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Judgment
PER: RAJEEV BHARDWAJ, MEMBER (JUDICIAL)
For non-payment of the advance amount paid by the purchaser of the property, Ms. Kattapalli Lavanya, for short ‘FC’, filed the present petition under Section 7 of the Insolvency and Bankruptcy Code, 2016, against the seller, M/s.NECX Private Limited, for short ‘CD’.
The facts necessary to dispose of this application, as stated, are that:
The CD is the owner of the property situated at IDA, Nacharam, Medchal Malkajgiri District and it was mortgaged with Union Bank of India, Chikkadapally Branch, Hyderabad (“Property”). The CD entered into an Agreement of Sale, for short ‘Agreement’ dated 17.11.2019 (Annexure-6 at pg.19 to 21 of the application) for sale of the property to the FC for a consideration of Rs.3.50 crores and out of this amount, Rs.1.00 crore was paid as advance amount. The remaining balance amount of Rs.2.50 crores was to be paid before the execution of Sale Deed within three months from the date of execution of the agreement.
It is claimed that the FC has already paid Rs.1,45,00,000/-and when the CD did not honour the terms and conditions of the agreement, notice as required under law was served upon the CD. However, the CD did not pay back the amount despite the receipt of notice.
The total due amount from the CD is Rs.1,98,46,247/-(Rupees One Crore Ninety Eight Lakhs Forty Six Thousand Two Hundred and Forty Seven only) which includes Rs.1,45,00,000/- as Principal amount and Rs.53,46,247/-as interest.
The CD by filing the counter has contended and contested the averments of the petition. However, it is agreed that the agreement has been executed between the parties and this amount was required by the CD to clear the loan taken from Union Bank of India.
It is alleged that the FC failed to pay the remaining sale consideration of Rs.2.50 crores and therefore, the CD could not repay the loan amount and accordingly, it was declared as NPA by Union Bank of India on 31.03.2020.
The CD has also issued a letter dated 25.06.2021 (Annexure-1 & 2 of the Counter) asking the FC to pay the balance sale consideration within 15 days, but no such amount was paid.
It is denied that Rs.1,45,00,000/- as claimed in Part IV was received by the CD and the terms and conditions of the agreement were violated by the FC and therefore, the CD is not liable to return back the received amount from the FC.
The FC has also suppressed the material facts from this Authority by not disclosing filing of W.P.No.20046/2021 in the Hon’ble High Court of Telangana seeking direction for release of the mortgaged property documents. However, that Writ Petition was dismissed by the Hon’ble High Court, vide Order dated 09.02.2022.
In the Rejoinder, the FC has reaffirmed and reiterated the contentions put forward in the application by submitting that the amount received by the CD is a financial debt and on this point, reliance has been placed on the decision of the Hon’ble NCLAT, Delhi Principal Bench in the Company Appeal (AT) (Insolvency) No.717 of 2020. The definition of the Financial Debt is also clear in this regard and which says that –
“any amount raised under any other transaction, including any forward sale or purchase agreement, having the commercial effect of a borrowing” is to be termed as Financial Debt.
The FC approached the Hon’ble High Court by filing WP No.20046/2021 for release of the mortgaged documents and the Hon’ble High Court has asked the parties for the amicable settlement of the dispute and a copy of the Order of the Hon’ble High Court is filed as Annexure-2 of the Rejoinder.
It is submitted that the terms and conditions of the agreement are violated by the CD and vide letter dated 10.07.2021 (Annexure-3 of the Rejoinder), the CD was asked to execute the Sale Deed as the FC was ready to pay the balance sale consideration. Despite this, the CD did not execute the Sale Deed.
We have heard the learned counsels for both sides and have gone through the entire record including the written submissions furnished by the FC.
Undisputedly, the CD entered into an agreement for the sale of property situated at IDA, Nacharam, Medchal Malkajgiri District in favour of FC for a sale consideration of Rs.3.50 crores vide Sale Agreement dated 17.11.2019 (Annexure-6 of the application). In pursuance thereof, Rs.1,00,00,000/-was paid as an advance by the FC to the CD and the remaining sale consideration was to be paid on or before the execution of the Sale Deed i.e. three months from the date of the agreement.
This is also not disputed the property in question was mortgaged with the Union Bank of India and the FC filed Writ Petition WP No.23463/2020, titled M/s.Necx Private Limited versus Union Bank of India and another for the release of mortgaged documents lying with the Union Bank of India. However, this Writ Petition was dismissed, vide Judgement dated 09.05.2022 (Annexure-2 of the Rejoinder) and the operative part of the said Judgement is –
“While admittedly the dispute raised by the petitioner is private and contractual between petitioner and respondent No.3 and therefore a writ petition under Article 226 of the Constitution of India may not be the proper remedy, nonetheless, Court is of the view that this is a matter which can be sorted out by the petitioner, respondent No.3 and respondent no.2 by way of negotiations. Therefore, in the facts and circumstances of the case, while the Court is not inclined to entertain the writ petition, Court is however of the view that there is scope for redressal of the grievance of the petitioner Katepalli Lavanya if all the stakeholders sit together and thrash out a settlement which will not only benefit respondent No.2 but also lessen the burden of respondent No.3 to a large extent.
About the payment of Rs.1,45,00,000/- as claimed in the petition, there is no dispute that Rs.1,00,00,000/- was paid at the time of the execution of the sale agreement but remaining balance amount of Rs.45,00,000/-has been denied by the CD. In the index of the petition at Sl. No.10, the FC has mentioned that a copy of the challan evidencing payment has been enclosed as Annexure-9 but this document is something else. There is no averment in the petition when the remaining amount of Rs.45,00,000/- was paid by the FC. However, in the Affidavit filed by the FC in the Writ Petition WP No.20046/2021 (Annexure-3 of the Counter), there is a reference in Para No.4 that Rs.45,00,000/- was paid through cheques on various dates, which are as follows:
| S.No. | Cheque No. | Date | Amount (Rs.) | Name of the Bank |
|---|---|---|---|---|
| 1. | 000037 | 27.02.2020 | 10,00,000/- | HDFC Bank |
| 2. | 575035 | 27.02.2020 | 5,00,000/- | Yes Bank |
| 3. | 000039 | 15.06.2020 | 5,00,000/- | HDFC Bank |
| 4. | 000042 | 29.06.2020 | 25,00,000/- | HDFC Bank |
| Total | 45,00,000/- | |||
About the payment of Rs.45,00,000/-, there must be specific pleadings as when and how this amount was paid, so that the CD could have got the opportunity to accept or deny the same. Therefore, it is not proved that the payment of Rs.45.00 lakhs was received by the CD.
In order to succeed in an application under Section 7 of the IBC, it must be proved that there exists a debt and default. The Hon'ble Apex Court in Innoventive Industries Ltd. versus ICICI Bank (2018)1SCC 407 has held that for initiation of corporate insolvency resolution process by financial creditor under sub-section (4) of Section 7 of the Code, 2016, the ‘Adjudicating Authority’ on receipt of application under sub-section (2) is required to ascertain existence of default from the records of Information Utility or on the basis of other evidence furnished by the financial creditor under sub-section (3). Under Section 5 of Section 7, the ‘Adjudicating Authority’ is required to satisfy: a. Whether a default has occurred; b. Whether an application is complete; and c. Whether any disciplinary proceeding is against the proposed Insolvency Resolution Professional.
To prove the above ingredients, the following clauses of the agreement are material for determining the controversy in question:
▪ Whereas the SELLER being in need of funds for the purpose of clearing partial loan dues in the Bank has decided to sell the property more fully described in the Schedule hereunder and the PURCHASER has offered to purchase the same.
▪ The SELLER agrees to put the purchaser in absolute and vacant possession of the schedule property after executing the sale deed and registering the same in the jurisdictional Sub-Registrar’s Office. ▪ It is hereby expressly provided and agreed by the parties hereto that both parties are entitled to enforce specific performance of the agreement against each other in case of breach of any conditions mentioned in this Agreement.
About the amount of debt, it is already observed that there is no dispute that Rs.1,00,00,000/- was paid as advance to sale consideration but remaining balance amount of Rs.45,00,000/- there is a dispute. In Guruprasad V Hishobkar versus Shree Aashraya Souhard Credit Society Limited and Another (2023 SCC OnLine NCLAT 299, it was held that “once the ‘threshold’ is crossed, it is not for the Adjudicating Authority to decide the exact ‘Quantum of Debt’, but what has to be examined is whether there is a ‘Debt’ and ‘Default’. Therefore, the dispute regarding Rs.45,00,000/- is not a matter of concern while admitting the CIRP under section 7 of IBC.
Now, the question is whether the amount claimed by the FC is a financial debt or not? Before we proceed to answer this question, a prefatory glance at certain definition clauses:
5(7) “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;
5(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 nonrecourse 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;
To fully understand the present issue, it is essential to explore the fundamental and essential criteria that determine the classification of a debt as a financial debt. Section 5(8) of the IBC which deals with financial debt has been exhaustively discussed in Anuj Jain, Interim Resolution Professional for Jaypee Infratech Ltd. versus Axis Bank Limited & Ors. (2020) 8 SCC 401 by the Hon’ble Apex Court and the relevant paragraph is to the effect:
“43.Applying the aforementioned fundamental principles to the definition occurring in Section 5(8) of the Code, we have not an iota of doubt that for a debt to become “financial debt” for the purpose of Part II of the Code, the basic elements are that it ought to be a disbursal against the consideration for time value of money. It may include any of the methods for raising money or incurring liability by the modes prescribed in clauses (a) to (f) of Section 5(8); it may also include any derivative transaction or counter-indemnity obligation as per clauses (g) and (h) of Section 5(8); and it may also be the amount of any liability in respect of any of the guarantee or indemnity for any of the items referred to in clauses (a) to (h). The requirement of existence of a debt, which is disbursed against the consideration for the time value of money, in our view, remains an essential part even in respect of any of the transactions/dealings stated in clauses (a) to (i) of Section 5(8), even if it is not necessarily stated therein. In any case, the definition, by its very frame, cannot be read so expansive, rather infinitely wide, that the root requirements of “disbursement” against “the consideration for the time value of money” could be forsaken in the manner that any transaction could stand alone to become a financial debt. In other words, any of the transactions stated in the said clauses (a) to (i) of Section 5(8) would be falling within the ambit of “financial debt” only if it carries the essential elements stated in the principal clause or at least has the features which could be traced to 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.”
Expanding further on the ambit and scope of financial debt in terms of Section 5(8) of IBC, we notice that the Hon’ble Supreme Court in Orator Marketing (P) Ltd. versus Samtex Desinz (P) Ltd., (2023) 3 SCC 753 has observed:
“21.The definition of “financial debt” in Section 5(8) IBC has been quoted above. Section 5(8) defines “financial debt” to mean “a debt along with interest if any which is disbursed against the consideration of the time value of money and includes money borrowed against the payment of interest, as per Section 5(8)(a) IBC. The definition of “financial debt” in Section 5(8) includes the components of sub-clauses (a) to (i) of the said Section.
22.NCLT and NCLAT have overlooked the words “if any” which could not have been intended to be otiose. “Financial debt” means outstanding principal due in respect of a loan and would also include interest thereon, if any interest were payable thereon. If there is no interest payable on the loan, only the outstanding principal would qualify as a financial debt. Both NCLAT and NCLT have failed to notice clause (f) of Section 5(8), in terms whereof “financial debt” includes any amount raised under any other transaction, having the commercial effect of borrowing.
23.Furthermore, sub-clauses (a) to (i) of sub-section (8) of Section 5 IBC are apparently illustrative and not exhaustive. Legislature has the power to define a word in a statute. Such definition may either be restrictive or be extensive. Where the word is defined to include something, the definition is prima facie extensive.
31.At the cost of repetition, it is reiterated that the trigger for initiation of the corporate insolvency resolution process by a financial creditor under Section 7 IBC is the occurrence of a default by the corporate debtor. “Default” means non-payment of debt in whole or part when the debt has become due and payable and debt means a liability or obligation in respect of a claim which is due from any person and includes financial debt and operational debt. The definition of “debt” is also expansive and the same includes, inter alia, financial debt. The definition of “financial debt” in Section 5(8) IBC does not expressly exclude an interest free loan. “Financial debt” would have to be construed to include interest free loans advanced to finance the business operations of a corporate body.” (Emphasis supplied) Own emphasis
The Hon’ble Supreme Court in Pioneer Urban Land and Infrastructure Ltd. & Anr. vs. Union of India & Ors., (2019) 8 SCC 416 while dealing with the scope of Section 5(8) (f) of the Code held as follows;
“75.And now to the precise language of Section 5(8)(f). First and foremost, the Sub-clause does appear to be a Residuary Provision which is “catch all” in nature. This is clear from the words “any amount” and “any other transactions” not covered by any of the other clauses, would amount to a financial debt if they had the commercial effect of a borrowing. The expression “transaction” is defined by Section 3(33) of the Code as follows: (33) “transaction” includes an agreement or arrangement in writing for the transfer of assets, or funds, goods or services, from or to the corporate debtor; As correctly argued by the Learned Additional Solicitor General, the expression “any other transaction” would include an arrangement in writing for the transfer of funds to the corporate debtor and would thus clearly include 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.”
“77.Also of importance is the expression “commercial effect”. “Commercial” would generally involve transactions having profit as their main aim Piecing the threads together, therefore, so long as an amount is “raised” under a real estate agreement, which is done with profit as the main aim, such amount would be subsumed within Section 5(8)(f) as the sale agreement between developer and home buyer would have the “commercial effect” of a borrowing, in that, money is paid in advance for temporary use so that a flat/apartment is given back to the lender. Both parties have “commercial” interests in the same – the real estate developer seeking to make a profit on the sale of the apartment, and the flat/apartment purchaser profiting by the sale of the apartment. Thus construed, there can be no difficulty in stating that the amounts raised from allottees under real estate projects would in fact, be subsumed within Section 5(8)(f) even without adverting to the explanation introduced by the Amendment Act.” Own emphasis
Thus, the raising of any amount under “any other transaction” having the “commercial effect” of a borrowing is indispensable to apply Section 5(8)(f). In Anuj Jain (supra), the Hon’ble Supreme Court articulated that the essential condition of financial debt is disbursement against the consideration for time value of money. The view propounded in Pioneer (supra) case is that the presence of profit as the main aim is essential for the commercial effect of a borrowing. In Orator (supra), it has also been emphasized that financial debt includes any amount raised under any other transaction having the commercial effect of borrowing.
Learned counsel for the FC has relied on the decision of the Hon’ble NCLAT, Delhi Principal Bench in Kolla Koteswara Rao versus S.K. Srihari Raju and Ors COMPANY APPEAL (AT) (Insolvency) No. 717 of 2020 decided on 26.03.2021, wherein the transaction which has derived from a loan agreement and has a commercial effect of borrowing which is not the same in this present application. In the above referred case the object was to pay the loan amount by receiving the sale consideration but the terms and conditions in the present case are different and it is clearly stipulated as what will happen in case the agreement was not honoured. Therefore, this decision is not applicable to the present case.
In the present case, the sale agreement does not qualify to have commercial effect of borrowing as the Sub-clause does appear to be a residuary provision which is “catch all” in nature. This is clear from the words “any amount” and “any other transactions” not covered by any of the other clauses, would amount to a financial debt if they had the commercial effect of a borrowing. But in the instant case the sale agreement does not qualify as a transaction amounting to commercial effect and does not amount to a transaction with a motive to earn profits. Though the sale agreement states the reason for selling the property is to pay back loans taken from Union Bank of India but it is important to note that the loan was neither assigned to the FC by Union Bank of India nor the agreement of sale had Union Bank of India as a party to it who is the actual Financial Creditor to the CD.
In the light of the above findings, we hereby find that the debt of Rs 1,00,00,000/- does not constitute a Financial Debt under section 5(8)(f) of the IBC as the essential ingredients discussed above to qualify a debt as Financial Debt is not met in the present application and after the examination of the nature of the transaction in the present case, it is a pure and simple agreement of sale of a property and merely because some “ Assured Amount” of return has been promised and it stands breached, such a transaction does not have consideration for the time value of money, and has no commercial effect of borrowings which is a substantive ingredient to be satisfied for fulfilling requirements of the expression ‘Financial Debt’.
As a sequel to our findings above, the Company Petition CP(IB) 96/7/HDB/2022 is hereby dismissed.