Attempt To Convert Operational Debt Into Financial Debt; NCLT Chennai Rejects Section 7 Petition.

Background Facts

Step Stones Infras Private Limited (“Financial Creditor”) and Srico Projects Pvt. Ltd (“Principal Contractor”) entered into an MOU dated 14.06.2017 for sub-contracting the construction of dwelling units. The Financial Creditor deposited a refundable security deposit to the Principal Contractor for the said contract. The Financial Creditor and Yes and Yes Infracon (P) Ltd (“Corporate Debtor”) vide an MOU dated 28.09.2019 agreed to transfer the construction work in the name of the Corporate Debtor in lieu of the security deposit amount, the retention amount and yardstick payment payable by the Financial Creditor to the Principal Contractor. The Corporate Debtor issued post dated cheques as guarantee which got dishonored upon presentation. Aggrieved by the dishonor, the Financial Creditor issued a legal notice dated 20.01.2020, which was replied to by the Corporate Debtor by a reply dated 03.02.2020.

It was contended by the Financial Creditor that aforesaid amount is in the nature of a financial debt and that the Corporate Debtor was liable to pay Rs. 85 lakhs with 14% interest p.a. from 01.01.2020.

On the contrary, it was contended by the Corporate Debtor that the aforementioned amount is not a Financial Debt. No disbursal has been made by the Financial Creditor towards the Corporate Debtor and payments were made only towards the Principal Contractor. Further there is no disbursal against consideration for time value of money as the security deposit does not carry any interest as per the MOU dated 14.06.2017. Further as per a letter dated 30.10.2020, Rs. 65 lakhs have been refunded by the Principal Contractor towards security deposit, hence only 35 lakhs are liable to be paid.

Findings of the Tribunal

The Tribunal observed that under the MOU dated 14.06.2017 the Financial Creditor had deposited Rs. 1 crores to the Principal Contractor for construction work and this transaction was operational in nature. The MOU dated 28.09.2020 transferred the same construction work to the Corporate Debtor. It was held that Transfer of the same work by a subsequent MOU would not alter the nature of the original transaction. Reliance was placed on the NCLT New Delhi judgment of Jambudwip Exports and Imports Limited vs UP Bone Mills Pvt. Ltd (IB)-447(ND)/2021. Thus the Financial Creditor had attempted to covert a debt of operational nature into a financial debt.

It was further held that the 14 % interest component in the MOU for delay in payment cannot be considered the time value of money. Reliance was placed on the NCLAT judgment of Budhpur Buildcon Pvt. Ltd. vs Mr. Abhay Narayan Manudhane [CA(AT) (Ins) No. 589 of 2021] wherein it was held that interest per se in any business contract cannot be termed to convert the debt into a “financial debt”, if it is in the nature of penal interest, which is a result of compensation of breach of contract.

With the aforesaid observations, the Tribunal rejected the petition.

Case: Step Stones Infras Private Limited vs Yes and Yes Infracon (P) Ltd

Case No. IBA/403/2020

Counsels for the Applicants Adv. S. Kamalakannan

Counsel for the RespondentAdv. R. Rajesh

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