P.S. Metal Works vs M/s Jeph Bev Private Limited

Per: Shri Deep Chandra Joshi, Judicial Member

This Application is filed by M/s P. S. Metal Works, (‘Applicant / Financial Creditor’), through the partner and authorised signatory, Mr. Harpreet Singh Saluja, who is duly authorised to sign this Application vide Authorisation Letter dated 20.12.2019 at Annexure – O of the Application, claiming to be a Financial Creditor, under Section 7 of the Insolvency and Bankruptcy Code (‘IBC’ / ‘Code’), 2016 read with Rule 4 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016, seeking to initiate a Corporate Insolvency Resolution Process (‘CIRP’) against M/s Jeph Bev Private Limited (‘Respondent’ / ‘Corporate Debtor’).

The Applicant, M/s P. S. Metal Works, is a registered partnership firm registered under the Partnership Act, 1932, having Registration No. 17/26/210/2010 dated 25.07.2014 issued by Registrar of Firms. Its registered office is at House No. 626, Hiran Magri, Sector – 11, Behind Alok School, Udaipur, Rajasthan – 313001 and is engaged mainly in the business of import, export, manufacturing, trading and dealing of lead batteries, scraps, ingots, aloo and related items. Copy of the same is annexed vide Annexure – B (Colly) of the Application.

Financial Creditor has provided the financial facility to the Corporate Debtor in the form of security deposit amounting to Rs. 50,00,000/- (Rupees Fifty Lakhs) through cheques of SBBJ Bank bearing Account Number 61095688842, towards the clearing & forwarding agreement (‘C&F Agreement/ Financial Contract’) which was furnished as per following details:

Financial Creditor, under the C&F Agreement, upon furnishing refundable security amount in favour of Corporate Debtor, was entitled to 12% per annum interest on aforementioned security deposit on a monthly basis. Copy of the C&F Agreement is annexed in Annexure – C of the Application.

Further, in lieu of the aforesaid refundable security deposit, the Corporate Debtor issued two cheques (‘000088 and 000089’) of Rs. 25,00,000/-(Rupees Twenty-Five Lakhs) each of Account No. 50200020780025 of HDFC Bank. Consequently, the Corporate Debtor was granted the said financial facility by Financial Creditor in accordance with the C&F Agreement dated 15.05.2017 for obtaining C&F Agency of a brand name ‘Indus Pride’. As per the Financial Contract, both parties had a lock-in period of 12 months. Each party to the Financial Contract had the right to withdraw from the agreement at any time by giving three months’ advance notice after the lock-in period. It was also agreed that the Respondent should appoint no other C&F without clearing all the dues of the Applicant.

After the expiration of the lock-in period of the Financial Contract on 14.05.2018, the Financial Creditor opted to dissolve the Financial Contract on account of non-payment of reimbursable expenses. The Applicant communicated their discontentment. Pursuant to discussions with the Corporate Debtor, it paid Rs. 10,00,000/- (Rupees Ten Lakhs) on 10.12.2018 and the same was acknowledged via email dated 10.12.2018 with the reference for payment of the remaining refundable security on 24.12.2018. Copy of the Payment Voucher and email dated 10.12.2018 is annexed as Annexure – G of the Application.

Meanwhile, the Financial Creditor presented Cheque No. 000088 and 000089 dated 15.09.2018 and 24.12.2018, respectively. The former Cheque was returned due to insufficient funds in the Corporate Debtor’s account, while the latter was returned because the payment stopped by the drawer. Thus, the Respondent did not fulfil the agreement and defaulted. Copy of the Cheque dishonoured statements with return memos dated 05.12.2018 and 24.12.2018 is annexed as Annexure – H of the Application.

The Financial Creditor issued Loan Recall Notice dated 11.08.2019 to the Corporate Debtor on 14.08.2019 for repayment of the outstanding security deposit along with interest and other charges; the same is annexed as Annexure – I. Thereafter, Respondent sent a reply of notice dated 30.08.2019, wherein Corporate Debtor has raised an allegation on Financial Creditor that it has paid Rs. 25,00,000/- (Rupees Twenty-Five Lakhs) on 10.12.2018 instead of Rs. 10,00,000/- (Rupees Ten Lakhs) and the Applicant tore off the receipt amounting to Rs. 15,00,000/- (Rupees Fifteen Lakhs). Copy of the reply to the notice is annexed as Annexure – L of the Application.

The Corporate Debtor failed to maintain financial discipline, i.e., failing to repay the entire security amount by 24.12.2018, clearly substantiated by bank statements and Form 26AS of the Applicant, as well as Financial Statements of the Corporate Debtor, vide Annexure – D, E, F and M (1) respectively of the Application. As a consequence, this Application was filed.

As claimed by the Applicant, the Respondent is liable to pay an amount of Rs. 43,71,835/- (Rupees Forty-Three Lacs Seventy-One Thousand Eight Hundred Thirty-Five) as of the date of filing of this Application. The total outstanding amount of the aforesaid financial debt along with interest, as enumerated under Part IV, is as follows:

Consequent to the notice issued by this Adjudicating Authority, the Respondent filed its reply vide Dairy No. 2453/2021 dated 23.11.2021, in which the following contentions are made:

a. The Applicant does not fall under the provisions of Section 7 of the Code as the claim made does not qualify as ‘financial debt’ under Section 5(8) of the Code. The ‘security deposit’ paid by the Financial Creditor was a sum paid for smooth functioning and to secure the execution of the main objective, i.e. storage of goods and distribution.

b. The nature of the security deposit does not meet the requirements of ‘borrowing’ because it fails to pass the concept of ‘disbursement of an amount against the time value of money’, and such money disbursed should have a ‘commercial effect of borrowing’. The transaction of giving a security deposit is not an independent transaction. Consequently, the definition of financial debt under the IBC excludes ‘security deposit’ as financial debt for filing an Application under Section 7 of the Code.

c. Further, such security deposit paid can also not be treated as a ‘guarantee’ given that the two essential components, ‘contract to promise’ and ‘contract to discharge the liability’, are missing in the C&F Agreement.

d. The present Application arises out of the C&F Agreement executed between the parties with the purpose of undertaking storage and distributorship of goods supplied by the Respondent and thus, giving rise to a principal-agent relationship, as provided under Clause 5 of the C&F Agreement. Clause 5 of the C&F Agreement is reproduced below for ease of reference:

e. Moreover, the Corporate Debtor has paid Rs. 25,00,000/- (Rupees Twenty-Five Lakhs) instead of Rs. 10,00,000/- (Rupees Ten Lakhs), and F.I.R. in this respect was registered with the police station Gandhi Nagar, Jaipur bearing number 671/2018.

We have gone through the documents filed by both parties and heard the arguments made by the counsels. The Applicant has claimed the default on the part of the Respondent for the security amount of Rs. 43,71,835/-(Rupees Forty-Three Seventy-One Eight Hundred Thirty-Five), including interest. Furthermore, Corporate Debtor has failed to substantiate and provide any documentation for the payment of Rs. 15,00,000/- (Rupees Fifteen Lakhs) over and above Rs. 10,00,000/- (Rupees Ten Lakhs) as acknowledged by the Financial Creditor.

Financial Creditor, in its reply to IA No. 57/JPR/2021, filed vide Dairy No. 1426/2021 dated 23.07.2021 has annexed the FIR Report dated 12.12.2018 and Final Report dated 27.02.2019 whereby the allegation made against the Applicant found to be false and bogus. Copy of the FIR Report dated 12.12.2018 and Final Report dated 27.02.2019 is annexed as RA/ 1 (Colly).

This Adjudicating Authority perused all the relevant papers and found them in order. The Registered Office of Corporate Debtor is situated in Jaipur; therefore, this Adjudicating Authority has jurisdiction to entertain and try this Application. The matter is within the limitation period as enunciated under the Law of Limitation.

In order to decide whether the debt is a Financial Debt, it is desirable to notice and refer to specific relevant provisions of IBC, 2016, which are set out below:

As per Section 5(8), 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 is that the debt should be disbursed against the consideration for the time value of money, which may include situations enumerated in various sub-clauses. In the matter of Mr. Rajnish Jain vs. (Manoj Kumar Singh – I.R.P.) & Ors., Company Appeal (AT) (Insolvency) No. 519 of 2020, the Hon’ble NCLAT observed that-

A security deposit can be considered a Financial Debt depending on the facts and circumstances in which money was tendered. When the interest accompanies a security deposit, it partakes the definitions as provided in Section 5(8) of the Code. The list of the definitions/ explanations given under Section 5(8) of the Code is not exhaustive in nature but merely illustrative, as held in the case of Dr. B.V.S. Lakshmi vs. Geometrix Laser Solution Pvt. Ltd., Company Appeal (AT) (Insolvency) No. 38 of 2017.

In addition, the acknowledgement of the Security Deposit as a liability in the financial statements of the Corporate Debtor and the deduction of TDS at various instances under Form 26 AS; the security deposit undertakes the characteristics of a Financial Debt. Consequently, the surrounding circumstances, the relationship, the character of the transactions and the manner in which the parties treated the security deposit transaction reveals the proper form of the C&F Agreement. In the present matter, the agreement in question appears to be a C&F Agreement, whereas, in reality, inferring from the context of the agreement, it holds the spirit of Financial Debt under Section 5(8) of the Code.

The Hon’ble NCLAT in Sach Marketing Pvt. Ltd. vs. Resolution Professional of Mount Shivalik Industries Ltd., Ms. Pratibha Khandelwal, Company Appeal (AT) (Insolvency) No. 180 of 2021 has squarely covered the issue and held that ‘Security Deposit’ carrying an interest would fall under the ambit of Section 5(8) of the Code. The relevant extract of the Judgment is reproduced for ease of reference:

The financial debt and further default in the debt payment should be established to initiate proceedings under Section 7 of the IBC. In the present matter, the Security Deposit provided by the Financial Creditor does fulfil the requirement of the consideration for time value. The Corporate Insolvency Resolution Process can be initiated against the Corporate Debtor, as it has committed a default. Therefore, the Adjudicating Authority has come to the view that the Corporate Insolvency Resolution Process of the Corporate Debtor should be initiated.

The Applicant has named one Mr. Anoop Bhatia with Registration No. IBBI/IPA-001/IP-P01142/2018-19/11969, duly registered with the Insolvency and Bankruptcy Board of India, to be appointed as the Interim Resolution Professional (‘IRP’). The Applicant has filed Consent in Form 2 under Insolvency and Bankruptcy Board of India (Application to Adjudicating Authority) Rules, 2016, stating that no disciplinary proceedings are pending against the named IRP. The credentials of the proposed IRP have been checked from the IBBI website, and nothing adverse is found on record.

Consequences of initiation of CIRP shall be inter-alia as follows:

a. The Insolvency Resolution Professional proposed by the Applicant Mr. Anoop Bhatia, is hereby appointed as the IRP to take over the affairs of the Corporate Debtor and duties as required to be performed by him under the provisions of IBC, 2016, including the issuance of publication in widely circulated Newspapers as contemplated under the provisions of IBC, 2016 and calling for claims from the creditors of Corporate Debtor and collation of the same shall be done.

b. Further, as a sequel of admission, the moratorium, as envisaged under Section 14 of IBC, 2016, is invoked concerning the Corporate Debtor, which will be in vogue during the Corporate Insolvency Resolution Process of the Corporate Debtor. The IRP shall carry out CIRP strictly as per the timelines specified and as envisaged under the provisions of IBC, 2016, in relation to the Corporate Debtor.

c. The said IRP shall act strictly in accordance with the provisions of IBC, 2016, and to defray his expenses to be incurred and fees on the account, the Applicant is directed to deposit a sum of Rs. 2,00,000/- (Rs. Two Lakhs Only) to the bank account of IRP within a week from the date of this order. The IRP shall duly file a status report apprising this Adjudicating Authority about the progress of CIRP as unfolding in relation to the Corporate Debtor. In terms of Section 17 & 19 of IBC, 2016, all personnel of the Corporate Debtor, including promoters and Board of Directors, whose powers shall stand suspended, shall extend all cooperation to the IRP during his tenure as such and the management of the affairs of the Corporate Debtor shall vest with the IRP.

d. In terms of Section 7 of IBC, 2016, this order shall be communicated at the earliest, not exceeding one week from today, to the Applicant, Corporate Debtor, and the IRP appointed by this Adjudicating Authority to carry out the CIRP. A copy of this order shall also be communicated to IBBI for its records.

CP No. (IB) 26/7/JPR/2020 is admitted in the abovementioned circumstances.

The Corporate Debtor filed this IA under Section 60(5) of the Code read with Rule 11 of the NCLT Rules, 2016, seeking dismissal of CP (IB) No. 26/7/JPR/2020 on the maintainability of the subject petition. In light of the foregoing, this Interim Application is infructuous and is disposed of accordingly.