Explore the detailed analysis of the legal case involving M/s. Mount Shivalik Industries Limited and The National Company Law Tribunal. The Supreme Court’s judgment provides insights into the classification of financial debts and operational debts under the Insolvency and Bankruptcy Code. Delve into the key arguments presented by the petitioner and the respondent in this crucial case.
Facts
- Oriental Bank of Commerce invoked Section 7 of the IBC against corporate debtor, M/s. Mount Shivalik Industries Limited.
- Resolution Professional rejected claims of four creditors as financial creditors.
- Agreements in form of letters were addressed by corporate debtor to The National Company Law Tribunal (NCLT) and admitted the application under Section 7 of IBC.
- First respondent filed claim with the second respondent as an operational creditor initially.
- NCLAT allowed appeals after imposing moratorium under Section 14 of IBC.
- Difference in interest payments under two agreements/letters dated April 1, 2014 and April 1, 2015.
- Committee of Creditors approved resolution plan of M/s. Kals Distilleries Pvt. Ltd. during the proceedings.
- First respondent filed separate applications before NCLT invoking relevant sections of IBC.
- The NCLAT held that Original Name was deemed to be a financial creditor and not an operational creditor.
- The judgment dated 7 October 2021 specifically identified Original Name’s status in relation to the insolvency proceedings.
- This distinction is crucial as it determines the rights and preferences of Original Name in the proceedings.
Also Read: Analysis of Supreme Court’s Judgment in Yash Tuteja & Anr. v. Union of India on PMLA Complaints
Arguments
- Arguing against the decision of the NCLAT, the petitioner stated that the acknowledgment of liability and interest component towards the security deposit should not override the law.
- The petitioner claimed that the NCLAT altered the concepts of financial and operational debts outlined in the IBC.
- Citing the Pioneer Urban Land and Infrastructure Ltd. case, it was argued that the amount paid by the first respondent does not constitute financial facilities for the corporate debtor.
- The petitioner pointed out the corporate debtor’s practice of raising finance through security deposits under service agreements.
- Emphasizing the ‘catch all’ provision in the IBC, it was highlighted that any transaction used as a tool for raising finance falls under financial debts.
- The petitioner contended that there was no intention to raise finance from the first respondent, who was designated as a Sales Promoter.
- It was argued that interest payment alone does not determine whether a debt is financial.
- Relying on legal precedents, the petitioner defended the impugned judgment.
- The petitioner emphasized that the agreements with the first respondent were not for actual services but for raising finance.
- Referring to V.E.A. Annamalai Chettiar & Ors. v. S.V.V.S. Veerappa Chettiar & Ors., the petitioner claimed that the true nature of the transaction should be considered.
- The petitioner opposed the view that the security deposit constituted money disbursed for financial facilities, highlighting the purpose of the agreements for promoting beer.
- It was argued that the NCLAT rightfully delved into the true nature and effect of the transaction per the agreements.
- The petitioner asserted that the corporate debtor had no intention to avail financial facilities from the first respondent.
- Three criteria – disbursal, time value of money, and commercial effect of borrowing – were presented to support the assertion that the transaction did not qualify as a financial debt.
- Various factual aspects, such as acknowledgment of interest liability for multiple years, were pointed out by the petitioner.
- The payment of the security deposit was indicated as a condition precedent for the first respondent’s appointment as Sales Promoter.
- The petitioner highlighted the fixed repayment terms and interest as considerations for the security deposit.
- The NCLAT’s viewpoint was deemed fallacious by the petitioner, who urged that the appeals be allowed.
- The agreements in question are service agreements where the corporate debtor agreed to take services from the first respondent for consideration.
- The security deposit was meant to ensure the performance of the terms of the agreements by the first respondent.
- Accounting treatment cannot override the law and the definition of ‘operational debt’ under the IBC.
- None of the ingredients of clauses (a) to (f) of sub-section (8) of Section 5 are present in this case.
- Based on a previous judgment of the NCLAT, the first respondent was categorized as an operational creditor by the second respondent.
- The security deposit was not intended to reorganize the corporate debtor’s debts.
- There was no financial contract between the corporate debtor and the first respondent.
- The money advanced by the first respondent cannot be classified as a financial debt, supporting the argument that the first respondent is an operational creditor as per the definition in the IBC.
Also Read: Meher vs. University Grants Commission: Legal Battle for Appointee Continuity
Analysis
- The judgement delves into the applicability of various clauses of the Insolvency and Bankruptcy Code (IBC) to determine financial debts in the case.
- It emphasizes the importance of establishing the existence of a debt and interest disbursed against the consideration for the time value of money for a debt to qualify as a financial debt.
- The analysis focuses on agreements related to security deposits and their classification as financial debts under clause (f) of sub-section (8) of Section 5 of the IBC.
- Real nature of transactions and correlation with services provided are key factors in determining whether a debt is operational or financial in nature.
- The interpretation of ‘financial creditor’ and ‘financial debt’ is juxtaposed with ‘creditor’ and ‘debt’ under the IBC, highlighting the distinctions and requirements for each category.
- The summary also addresses the commercial effect and borrowing aspects of transactions under the IBC.
- Case-specific details regarding security deposits, interest payments, and financial statements are analyzed to establish the financial nature of the debts owed.
- The impact of security interests and the role of different types of creditors in insolvency resolution processes are deliberated upon in relation to the Code’s objectives.
- The judgment highlights the need for a clear correlation between services rendered or goods provided and the debt claimed to ascertain whether it qualifies as an operational debt.
- Various aspects of financial debts, operational debts, agreements, and their implications within the IBC framework are explored through the analysis.
- Clause (b) includes the right to remedy for a breach of contract under any law for the time being in force.
- Financial debt or operational debt must arise out of a liability or obligation in respect of a claim.
- The definition of ‘claim’ under sub-section (6) of Section 3 of the IBC includes a right to payment, whether reduced to judgment, fixed, disputed, undisputed, legal, equitable, secured, or unsecured.
- A liability or obligation is not covered by the definition of ‘debt’ unless it is in respect of a claim covered by sub-section (6) of Section 3 of the IBC.
- The definition of ‘financial debt’ under sub-section (8) of Section 5 of the IBC includes various types of debts disbursed against the consideration for the time value of money.
- A debt must be a liability or obligation in respect of a claim that is due from any person, including financial debt and operational debt.
- Section 5(8) of the Insolvency and Bankruptcy Code (IBC) outlines that a financial debt involves disbursal against consideration for the time value of money.
- Financial creditors play a crucial role in ensuring the rejuvenation of the corporate debtor and its ability to repay debts and meet obligations.
- The concept of ‘time value of money’ is essential in defining financial debt under the IBC.
- The definition of financial debt is not exhaustive and includes various methods for raising money or incurring liabilities.
- The term ‘financial creditor’ pertains to individuals directly engaged in the functioning and viability assessment of the corporate debtor.
- The term ‘disburse’ refers to the payment of money for a specific purpose, such as funding a real estate project.
- Operational debt is distinct from financial debt and encompasses claims related to goods, services, employment, or dues payable to the government.
Decision
- The appointment as Sales Promoter for Beer promotion at Ranchi (Jharkhand) was made on 1 April 2014.
- The Sales Promoter was to receive Rs. 4,000 per month for their promotional work.
- Instructions were to be conveyed in writing by the Marketing Manager of the company.
- Selling rates of the beer were to be decided by the company, and changes were not allowed without prior confirmation.
- Upon termination of the agreement, no damages or compensation could be claimed by the Sales Promoter.
- All company property in custody was to be returned upon termination.
- Another party could be appointed as Sales Promoter for the mentioned areas at the company’s discretion.
- The appointment was from 1 April 2014 to 31 March 2015.
- Commission settlement was to be done on a quarterly basis.
- A minimum security deposit of Rs. 53,15,000 carrying 21% interest per annum was required to be deposited with the company.
Case Title: GLOBAL CREDIT CAPITAL LIMITED Vs. SACH MARKETING PVT. LTD. (2024 INSC 340)
Case Number: C.A. No.-001143 / 2022
