Corob India Pvt. Ltd vs Mr. Birendra Kumar Agrawal Resolution ...

[Arising out of the Impugned Order dated 01.03.2024 passed by the Adjudicating Authority, National Company Law Tribunal, Mumbai Bench-V in I.A. No. 3878 of 2023 In C.P. No. 979 of 2022]

In the matter of: COROB INDIA PVT. LTD. Through its Authorized Signatory 502 & 503, Kohinoor City Wing A Office Area Industrial Estate and Premises Cooperative Society Ltd., Wing B, 5th floor, Kirol Road, Off LBS Marg, Kurla, Mumbai - 400070 ...Appellant

Versus

1. MR. BIRENDRA KUMAR AGRAWAL Resolution Professional of Renaissance Indus Infra Private Limited IBBI Registration No.: U45400MH2012PTC236737 913, Corporate Annexe, Sonawala Lane, Near Udyog Bhavan, Goregaon (E), Mumbai - 400063 ...Respondent No.1

2. CANARA BANK PB NO. 292, Warden House, Sir Phirozeshah Mehta Road, Fort, Mumbai-400 001 ...Respondent No.2

Present :

For Appellant : Ms. Misha, Mr. Vaijyant Paliwal and Ms. Kirti Gupta, Advocates.

For Respondent : Mr. Kunal Kanungo, Ms. Tanushree Sogani, Mr. Atishay Jain, Advocates for R-1. JUDGMENT

(Hybrid Mode)

Per: Barun Mitra, Member (Technical)

The present appeal filed under Section 61 of Insolvency and Bankruptcy

Code 2016 ('IBC' in short) by the Appellant arises out of the Order dated

01.03.2024 (hereinafter referred to as 'Impugned Order') passed by the

Adjudicating Authority (National Company Law Tribunal, Mumbai Bench-V)

in I.A. No. 3878 of 2023 in C.P. (IB) No. 979 of 2022. By the impugned order,

the Adjudicating Authority has partially allowed the relief sought by the

Appellant in IA No. 3878 of 2023. Aggrieved by the fact that all the reliefs were

not granted by the Adjudicating Authority the present appeal has been filed

by Corob India Pvt. Ltd.- Appellant.

2. Coming to the brief facts of the case, the Appellant- Corob India Pvt.

Ltd. desired to obtain a premises on lease from Renaissance Indus Infra Pvt.

Ltd.- Corporate Debtor. For this purpose, the Appellant and the Corporate

Debtor executed a lease deed dated 12.12.2018. In terms of the lease deed,

the Corporate Debtor agreed to provide the subject premises on lease to the

Appellant for a period of 10 years commencing from 12.12.2019. Article 3.4 of

the lease deed noted that the Appellant had provided Security Deposit and a

Bank Guarantee ("BG" in short) to the Corporate Debtor. In terms of the lease

deed the Corporate Debtor was required to handover possession of the leased

premises to the Appellant on 12.10.2019 which the Corporate Debtor failed to

Page 2 of 20 Company Appeal (AT) (Insolvency) No. 749 of 2024 do. The Corporate Debtor in their e-mail dated 22.02.2022 acknowledged the

delay in handing over possession of the leased premises to the Appellant.

Further, admitting their poor financial condition, the Corporate Debtor also

acknowledged that it was not in position to grant the Appellant the benefit of

rent-free occupation. The Appellant issued a Notice of Default to the Corporate

Debtor on 30.06.2022 in terms of the lease deed. Despite issue of Notice of

Default, the Corporate Debtor continued to remain in breach of the lease deed.

Eventually, on 12.08.2022 the Appellant issued a Termination Notice to the

Corporate Debtor in terms of the lease deed. Subsequently, the Corporate

Debtor was admitted into CIRP on 31.03.2023 following which the Appellant

lodged its claim in respect of the BG and Security Deposit in Form-C and

Form-F with the Resolution Professional ("RP" in short)-Respondent No. 1.

the RP responded on 18.05.2023 informing the Appellant that the claim lodged

by the Appellant in Form-C had been admitted in the category of "Other

Creditors". Thereafter, the Appellant filed IA No. 3878 of 2023 before the

Adjudicating Authority seeking (a) return original BG issued by Respondent

No. 2 on behalf of the Appellant to the Corporate Debtor (b) RP to return the

Security Deposit amount along with the 18% interest per annum provided by

the Appellant to the Corporate Debtor (c) alternatively the RP to admit the

amount of Security Deposit as financial debt owned by the Corporate Debtor

to the Appellant in terms of Form-C submitted by the Appellant on 18.04.2023

and admit the Appellant's claims as financial creditor. The matter was heard

by the Adjudicating Authority and the orders passed on 01.03.2024. In the

impugned order, the RP was directed to return the original BG to the Appellant

Page 3 of 20 Company Appeal (AT) (Insolvency) No. 749 of 2024 but the other reliefs sought by the Appellant were rejected. Aggrieved by this

impugned order, the present appeal has been preferred by the Appellant.

3. We have heard Shri Vaijyant Paliwal, Ld. Advocate appearing for the

Appellant while Shri Kunal Kanungo, Ld. Advocate appeared representing

Respondent No.-1.

4. Making his submissions, the Ld. Counsel of the Appellant stated that

the Security Deposit made by the Appellant with the Corporate Debtor for the

purpose of the lease deed was an asset belonging to the Appellant and not to

the Corporate Debtor. It was submitted that the Appellant also addressed a

letter on 16.05.2023 to the RP stating that the Security Deposit lying with the

Corporate Debtor was an asset of the Appellant and should be refunded

forthwith. Since, the leased premises were never handed over to the Appellant

by the Corporate Debtor and the lease deed stood terminated, the Security

Deposit should have been returned by the RP more so as the Corporate Debtor

had agreed to return the Security Deposit during the meeting held with them

on 07.12.2022. It was contended that commencement of CIRP does not create

any new rights but only preserves the status quo. Hence, the Security Deposit

which never formed part of the assets of the Corporate Debtor should be

returned by the RP to the Appellant. It is the case of the Appellant that the

Adjudicating Authority committed an error in not directing the RP to return

the Security Deposit to the Appellant or to admit the claim filed by them in

Form-C as a financial debt. The RP was required to respect and honour the

obligations as it existed prior to CIRP. It was further asserted that the Security

Page 4 of 20 Company Appeal (AT) (Insolvency) No. 749 of 2024 Deposit was to be used for carrying out construction of the leased premises

and hence it deserves to be treated as financial debt under the IBC framework.

While admitting that the Appellant had lodged their claim in the Form-C for

admission of the Security Deposit as a financial debt, it was stated that the

same was done without prejudice. It was also contended that the Adjudicating

Authority erred in entering into the dispute whether the Appellant was an

Operational Creditor when no such contentions were raised by the Appellant.

The Security Deposit not being an asset of the Corporate Debtor, the RP could

not have taken control and custody of the same in pursuance of Section 18 of

the IBC. It was also contended that the impugned order is in the teeth of the

judgment of Hon'ble Supreme Court in the case of Embassy Property

Development Pvt. Ltd. Vs State of Karnataka and Ors. (2020) 13 SCC 308

which held that the purpose of moratorium provided for in Section 14 of IBC

is only to preserve that status quo and not create new right. It was, therefore,

a patent mistake on the part of both the RP and the Adjudicating Authority to

have failed to consider that the Security Deposit was an asset of the Appellant

and not an asset of the Corporate Debtor.

5. Rebutting the arguments of the Appellant, the Ld. Counsel for the RP

contended that on verification of the lease deed and its terms and stipulations,

it was found that Security Deposit could not be considered as a loan. The

nature of transaction at the time of disbursement of the amount is the most

important factor to determine the status of the party and no party can be

allowed to take a stand convenient to them at a later stage. Since, the Security

Page 5 of 20 Company Appeal (AT) (Insolvency) No. 749 of 2024 Deposit had been advanced as interest free Security Deposit, it cannot be

treated as a financial debt. The nature of transaction between the parties was

such that in the event of failure to refund the Security Deposit within

stipulated period, the deposit was to be returned with interest of 18% and no

lease rent would be required to be paid by the Appellant till the time the

deposit would be returned. Hence, it was implicit that the Security Deposit

was to be treated as payment towards lease rent and never disbursed or

deposited against consideration for time value of money. The basic ingredients

of financial debt of there being disbursal against consideration for time value

of money and commercial effect of borrowing was missing. It was further

contended that the Adjudicating Authority was right in holding that the

transaction was not even an operational debt since the Appellant had not

rendered any services or provided any goods for which it was entitled to claim

any amount. It was further submitted by the RP that once CIRP is initiated,

for any creditor to seek money from the Corporate Debtor, it is required to

lodge claim before the RP. As per Section 3(6) of the IBC, claim includes right

to remedy for breach of contract if any such breach gives rise to a right to

payment. In the instant case, the Appellant has sought refund of Security

Deposit on account of breach of a contract. Thus, it is a claim for payment

which has arisen out of breach of contract by the Corporate Debtor due to

non-refund of the Security Deposit after termination of the lease deed.

However, as the sums so involved in the Security Deposit being neither in the

nature of financial debt nor an operational debt, as per the provisions of the

IBC, RP had no option but to place the Appellant in the category of "Other

Page 6 of 20 Company Appeal (AT) (Insolvency) No. 749 of 2024 Creditors". Return of the said amount of Security Deposit amount along with

the 18% interest per annum directly to the Appellant outside the resolution

framework as claimed by the Appellant was not possible as it would be against

provisions of moratorium under Section 14 of IBC and tantamount to

preferential treatment which is impermissible in law.

6. We have duly considered the arguments advanced by the Learned

Counsel for both the parties and perused the records carefully.

7. The short point for consideration is whether the RP's treatment of the

claim made by the Appellant in respect of the Security Deposit made in

pursuance of the Lease Deed in the category of 'Other Creditor' is justifiable

in the facts of the present case.

8. Before we dwell upon the issue which we have outlined for our

examination and analysis, it will be useful to go through the relevant terms of

the Lease Deed which are as reproduced below:

"Article 3 3.4 Security Deposit

(a) That the Lessee has deposited with Lessor towards Security Deposit as details mentioned in Annexure A and in Receipt Clause i.e. an amount equivalent to 4 months the Lease Rent, which the Lessor hereby acknowledges & a receipt thereof will also be separately given to the Lessee. The Lessor are entitled to retain it with them the said security deposit without any liability to pay interest on it and the said amount will be paid back to the Lessee within 7 days, after handing over the vacant and peaceful possession of the Leased Premises at the end of the Lease agreement or sooner determination thereof, after deducing any undisputed amount mutually agreed between the parties payable to the Lessor on account of Lease Rent, CAM charges, power bill outstanding and cost of any major damage to the property

Page 7 of 20 Company Appeal (AT) (Insolvency) No. 749 of 2024 expect normal wear and tear. The Lessee has also provided a Bank Guarantee to the Lessor for an amount equivalent to 2 months Lease Rent i.e. and amount of Rs. 45,67,152/- (Rupees Forty Five Lakhs Sixty Seven Thousands One Hundred Fifty Two Only) to be released in the event of the Lessor committing default in payment of monthly Lease Rent in respect of the Leased Premises.

ARTICLE 6 FAILURE TO REFUND SECURITY DEPOSIT

In case the Lessor fails to refund the security deposit paid by the Lessee to the Lessor under this Lease, upon the expiry of the Lease Period or earlier determination of the Lease hereby granted then, in that event PROVIDED HOWEVER that the Lessee is ready and willing to hand over peaceful possession of the Leased Premises to the Lessor, the following consequences will follow.

(a) The Lessee shall be entitled and is hereby authorized to continue to occupy and use the Leased Premises without being liable to pay any outgoings, cess, taxes and levies etc.

(b) In addition, the Lessor will be liable to pay to the Lessee interest at the rate of 18% per annum on the amount of the deposit from the date such refund is due upto the date of actual payment/ realization.

The Lessee will have the right to continue using the Leased Premises without having to pay any direct Lease Rent till the time the Security Deposit with interest at the rate of 18% per annum is returned to the Lessee by way of cheque/DD/RTGS.

(c) Notwithstanding whatsoever stated hereinbefore, the Lessee shall be liable to pay electricity charges/water charges at actuals, for such period till it uses and occupies the Leased Premises.

ARTICLE 8 8.2 CONSEQUENCES OF TERMINATION

(a)....

(b) On the expiry or earlier termination of this Lease, the Lessee shall, within not more than Thirty (30) days of such expiry or termination, remove all his belongings, furniture, fixtures, chattels, articles and things which is movable and can be removed or dismantled without causing any damages to the Leased Premises but not limited to the flooring, and simultaneously against the Lessor refunding the Security Deposit paid by the Lessee, vacate and hand over quiet and peaceful possession of the Leased Premises to the Lessor in the good

Page 8 of 20 Company Appeal (AT) (Insolvency) No. 749 of 2024 order and condition in which they were at the time when the Lessee entered into the Lease Premises save and except normal wear and tear."

(Emphasis supplied)

9. Now that we have seen the above provisions of the lease deed, we now

proceed to notice the sequence of events averred by Appellant. It is submitted

by the Appellant that when the Corporate Debtor failed to handover possession

of the leased premises to the Appellant in time, written communications were

sent by them to the Corporate Debtor on their failure to handover leased

premises. Further a meeting was held by them with the Corporate Debtor on

10.02.2022 in this regard. Following this meeting, the Corporate Debtor by

their e-mail dated 22.02.2022 acknowledged the delay in handing over

possession of the leased premises and that in view of their poor financial

condition, they were not in position to grant the Appellant the benefit of 1278

days rent-free period. An alternative proposal was also made by the Corporate

Debtor to the Appellant to pay balance consideration costs to the tune of Rs

3.45 Cr. directly to another entity to complete construction of the leased

premises for enabling its handover to them. It was also clarified that in lieu of

payment of Rs 3.45 Cr., the Appellant would be eligible to get rent-free period

of 15 to 16 months. This proposal was not acceded to by the Appellant since

there was no definite and time-bound commitment of handing over of the

leased premises. Eventually, on 12.08.2022 the Appellant issued a

Termination Notice to the Corporate Debtor in terms of the lease deed.

Following issue of Termination Notice, a meeting was held between the

Appellant and the Corporate Debtor on 07.12.2022 in which the the Corporate

Page 9 of 20 Company Appeal (AT) (Insolvency) No. 749 of 2024 Debtor agreed to return the Security Deposit and BG but failed to do so. The

Minutes of the Meeting held on 07.12.2022 which was addressed by the

Appellant to the Corporate Debtor in their e-mail date 23.12.2022 is place at

page 268-271 of Appeal Paper Book ("APB" in short).

10. Given this backdrop of chronology of events, it is the case of the

Appellant that the Corporate Debtor had categorically acknowledged during

the meeting held on 07.12.2022 that the lease deed had been terminated and

that they undertook to return the Security Deposit. The termination of the

lease deed was never contested by the Corporate Debtor. Moreover, the liability

to return the BG as well as the Security Deposit had been specifically admitted

by the Corporate Debtor. Upon termination of lease deed, no rights survived

in favour of the Corporate Debtor. Since the Security Deposit was a sum held

by the Corporate Debtor in trust/contractual agreement for the benefit of the

Appellant at the time of commencement of CIRP, the Corporate Debtor was

obligated to return the deposit of the Appellant. The Security Deposit did not

form part of the estate of the Corporate Debtor and hence the RP had no right

to retain the same. Instead, the Security Deposit amount was an asset of the

Appellant and could not be retained by the Corporate Debtor. Section 18 of

IBC does not allow the RP to take control of assets owned by third parties even

if held in the possession of the Corporate Debtor under trust or under

contractual agreements.

11. It is further their contention that though in terms of lease deed, the

Security Deposit was to be adjusted towards rent for 4 months but since the

Page 10 of 20 Company Appeal (AT) (Insolvency) No. 749 of 2024 Corporate Debtor had not handed over the possession of the leased premises

to the Appellant, the question of adjustment of the Security Deposit towards

rent did not arise. Further, failure on the part of the Corporate Debtor to

comply to the lease deed leading to termination thereof rendered the Security

Deposit to be subjected to the payment of interest at the rate of 18% per

annum. Thus, the Appellant was entitled to refund of the Security Deposit

along with the interest from 19.09.2022 till the date of filing of the application.

It was contended that upon the failure on the part of the Corporate Debtor to

perform its obligations under the lease deed, the Security Deposit became

refundable with interest in terms of Article 6 of the lease deed and hence took

the form of a financial debt.

12. It has also been vehemently contended that the Adjudicating Authority

failed to ascertain the real nature of Security Deposit transaction under the

lease deed which was made with the purpose to finance the construction of

leased premises. This is substantiated by the fact that lease deed was entered

10 months prior to the date of handing over possession of the lease premises.

Further, the alternative proposal made by the Corporate Debtor for the

Appellant to pay in advance Rs 3.45 Cr. Buttressed the fact that the Security

Deposit was also intended to be utilized for completing construction of the

leased premises. Hence, the deposit was in the nature of a financial debt

availed by the Corporate Debtor for financing the consideration of the leased

premises. The deposit was thus an amount disbursed by the Appellant to the

Corporate Debtor against time value of money which constituted a financial

Page 11 of 20 Company Appeal (AT) (Insolvency) No. 749 of 2024 debt. Hence, this was a case similar to home buyers who are recognized as

financial creditor. Hence, the Appellant could not have been classified as

"other creditor" and therefore on this ground the impugned order was assailed.

13. Per contra, it is the contention of the RP that Article 6 of the lease deed

does not set out anywhere that the Security Deposit was in the form of a loan.

The amount of Security Deposit under Article 3 (Clause 3.4) was equivalent to

4 months of lease rent. Moreover, the Security Deposit was to be retained by

the Corporate Debtor without any liability to pay interest on it. The Corporate

Debtor was required to keep the deposit amount without any liability to pay

interest on it and only on the event of failure to refund the same at the

stipulated point of time that interest was chargeable under Article 6. Thus,

from the records and documents, the intention of the party was that the

Security Deposit lacked the element of commercial borrowing and disbursal

against consideration for time value of money. Thus, the Security Deposit

amount lacked an element of commercial effect of borrowing. Further, it was

contended that in the balance sheet of the Corporate Debtor, the amount of

Security Deposit was shown as "non-current liabilities" and not treated as

long-term loan and advance. Hence, the claim amount made by the Appellant

was accepted and the Appellant added in the category of "Other Creditors".

14. At this stage, we may see how the Adjudicating Authority has treated the

issue at hand. The relevant excerpts of the impugned order is as placed below:

"1. The main contention of the Applicant is that since the Security Deposit, although given on the basis of a Lease Agreement, is supposedly used for carrying out construction work in the Leased

Page 12 of 20 Company Appeal (AT) (Insolvency) No. 749 of 2024 Premises, given the fact that it was demanded 10 months prior to the date of commencement of lease, it deserves to be treated as a Financial Debt. The Bench is however of the considered opinion that this is not akin to a case of an underlying Sale Agreement which confers the status of a Financial Creditor on the Home Buyer. Moreover, interest@ 18% p.a. payable on the amount of Deposit is to be charged from the date the refund is due up to the date of actual payment/realisation and not earlier. Thus it is evident that the time value of money and commercial effect of borrowing both of which are essential ingredients to constitute a Financial Debt is lacking in the present case. Therefore, the Applicant cannot be classified as a Financial Creditor.

2. The next question to be answered by this Bench is whether the Applicant is fit to be classified as an Operational Creditor. In order, to answer this reliance is placed on the case of Jindal Steel & Power Ltd. v. DCM International Ltd. (2017 SCC OnLine NCLAT 441) wherein it was held that tenants do not come within the meaning of "operational creditor" as defined under Sections 5(20) and (21), IB Code. In this case, the tenant sought to recover the security deposit on account of the termination of the lease agreement with the landlord. The NCLAT upheld the order of the NCLT rejecting the application filed under Section 9 by the tenant holding that the tenant does not come within the meaning of the term "operational creditor" Thus, in light of the above cited case law it is clearly established that the Applicant is not fit to be classified as an Operational Creditor.

3. In light of the facts and circumstances of the present case and the settled law it is established that the Applicant is neither fit to be classified as a Financial Creditor nor as Operational Creditor. Respondent No.1, therefore, has rightly classified the claim under the heading "Other Creditors".

(Emphasis supplied)

15. Before we proceed to go into the merits of the arguments adduced by the

Appellant and the RP, we may now go through some of the relevant definition

clauses which finds place in Sections 3 and 5 under Part II Chapter I Preliminary

of the IBC would be constructive:

Page 13 of 20

Company Appeal (AT) (Insolvency) No. 749 of 2024 3(6) "claim" means -

(a) a right to payment, whether or not such right is reduced to judgment, fixed, disputed, undisputed, legal, equitable, secured, or unsecured;

(b) right to remedy for breach of contract under any law for the time being in force, if such breach gives rise to a right to payment, whether or not such right is reduced to judgment, fixed, matured, unmatured, disputed, undisputed, secured or unsecured;

3(10) "creditor" means any person to whom a debt is owed and includes a financial creditor, an operational creditor, a secured creditor, an unsecured creditor and a decree-holder; 3(11) "debt" means a liability or obligation in respect of a claim which is due from any person and includes a financial debt and operational debt;

3(12) "default" means non-payment of debt when whole or any part or instalment of the amount of debt has become due and payable and is not 1[paid] by the debtor or the corporate debtor, as the case may be;

3(33) "transaction" includes a agreement or arrangement in writing for the transfer of assets, or funds, goods or services, from or to the corporate debtor;

5(7) "financial creditor" means any person to whom a financial debt is owed and includes a person to whom such debt has been legally assigned or transferred to;

5(8) "financial debt" means a debt along with interest, if any, which is disbursed against the consideration for the time value of money and includes-

(a) money borrowed against the payment of interest;

(b) any amount raised by acceptance under any acceptance credit facility or its dematerialised equivalent;

(c) any amount raised pursuant to any note purchase facility or the issue of bonds, notes, debentures, loan stock or any similar instrument;

(d) the amount of any liability in respect of any lease or hire purchase contract which is deemed as a finance or capital lease under the Indian Accounting Standards or such other accounting standards as may be prescribed;

(e) receivables sold or discounted other than any receivables sold on non-recourse basis;

Page 14 of 20 Company Appeal (AT) (Insolvency) No. 749 of 2024

(f) any amount raised under any other transaction, including any forward sale or purchase agreement, having the commercial effect of a borrowing;

Explanation.-For the purposes of this sub-clause, -

(i) any amount raised from an allottee under a real estate project shall be deemed to be an amount having the commercial effect of a borrowing; and

(ii) the expressions, "allottee" and "real estate project" shall have the meanings respectively assigned to them in clauses (d) and (zn) of section 2 of the Real Estate (Regulation and Development) Act, 2016 (16 of 2016);

(g) any derivative transaction entered into in connection with protection against or benefit from fluctuation in any rate or price and for calculating the value of any derivative transaction, only the market value of such transaction shall be taken into account;

(h) any counter-indemnity obligation in respect of a guarantee, indemnity, bond, documentary letter of credit or any other instrument issued by a bank or financial institution;

(i) the amount of any liability in respect of any of the guarantee or indemnity for any of the items referred to in sub-clause (a) to (h) of this clause;

5(20) "operational creditor" means a person to whom an operational debt is owed and includes any person to whom such debt has been legally assigned or transferred;

5(21) "operational debt" means a claim in respect of the provision of goods or services including employment or a debt in respect of the [payment] of dues arising under any law for the time being in force and payable to the Central Government, any State Government or any local authority.

16. We have noticed the termination of the Lease Deed which is an

undisputed fact. When the Appellant terminated the Lease Deed, the claim for

breach of contract clearly arose. We have already noticed above the definition

of claim under Section 3(6)(b) according to which the claim of the Appellant

against the Corporate Debtor arises due to breach of contract which is claim

within the meaning of IBC. The Security Deposit claimed by the Appellant is

Page 15 of 20 Company Appeal (AT) (Insolvency) No. 749 of 2024 clearly a claim within the meaning of IBC. Now that we have noted the

statutory construct of IBC and the provisions of the Lease Deed, we would like

to examine the contention of the Appellant that they deserve to be treated as

Financial Creditor and their claim of Security Deposit to be treated as financial

debt qua the Corporate Debtor.

17. The essential elements of financial debt in the context of Section 5(8) of

IBC is inclusive of debt alongwith interest which disbursal must be against

consideration for time value of money and also includes anything which is

equivalent to the money that has been loaned as long as commercial effect of

borrowing or profit is discernible. It is a well settled proposition of law as laid

down by the Hon'ble Apex Court in Pioneer Urban Land and Infrastructure

Ltd. v. Union of India (2019) 8 SCC 416 that any debt to be treated as financial

debt, there must happen disbursal of money to the borrower for utilization by

the borrower and that the disbursal must be against consideration for time value

of money. In the matter of Anuj Jain, Interim Resolution Professional for

Jaypee Infratech Ltd. v. Axis Bank Limited & Ors. (2020) 8 SCC 401, the

Hon'ble Supreme Court has also held that the essential condition of financial

debt is disbursement against the consideration for time value of money. Further

in the most recent judgment of Hon'ble Supreme Court in Orator Marketing (P)

Ltd. v. Samtex Desinz (P) Ltd. (2023) 3 SCC 753, it has been clearly held that

financial debt also includes an interest free loan.

18. We find that the Adjudicating Authority has returned the finding that the

Appellant did not fall in the category of a "financial creditor" nor the alleged

Page 16 of 20 Company Appeal (AT) (Insolvency) No. 749 of 2024 transaction of Security Deposit fell within the ambit of "financial debt" in terms

of the statutory provisions enshrined in Section 5(7) and 5(8) of the IBC. The

above findings of the Adjudicating Authority have been predicated on the terms

of Lease Deed entered between the Appellant and the Corporate Debtor. At this

stage we may proceed to examine to determine the real nature of the underlying

transaction of Security Deposit in the background of Lease Deed in order to

determine whether it qualifies as a financial debt or not for the purposes of the

IBC. When we look at the Lease Deed, we notice that the amount of Security

Deposit under Clause 3.4 was equivalent to 4 months of lease rent and this sum

was to be retained by the Corporate Debtor without any liability to pay interest

on it. Thus, the Security Deposit had been advanced as interest free Security

Deposit. Thus, from the records and documents, the intent of the two parties

was that the Security Deposit was a corpus amount of four months of lease rent

kept on hold with Corporate Debtor which would be refundable to the Appellant

without interest on termination of lease and after deducting dues arising on

account of unpaid lease rent, utility charges and damages caused to property, if

any, other than normal wear and tear. It is clear, therefore, that Security Deposit

was never disbursed or deposited against consideration for time value of money.

Only in the event of failure to refund the Security Deposit from the date such

refund was due that the deposit was to be returned with interest of 18%. It was

bereft of all elements of commercial borrowing. The essential elements in the

principal clause of Section 5(8) of the IBC pertaining to financial debt was

therefore not satisfied. Clearly therefore, the present transaction was not

Page 17 of 20 Company Appeal (AT) (Insolvency) No. 749 of 2024 disbursement for time value of money and does not fall within the canvas of

financial debt as defined under Section 5(8) of the IBC.

19. This now brings us to the question whether the Appellant fell in the

category of Operational Creditor and that an operational debt was owed to him.

We have already noticed that the Lease Deed provided for security deposit as a

security against a promise of a future handing over of leased premises. Lease

deed outlined certain terms and conditions parties agreed between the two

parties subject to which the leased property would be handed over to the

Appellant by the Corporate Debtor one of which included payment of security

deposit.

20. Section 5(20) of the IBC lays down that, unless the context otherwise

requires, "operational creditor" means a person to whom an operational debt is

owed and Section 5(21) provides that "operational debt" means a claim in respect

of the provision of goods or services including employment or a debt in respect

of the payment of dues arising under any law for the time being in force and

payable to the Central Government, any State Government or any local

authority.

21. From a plain reading of the above definition of "operational debt", it is clear

that it must relate to a claim which is confined to either of the four categories

viz. provision of goods, services, employment and Government dues. It may be

pertinent to add here that the expression "services" has not been defined in the

IBC and has to be interpreted in a broad and purposive manner. The sum of

Security Deposit made in the facts of the present case which was given in the

Page 18 of 20 Company Appeal (AT) (Insolvency) No. 749 of 2024 form of advance by the Appellant to the Corporate Debtor for prospective

occupation of the leased premises on rent, this deposit was in the nature of

advance for use of the premises. For a debt to be classified as an 'operational

debt', it must bear some nexus with the provision of goods or services, without

specifying who is to be the supplier or the receiver of such goods or services as

has been held by the Hon'ble Supreme Court in M/s Consolidated Construction

Consortium Ltd. Vs M/s Hitro Energy Solutions Pvt. Ltd. in Civil Appeal No.

2839 of 2020. Hence the payment of Security Deposit as advance for use of the

Leased premises is clearly included in the "provision of services" and therefore

falls within the purview of operational debt. We are therefore of the considered

opinion that impugned order in not treating the Appellant as an Operational

Creditor suffers from legal infirmity and the same cannot be supported.

22. Section 18 enjoins upon the RP to collect all information relating to the

assets, finances and operations of the Corporate Debtor as well as take over

control and custody of assets excluding assets owned by a third party in

possession of the Corporate Debtor held under trust or under contractual

arrangements. It is incumbent upon the RP under Section 18 of IBC to embark

upon necessary steps to take control and custody of the assets of the Corporate

Debtor and under Section 20 of IBC to protect and preserve the value of the

property of the Corporate Debtor. That being the case there are no grounds to

find faults or illegality on the part of the RP in including the Security Deposit in

the pool of assets of the Corporate Debtor under CIRP and in inviting claims for

payment in terms of resolution plan. We have already noted that the Appellant

Page 19 of 20 Company Appeal (AT) (Insolvency) No. 749 of 2024 has already exercised its liberty in filing their claim with RP in Form-C as

financial creditor. However, the RP having examined the claim of the Appellant

placed the Appellant in the category of 'Other Creditors'. For the reasons

explained above, we have already held that the Security Deposit was in the

nature of operational debt. We therefore cannot agree with the categorisation

followed by the RP by placing the Appellant in the category of 'Other Creditors'.

Since the ingredients of operational debt stands satisfies, and includes all those

provide or receive operational services from the Corporate Debtor. We are

therefore of the considered view that the Appellant in the present factual matrix

should be accorded the status of an operational creditor.

23. For the foregoing reasons, we direct the RP to admit the claim of the

Appellant as an Operational Creditor and Appellant be allowed to substitute

Form-C as already filled up with Form-B. Paragraphs 3 and 4 of the impugned

order is modified accordingly. The Appeal is disposed of with the above

observations. No costs.

[Justice Ashok Bhushan] Chairperson

[Barun Mitra] Member (Technical)

Place: New Delhi Date: 08.11.2024

Abdul/Harleen

Page 20 of 20 Company Appeal (AT) (Insolvency) No. 749 of 2024