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Term 'Financial Creditor' Under Insolvency Code Analysed By NCLAT

In Nikhil Mehta and Sons  vs AMR Infrastructure Ltd., the National Company Law Appellate Tribunal took a in depth look at the meaning of the term 'Financial Creditor' under the Insolvency and Bankruptcy Code, 2016.

In this matter the appellants had entered into various agreements with the respondents regarding some properties. The one of the unit was purchased by the Appellant(s) under the 'Committed Return Plan' as per which if the Appellant(s) were to pay a substantial portion of the total sale consideration upfront at the time of Execution of the MOU, and the Respondent undertook to pay a particular amount to the buyer/purchaser (The appellant(s) in this case) each month, as Committed Returns /Assured Returns from the date of execution of the MOU till the time the actual physical possession of the unit is handed over to the buyer/ purchaser. In the said projects the appellants also had an option to choose the construction/ time linked payment plan as per which they were required to pay a certain percentage of the sale consideration amount at various stages of construction of the project.

The Respondent started paying the committed returns to the Appellant(s) as per the MOU, but stopped paying the committed returns to the Appellant(s) from April, 2014, for the unit of the Appellants No.3 and 4, and from January, 2014, for the units of the remaining Appellants, unilaterally and without assigning any reason. The Appellants contacted the Respondent on various occasions demanding the release/payment for their monthly committed returns but to no avail.

Having no other option, the Appellants had jointly filed an Application U/s 7 of the Insolvency and Bankruptcy Code, 2016, before the Adjudicating Authority on 16.01.2017 which while examining the nature of transactions of the present case,  came to a conclusion that the appellants do not come within the meaning of 'Financial Creditor', as in the case in hand "Assured Returns" is associated with the delivery of possession of the properties and has got 'nothing to do with the requirement of Section 5(8), the time value of money which is mercifully missing in the transaction in hand rder dated 23.01.2017, which is why the present Appeal has been filed.

The Appellate Tribunal held that the Learned Adjudicating Authority while rightly interpreted the provisions of law to understand the meaning of expression 'financial creditor' at paragraph 12 of the impugned judgement as quoted above, but failed to appreciate the nature of transactions in the present case and wrongly came to a conclusion "that it is a pure and simple agreement of sale and purchase of a piece of property and has not acquired the status of a financial debt as the transaction does not have consideration for the time value of money".

The Appellate Tribunal said that the agreement shows that the respondent agreed to complete the construction of shopping mall on or before December 2009, in all respects. and was required to complete and handover the shop in the shopping mall before the said date. It is not the case of the respondent that the construction was stopped or delayed on account of factors beyond the control of the respondent, as stipulated in the later part of the Memorandum of Understanding. It was agreed upon by the respondent that since the appellants have paid most of the amount the respondent was ready to pay "monthly committed returns" to the appellants. However, as the appellants were not required the monthly return till December 2008 i.e. for 9 months so the Respondent-Corporate Debtor undertook to make a consolidated payment of Rs. 99,600/- less TDS. For every calendar month the Corporate Debtor was liable to pay committee return w.e.f. January 2009 till the date of handing over of the possession to the appellants. Therefore, it is clear that the amount disbursed by the appellants was "against the consideration of the time value of the money" and "the Respondent-Corporate Debtor raised the amount by way of sale - purchase agreement, having a commercial effect of borrowing." This is also clear from annual returns filed by Respondent and not disputed by the Respondent-Corporate Debtor in their annual returns, wherein the amount so raised/borrowed has been shown as 'commitment charges' under the head "Financial cost". The financial cost includes "Interest of loans" and other charges. Therefore, the 'commitment charge', which include interest on loan, shown against the head "Financial cost" having accepted by the Corporate Debtor in their annual return, we hold that the appellants have successfully proved that they are 'financial Creditor' within the meaning of Section 5(7) of the 'I & B Code'.


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