NCLAT Delhi: Security Of Refund Of Advance Amount Can't Change Nature Of Transaction Into Financial Debt

Background Facts:

An Agreement was entered between Sainik Industries Pvt. Ltd. (Appellant) and Indian Sugar Manufacturing Company Ltd. (Corporate Debtor) for the supply of sugar as the Corporate Debtor was engaged in the manufacturing and selling of sugar. As per the Agreement, penalty would be imposed if the Corporate Debtor refuses or fail to deliver the entire/part quantity of sugar and contemplated giving of security cheques by the Corporate Debtor towards refund of the advance amount. In 2016, Appellant had advanced an amount of Rs. 10 Crores to the Corporate Debtor.

Corporate Insolvency Resolution Process ('CIRP') was initiated by the Appellant against the Corporate Debtor under Section 9 of Insolvency and Bankruptcy Code, 2016 ('IBC') and notices were issued on 06.02.2020 by Adjudicating Auhtority. Further, the Appellant also filed a commercial suit seeking grant of money decree of an admitted amount of Rs.19.55 crores. On 12.01.2023, a summary judgment was awarded for an amount of Rs. 3.75 crores.

CIRP was initiated against the Corporate Debtor under Section 7 of IBC by Saisidha Sugar Equipments and Engineering Company Pvt. Ltd. and was admitted by initiated by the order dated 23.03.2023 of the Adjudicating Authority.

On 01.06.2023, the Appellant had submitted its claim in Form C to the Interim Resolution Professional ('IRP') classifying its debt of Rs.34.65 crores as a Financial Debt. However, the same was rejected by the Resolution Professional ('RP') and was categorised as an Operational Debt. The Appellant filed an application before NCLT Mumbai to direct the IRP to accept its claim as Financial Debt, however, the same was rejected by NCLT Mumbai.

The present appeal has been filed by the Appellant against NCLT Mumbai's Order dated 17.10.2023 rejecting the admission of the Appellant's claim in the CIRP.

NCLAT Verdict:

The NCLAT New Delhi dismissed the appeal and held that the Security of refund of advance amount cannot change the nature of transaction into financial debt.

The Appellate Tribunal referred to the definition of 'operational debt' under Section 5(21) of IBC which is as follows and noted that any claim in respect of the provision of goods or services falls within the definition of operational debt.

Section 5(21): 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 Consolidated Construction Consortium Ltd. (2022), the Supreme Court considered the provision of Section 5(21) i.e. operational debt and held that the expression “in respect of” in Section 5(21) has to be interpreted in a broad and purposive manner.

NCLAT noted that the above case is squarely applicable since an advance was given for carrying out for the supply of goods which the project was subsequently cancelled and a claim for return of advance was laid in the said context and a similar question arose as to whether advance is operational debt or not wherein it was ruled that the advance constitutes 'operational debt'.

The Appellate Tribunal noted that the penalty provided for the failure or refusal to deliver the sugar is not uncommon in the Agreement of supply and the said clause has no bearing that the Appellant's claim constitutes a 'Financial Debt'.

Further, Clause 4 relates to the Appellant's entitlement to receive and recover the difference in price in the event sugar is sold on the higher price. The Agreement provides for the recovery in difference of price is natural consequence of the Agreement between the parties for the supply of white sugar at a fixed price of 6000 per MT. Clause 5 also provides of adjustment of advance and that the Corporate Debtor shall 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 said clause also like penalty on account of failure of performance by the Corporate Debtor. Clause 7 deals with security under which the second party has given security cheque of Rs.5 Crore each towards the refund of advance amount.

Thus, the Appellate Tribunal noted that the Security of refund of advance amount cannot change the nature of transaction for supply of sugar into financial debt. Security for advance in supply of goods is also an accepted mode and manner for protecting the advance but the said clause has no bearing on nature of transaction.

Thus, NCLAT observed that all the clauses in no manner reflect that the transaction between the parties was a financial transaction and the debt due is a financial debt.

In conclusion, the NCLAT observed that NCLT Mumbai has rightfully held the Appellant's claim to be operational debt.

Case Title: Sainik Industries Pvt. Ltd. vs. Ritesh Raghunath Mahajan, RP, Indian Sugar Manufacturing Company Ltd.

Case No.: Company Appeal (AT) (Insolvency) No. 1614 of 2023

Counsel for Appellant: Mr. Krishnendu Datta, Sr. Advocate with Mr. Anand Varma, and Ms. Apoorva Pandey, Advocates.

Counsel for Respondent: Mr. Rohit Gupta, Mr. Ramchandra Madan, Advocates for RP

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