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Judgment
Per: Kanthi Narahari Member (T)
The present Appeal is filed against the order dated 29.11.2019 in IA/98/2019 in CP No.352 of 2018 passed by the Adjudicating Authority (NCLT, Cuttack Bench) whereby the Adjudicating Authority dismissed the above IA filed by the Appellant. Aggrieved by the same, the Appellant preferred the present Appeal.
Appellant’s Submissions
Shri Arijit Mazumdar, Learned Counsel appeared for the Appellant submitted the brief facts.
It is submitted that by the Impugned Order the Adjudicating Authority upheld the decision of the Resolution Professional of the Corporate Debtor i.e. OSPIL to admit the 2nd Respondent herein as a Financial Creditor in the CIR Process of Corporate Debtor.
It is submitted that in response to the public announcement the 2nd Respondent filed its claim purporting to be a Financial Creditor of the Corporate Debtor on the basis of certain amounts allegedly advanced by the 2nd Respondent to the Corporate Debtor in terms of a Compulsory Convertible Loan Agreements dated 28.03.2015 and 20.06.2015 entered into between the 2nd Respondent and the Corporate Debtor. In terms of Clause 1.1 of the CCL Agreement, the term ‘Investor’ is expressly defined to include the 2nd Respondent. As per the definition it is evident that any amounts advanced by the identified investor under the CCL Agreements would fall within the ambit of the term ‘Equity Contributions’.
It is submitted that Schedule II (Estimated Project cost and financing plan) of the CCL Agreement dated 28.03.2015 establishes that the amounts advanced under the CCL Agreements in the form a Compulsorily Convertible Loan were contemplated by the parties to be a part of the investor contribution by the investors of the Corporate Debtor, which is treated to be separate from the debt to be extended by the Lenders of Corporate Debtor in the form of term loans. Accordingly, the moneys advanced by the 2nd Respondent to the Corporate Debtor shall be compulsorily convertible into preference share capital of the Corporate Debtor on and from the convertible due date as provided under the terms of CCL Agreement. The said conversion period commences from the 5th year after the 1st drawdown of the compulsorily convertible facility by the Corporate Debtor and lasts till the end of its tenure of 20 years.
The 2nd Respondent itself admitted that the arrangement under the CCL Agreements to be in the nature of an equity investment in a firm Affidavit filed before the Learned Senior Civil Judge, Senior Division Sealdah in title suit No.177 of 2016 filed by the 2nd Respondent in respect of the title of the Pipeline Asset.
It is submitted that in view of the above fact, three Lenders of the Corporate Debtor namely the Appellant, State Bank of India and ICICI Bank Ltd. addressed a letter dated 08.06.2019 to the Resolution Professional seeking to highlight certain transactions entered into by the Corporate Debtor which would have a bearing on the ongoing CIR Process including the transaction entered into between the Corporate Debtor and the 2nd Respondent by way of the CCL Agreements.
The RP informed the COC Members that the 2nd Respondent filed a claim for an amount of Rs.549,76,00,000/- and that the same was under review.
It is submitted that the members of the COC obtained 3rd Party legal opinion into the aspect whether the claim filed by the 2nd Respondent can be classified as a Financial Debt, according to the opinion the 2nd Respondent claim cannot be classified as a Financial Debt and the said third party legal opinion was shared with the Resolution Professional vide email dated 09.07.2019.
It is stated that the Resolution Professional admitted the claim of the 2nd Respondent as a Financial Debt in terms of section 5(8) of the Code, on the basis of a review of documents made available to him and the legal advice procured by him including a third-party legal opinion obtained by him. Further, the Resolution Professional informed that he had classified the 2nd Respondent as a related party of the Corporate Debtor. However, the members of COC expressed their severe reservations with the decision taken by the Resolution Professional on admitting the purported claim filed by the 2nd Respondent and requested the Resolution Professional to provide with a copy of 3rd party legal opinion.
It is submitted that against the decision of the Resolution Professional the Appellant was constrained to file the Company application before the Learned Adjudicating authority and the Learned Adjudicating Authority was pleased to dismiss the said Application vide the Impugned Judgment dated 29.11.2019.
The Learned Counsel further submitted that whether the amount advanced by the 2nd Respondent to the Corporate Debtor under the CCL Constitute a debt in terms of Section 3(11) of the Code. Further the amounts advanced by the 2nd Respondent to the Corporate Debtor under the CCL Agreements constitute a Financial Debt in terms of Section 5(8) of the Code. In view of the aforesaid reasons, the Learned Counsel prayed this bench to set side the Impugned Order of the Learned Adjudicating Authority dated 29.11.2019 in CA 98 of 2019 in CP 352 of 2018 and allow the Appeal as prayed for.
ST 1 RESPONDENT’S SUBMISSION:
The Learned Senior Counsel appearing for the 1st Respondent submitted that the 2nd Respondent’s claim of Financial Debt owed to it by the Corporate Debtor is premise on two loan Agreements i.e. Rs.136,50,00,000/- Loan Agreement-1 and Rs.290,00,00,000/- Loan Agreement-2.
The Learned Counsel submitted that as per the Provisions of Section 5(7) 5(8) of the Code suggest that in case of any money advanced against payment of interests or has the commercial effect of a borrowing, such moneys lent would constitute a Financial Debt and the Creditor would be a Financial Creditor under the Provisions of the Code. Accordingly, Loan-1 and Loan-2 are both interest bearing and both have the commercial effect of a borrowing. The accounting treatment provided by the borrower and lender are that of the borrowing transactions. Therefore, the 2nd Respondent is a Financial Creditor of the Corporate Debtor. With regard to the contention of the Appellant that the amount provided was intended to be the equity contribution as an investor. In any event, as per the Loan Agreements the loan extended by the 2nd Respondent were in the nature of a Financial Debt. As per the Loan Agreement would be required to pay interest or the loans advanced as per the Provisions of the Loan Agreement. Further, as per the clauses of the Loan agreement the borrower shall pay interest to the lender i.e. the 2nd Respondent on the loans outstanding from time to time and on all moneys due and payable under the Agreement at the applicable rate of interest.
It is submitted that the loans also provided a right to 2nd Respondent to recall the same in case of an event of default. Accordingly, in accordance with the Loan Agreement the 2nd Respondent has recalled the loan.
It is submitted that the loans have all the facets of a Financial Debt. The fact that there is interest payable by the Corporate Debtor to other Appellant clearly indicates that there is a time value of money. Moreover, there are clauses which clearly indicates that the amounts provided are payable and in fact, there are certain mandatory requirements to repay the loan.
It is submitted that as per the Clauses of the Loan Agreement the liability of the Corporate Debtor to make payment to the 2nd Respondent and that repayment or conversion is at the action of the Borrower. It is also clarified that in case a repayment notice is served the borrower has a right to repay the relevant amount in quarterly instalments. It is a fact that the loans were disbursed to the Corporate Debtor for interest and hence have time value for money. Further the loans have also the commercial effect of borrowing accordingly the loans would be categorized as financial debt under the Provisions of Section 5(8)(a) and 5(8)(f) of the Code and the 2nd Respondent would be a Financial Creditor to the Corporate Debtor.
In view of the reasons, the Appellant has not made out any case either on facts or on law. Hence, the appeal may be dismissed.
ND 2 RESPONDENT’S SUBMISSIONS:
The Learned Senior Counsel appearing for the 2nd Respondent submitted that it is an admitted fact that the 2nd Respondent entered into a Loan Agreement with the Corporate Debtor dated 28.03.2015 and a supplementary Loan Agreement dated 28.03.2015. Subsequently, a Right to Use agreement (RTU) dated 30.03.2015 was entered into by and between the Corporate Debtor and Essar Steel. After execution of the Agreements the 2nd Respondent disbursed an amount of Rs.136.50 Crore in performance of the said Agreements in tranches as required by the Corporate Debtor. Thereafter Corporate Debtor required further credit facilities and this Respondent agreed to provide a further sum of Rs.290 crores on the basis of Loan Agreement executed between this Respondent and the Corporate Debtor dated 20.06.2015. Accordingly, this Respondent disbursed a sum of Rs.185.10 crores out of the sanctioned sum of Rs.290 Crores. It is stated that under both the Agreements the Corporate Debtor was required to serve the credit facilities and pay interest @ 12% per annum. As a security to the loan availed by the Corporate Debtor, the Corporate Debtor created several security/charges in favor of this Respondent.
It is evident from a mere perusal of the Loan Agreement dated 28.03.2015, it expressly stated to be a Loan agreement. In fact, the Corporate Debtor was liable to pay interest on the loan availed by it which is evident from Clause 2.6 of the loan agreement dated 28.03.2015. Further, as per clauses 2.6.1 and 2.6.2 of the Loan Agreement dated 28.03.2015 it is evident that the borrower namely the CD was to pay interest to this Respondent on the loan outstanding from time to time and all moneys due and payable under the agreement at the applicable rate of interest. As per clause 7.2 of the Loan Agreement upon occurrence of default this respondent entitled to recall the entire loan facilities.
It is submitted that this Respondent is a Financial Creditor of the Corporate Debtor having extended the financial facilities/or loan to the Corporate Debtor against payment of interest and for time value of money for which the debt in question squarely falls under the definition of Financial Debt as per Section 5(8) of the Code. Upon default being committed by the Corporate Debtor this Respondent was constrained to issue notice on 09.01.2017. The Corporate Debtor has never challenged the recall notice issued by this Respondent on any of the grounds mentioned in the instant appeal.
It is submitted that this Respondent was a part of the Joint Lenders Forum (JLF) so constituted in respect of Essar Steel India Ltd. where the loan to the Corporate Debtor was discussed and the Appellant has never challenged the status of this Respondent as lender Financial Creditor of the Corporate Debtor. Having not challenged the status of this Respondent, the Appellant is estopped from contending that this Respondent is not a Financial Creditor. Further the Appellant has always admitted and acknowledged that this Respondent is a Financial Creditor. In fact, the Appellant had voted in favor of the Resolution Plan which recognizes this respondent as a Financial Creditor.
It is submitted that the Resolution Plan in respect of the Corporate Debtor has been approved by the COC with 100% voting and in Resolution Plan this Respondent is classified as a Financial Creditor and the Appellant has voted in favor of this Resolution Plan.
In view of the aforesaid reasons, the Appellant has not made out any case and the appeal may be dismissed with exemplary costs.
ANALYSIS/APPRAISAL
Heard the Learned Counsel appeared for the respective parties, perused the pleadings and documents filed in support of their case. After analyzing the pleading the only issue need to be determined and addressed whether the 2nd Respondent is a Financial Creditor or not.
Pursuant to the Corporate Insolvency Resolution Process of the OSPL, the 2nd Respondent filed a claim before the IRP and the IRP admitted the claim and treated the 2nd Respondent as Financial Creditor. The stand of the Appellant is that the 2nd Respondent advanced the amounts to the Corporate Debtor (OSPIL) in terms of Compulsorily Convertible Loan Agreements dated 28.03.2015 and 20.06.2015 entered between the 2nd Respondent and the Corporate Debtor (OSPIL). The Appellant also contended that the IRP has not taken into account the fact that the claim of the 2nd Respondent is not a Financial Debt and cannot be classified as a Financial Debtor. It is an admitted fact that the appellant is one of the member of COC. As stated supra the Resolution Professional of the Corporate Debtor admitted the claim filed by the 2nd Respondent as a Financial Debt in terms of Section 5(8) of the I&B Code 2016, on the basis of the documents made available to him.
It is apt to mention that the IRP while classifying the 2nd Respondent as Financial Creditor also treated the 2nd Respondent as related party. Aggrieved by the same, the 2nd Respondent filed application before the Adjudicating Authority challenging the said decision. However, the Learned Adjudicating Authority dealt the issue with regard to the related party in the Application. The Plan has been approved by the Learned Adjudicating Authority and the same was implemented.
While so, the Appellant filed an Application before the Adjudicating Authority stating that the Resolution Professional has wrongly admitted the claim of the 2nd Respondent as a Financial Debt and the Appellant sought to set aside the claim admitted by the Resolution Professional. The Learned Adjudicating Authority after due deliberation and considering the facts, dismissed the said Application.
Admittedly, the Corporate Debtor and the 2nd Respondent entered into a Loan Agreement dated 28.03.2015 for purchase of 253 KMS of Operational Slurry Pipeline developed by Essar Steel India Ltd. From the preamble of the Loan Agreement it is evident that the OSPL is referred as Borrower and the 2nd Respondent referred as Lender. Article 1 thereof defines definitions and interpretations. Article 2 refers to Agreement and Terms of Loans. As per Subclause 2.6 it refers to Interest and 2.6.1 refers to Interest and Reset. Sub Clause 1 of 2.6.1 states as under:
“Interest with respect to Loan facility. The Borrower shall pay interest to Srei, on the loans outstanding, from time to time, and on all monies due and payable under this Agreement, at the applicable interest rate (more particularly setout in Schedule III) for the interest period on each interest payment date, subject to tax deduction at source as per applicable laws. The first of such interest shall be paid on the first interest payment date falling after the initial drawdown. It is clarified that upon change of base rate, which is a floating rate, at any time, during the currency of the loan facility the applicable interest rate shall stand revised from the date of change of base rate”
Further Clause 2.7.2 of the Loan Agreement refers to voluntary prepayment. It reads as under:
“Notwithstanding anything contained in the transaction documents, the borrower shall have the option to prepay the loan in full or in part, together with all interest, additional interests (if any), default interest (if any), other charges and moneys due and payable to SREI upto the date of such prepayment before final settlement date, by issuing a return notice of 7 business days. Such repayment may be made by any of the modes specified in this agreement. Further, Clause 2.7.3 also provides for mandatory prepayment.”
We refer to Loan agreement dated 20.06.2015 entered between the Corporate Debtor i.e. OSPIL and the 2nd Respondent. As per the loan agreement the OSPIL referred to as the borrower and the 2nd Respondent refers to as the Lender. From the perusal of classes of this Agreement the clauses of the Loan Agreement dated 28.03.2015 is similar. However, we refer to the clauses of the Loan Agreement dated 20.06.2015. Clause 2.6 refers to as interest. Clause 2.6.1 refers to Interest and Reset.
Sub Clause.1 Interest.
“The borrower shall pay interest to SREI on the loans at the applicable interest rate for the interest period on each interest payment date, subject to tax deduction at source as per applicable laws. The first of such interest shall be paid on the first interest payment date, falling after the initial Drawdown. It is clarified that upon change of base rate, which is a floating rate, at any time, during the currency of the Loan Facility, the applicable Interest Rate shall stand revised from the date of change of base rate.”
Clause 2.6.2 provides for Additional Interest.
Further in both the Loan Agreement Clauses 2.7.2, it provides for Voluntary Prepayment and Clauses 2.7.3 thereof provides for mandatory prepayment. Clause 2.7.2 thereof states as under:
“Voluntary Prepayment. ‘notwithstanding anything contained in the financing documents, the borrower shall have the option to prepay the loans, in full or in part, together with all interests, additional interests, Default Interests, other charges and moneys due and payable to SREI up to the date of such prepayment before the dates on which such payment/repayment falls due, by issuing a prior return notice of at least 7 business days to SREI specifying therein the proposed date of prepayment and the amount which the borrower proposes to prepay, without payment of any prepayment premium”
From the above Article/Clauses of the both the Loan Agreements it is crystal clear that the Loan Agreements does have interest clause and voluntary prepayment. Therefore, for all the purposes the debt advanced by the 2nd Respondent clearly attracts Financial Debt and the Creditor to be classified a Financial Creditor under Section 5 (7) and 5(8) of the I&B Code, 2016.
Now we refer to the Provisions of Law. Section 5 sub section 7 defines ‘Financial Creditor’ means any person to whom a financial debt is owed and includes a person to whom such debt has been legally assigned or transferred to. Sub Section 8 of Section 5 defines
‘Financial Debt’ means a debt along with 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. In terms of the Loan Agreements dated 28.03.2015 and 20.06.2015, the Corporate Debtor (OSPIL) owed a Financial Debt to the 2nd Respondent. The said debt is a Financial Debt in view of the above Provisions of Law for the reason that the money borrowed by the Corporate Debtor from the 2nd Respondent against the payment of interest and both the Loan Agreements have interest bearing and commercial effect of a borrowing. Admittedly, the payment of interest has been very well incorporated in both the Loan Agreements and also provided for voluntary prepayment.
From a bare perusal of the Loan Agreements it is evident that the arrangements made in the Loan Agreements does not restrict it to a mandatory conversion but allows repayment at the option of borrower and prepayment and mandatory payment after due notice, after issuing a return notice to the lender. In the voluntary prepayment it is specifically stated that the option to prepay a loan in full or in part, together with all interests, additional interests if any, default interest if any, other charges and moneys due and payable to the 2nd Respondent. Therefore, it is aptly clear that the Loan Agreements have commercial effect of borrowing and the classification of the 2nd Respondent as Financial Creditor and the Loan is a Financial Debt absolutely in accordance with law and no interference is called for.
For the aforesaid reasons, there is no legal infirmity or illegality in the order passed by the Adjudicating Authority. Viewed in that perspective, we are not hesitant to hold that the Appeal is devoid of any merit and liable to be dismissed. Accordingly, the Appeal is dismissed. However, no orders as to costs.