Nikhil Mehta And Sons vs Amr Infrastructure Ltd

(arising out of Order dated 23RD January, 2017 passed by NCLT, New Delhi Bench in C.P No (ISB)-03(PB)/2017)

IN THE MATTER OF:

Nikhil Mehta and Sons .Appellants

Vs

AMR Infrastructure Ltd. .Respondent

Present: For Appellant: - Mr. Varun Kathuria, Advocate

For Respondent: - Mr. Ajay Verma, Advocate

JUDGEMENT

SUDHANSU JYOTI MUKHOPADHAYA,

This appeal has been preferred by appellants against order dated 23rd

January 2017 passed by 'Adjudicating Authority (National Company Law Tribunal),

Principal bench, New Delhi whereby and whereunder the 'Adjudicating Authority'

held that appellants are not 'Financial Creditor' as defined under section 5(7) of the

Insolvency & Bankruptcy Code, 2016 (hereinafter referred to as 'I & B Code). The

adjudicatory authority further held that as many winding up petitions are pending

before the Hon'ble Delhi High Court against the 'Corporate Debtor' and Financial

Liquidator has been appointed, the application preferred by appellants for 2

triggering insolvency process by invoking Section 7 of the 'I & B Code read with

Rule-4 and Rule-9(1) of the Insolvency and Bankruptcy (Application to Adjudicating

Authority), Rules 2016 (hereinafter referred to as 'Adjudicating Authority' Rules

2016) is not maintainable.

2. The case of the appellants and the submission as made by learned counsel

for the appellants are as follows: -

The appellants reached different agreements! Memorandum of

Understanding with respondent M/ s AMR Infrastructures Limited (hereinafter

referred to as 'Corporate Debtor) for purchase of three units being a residential flat,

shop and office space in the projects, Kessel-I Valley, One Mall and One Home

which were being developed by and promoted by 'Corporate Debtor'.

3. 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.

4. 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, 3

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.

5. 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 was dismissed vide order dated 23.01.2017, which is why

the present Appeal has been filed.

6. It is the case of the Appellants that the concept and plan of payment of

Committed Returns/Assured Returns by the builders/real estate developers such

as the Respondent, is a method adopted by them to mobilise funds/raise finance

from the general public/ open market at much lower rates than what is normally

made available to them by banking and other financial institutions without having

the obligation to offer security or any collateral and without there being any

regulatory body to supervise and oversee such a transaction thereby making the

Appellants the "Financial Creditors" of the Respondent as defined U/s 5 (8)(f) of

the I & B Code.

7. It is for this reason that the Respondent had offered to pay a fixed monthly

amount to the Appellants as Committed Returns /Assured Returns if the

Appellants were willing to pay a substantial portion of the entire consideration

amount upfront to them at the time of booking their units, as the Respondent was

getting easy access to the funds of the Appellants without having to offer/pledge

any collateral /security in return. It is pertinent to mention here that there were

no other contingencies/conditions/criteria which were to be fulfilled /met by the

Appellants in order to get the monthly committed returns and therefore, the 4

agreement/ Memorandum of Understanding and transaction between the

Appellants and the Respondent were not a simple real-estate transaction. The

Appellants have also placed on record the order dated 19.12.2014 passed by SEBI

in the matter of M/ s MVL Limited wherein it has held that such transactions

where the developer offers to pay assured returns to the buyers "are not pure real

estate transactions, rather they satisfy all the ingredients of a Collective

Investment Scheme as defined under Section 1 1AA of the SEBI Act," and has made

other observations as well stating that the developer was engaged in "fund

mobilization activity" by offering assured returns. Copy of the SEBI Order is at

pages 451 to 473 of the Appeal.

8. It is the case of the Appellants that various winding up petitions have been

filed and are pending against the Respondent for non-payment of the assured

returns to various buyers wherein the Respondent has admitted liability and has

offered to settle the claims but has not yet been able to do so. Therefore, since

the provision of the Winding up under the Companies Act, stands substituted by

the Insolvency and Bankruptcy Code, 2016, then the Appellants should be entitled

to relief under the I & B Code itself.

9. It is the case of the Appellants that they are undoubtedly "creditors" of the

Respondent as defined under the I & B Code, to whom an admitted and quantified

"debt" is owed by the Respondent and who have a valid "claim" against the

Respondent as has been defined under the I & B Code and therefore, the

Adjudicating Authority should have heard and allowed the claim/ application of

the Appellants holding them to be "Financial Creditors" as defined under the I &

B Code.

5

10. Further case of the Appellants is that as per the latest balance sheet of the

respondent, the amount which is to be paid to the Appellants by the Respondent

as Committed Returns/Assured Returns is shown as "Commitment Charges"

under the header of "Financial Costs". The Respondents has not filed any reply

to the said claim of the Appellants despite of being given an opportunity to do so

by this Appellate Tribunal. The said balance sheet is at pages 34-63 of the paper

book dated 17.04.2017 of the Appellants and the relevant entry is at page 60 of

the said paper book.

11. According to Appellants they are the "Financial Creditors" of the

Respondent, and the Respondent was deducting TDS on the amount which it was

paying to the Appellants as Committed Returns/Assured Returns under Section

194(A) of the Income Tax Act, which is applicable to deduction of TDS on the

amount which is paid to some as "Interest, other than Interest on Securities". This

therefore, makes it clear that the payment made by the Respondent to the

Appellants in the form of Committed Returns/Assured Returns is nothing but a

payment of "interest" to the Appellants by the Respondent thereby making the

amount paid by the Appellants to the Respondent at the time of booking of their

unit a Loan given by the Appellants to the Respondent for constructing the project.

In support of the above claim the Appellants have placed on records, their Form

16A and 26AS which are at pages 5-33 of their paper book dated 17.-04.2017,

filed before this Appellate Tribunal.

12. The Respondent-Corporate Debtor has appeared but not filed any affidavit

denying the averments made by appellants or the enclosures attached with the

appeal.

6

13. The petition for condonation of delay of seven days in preferring the appeal

under Section 61(2) of the 'I & B Code' has been filed. Taking into consideration

the grounds taken therein particularly that number of petitions were wrongly

mentioned in the original impugned judgement and on hearing the parties the delay

of seven days in preferring the appeal is condoned.

14. The question arises for consideration in this appeal are: -

i) Whether the appellants who reached with agreements/ Memorandum of

Understandings with respondent for the purchase of three units being a

residential flat, shop and office space in the projects developed, promoted

and marketed by the respondent come within the meaning of 'Financial

Creditor' as defined under the provisions of sub-section (5) of Section 7 of the

I & B code and

ii) Whether an application for triggering insolvency process under Section

7 of 'I &B code' is maintainable where winding up petitions have been

initiated and pending before Hon'ble High Court against the 'Corporate

Debtor'.

15. To determine the first question it is desirable to notice and refer provisions

of Section 5(7) and 5(8) and Section 7 of the 'I & B code', which are set out below: -

'5. In this Part, unless the context otherwise requires, - 1

(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;

7

(8) 'financial debt" means a debt alongwith 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 de-materialised

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 afinance

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 nonrecourse basis;

(J) any amount raised under any other transaction,

including any forward sale or purchase agreement,

having the commercial effect of a borrowing;

(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-clauses (a) to (h) of this clause;

"7. (1) A financial creditor either by itself or jointly with

other financial creditors may file an application for

initiating corporate insolvency resolution process

against a corporate debtor before the Adjudicating

Authority when a default has occurred.

Explanation.-- For the purposes of this sub-section, a

default includes a default in respect of a financial debt

owed not only to the applicant financial creditor but to

any other financial creditor of the corporate debtor.

(2) The financial creditor shall make an application

under sub-section (1) in such form and manner and

accompanied with such fee as may be prescribed. (3)

The financial creditor shall, along with the application

furnish-- (a) record of the default recorded with the

information utility or such other record or evidence of 9

default as may be specified; (h) the name of the

resolution professional proposed to act as an interim

resolution professional; and (c) any other information

as may be specified by the Board.

(3) The financial creditor shall, along with the

application furnish--

(a) record of the default recorded with the information

utility or such other record or evidence of default as

may be specified;

(b) the name of the resolution professional proposed to

act as an interim resolution professional; and

(c) any other information as may be specified by the

Board.

(4) The Adjudicating Authority shall, within fourteen

days of the receipt of the application under sub-section

(2), ascertain the existence of a default from the

records of an information utility or on the basis of other

evidence furnished by the financial creditor under sub-

section (3).

(5) Where the Adjudicating Authority is satisfied that--

(a) a default has occurred and the application under

sub-section (2) is complete, and there is no disciplinary

proceedings pending against the proposed resolution

professional, it may, by order, admit such application;

or (b) default has not occurred or the application under 10

sub-section (2) is incomplete or any disciplinary

proceeding. is pending against the proposed resolution

professional, it may, by order, reject such application:

Provided that the Adjudicating Authority shall, before

rejecting the application under clause (li) of sub-section

(5), give a notice to the applicant to rectify the defect in

his application within seven days of receipt of such

notice from the Adjudicating Authority.

(6) The corporate insolvency resolution process shall

commence from the date of admission of the

application under sub-section (5).

(7) The Adjudicating Authority shall communicate--

(a) the order under clause (a) of sub-section (5) to the

financial creditor and the corporate debtor;

(b) the order under clause (b) of sub-section (5) to the

financial creditor, within seven days of admission or

rejection of such application, as the case may be"

16. From a bare perusal of Section 7, it is patent that the insolvency process can

be triggered by a 'Financial Creditor' or jointly against the 'Corporate Debtor' when

default or debt has occurred.

17. The first question arises for consideration is as to who is a 'Financial

Creditor'. Learned Adjudicating Authority, for determination of the aforesaid issue ii

examined the definition provided in Section 5 (7) and 5(8) and in the impugned

judgement rightly observed:-

"12. A perusal of definition of expression 'Financial Creditor' would

show that it refers to a person to whom a Financial debt is owed

and includes even a person to whom such debt has been legally

assigned or transferred to. In order to understand the

expression 'Financial Creditorç the requirements of expression

financial debt' have to be satisfied which is defined in Section

5(8) of the IBC The opening words of the definition clause

would indicate that a financial debt is a debt along with interest

which is disbursed against the consideration for the time value

of money and it may include any of the events enumerated in

sub-clauses (a) to (i). Therefore the first essential requirement of

financial debt has to be met viz, that the debt is disbursed

against the consideration for the time value of money and which

may include the events enumerated in various sub-clauses. A

Financial Creditor is a person who has right to afinancial debt.

The key feature offinancial transaction as postulated by section

5(8) is its consideration for time value of money. In other words,

the legislature has included such financial transactions in the

definition of 'Financial debt' which are usually for a sum of

money received today to be paid for over a period of time in a

single or series of payments in future. It may also be a sum of

money invested today to be repaid over a period of time in a

single or series of instalments to be paid in future. In Black's 12

Law- Dictionary (9th edition) the expression 'Time Value' has

been defined to mean "the price associated with the length of

time that an investor must wait until an investment matures or

the related income is earned". In both the cases, the inflows and

outflows are distanced by time and there is a compensation for

time value of money. It is significant to notice that in order to

satisfy the requirement of this provision, the financial

transaction should be in the nature of debt and no equity has

been implied by the opening words of Section 5(8) of the IBC. It

is true that there are complex financial instruments which may

not provide a happy situation to decphe1 the true nature and

meaning of a transaction. It is pertinent to point out that the

concept 'Financial Debt' as envisaged under Section 5(8) of the

IBC is distinctly different than the one prevalent in England as

provided in its Insolvency Act, 1986 and the 'Rules' framed

thereunder. It appears that in England there is no exclusive

element of disbursement of debt laced with the consideration

for the time value of money. However, forward sale or purchase

agreement as contemplated by Section-5 (8)(f) may or may not

be regarded as a financial transaction. A forward contract to

sell product at the end of a specified period is not a financial

contract. It is essentially a contract for sale of specified goods.

It is true that some time financial transactions seemingly

restructured as sale and repurchase. Any repurchase and

reverse repo transaction are sometimes used as devices for

raising money. In a transaction of this nature an entity may 13

require liquidity against an asset and the financer in return sell

it back by way of a forward contract. The difference between

the two prices would imply the rate of return- to the financer.

(See Twcman's Law Relating to IBC, 2016 by Vinod Kothari &

Sikha Barisal)."

18. However, while examining the nature of transactions of the present case the

learned Adjudicating Authority 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, with following observations:-

"When we examine the nature of transactions in the present

case, we find that it is a pure and simple agreement of sale or

purchase of apiece ofproperty.

The agreement to sell a flat or office space etc. Merely because

some "assured amount" of return has been promised and it

stands breached, such a I transaction would not acquire the

status of a financial debt' as the transaction does not have

consideration for the time value of money, which is a substantive

ingredient to be satisfied for flulfilling requirements of the

expression 'Financial Debt'.

Essentially in the case in hand Assured Returns' is associated

with the delivery ofpossession of the aforementioned properties

and has got nothing to do with the requirement of sub-section(8) 14

of section 5. It is the consideration for the time value of money

which is mercifully missing in the transaction in hand. The

classical transaction which would cover the definition of

financial debts is illustrated in sub-clause (a) of sub-section (8)

of Section-5 i.e. the money borrowed against the payment of

interest. Learned Counsel of Applicants has not been able to

show from any material on record or otherwise that it is a

financial transaction in which a debt has been disbursed

against the consideration for the time value of money and he

being the Financial Creditor is entitled to trigger the insolvency

process against the Respondent in accordance with Section 7 of

the IBC."

From the provisions of Law and discussion as made and quoted above, we

find that following essential criteria's to be fulfilled for a Creditor to come within

the meaning of 'Financial Creditor':-

(i) A person to whom a 'Financial debt' is owed and includes a person

whom such debt has been legally assigned or transferred to

(ii) The debt along with interest, if any, is disbursed against the

consideration for time value of money and include any one or more

mode of disbursed as mentioned in clause (a) to (i) of sub-section (8)

of Section 5.

19. To determine the question whether appellants came within the meaning of

'Financial Creditor', it is desirable to notice the relevant clause of one of the

Memorandum of Understanding dated 12th April 2008 reached between the 15

appellants and the Respondent-Corporate Debtor, relevant portion of which is

quoted below:-

"AND whereas the Developer has represented that it shall

complete the construction of the Shoopping Mall on or before

December 2009, in all respects and shall render the shoppind

mall ready for occupation & possession by the said date unless

the construction is stoped or odelayed on account of factors

beyond the control of Developer, as stipulated in the later part

of this memorandum of Understanding."

AND WHEREAS the Investor is interested in booking of Shop No.

E-47 measuring 1453.432 sq. ft. For a total consideration

amount of Rs. 46,67,402/- (rupees Forty Six Lacs Sixty Seven

Thousand four Hundred Two Only). The Investor acknowledge

that the Developer has readily provided all information &

clarifications as required by them but that they has not unduly

relied upon and is not influenced by any architect's plans,

advertisements representations, warranties, statements or

estimates of any nature whatsoever whether written or oral

made by the Developer. N

"Cheque of Rs.2 7,00,000/-payable on Punjab National Bank

vide Cheque No. 462365 dated 19.03.2008.

Cheque of Rs. 9,Q0,000/-payable Punjab National Bank vide

Cheque No.462350 dated 19.03.2008.

16

The receipt of which is acknowledged by the Developer and

the Developer hereby discharge the Investor of all the

Payments under this MOU except the amount of

Rs. 10,17,402/- which is payable at the time of possession.

Since the Investor has paid most of the consideration as on

19.03.2008, the Developer is ready to pay the monthly

committed return to the Investor but the Investor does not

require the monthly return till December, 2008 i.e. for the 9

month. So the DEVELOPER hereby undertakes to make a

consolidated payment of Rs.99,600/- (Rupees Ninety Nine

Thousand Six Hundred only) less TDS as applicable every

calendar month to the INVESTOR as a committed return w.e.f.

January 2009 up to the date of handing over ofpossession to

the INVESTOR.

The Investor has given the first leasing rights to the Developer

and Developer hereby assures the investor that they will

assist the Investor in leasing out the shop as per general

market trends and practices prevailing till time ofpossession.

The developer further assures the investor that if they are not

able to lease the unit till possession they will pay the amount

of Rs. 1,10,000/-per month w.e.f. dated ofpossession till unit

is first leased out."

20. From the aforesaid agreement/ Memorandum of Understanding it is clear

that appellants are "investors" and has chosen "committed return plan". The

respondent in their turn agreed upon to pay monthly committed return to 17

investors. Thus, the amount due to the appellants come within the meaning of

'debt' as defined in Section 3(11) of the Cf & B Code' which reads as follows:-

"(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;"

21. The appellants have enclosed the annual return of Respondent-Corporate

Debtor dated 31St March 2014. Therein the amount deposited by 'investors'

including the appellants as has been shown as committed return while giving the

'financial cost"/ at par with interest on loans, as shown below:-

"27 FINANCIAL COSTS Interest on Loans 39,83,980.89.00 9,33,359.01.00 Leasing Charges 5,93,29,559.00 1,96,67,593.00 Interest & Penalties for non-compliance 55,85,518.00 59,75,659.05 Commitment charges 15,30,9 1,296.00 32,32,97,199.00 Processing Fee 7,49,449.00 Bank Charges 7,76,690.19 4,71,313.03

23,35,16,293.00 35,03,45,123.09-

22. Form 16-A shows the TDS deducted from the interest earned by the

appellant Nikhil Mehta under Section 194-A of the Income Tax Act 1961. Therein

summary of payment including amount credited has been shown as follows:-

Summary of Payment Amount Nature of Date of Status of paid/credi Payment payment/credit Booking ted (dd/mm/yyyy) () 41,107.00 194A-Interest 30/04/2011 MATCHED other than Interest on Securities 18

41,107.00 194A-Interest 30/05/2011 MATCHED other than Interest on Securities 41,107.00 194A-Interest 30/06/2011 MATCHED other than Interest on Securities Summary of Tax Deducted at Source in respect of deductee Quarter Receipt Numbers Amount of tax Amount of of original deducted in tax quarterly respect of the deposited/re statements of deductee mitted in TDS under sub- () respect of section (3) of deductee section 200 ()

Qi BHRXHRAC 12,333.00 12,333.00

23. From the 'Annual Return' of the Respondent and Form-16A, we find that

the 'Corporate Debtor' treated the appellants as 'investors' and borrowed the

amount pursuant to sale purchase agreement for their commercial purpose

treating at par with 'loan' in their return. Thereby, the amount invested by

appellants come within the meaning of 'Financial Debt', as defined in Section

5(8)(f) of I & B Code, 2016 subject to satisfaction as to whether such disbursement

against the consideration is for time value of money, as discussed in the

subsequent paragraphs.

24. Learned Adjudicating Authority has rightly highlighted the opening word of

the definition clause which indicate that a 'financial debt' is a debt along with

interest which is disbursed against the consideration for the time value of

money and may include any of the events enumerated in sub-clause (a) to (i).

Therefore, it is to be seen whether the amount paid by the appellants to the

Corporate Debtor, fulfil the other condition of "disbursement against

consideration of time value and money", to come within the definition of "Financial 19

Creditor" having satisfied that the Corporate Debtor raised the amount through a

transaction of sale and purchase of agreement having commercial effect of a

borrowing (Section 5(8) (f)).

25. 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 20

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'.

26. Learned Adjudicating Authority while rightly interpreted the provisions of

law to understand the meaning of expression 'financa1 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".

27. For the reasons aforesaid, we set aside the impugned judgement dated 23rd

January 2017 passed by the learned Adjudicating Authority in C.P.No. (ISB)-

03(PB)/2017 and remit the matter to Adjudicating Authority to admit the

application preferred by appellants and pass appropriate order, if the application

under Section 7 of the 'I & B Code' is otherwise complete. In case it is found to be

not complete, the appellants should be given seven days' time to complete the

application as per proviso to Section 7 of the 'I & B COde'.

28. The appeal is allowed with aforesaid observations and directions. However,

in the facts and circumstances, there shall be no order as to cost.

(Balvinder Singh) (Justice S.J. Mukhopadhaya) Member (Technical) Chairperson

NEW DELHI 21st July, 2017 sm