05 (8) (e)

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 »

Trade receivables discounted on non-recourse basis and liability arose to Corporate Debtor to pay Financers, Financers stepped into the shoes of Suppliers | When Section (5)(8)(e) specifically covers receivables sold or discounted, the discounting of invoices cannot be covered by any other clause such as Section 5(8)(f) – Mudraksh Investfin Pvt. Ltd. Vs. Brijesh Singh Bhaduriya, RP of RCI Industries and Technologies Ltd. – NCLAT New Delhi

Hon’ble NCLAT holds that:
(i) Supplier has sold goods to the Corporate Debtor against which invoices were raised by the Supplier against the Buyer. The said invoices were discounted by the Financer from time to time and Corporate Debtor was liable to make payment to the Financer along with interest. The Financers have made payment to the Suppliers. The Corporate Debtor could not make the payment to the Financers.
(ii) The original transaction between the parties were for the sale and purchase of goods.
(iii) Discounting was without any recourse basis. Thus, the discounting is clearly excluded from financial debt under Section 5, sub-section (8) (e).
(iv) When Section 5, sub-section (8) (e) specifically covers receivables sold or discounted, the discounting of invoices cannot be covered by any other clause. Hence, discounting of invoices cannot fall under Section 5, sub-section (8) (f).
(v) The transaction emanates from sale and purchase of goods in the present case. No disbursement was made to the Corporate Debtor, hence, the transactions cannot be held to be a financial debt.

Trade receivables discounted on non-recourse basis and liability arose to Corporate Debtor to pay Financers, Financers stepped into the shoes of Suppliers | When Section (5)(8)(e) specifically covers receivables sold or discounted, the discounting of invoices cannot be covered by any other clause such as Section 5(8)(f) – Mudraksh Investfin Pvt. Ltd. Vs. Brijesh Singh Bhaduriya, RP of RCI Industries and Technologies Ltd. – NCLAT New Delhi Read Post »

Substance of a transaction is important rather than its form, and accounting entries cannot determine the character and nature of a transaction – Mr. Rakesh Bothra v. Mr. Alok Kailash Saksena – NCLT Mumbai Bench

NCLT Mumbai Bench held that:
(i) Substance of a transaction is important rather than its form, and accounting entries can not determine the character and nature of a transaction.
(ii) The Section 5(8) of the Code includes “receivables sold or discounted other than any receivables sold on nonrecourse basis” under the definition of financial debt. There is no dispute that the money was disbursed to the Corporate Debtor in consideration of assignment of such invoices and assignment of such invoices was not on nonrecourse basis, which is evidenced from the principal being acknowledged and paid by the Corporate during the course of pendency of Section 7 application filed by the Applicant.
(iii) The Applicant shall provide copy of ledger account with narration in its books of account to the Corporate Debtor to assist him to make necessary inquiry for verification.

Substance of a transaction is important rather than its form, and accounting entries cannot determine the character and nature of a transaction – Mr. Rakesh Bothra v. Mr. Alok Kailash Saksena – NCLT Mumbai Bench Read Post »

The Financial Debt which is covered by Factoring Agreement is clearly covered within meaning of Section 5(8)(e) of the IBC and the Financial Creditor was entitled to being recourse – Mr. Ritesh Kumar Agrawal, Suspended Director Arcons Infrastructure and Constructions Pvt. Ltd. Vs. M/s. India Factoring and Finance Solutions Pvt. Ltd. – NCLAT New Delhi

NCLAT observed that Clause 12.1 the Factoring Agreement which has been entered into between the parties on 05th July, 2018, itself indicates that India Factoring shall have the right of recourse against the client. The client as per Factoring Agreement is Arcons Infrastructures and Constructions Pvt. Ltd. The clause 12 as noted above in the definition of recourse clearly indicates that agreement between the parties was not any agreement which may be called as agreement of non recourse basis. Thus, the Financial Debt which is covered by Factoring Agreement is clearly covered within meaning of Section 5(8)(e) of the Code and the Financial Creditor was entitled to being recourse. 

The Financial Debt which is covered by Factoring Agreement is clearly covered within meaning of Section 5(8)(e) of the IBC and the Financial Creditor was entitled to being recourse – Mr. Ritesh Kumar Agrawal, Suspended Director Arcons Infrastructure and Constructions Pvt. Ltd. Vs. M/s. India Factoring and Finance Solutions Pvt. Ltd. – NCLAT New Delhi Read Post »

Discounting of invoice/receivables, Financial Debt or Operational Debt under IBC – Minions Ventures Pvt. Ltd. Vs. TDT Copper Ltd. – NCLAT New Delhi

The Agreement (COR) was entered into between the Seller, Financier and the Corporate Debtor (As customer). As per the agreement, the Seller had agreed for discounting of invoice of the customer (CD) for the creation of the right and interest in the invoice receivables in favour of the Financier (Appellant). Upon execution of agreement of COR, the Appellant as a Financier discounted the invoice and deposited the amounts into an escrow/nodal account maintained by KredX with an escrow/nodal agent, namely, Yes Bank Limited who further transferred the said amount to the account of the Seller and on receiving, the Seller transferred its right to receive the money under the invoices in favour of the Financiers/Appellants.

Discounting of invoice/receivables, Financial Debt or Operational Debt under IBC – Minions Ventures Pvt. Ltd. Vs. TDT Copper Ltd. – NCLAT New Delhi Read Post »

Factoring transactions on recourse basis only will fall within the mischief of Section 5(8)(e) of the IBC- M/s Canbank Factors Ltd. Vs. M/s. Shree Jaya Laboratories Pvt. Ltd. – NCLT Hyderabad Bench

The Adjudicating Authority held that in the background of the RBI Circular “Provision of Factoring Services by Banks — Review”, dated 30 July 2015, when we refer the definition of Financial Debt in section 5(8) of the Code, more particularly the clause (e) thereof, it becomes immediately clear that only the factoring transactions in respect of “receivables other than on non-recourse basis” are included therein. In other words, factoring transactions on recourse basis only will fall within the mischief of Section 5(8)(e) of the Code. The reason to restrict the mischief of Section 5(8)(e) to debt arising from discounting of bills otherwise than on non-recourse basis only fits perfectly into the concept of Financial Debt under the Code having the two intrinsic ingredients of ‘disbursal” of funds for “time value of money” which would obtain in the case of an Assignor only.

Factoring transactions on recourse basis only will fall within the mischief of Section 5(8)(e) of the IBC- M/s Canbank Factors Ltd. Vs. M/s. Shree Jaya Laboratories Pvt. Ltd. – NCLT Hyderabad Bench 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 »

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