Debt to be considered as an operational debt arising out of written arrangement only if the claim has some connection or co-relation with service subject matter of transaction: Supreme Court
Justices Abhay S. Oka & Pankaj Mithal [25-04-2024]

Read Order: GLOBAL CREDIT CAPITAL LIMITED & ANR v. SACH MARKETING PVT. LTD. & ANR. [SC- CIVIL APPEAL NO. 1143 OF 2022]

Tulip Kanth

New Delhi, April 29, 2024: While confirming the view of the NCLAT that the amounts covered by security deposits under the agreements constituted a financial debt, the Supreme Court has asked the Resolution Professional to continue with the Insolvency process of the corporate debtor.

In this case, there were two agreements of April 1, 2014 and April 1, 2015 between the corporate debtor and the first respondent in the form of letters. By the agreement, the corporate debtor appointed the first respondent as a Sales Promoter to promote beer manufactured by the corporate debtor at Ranchi (Jharkhand) for twelve months. One of the conditions incorporated by the corporate debtor was that the first respondent should deposit a minimum security of Rs.53,15,000/- with the corporate debtor, which will carry interest. The terms of the 2015 agreement/letter were identical, however, under the second agreement/letter, the corporate debtor was to pay the interest on Rs.32,85,850/- @21% per annum.

The Oriental Bank of Commerce invoked the provisions of Section 7 of the IBC against the corporate debtor. The National Company Law Tribunal (NCLT) admitted the application. The second respondent was appointed as the Interim Resolution Professional. Initially, the first respondent filed a claim with the second respondent as an operational creditor but the same was rejected. 

Therefore, an application was moved before the NCLT under sub-section (5) of Section 60 of the IBC by the first respondent seeking a direction to the second respondent to admit the first respondent's claim as a financial creditor but the same was rejected. Aggrieved by the said order, the first respondent preferred an appeal before the NCLAT whereby it was held that the first respondent was a financial creditor and not an operational creditor. The NCL approved the resolution plan of M/s. Kals Distilleries Pvt. Ltd. (Respondent no.6) in the CIRP of the corporate debtor.

In another Civil Appeal, the second respondent was the resolution professional. The corporate debtor was the same as in the other appeal. The fifth respondent had provided financial assistance to the corporate debtor of Rs.75,00,000. The fourth respondent provided financial assistance to the corporate debtor of Rs.1,62,00,00. The first respondent advanced a sum of Rs.25,00,000 to the corporate debtor and the third respondent advanced a sum of Rs.1,00,000.

 The Resolution Professional rejected the claims of the four creditors as financial creditors. Therefore, they filed separate applications before the NCLT but those were rejected.  In the appeals preferred by them before the NCLAT, the NCLAT allowed the appeals by relying upon its judgment, which was the subject matter of challenge.

The Bench made it clear that where one party owes a debt to another and when the creditor is claiming under a written agreement/arrangement providing for rendering service, the debt is an operational debt only if the claim subject matter of the debt has some connection or co-relation with the service subject matter of the transaction. The written document cannot be taken for its face value. Therefore, it is necessary to determine the real nature of the transaction on a plain reading of the agreements.

“Therefore, there is no manner of doubt that there is a debt in the form of a security deposit mentioned in the said two agreements”, it held.

As there was no clause regarding forfeiture of the security deposit or part thereof, the corporate debtor was liable to refund the security deposit after the period specified therein was over with interest @21% per annum. It was opined that since the security deposit payment had no correlation with any other clause under the agreements, as held by the NCLAT, the security deposit amounts represented debts covered by sub- section (11) of Section 3 of the IBC. 

“The reason is that the right of the first respondent to seek a refund of the security deposit with interest is a claim within the meaning of sub- section (6) of Section 3 of the IBC as the first respondent is seeking a right to payment of the deposit amount with interest. Therefore, there is no manner of doubt that there is a debt in the form of a security deposit mentioned in the said two agreements”, it added.

It was further observed that a transaction has been defined in sub-section (33) of Section 3 of the IBC, which includes an agreement or arrangement in writing for the transfer of assets, funds, goods, etc., from or to the corporate debtor. In this case, there was an arrangement in writing for the transfer of funds to the corporate debtor, therefore, the first condition incorporated in clause (f) is fulfilled. 

In light of such factual and legal aspects and considering the letter mentioned as well as the financial statements of the corporate debtor, the Bench held that the amount raised under the said two agreements had the commercial effect of borrowing as the corporate debtor treated the said amount as borrowed from the first respondent.

Concurring with NCLAT’s view that the amounts covered by security deposits under the agreements constituted financial debt, the Bench enumerated its conclusion as follows:

• There cannot be a debt within the meaning of sub- section (11) of section 5 of the IB Code unless there is a claim within the meaning of sub-section (6) of section 5 of thereof;
• The test to determine whether a debt is a financial debt within the meaning of sub-section (8) of section 5 is the existence of a debt along with interest, if any, which is disbursed against the consideration for the time value of money. The cases covered by categories (a) to (i) of sub-section (8) must satisfy the said test laid down by the earlier part of sub-section (8) of section 5;
• While deciding the issue of whether a debt is a financial debt or an operational debt arising out of a transaction covered by an agreement or arrangement in writing, it is necessary to ascertain what is the real nature of the transaction reflected in the writing; and
• Where one party owes a debt to another and when the creditor is claiming under a written agreement/ arrangement providing for rendering service, the debt is an operational debt only if the claim subject matter of the debt has some connection or co- relation with the service subject matter of the transaction.”

Consequently, the Bench upheld the NCLAT's view, dismissed the appeals and ordered the Resolution Professional to continue with the CIRP.