14 Jun 2024
Holds that the amounts received under the agreement for appointment as ‘Sales Promoter’ had the commercial effect of borrowing
In the case of Global Credit Capital Limited & Anr vs. Sach Marketing Private Limited & Anr, 2024 SCC OnLine SC 649, the Hon’ble Supreme Court (“SC”) has held that while deciding the issue of whether a debt is a financial debt or an operational debt under the Insolvency and Bankruptcy Code, 2016 (“IBC”), it is necessary to ascertain the real nature of the transaction between the parties. The issue for consideration before the SC was whether the security deposit paid by the first respondent to the corporate debtor for appointment as ‘Sales Promoter’ would be treated as a ‘financial debt’ under IBC.
The corporate debtor had appointed the first respondent as a ‘Sales Promoter’ to promote beer manufactured by the corporate debtor for a period of twelve months. One of the conditions incorporated by the corporate debtor in the agreement was that the first respondent would be required to deposit a minimum security with the corporate debtor, which would carry interest @ 21% per annum. Subsequently, corporate insolvency resolution process was initiated against the corporate debtor. The first respondent filed a claim with the resolution professional as a financial creditor. However, the resolution professional rejected the claim on the ground that the first respondent could not be considered a financial creditor. Aggrieved by the aforesaid action, the first respondent moved an application before the National Company Law Tribunal (“NCLT”) under Section 60(5) of the IBC seeking a direction to the resolution professional to admit the first respondent’s claim. The said application was rejected by NCLT. Thereafter, the first respondent preferred an appeal before the National Company Law Appellate Tribunal (“NCLAT”). By the impugned order dated 07.10.2021, the NCLAT held that the first respondent was a financial creditor and not an operational creditor. The said order was, thereafter, challenged before the SC.
The SC examined the definition of ‘financial debt’ under Section 5(8) of the IBC to hold that the test to determine whether a debt is a financial debt is the existence of a debt along with interest, if any, which is disbursed against the consideration for the time value of money. Further, the Court analysed the definition of ‘operational debt’ under Section 5(21) to hold that for applicability of the first part of the definition the claim must be concerning the provisions of goods or services. It held that in the case of a contract of service, there must be a correlation between the service as agreed to be provided under the agreement and the claim. The written document cannot be taken for its face value. It is necessary to determine the real nature of the transaction on a plain reading of the agreements.
After analysing the terms of the concerned agreement, the Court noted that for acting as a Sales Promoter of the beer manufactured by a corporate debtor, only a sum of Rs.4,000/- per month was made payable to the first respondent and there was no commission payable to the first respondent on the quantity of sales. Further, as there was no clause regarding forfeiture of the security deposit, the corporate debtor was liable to refund the security deposit after the period specified therein was over with interest @21% per annum. The amount of security deposit specified in the agreement had no correlation whatsoever with the performance of the other conditions of the contract. In light of the aforesaid terms, the SC held the security deposit amount represented debt covered under Section 3(11) of the IBC.
The SC held that only the claim of Rs.4,000/- per month had any connection with the services rendered by the first respondent under the agreement. The payment of the security deposit had no relation with the service supposed to be rendered by the first respondent. Therefore, the debt claimed by the first respondent could not be classified as an operational debt by any stretch of imagination. The SC further examined the definition of ‘financial debt’ under Section 5(8)(f), which covers “any amount raised under any other transaction, including any forward sale or purchase agreement, having the commercial effect of a borrowing”. The Apex Court referred to the treatment of the security deposit in the financial statements of the corporate debtor to hold that the amount raised under the said agreement had the commercial effect of borrowing as the corporate debtor treated the said amount as borrowings. Therefore, the amounts covered by security deposits under the agreement were held to constitute financial debt. Consequently, the SC upheld the view taken by the NCLAT and dismissed the appeals.
In the case of Global Credit Capital Limited & Anr vs. Sach Marketing Private Limited & Anr, 2024 SCC OnLine SC 649, the Hon’ble Supreme Court (“SC”) has held that while deciding the issue of whether a debt is a financial debt or an operational debt under the Insolvency and Bankruptcy Code, 2016 (“IBC”), it is necessary to ascertain the real nature of the transaction between the parties. The issue for consideration before the SC was whether the security deposit paid by the first respondent to the corporate debtor for appointment as ‘Sales Promoter’ would be treated as a ‘financial debt’ under IBC.
The corporate debtor had appointed the first respondent as a ‘Sales Promoter’ to promote beer manufactured by the corporate debtor for a period of twelve months. One of the conditions incorporated by the corporate debtor in the agreement was that the first respondent would be required to deposit a minimum security with the corporate debtor, which would carry interest @ 21% per annum. Subsequently, corporate insolvency resolution process was initiated against the corporate debtor. The first respondent filed a claim with the resolution professional as a financial creditor. However, the resolution professional rejected the claim on the ground that the first respondent could not be considered a financial creditor. Aggrieved by the aforesaid action, the first respondent moved an application before the National Company Law Tribunal (“NCLT”) under Section 60(5) of the IBC seeking a direction to the resolution professional to admit the first respondent’s claim. The said application was rejected by NCLT. Thereafter, the first respondent preferred an appeal before the National Company Law Appellate Tribunal (“NCLAT”). By the impugned order dated 07.10.2021, the NCLAT held that the first respondent was a financial creditor and not an operational creditor. The said order was, thereafter, challenged before the SC.
The SC examined the definition of ‘financial debt’ under Section 5(8) of the IBC to hold that the test to determine whether a debt is a financial debt is the existence of a debt along with interest, if any, which is disbursed against the consideration for the time value of money. Further, the Court analysed the definition of ‘operational debt’ under Section 5(21) to hold that for applicability of the first part of the definition the claim must be concerning the provisions of goods or services. It held that in the case of a contract of service, there must be a correlation between the service as agreed to be provided under the agreement and the claim. The written document cannot be taken for its face value. It is necessary to determine the real nature of the transaction on a plain reading of the agreements.
After analysing the terms of the concerned agreement, the Court noted that for acting as a Sales Promoter of the beer manufactured by a corporate debtor, only a sum of Rs.4,000/- per month was made payable to the first respondent and there was no commission payable to the first respondent on the quantity of sales. Further, as there was no clause regarding forfeiture of the security deposit, the corporate debtor was liable to refund the security deposit after the period specified therein was over with interest @21% per annum. The amount of security deposit specified in the agreement had no correlation whatsoever with the performance of the other conditions of the contract. In light of the aforesaid terms, the SC held the security deposit amount represented debt covered under Section 3(11) of the IBC.
The SC held that only the claim of Rs.4,000/- per month had any connection with the services rendered by the first respondent under the agreement. The payment of the security deposit had no relation with the service supposed to be rendered by the first respondent. Therefore, the debt claimed by the first respondent could not be classified as an operational debt by any stretch of imagination. The SC further examined the definition of ‘financial debt’ under Section 5(8)(f), which covers “any amount raised under any other transaction, including any forward sale or purchase agreement, having the commercial effect of a borrowing”. The Apex Court referred to the treatment of the security deposit in the financial statements of the corporate debtor to hold that the amount raised under the said agreement had the commercial effect of borrowing as the corporate debtor treated the said amount as borrowings. Therefore, the amounts covered by security deposits under the agreement were held to constitute financial debt. Consequently, the SC upheld the view taken by the NCLAT and dismissed the appeals.