05 (8) (d)

While deciding the issue of whether a debt is a Financial Debt or an Operational Debt under IBC, it is necessary to ascertain what is the real nature of the transaction – Global Credit Capital Ltd. and Anr. Vs. Sach Marketing Pvt. Ltd. and Anr. – Supreme Court

In this landmark decision, Hon’ble Supreme Court ruled that:

(i) There cannot be a debt within the meaning of Section 3(11) of the IB Code unless there is a claim within the meaning of Section 3(6) of thereof;
(ii) The test to determine whether a debt is a financial debt within the meaning of Section 5(8) is the existence of a debt along with interest, if any, which is disbursed against the consideration for the time value of money. The cases covered by categories (a) to (i) of sub-section (8) must satisfy the said test laid down by the earlier part of Section 5(8);
(iii) While deciding the issue of whether a debt is a financial debt or an operational debt arising out of a transaction covered by an agreement or arrangement in writing, it is necessary to ascertain what is the real nature of the transaction reflected in the writing; and
(iv) Where one party owes a debt to another and when the creditor is claiming under a written agreement/ arrangement providing for rendering ‘service’, the debt is an operational debt only if the claim subject matter of the debt has some connection or co-relation with the ‘service’ subject matter of the transaction.

While deciding the issue of whether a debt is a Financial Debt or an Operational Debt under IBC, it is necessary to ascertain what is the real nature of the transaction – Global Credit Capital Ltd. and Anr. Vs. Sach Marketing Pvt. Ltd. and Anr. – Supreme Court Read Post »

Securing cash flow arising out of lease agreement by Debenture Trustee of a Lessor, on rental are being paid by Corporate Debtor cannot be equated with a Financial Debt under IBC – Axis Trustee Services Ltd. Vs. Mr. Vijaykumar V. Iyer – NCLT Mumbai Bench

Vide Master Lease Agreement certain assets were given by Bhavna Asset Operators Pvt. Ltd. (BAOPL) to the Corporate Debtor on an operating lease basis and the CD was required to pay monthly lease rentals on each payment date. BAOPL, CD and the Debenture trustee also entered into a Tripartite Agreement. BAOPL defaulted in payment of its obligations under the debentures. The Debenture trustee, therefore, lodged its claim on as a Financial Creditor of the CD which had guaranteed to make the outstanding payments due and payable by BAOPL.

NCLT Mumbai Bench held that:
(i) The obligations of BAOPL in respect of NCDs are to be secured, inter alia, by the creation of first ranking exclusive mortagage over the cash flows and receivables arising out of the MLA and all cash flows and receivable arising out of the MLA are to be directly deposited by CD into an escrow account. Hence, in our view a liability or obligation to pay the lease rentals cannot be equated with a financial debt nor can it be said that the CD stood as guarantor for payment of the NCDs.
(ii) As per the Code, for a person to be designated as a financial creditor of the CD, it has to be shown that the CD owes a financial debt to such person. As already stated, the obligation of the CD is to make payments of lease rentals and other charges to BAOPL as per the terms of MLA.
(iii) Therefore, the essence of the Transaction Documents cannot be taken to be falling within the definition of a financial debt so far as CD is concern. Therefore, the relief sought in the IAs cannot be granted.
Lessor

Securing cash flow arising out of lease agreement by Debenture Trustee of a Lessor, on rental are being paid by Corporate Debtor cannot be equated with a Financial Debt under IBC – Axis Trustee Services Ltd. Vs. Mr. Vijaykumar V. Iyer – NCLT Mumbai Bench Read Post »

Judgment in Mr. M. Ravindranath Reddy as well as judgment in Promila Taneja’s case does not lay down the correct law on categorisation of License Fee under Operational Debt in IBC. The claim of Licensor for payment of license fee for use of Demised Premises for business purposes is an Operational Debt within the meaning of Section 5(21) of the IBC – Jaipur Trade Expocentre Pvt. Ltd. Vs. M/s Metro Jet Airways Training Pvt. Ltd. – NCLAT New Delhi

NCLAT held that both in Mr. M. Ravindranath Reddy and Promila Taneja this Tribunal did not dwell upon the correct meaning of expression ‘service’ used in Section 5(21) of the Code. More so, even if an expression is not defined in the statute, the meaning of expression in general parlance has to be considered for finding out the meaning and purpose of expression. The judgment of this Tribunal in Mr. M. Ravindranath Reddy’s case does not consider the extent and expanse of the expression ‘service’ used in Section 5(21) of the Code. Essential goods and services are entirely different concept and the protection under Section 14(2) as provided for is an entirely different context. Thus, the observations made that there has to be nexus to the direct input or output produced or supplied by the Corporate Debtor, is a much wider observation not supported by scheme of the Code. We having held that judgment of Mr. M. Ravindranath Reddy’s case does not lay down correct law, the judgment in Promila Taneja’s case can also not be followed.

Judgment in Mr. M. Ravindranath Reddy as well as judgment in Promila Taneja’s case does not lay down the correct law on categorisation of License Fee under Operational Debt in IBC. The claim of Licensor for payment of license fee for use of Demised Premises for business purposes is an Operational Debt within the meaning of Section 5(21) of the IBC – Jaipur Trade Expocentre Pvt. Ltd. Vs. M/s Metro Jet Airways Training Pvt. Ltd. – NCLAT New Delhi Read Post »

Lease of land by NOIDA to Builders does not fall within the ambit of Financial Debt, to be treated as an Operational Debt – New Okhla Industrial Development Authority Vs. Anand Sonbhadra – Supreme Court

Hon’ble Supreme Court held that Section 5(8)(d) includes only a finance or a capital lease, which is deemed, as such, under the Indian Accounting Standards. Section 5(8)(f) is a residuary and catch all provision. A lease, which is not a finance or a capital lease under Section 5(8)(d), may create a financial debt within the meaning of Section 5(8)(f), if, on its terms, the Court concludes that it is a transaction, under which, any amount is raised, having the commercial effect of the borrowing. All that we are finding, in the facts of this case, is that the lease in question does not fall within the ambit of Section 5(8)(f). This is for the reason that the lessee has not raised any amount from the appellant under the lease, which is a transaction.

Lease of land by NOIDA to Builders does not fall within the ambit of Financial Debt, to be treated as an Operational Debt – New Okhla Industrial Development Authority Vs. Anand Sonbhadra – Supreme Court Read Post »

The definition of Financial Debt in Section 5(8) of 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 – M/s. Orator Marketing Pvt. Ltd. Vs. M/s. Samtex Desinz Pvt. Ltd. – Supreme Court

This judgment is not only on interest free advance. In this judgment, Hon’ble Supreme Court interpreted definition of Financial Creditor u/s 5(8) of the IBC, right of a financial creditor on default by Corporate Debtor, Construction/Interpretation of Statutory Provision, in case of doubt, how to read a statute, Interpretation of word “include” etc. Read summary with full text of the judgment.

The definition of Financial Debt in Section 5(8) of 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 – M/s. Orator Marketing Pvt. Ltd. Vs. M/s. Samtex Desinz Pvt. Ltd. – Supreme Court Read Post »

The lease of land between developing authority and the builders cannot be considered or treated as a financial lease – New Okhla Industrial Development Authority Vs. Mr. Anand Sonbhadra (RP)- NCLAT New Delhi

NCLAT held that keeping in view the Indian Accounting Standards, what appears broadly is that when lease involves real estate (like land in present matter) with a fair value different from its carrying amount, the lease can be classified as a finance lease if the lease transfers ownership of the property to the lessee by the end of the lease term or there is bargain purchase option. The lease must transfer substantially all the risks and also rewards incidental to ownership of the asset.

The lease of land between developing authority and the builders cannot be considered or treated as a financial lease – New Okhla Industrial Development Authority Vs. Mr. Anand Sonbhadra (RP)- NCLAT New Delhi Read Post »

Dues in the nature of rent of immovable property do not fall under the head of Operational Debt as defined under Section 5 (21) of IBC – Promila Taneja Vs. Surendri Design Pvt. Ltd. – NCLAT New Delhi

NCLAT in Promila Taneja Vs. Surendri Design Pvt. Ltd. (2020) ibclaw.in 428 NCLAT held that in the matter of Anup Shushil Dubey Vs. National Agriculture Co-operative Marketing Federation of India Limited & Ors (2020) ibclaw.in 293 NCLAT, it does not appear that the Learned Counsel for parties duly assisted the Hon’ble Bench. It appears to us that the Learned Counsel for parties did not properly assist the Hon’ble Bench in the matter of Anup Shushil Dubey Vs. National Agriculture Co-operative Marketing Federation of India Limited & Ors. Further, it was held that we are finding difficulty to change the view we had taken in the matter of Mr. M. Ravindranath Reddy Versus Mr G. Kishan & Ors. [2020] ibclaw.in 95 NCLAT.

Dues in the nature of rent of immovable property do not fall under the head of Operational Debt as defined under Section 5 (21) of IBC – Promila Taneja Vs. Surendri Design Pvt. Ltd. – NCLAT New Delhi Read Post »

Interpretation of Preferential & Undervalued Transactions under Section 43 of IBC| Whether the lender of Holding Company could be recognized as Financial Creditors of the Corporate Debtor (Subsidiary Company/Guarantor) on the strength of the mortgage created by the Corporate Debtor, as collateral security of the debt of its Holding Company – Anuj Jain IRP for Jaypee Infratech Ltd. Vs. Axis Bank Ltd. etc. – Supreme Court

This judgment covers:
A.1 PUFE transactions comes into full effect in CIRP too.
A.2 The concept of Preferential Transactions.
A.3 Charging parts of the Section 43 of IBC.
A.4 Section 43 of IBC is deeming provision.
A.5 Look-back period.
A.6 Exclusion Part: Interpretation of Section 43(3) of IBC.
A.6.a. Meaning of “new value” Explanation to Section 43(3).
A.6.b. Transfer made in the ordinary course of the business or financial affairs.
A.6.c. The expression “or”, appearing as disjunctive between the expressions “corporate debtor” and “transferee”, ought to be read as “and”.
A.6.d. The expression ‘ordinary course of business’.
A.7. Net concentrate of Section 43 of IBC.
A.8 Checklist/Test whether a transaction falls squarely within the ambit of Section 43 of the Code.
A.9 To do: Steps follow by a Resolution Professional to find out whether a Transaction falls under Section 43 of IBC.
A.10. Can RP file one composite application under Sections 43, 45 and 66 of the Code and AA decide?
B. Whether transactions in the present case are preferential, falling within the ambit of sub-section (2) of Section 43 IBC.
C. Interpretation of definition of Financial Debt and Financial Creditor.
C.1 The expressions “means and includes” in the definition of Financial Creditor.
C.2 The essentials for financial debt and financial creditor.
C.3 Every secured creditor may not be a financial creditor.
C.4 A person having only security interest over the assets of corporate debtor cannot partake the character of a Financial Debt within the meaning of Section 5(8) of IBC.
C.5 Secured creditors indicated by this Court in Essar Steel and Swiss Ribbons, as being subsumed in financial creditors.
D. Whether Lenders of JAL could be categorised as Financial Creditors of JIL.

Interpretation of Preferential & Undervalued Transactions under Section 43 of IBC| Whether the lender of Holding Company could be recognized as Financial Creditors of the Corporate Debtor (Subsidiary Company/Guarantor) on the strength of the mortgage created by the Corporate Debtor, as collateral security of the debt of its Holding Company – Anuj Jain IRP for Jaypee Infratech Ltd. Vs. Axis Bank Ltd. etc. – Supreme Court Read Post »

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