NCLAT: Refund Of Advance Amount Cannot Change Nature Of Transaction Into Financial Debt
Upholds the order of the Mumbai Bench of the National Company Law Tribunal
The New Delhi Bench of the National Company Law Appellate Tribunal (NCLAT) has held that the refund of the advance amount cannot change the nature of the transaction into financial debt.
An agreement was entered between Sainik Industries Pvt. Ltd. (appellant) and Indian Sugar Manufacturing Company Ltd. (corporate debtor) for the supply of sugar.
As per the agreement, a penalty was to be imposed if the corporate debtor refused or failed to deliver the entire/part quantity of sugar. It contemplated giving security cheques by the corporate debtor towards the refund of the advance amount. (In 2016, the appellant had advanced an amount of Rs.10 crores to the corporate debtor).
Later, the appellant initiated the Corporate Insolvency Resolution Process (CIRP) against the corporate debtor under Section 9 of the Insolvency and Bankruptcy Code (IBC), 2016 and notices were issued on 06 February 2020 by the Adjudicating Authority (AA).
The appellant also filed a commercial suit seeking a grant of money decree of Rs.19.55 crores. On 12 January 2023, a summary judgment was awarded for Rs.3.75 crores.
The CIRP was initiated against the corporate debtor under Section 7 of the IBC by Saisidha Sugar Equipments and Engineering Company. The AA initiated the order on 23 March 2023.
On 01 June 2023, the appellant submitted its claim in Form C to the Interim Resolution Professional (IRP), classifying its debt of Rs.34.65 crores as financial debt. However, the Resolution Professional (RP) rejected it and categorized it as an operational debt.
Thereafter, the appellant approached the Mumbai Bench of the National Company Law Tribunal (NCLT) to direct the IRP to accept its claim as financial debt, but it was rejected.
The appellant then appealed against the NCLT Mumbai's 17 October 2023 order wherein it rejected the admission of its claim in the CIRP.
The New Delhi Bench of the NCLAT comprising Justice Ashok Bhushan (Chairperson), Barun Mitra (Technical Member), and Arun Baroka (Technical Member), dismissed the appeal and held that the refund of the advance amount could not change the nature of the transaction into financial debt.
The tribunal referred to the definition of 'operational debt' under Section 5(21) of IBC. It stated, “An operational debt is defined as ‘a claim for the provision of goods or services, including employment, or a debt for the repayment of dues arising under any law for the time being in force and payable to the Central government, any State government, or a local authority’.
It pointed out that in the Consolidated Construction Consortium Ltd. (2022) case, the Supreme Court considered the provision of Section 5(21) i.e. operational debt. It held that the expression ‘in respect of’ was to be interpreted in a broad and purposive manner.
The NCLAT stated that the case was squarely applicable since an advance was given for carrying out the supply of goods, but the project was subsequently canceled. A claim for return of advance amount was in that context and a similar question arose of whether an advance amount was operational debt, and wherein it was ruled that it constituted 'operational debt'.
The tribunal noted that the penalty provided for the failure to deliver the sugar was not uncommon in the agreement of supply and the clause had no bearing that the appellant's claim constituted a 'financial debt'.
The bench added that Clause 4 related to the appellant's entitlement to receive and recover the difference in price in the event the sugar was sold at a higher price. The agreement provided for the recovery differencein price was a natural consequence of the agreement between the parties for the supply of white sugar at a fixed price of 6000 PMT.
Clause 5 provided the adjustment of advance, and that the corporate debtor would also pay the (above-mentioned) amount along with interest at the rate of Rs.30 PMT per day till the refund of the advance amount. The clause was like a penalty on account of failure of performance by the corporate debtor.
Similarly, Clause 7 dealt with security under which the second party gave security cheques of Rs.5 crores each towards the refund of the advance amount.
The NCLAT observed that the refund of the advance amount could not change the nature of the transaction for the supply of sugar into financial debt. The security payment in the supply of goods was also an accepted mode and manner for protecting the amount but the clause had no bearing on the nature of the transaction.
Thus, the NCLAT noted that none of the clauses reflected that the deal between the parties was a financial transaction and the debt due was a financial debt. It held that NCLT, Mumbai rightfully held the appellant's claim as an operational debt.