KEY HIGHLIGHTS
- NCLT: Corporate insolvency resolution process cannot be initiated under Section 7 of IBC based on transfer agreement for purchase of debentures from financial creditors.
- NCLAT: Security for refund of advance amount cannot change the nature of transaction for supply of goods into financial debt.
Delhi High Court : Directors of a company cannot be made a party to an arbitration proceeding which has been initiated against the company by the virtue of the 'group of companies doctrine'.- NCLAT: Definition of financial debt under IBC does not use the expression that disbursement should be made to corporate debtor only.
I. NCLT: Corporate insolvency resolution process cannot be initiated under Section 7 of IBC based on transfer agreement for purchase of debentures from financial creditors.
Facts
On
Thereafter, upon default in repayment of the NCDs, the Petitioner filed a company petition against MDPL under Section 7 (Initiation of corporate insolvency resolution process by financial creditor) of IBC ("Company Petition"). Subsequent to admission of MDPL in corporate insolvency resolution process ("CIRP"),
Clause 3 of the Transfer Agreement provided for "Undertaking for Financial Obligation". Pertinently, the aforesaid clause stipulated that the Respondent agrees, undertakes, confirms and declares that it shall furnish an irrevocable and unconditional undertaking, that is, the Financial Undertaking in favour of the Petitioner and guarantees to make payment of the Balance Amount. It was further stipulated that the Petitioner shall be considered as financial creditor qua the Respondent subject to the terms and conditions as set out in the Transfer Agreement.
Accordingly, the Petitioner withdrew the Company Petition. However, despite the aforesaid withdrawal, the Respondent did not make timely payment of the Balance Amount and continued to seek extension of time for payment of the same. However, despite the Petitioner granting additional time upon acknowledgement of liability by the Respondent, the Respondent sought another extension and kept on repeatedly seeking additional time to make the balance payment. On account of the aforesaid default committed by the Respondent, the Petitioner filed the present Company Petition before NCLT. Further, the Petitioner, having a separate remedy against MDPL, filed another company petition being CP No. 624 of 2023.
Issue
Whether CIRP can be initiated under Section 7 of IBC on the basis of transfer agreement for purchase of debentures if the element of disbursal against the consideration for time value of money is absent, thereby, the debt not amounting to financial debt under Section 5(8) of IBC.
Arguments
Contentions of the Petitioner:
Petitioner submitted that the Respondent had issued a public notice dated
Petitioners submitted that under the Transfer Agreement and Financial Undertaking, the Respondent had inter alia given an indemnity/guarantee under the Debenture Trust Deed. Pertinently, under the afore-mentioned agreements, the Respondent had undertaken that it guarantees that it shall, upon demand, forthwith pay to the Petitioner without demur the Balance Amount, together with interest at the rate of 24% per annum (compounded annually) and further that the Petitioner shall be considered as a financial creditor of the Respondent until the aforesaid financial obligation is fully discharged to the satisfaction of the Petitioner. Further, the Respondent had also given an indemnity to the Petitioner in terms of the afore-mentioned agreements.
The Petitioner also submitted that the Transfer Agreement and Financial Undertaking are commercial contracts as mutually and bilaterally entered into between the Petitioner and Respondent. The terms of the aforesaid agreements are clear and unambiguous and the same needs to be construed strictly without altering the nature of the contract. In this regard, the Petitioner relied upon the judgment pronounced by the Hon'ble Supreme Court in the matter of
Further, the transaction between the Petitioner and Respondent arose pursuant to the issuance of NCDs as per the transaction between the Petitioner and MDPL. Considering the fact that the transaction between the Petitioner and MDPL falls within the scope of financial debt, an indemnity/guarantee given by the Respondent for such financial debt would also be classified as a financial debt. The Petitioner submitted that the clauses of Transfer Agreement and Financial Undertaking also specify that the liability owed by the Respondent qua the Petitioner is in the nature of financial debt.
On account of the afore-mentioned, it was contended that the transaction between the Petitioner and Respondent fulfils the test of "commercial effect of borrowing" under Section 5(8)(f) of IBC.
Contentions of the Respondent:
The Respondent contended that there has been no borrowing whatsoever by the Respondent from the Petitioner. The Respondent further submitted that there has been no disbursal of any amount by the Petitioner to the Respondent till date against consideration for time value of money. Further, it was contended that reliance on the clauses of Transfer Agreement and/or Financial Undertaking would not constitute a financial debt under Section 5(8) of IBC.
Respondent further submitted that the entire premise of the arrangement as agreed by the Respondent was that MDPL continues to have valid and subsisting development rights over the subject property in question, which in turn, would ensure that the NCDs are duly secured and assigned by the Petitioner in favour of the Respondent. However, by virtue of termination of Development Agreement on account of defaults by MDPL, the entire premise of the transaction between the Petitioner and the Respondent as contemplated under the Transfer Agreement and Financial Undertaking stood extinguished.
It was contended that the Financial Undertaking also records that the Petitioner is obligated to transfer the NCDs in favour of the Respondent along with all rights, title, interest, claims. causes of action available with the Petitioner under the debenture documents. However, the Respondent had neither taken over the liabilities of MDPL nor guaranteed the obligations of MDPL under the debenture documents. In fact, contrary thereto, Petitioner had agreed to transfer the NCDs to the Respondent along with its security interest and actionable claims against MDPL and that Petitioner had represented to the Respondent that the Petitioner has considerable value on account of the underlying security on the subject property in question, from the perspective of a valuable consideration. However, no security for payment of the aforesaid amount of balance purchase price under the Transfer Agreement has been created by the Respondent in favour of the Petitioner either under the Transfer Agreement or under the Financial Undertaking. Further, on account of the termination of the Development Agreement by the Society, MDPL neither has development rights over the subject property in question nor possession or control over the same. Therefore, the security interest created in favour of the Petitioner stands completely deteriorated and the NCDs have been rendered without any value. On account of the aforesaid reason, it was contended that the Transfer Agreement has become incapable of performance and thus stands terminated, cancelled, null and void.
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