forward sale or purchase agreement, having the commercial effect of a borrowing;
7. 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;
8. 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;
9. 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;

Section 7 of the Code deals with the process of the initiation of Corporate Insolvency Resolution process in case application is filed by the Financial Creditor and read as follows:

 (1) A financial creditor either by itself or jointly with other financial creditors 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 sub-section (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.

Questions before the Tribunal for consideration

1. Whether the Applicant to be considered as a Financial Creditor for the purpose of the Insolvency process as per Code?
2. Whether the ‘Assured Return’ to be paid as per MOU, qualifies to be considered as the Financial Debt and its non-payment is a default for the institution of Insolvency process?

Views of NCLT

The NCLT in the light of aforesaid facts and the provisions of the Code has deliberated on the interpretation of Section 7 of the Code.

Status of the matter

Since the counsel for Applicants has not been able to prove that the aforesaid transaction is a financial transaction in which a debt has been disbursed against the consideration for the time value of money and the applicants being financial creditor is entitled to trigger the insolvency process under section 7 of Code, the application was dismissed. 

Conclusion

The NCLT by its judgment has laid down ‘the consideration for time value of money under a Financial Transaction’ as an essential element for determination of a Financial Debt. Reference of the Commentary from, further substantiates, the amount to be paid/received under sale and purchase agreements to be carried out in future does not imparts the nature of Financial debt, it’s the financial/money transaction coupled with the interest or the compensation for time value of money which imparts the character of Financial Debt.

In the instant case, Money was paid in advance for the delivery of possession to be made in future and the “Assured Return” for the amount so advanced was not proved from the material on record as to constitute the interest on advance or the payment in reference to time value of money.

– Sagar Batra (sagar@vinodkothari.com)

 

[1] http://nclt.gov.in/Publication/Principal_Bench/2017/Others/AMR%20Infrastructure%20Ltd.%20(Nikhil%20Mehta).pdf

[2] For the analysis of the scope of Financial Debt and for consideration of forward sale & purchase transactions under the ambit of Financial Debt, reliance is made on the commentary of the TAXMANN’S Law relating to Insolvency and Bankruptcy Code 2016 by Vinod Kothari and Sikha Bansal.