Pec Limited vs Phulchand Exports Private Limited

PEC Ltd. ... Appellant A Government of India Enterprise, MMTC DRO, Block F, Third Floor, Flatted Factory Complex, Jhandewalan Extension, Karol Bagh, Delhi 110055.

Versus

M/s. Phulchand Exports Pvt. Ltd. ...Respondent

2nd Floor, West Wing Electric Mansion, Appasaheb Marathe Marg, Worli, Mumbai - 400025.

Present

For Appellant: Mr. Krishan Kumar, Mr. Nitin Pal, Advocates

For Respondent: Mr. Arun Kathpalia, Sr. Advocate, Ms. Natasha Dalmia, Mr. Umang Mehta and Mr. Suchakshu Jain, Advocates

Judgment (Date:22.08.2022)

(Per: Dr. Alok Srivastava)

This appeal has been filed by PEC Limited ('Appellant') under

section 61 of the Insolvency and Bankruptcy Code, 2016

(hereinafter called 'IBC') aggrieved by the order dated 27.8.2021

Company Appeal (AT) (Insolvency) No. 1071 of 2021 Page 1 of 25 (hereinafter called 'Impugned Order') passed by the NCLT, Mumbai

Bench - (C-III) (the Adjudicating Authority) in CP. (IB)-63/MB/2020.

2. In brief, the facts of the case are that six contracts for

procurement, shipping and export of iron ore, were entered into

between M/s. Phulchand Exports Pvt. Ltd. (Corporate Debtor) and

PEC Limited (so-called Financial Creditor) between 3.11.2010 and

12.7.2012 (called 'Associate Supplier Contract') leading to a

disbursement of Rs. 63.57 crores. This amount was advanced by

the so-called Financial Creditor/Appellant to the Corporate Debtor

as packing credit. This agreement was preceded by a back to back

contract (hereinafter called 'Foreign Contract') entered into between

M/s. Networth Trading Pte Ltd., Singapore (buyer) and PEC Ltd, New

Delhi (seller) for supply of iron ore fines on 2.11.2010. It is stated

by the Appellant that before he could export the iron ore fines to the

buyer in China, the Hon'ble Supreme Court issued directions

imposing ban on export of iron ore from Goa and hence the shipment

could not be done.

3. It is further claimed by the Appellant that it sent a letter on

8.9.2014 to M/s. Phulchand Exports Pvt. Ltd./Respondent for

making payment of the outstanding amount of Rs. 73,84,12,693/-

in respect of the above-mentioned six contracts, to which the

Respondent sent a reply dated 15.9.2014 admitting that the said Company Appeal (AT) (Insolvency) No. 1071 of 2021 Page 2 of 25 amount was due and proposing to repay the outstanding dues in

instalments. Since the Respondent failed to make payment of the

outstanding amount as promised, he was sent reminders vide e-mail

dated 8.10.2014 and letters dated 31.12.2014, 13.1.2015 and

5.2.2015 to the Respondent asking for outstanding payment.

Thereafter, both the parties entered into negotiations to arrive at a

settlement of pending dues, but these efforts were unsuccessful,

whereupon, the Appellant filed an application under section 7 of the

IBC for insolvency resolution of the Corporate Debtor. This

application was dismissed vide Impugned Order dated 27.8.2021.

Grounds of Appeal

4. The Appellant has preferred the appeal claiming that he, as

Financial Creditor, has provided financial assistance in the form of

packing credit to the Respondent/Corporate Debtor for procurement

of iron ore to be exported to a foreign buyer, retaining a trade margin

@ 1% of the Free on Board (FOB) value of the shipment. The

Appellant had earlier entered into a buyer-seller contract with a

foreign buyer M/s Networth Trading Pte Ltd. for supply of iron ore

fines at a port in China. In accordance with clause 6 of the Associate

Supplier Contract, the Appellant gave interest-bearing finance to the

Respondent. Upon demanding payment of the amounts so given by

the Appellant, cheques were issued by the Respondent for Company Appeal (AT) (Insolvency) No. 1071 of 2021 Page 3 of 25 repayment (which were later dishonoured), which show that the

debt is due and payable. Further, the Respondent has given

confirmation of the debt, though 'without prejudice', which should

be taken as admission of his liability to repay the outstanding

amount. Further, the liability is admitted/ acknowledged by the

Respondent through various e-mails and letters, which are stated in

clause (G) of para 9 at page 30 of the appeal paperbook, Vol. I.

Furthermore, the Associate Supplier Agreement is basically an

agreement for financial assistance and since the outstanding debt

was acknowledged within a period of 3 years from the date of filing

the section 7 application, it is within limitation and in accordance

with clause (f) of the sub-section 8 of section 5 of the IBC, the

outstanding amount payable by the Respondent is covered in the

definition of 'financial debt'.

5. We heard the arguments of the learned counsels of both the

parties and perused the record.

6. The Learned Counsel for Appellant has argued that six

agreements were signed between the Appellant and Respondent

during the period 3.11.2010 to 12.7.2012 and in accordance with

these agreements a total amount of Rs.62.57 crores was disbursed

to the Respondent. He has referred to one such agreement dated

3.11.2010 between the Appellant and Respondent (hereinafter Company Appeal (AT) (Insolvency) No. 1071 of 2021 Page 4 of 25 called 'Associate Supplier Agreement') to argue his case. The

Associate Supplier Agreement provided that the Associate Supplier

(Respondent) shall perform, fulfill and observe all the obligations,

covenants and agreements and observe under, in terms so of or by

virtue of the foreign contract, in consultation with the Associate

Supplier. He has further argued that financial assistance in the

form of interest bearing advance was given by the Appellant to the

Respondent in accordance with clause 5 of the Associate Supplier

Agreement (attached at pp. 77-78 of the appeal paperbook Vol. I),

and, thus, this financial assistance was given for time value of

money.

7. He has further referred to the judgment of this tribunal in the

matter of PEC Ltd. vs. M/s. Sree Ramakrishna Alloys Ltd. [CA

(AT) (INS) 225 of 2017) and PEC Ltd. vs. M/s. Sri Gangadhara

Steels Limited [CA (AT) (Ins.) No. 236 of 2017] in which by a

common judgment dated 13.12.2017 the financial assistance

provided by PEC Ltd. was held to be financial credit. He has also

claimed that the agreements under consideration in the

aforementioned cases were similar to the agreement in the present

appeal and, hence, the financial assistance provided by the

Appellant in this appeal should be classified as a financial debt on

the same basis. In this connection, he has referred to paragraph 19

Company Appeal (AT) (Insolvency) No. 1071 of 2021 Page 5 of 25 of the judgment dated 13.12.2017 in aforementioned matters to

emphasize that in a similar situation M/s. PEC Limited was

considered as Financial Creditor.

8. On the point of limitation, the Learned Counsel for Appellant

has referred to the acknowledgment dated 15.9.2014 sent by the

Respondent (attached at pp.126-127 of the appeal paperbook, Vol.I),

wherein the Respondent had agreed to repay Rs. 12 crores towards

old outstanding dues between 30.9.2014 to 5.10.2014 and Rs. 50

crores each in quarterly instalments starting from October, 2014 till

June, 2015 for a total of Rs. 57 crores. He has also stated that the

Financial Creditor vide his e-mail dated 8.10.2014, addressed to the

Corporate Debtor, provided the details of the outstanding dues

contract-wise. He has further referred to the letters of the Appellant

dated 8.9.2014 (attached at pg. 125 of the appeal paperbook, vol. I)

and 17.9.2014 (attached at pg. 128 of the appeal paperbook, vol. I)

to emphasize that the outstanding payments due to the appellant

from the respondent were communicated to the Respondent/

Corporate Debtor, who accepted this position and agreed to make

repayment vide letter dated 15.9.2014. He has strongly argued that

since the financial credit was provided to the Corporate Debtor and

the outstanding payments are due to the Appellant/Financial

Creditor as admitted by the Corporate Debtor in the aforesaid

Company Appeal (AT) (Insolvency) No. 1071 of 2021 Page 6 of 25 communications. The financial debt is due and payable to the

Financial Creditor, and, therefore section 7 application filed by the

Appellant ought to have been admitted by the Adjudicating

Authority.

9. The Learned Senior Counsel for Respondent has argued that

the main contract for supply of iron ore fines was executed between

the Networth Trading Pte Limited, Singapore and PEC Limited, New

Delhi as buyer and seller respectively (attached at pp.39-56 of the

reply of Respondent, submitted vide dy. No. 34278 dated

14.3.2022), wherein the seller PEC Limited has contracted to supply

1,00,000 WMTS ± 5% at seller option to the buyer Networth Trading

Pte. Ltd. He has argued that in connection with the supply to the

foreign party, the Appellant has entered into an agreement on

3.11.2010 with the Respondent (called the 'Associate Supplier')

(attached at pp. 77-80 of the appeal paperbook, Vol.I) whereby the

Respondent, as Associate Supplier, has undertaken to fulfill,

perform and discharge obligations and responsibilities of PEC Ltd.

as per aforementioned foreign contract, and therefore, the

relationship between the Appellant and Respondent is that of

Principal and Agent and not of a Financial Creditor and Corporate

Debtor.

Company Appeal (AT) (Insolvency) No. 1071 of 2021 Page 7 of 25

10. The Learned Senior Counsel for Respondent has also referred

to paragraphs 23 and 24 of the Impugned Order to point out that

the Adjudicating Authority has surmised that the contract between

the Appellant and Respondent is akin to one between Principal and

Agent and the Respondent works as Agent of the Appellant (who is

the Principal), who has been given an interest bearing advance to

fulfill all obligations and responsibilities of the Principal/PEC

Limited. He has further pointed out that in Part-IV of section 7

application (attached at pp.187-220 of the appeal paperbook, Vol.II),

no date of default has been explicitly stated in Part IV of this

application. He has thus claimed that in the absence of any date of

default even the amount claimed as financial debt cannot be said to

be due and payable to the Financial Creditor. He has referred to

para 28 of the Impugned Order, where the Adjudicating Authority

has held as follows:-

"Therefore, it again reinforces the fact that this advance has not been made for the time value of money, but for procurement of iron ore and shipping it to the foreign buyer as per the foreign contact entered between the parties. This also clearly shows that it is an operational debt, an advance bearing a rate of interest to procure goods on behalf of the Petitioner to supply to the foreign buyer, where, the Petitioner is the 'Supplier', on a given shipment date i.e., 31.12.2013."

11. The Learned Senior Counsel for Respondent has also

submitted that the Foreign Contract has a 'Force Majeure' clause, Company Appeal (AT) (Insolvency) No. 1071 of 2021 Page 8 of 25 which according to clause 3 of the Associate Supplier contract has

to be abided by the Associate Supplier. He has stated that the 'Force

Majeure' condition in clause 14 of the Foreign Contract' entitles

either of the parties, which is unable to fulfill any obligation under

the contract, to inform the other party of the existence of the

circumstances preventing the performance of the contract within 15

days of occurrence of any of the causes of 'Force Majeure'. He has

further pointed out that the 'Force Majeure' clause covers 'act of

Government' among other causes/events as valid causes of inability

to perform whole or in part any obligation under the contract. He

has also referred to the 'Terms of Payment' included in the Foreign

Contract and Associate Supplier Contract which entitles PEC Ltd.

to receive payment within 7 days from the dispatch of documents

and proceeds from the foreign buyer, and after due deductions of

the payments made by the PEC directly to the Associate Supplier or

to the vendors on the advice of Associate Supplier including PEC's

trading margin, taxes, duties, levies, interest, ocean freight, etc. due

amounts are to be paid to the Associate Supplier. He has pointed

out that reading the 'Terms of Payment' included in both the

contracts/agreements together, it is quite clear that the payment is

to be first received by PEC Limited and after making due deductions

for payments made by PEC directly, the remaining amount is to be

paid to the Associate Supplier.

Company Appeal (AT) (Insolvency) No. 1071 of 2021 Page 9 of 25

12. It is thus clear that there is no repayment schedule stipulated

in the Associate Supplier Agreement and the payment will be made

to PEC Ltd. only after the shipment of the iron ore fines, which was

not made in the present case, as the iron ore was confiscated by the

government authorities and, therefore, no payment was received

from the foreign buyer. He has strongly argued that in such a

situation when no payment was received from the foreign buyer in

the event of 'force majeure' how could PEC Ltd, realise the amount

given to the Associate Supplier and so there was no actual default

in payment by the Respondent to the Appellant.

13. The main issue that arises in this appeal is whether the said

amount given by the so-called Financial Creditor (Appellant) to the

Corporate Debtor (Respondent) is a financial debt under the IBC,

and if it is so, then is the repayment of the debt in respect of the

claim in default and due and payable to the Appellant.

14. We reproduce below the definitions given in IBC which are

relevant for the present appeal:-

"3. Definitions. In this Code, unless the context otherwise requires, -

Xxxx xxxx xxxx

Company Appeal (AT) (Insolvency) No. 1071 of 2021 Page 10 of 25 (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.

(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 paid by the debtor or the corporate debtor, as the case may be."

"5. Definitions - In this Part, unless the context otherwise requires, -

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

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

Xxx xxx xxx xxx

(21) "operational debt' means a claim in respect of the provision of goods or services including employment or a debt in r4espect 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."

15. The Associate Supplier Agreement dated 3.11.2010 and the

Foreign Contract dated 2.11.2010 are also relevant for disposal of

this appeal (attached at pp.77-80 of the appeal paperbook, Vol. I)

and the relevant portions of both the agreement and contract are

reproduced below:

Company Appeal (AT) (Insolvency) No. 1071 of 2021 Page 11 of 25 I. Extracts from ASSOCIATE SUPPLIER AGREEMENT

Xxx xxx xxx xxx

AND WHEREAS the 'Associate Supplier' has agreed to fulfill, perform and discharge the obligations and responsibilities of PEC under, in terms of and by virtue of the above said Foreign Contract in the manner and on the terms and conditions as contained in the Foreign Contract and/or which PEC have imposed.

Xx xx xx xx

1. SCOPE OF AGREEMENT

The 'Associate Supplier' shall, unless inconsistent with the provisions of the Agreement perform, fulfill and observe all the obligations covenants and agreements and observe under, in terms of or by virtue of the 'Foreign contract' including obligations, agreement and covenants, as made in consultation with the 'Associate Supplier' be modified or provided for in the Foreign contract in future. The obligations, covenants and agreements as have been agreed to be performed, fulfilled and observed by the 'Associate Supplier', shall include, without being restricted to procure and supply iron ore fines, undertake all logistics involved, in export of iron ore fines to China right from the loading into trucks at pithead in the Mines upto loading into the ship at Panjim/Mormugao, Goa loading port, chartering of vessel if any including inspection and fulfilling of warranties/guarantees under the Foreign Contract.

Xx xx xx xx

3. TERMS OF FOREIGN CONTRACT:

The 'Associate Supplier' shall abide by all the terms and conditions of the foreign contract appended as ANNEXURE - I. The 'Foreign Contact' shall form an integral and inseparable part of this agreement contents of 'foreign contract' shall not be Company Appeal (AT) (Insolvency) No. 1071 of 2021 Page 12 of 25 disclose to any third party without PEC's written permission to this effect.

Xx xx xx xx

5. FINANCIAL ASSISTANCE:

5.1 At the request of Associate Supplier PEC may consider to give an interest bearing advance to Associate Supplier so as to facilitate them to fulfill, perform and discharge all the obligations and responsibilities of PEC under, in terms of and by virtue of the Order, in the matter and on the terms and conditions therein contained and/or by which PEC have imposed.

5.2 In such an event, Associate Supplier shall make payment to various vendors and submit the receipts to PEC. PEC shall make the interest bearing advance payment for such expenses equal to the value for which receipts have been submitted subject to 90% of the contract value as packing credit. Iron Ore fines with value addition at each stage shall remain pledged to PEC till it is exported.

5.3 Interest @ 9% p.a on monthly rest basis shall be chargeable on the amounts advanced to the associate Supplier and if for any reason Associate Supplier are not able to supply the material as per foreign contract, Associate supplier shall pay to PEC interest @ 11.5% p.a. on monthly rest on the payments already made by PEC on their advice and refund the principal and interest amount immediately.

6. PEC'S TRADING MARGIN

PEC's trading margin shall be @ net 1% (one percent) of FOB value of the 'Foreign Contract' which along with other PEC dues shall be deducted from the realization of each negotiation, balance amount of any, due to Associate Supplier shall be paid thereafter.

Company Appeal (AT) (Insolvency) No. 1071 of 2021 Page 13 of 25

7. TERMS OF PAYMENT

PEC shall receive the payment within seven days from dispatch of documents and proceeds will be given to Associate Supplier after deducting all the payments made by PEC directly to the Associate Supplier or to the vendors on the advise of Associate Supplier, including PEC's trading margin, taxes (illegible) levies, interest, ocean freight, if paid by PEC etc. The difference in the Account shall be settled and paid to Associate Supplier within 5 banking days of settlement of each shipment.

II. Extracts from FOREIGN CONTRACT

Xxx xxx xxx xxx

The contract is made by and between the buyer and seller whereby the Buyer agrees to buy and the Seller agrees to sell the under mentioned goods for China, on the terms and conditions stated below:-

CLAUSE 1 NAME OF COMMODITY: 50.00% FE IRON ORE FINES

COUNTRY OF ORIGIN: India PACKING: In bulk Port of loading: Mormugao, India Port of Destination: One Main Port, China

CLAUSE 2 SHIPMENT PERIOD AND QUANTITY

Quantity: 1,00,000 WMTS ± 5% at Seller's option

Shipment: On or before 31st Dec. 2010

Partial Shipment: Allowed

Company Appeal (AT) (Insolvency) No. 1071 of 2021 Page 14 of 25 CLAUSE 6 PAYMENT

Buyer shall arrange payment within 7 days from the dispatch of documents from sellers bank.

CLAUSE 14 FORCE MAJEURE

If at any time during the existence of this contract either party is unable to perform whole or in part any obligation under this contract, because of war, hostility, military operation of any character, and commotion's, sabotage, quarantine restriction, acts of Government, acts of God, fie, floods, explosions, epidemics, strikes or other labour trouble, embargoes including all natural calamities then the date of fulfillment of any obligation shall be postponed during the time when such circumstances are operative.

Any waiver/extension of time in respect of the delivery of any installment or part of the goods shall not be deemed to be waiver/extension of time in respect of the remaining deliveries. If operation of such circumstances exceeds two months, either party will have the right to refuse further performance of the contract in which case neither party shall have the right to claim eventual damages.

The party which is unable to fulfill its obligations under the present contract must within 15 days of occurrence of any of the causes mentioned in this clause, shall inform the other party of the existence of the circumstances preventing the performances of the contact. Certificate issued by a Chamber of Commerce or any other competent authority connected with the cause in the country of the Seller or the buyer shall be sufficient proof of the existence of the above circumstances and their duration. Non-availability of material will not be an excuse to the Sellers for not performing their obligations under this contract."

Company Appeal (AT) (Insolvency) No. 1071 of 2021 Page 15 of 25

16. It is clear from the pleadings and documents submitted by the

parties that the Foreign Contract was entered into between the

buyer Networth Trading Pte Limited and seller PEC Ltd. on

2.11.2010. Thereafter, for fulfillment of this contact, an agreement

(referred as 'Associate Buyer Agreement') was signed on the next day

i.e. 3.11.2010 between the Appellant and Respondent. The Foreign

Contract is regarding procurement and shipment of 1,00,000 WMTS

± 5% at seller's option of iron ore fines from Mormugao Port, India

to a port in China. The payment condition included on the contract

mentions that the buyer shall arrange payment within 7 days from

the date of dispatch of documents from seller bank. Thus, payment

is to be made by the buyer Networth Trading Pte Ltd. to the seller

PEC Ltd. after shipment from Mormugao Port in India. The other

contract, which is the Associate Supplier Agreement' states that the

Associate Supplier shall fulfill, perform and discharge obligations

and responsibilities of PEC Ltd. in terms of and by virtue of the

foreign contract, which include procurement and supply of iron ore

fines, undertake all logistics involved in export of iron ore fines to

China right from the loading into trucks at pithead in the mines

upto loading into the ship at Panjim/Mormugao, Goa loading port,

chartering of vessel if any including inspection and fulfilling of

warranties/guarantees under the Foreign Contract. The Foreign

Contract also stipulates that the Associate Supplier shall abide by

Company Appeal (AT) (Insolvency) No. 1071 of 2021 Page 16 of 25 the terms and conditions of the foreign contract and foreign contract

shall form an integral and inseparable part of this agreement i.e.

Associate Supplier agreement (reference clause 4 of the Associate

Supplier Agreement).

17. The financial assistance, which is included in clause 5 of the

Associate Supplier Agreement, provides that PEC Ltd. may consider

to give an interest-bearing advance to Associate Supplier so as to

facilitate them to fulfill, perform and discharge all the obligations

and responsibilities of PEC under, in terms of and by virtue of the

order, in the manner and on the terms and conditions therein

contained and/or by which PEC have imposed. Furthermore, the

iron ore fines shall remain pledged to PEC till they are exported.

Clause 5.3 provides for payment of interest @ 9% p.a. on the amount

advanced to the Associate Supplier and if, for any reason, the

Associate Supplier is not able to supply the material as per foreign

contract, Associate Supplier shall pay to PEC interest @ 11.5% p.a.

on monthly rest on the payments already made by PEC on their

advice and refund the principal and interest amount immediately.

Furthermore, the clause 7 - 'Terms of Payment' - in the Associate

Supplier Agreement stipulates that PEC shall receive the payment

within seven days from the dispatch of documents and proceeds will

be given to Associate Supplier after deducing all the payments made

Company Appeal (AT) (Insolvency) No. 1071 of 2021 Page 17 of 25 by PEC directly to the Associate Supplier or to the vendors,

including PEC's trading margin of 1% of FOB value, taxes, levies,

interest, ocean freight, if paid by PEC. The difference in the account

will be paid to the Associate Supplier by PEC Ltd.

18. From the above discussion, it is abundantly clear that a

buyer-seller contract was entered into between the Networth

Trading Pte Limited, Singapore and PEC Limited on 2.11.2010 and

in furtherance of contract, PEC entered into an agreement with the

Associate Supplier Phulchand Exports Pvt. Ltd. (Respondent)

through a separate agreement dated 3.11.2010. The financial

assistance provided to the Associate Supplier by PEC Ltd. is to fulfill,

perform and discharge the obligations and responsibilities of PEC

under the foreign contract. It is clear that the amount provided by

PEC as financial assistance, and claimed by it as financial debt

under IBC, is basically for purchase, shipment and export of iron

ore fines in fulfilment of the foreign contract. This amount is

certainly not an amount given by PEC Ltd. as a financial creditor to

a corporate entity M/s Phulchand Exports to ensure its overall

financial viability.

19. In this regard, the following two judgments of Hon'ble

Supreme Court provide much clarity regarding the purpose of

Company Appeal (AT) (Insolvency) No. 1071 of 2021 Page 18 of 25 financial debt in ensuring the financial viability of the corporate

debtor:

I. Swiss Ribbons Pvt. Ltd. & Anr. Vs. Union of India & Ors.

[2019 SCC OnLine SC 73, decided on 25.01.2019]

"27. According to us, it is clear that most financial creditors, particularly banks and financial institutions, are secured creditors whereas most operational creditors are unsecured, payments for goods and services as well as payments to workers not being secured by mortgaged documents and the like. The distinction between secured and unsecured creditors is a distinction which has obtained since the earliest of the Companies Acts both in the United Kingdom and in this country. Apart from the above, the nature of loan agreements with financial creditors is different from contracts with operational creditors for supplying goods and services.

Financial creditors generally lend finance on a term loan or for working capital that enables the corporate debtor to either set up and/or operate its business. On the other hand, contracts with operational creditors are relatable to supply of goods and services in the operation of business.

Financial contracts generally involve large sums of money. By way of contrast, operational contracts have dues whose quantum is generally less. In the running of a business, operational creditors can be many as opposed to financial creditors, who lend finance for the set up or working of business. Also, financial creditors have specified repayment schedules, and defaults entitle financial creditors to recall a

Company Appeal (AT) (Insolvency) No. 1071 of 2021 Page 19 of 25 loan in totality. Contracts with operational creditors do not have any such stipulations. Also, the forum in which dispute resolution takes place is completely different. Contracts with operational creditors can and do have arbitration clauses where dispute resolution is done privately.

Operational debts also tend to be recurring in nature and the possibility of genuine disputes in case of operational debts is much higher when compared to financial debts. A simple example will suffice. Goods that are supplied may be substandard. Services that are provided may be substandard. Goods may not have been supplied at all. All these qua operational debts are matters to be proved in arbitration or in the courts of law. On the other hand, financial debts made to banks and financial institutions are well-documented and defaults made are easily verifiable.

28. Most importantly, financial creditors are, from the very beginning, involved with assessing the viability of the corporate debtor. They can, and therefore do, engage in restructuring of the loan as well as reorganization of the corporate debtor's business when there is financial stress, which are things operational creditors do not and cannot do. Thus, preserving the corporate debtor as a going concern, while ensuring maximum recovery for all creditors being the objective of the Code, financial creditors are clearly different from operational creditors and therefore, there is obviously an intelligible differentia between the two which has a direct relation to the objects sought to be achieved by the Code."

(Emphasis supplied) Company Appeal (AT) (Insolvency) No. 1071 of 2021 Page 20 of 25 II. Anuj Jain, Interim Resolution Professional for Jaypee Infratech Ltd. V. Axis Bank Ltd. (2020) 8 SCC 401

"50. A conjoint reading of the statutory provisions with the enunciation of this Court in Swiss Ribbons [Swiss Ribbons (P) Ltd. v. Union of India, (2019) 4 SCC 17] , leaves nothing to doubt that in the scheme of the IBC, what is intended by the expression "financial creditor" is a person who has direct engagement in the functioning of the corporate debtor; who is involved right from the beginning while assessing the viability of the corporate debtor; who would engage in restructuring of the loan as well as in reorganisation of the corporate debtor's business when there is financial stress. In other words, the financial creditor, by its own direct involvement in a functional existence of corporate debtor, acquires unique position, who could be entrusted with the task of ensuring the sustenance and growth of the corporate debtor, akin to that of a guardian. In the context of insolvency resolution process, this class of stakeholders, namely, financial creditors, is entrusted by the legislature with such a role that it would look forward to ensure that the corporate debtor is rejuvenated and gets back to its wheels with reasonable capacity of repaying its debts and to attend on its other obligations. Protection of the rights of all other stakeholders, including other creditors, would obviously be concomitant of such resurgence of the corporate debtor."

(Emphasis supplied)

Company Appeal (AT) (Insolvency) No. 1071 of 2021 Page 21 of 25

20. The terms of payment included in the Foreign Contract and

Associate Supplier Agreement make it clear that the payment is to

be received by PEC Limited from the buyer Networth Trading Pte

Limited and after deduction of amount advanced to M/s. Phulchand

Exports Pvt. Ltd., the trading margin and other taxes and related

expenses paid by PEC Ltd., the remaining amount shall be paid to

M/s Phulchand Exports Pvt. Ltd. Therefore, the financial assistance

provided by PEC Ltd. is for the express purpose of buying, shipping

and exporting iron ore fines limited to the performance of the

Foreign Contract and is in no way to be used for assessing the

financial viability of the corporate debtor and in ensuring the

financial strength of the corporate debtor. Moreover, as has been

noted earlier, the payment from the buyer is to be received by PEC

Ltd. and remaining amount is to be made to M/s Phulchand Exports

after making due adjustment of payments already made by PEC Ltd.

It is clear that there is no repayment schedule of the financial

assistance given nor there is any clear event of default (except in a

Force Majeure situation) or a date of default. Thus we find no force

in the argument of the Learned Counsel of Appellant that since the

amount given by the Appellant to the Respondent is interest bearing,

it is a financial debt.

Company Appeal (AT) (Insolvency) No. 1071 of 2021 Page 22 of 25

21. An examination of the debt given as advance by PEC Ltd. in

the light of the definitions provided in sub-section 11 of section 3

and clause (f) of sub-section 8 of section 5 of the IBC makes it clear

that while the amount advanced by PEC to M/s. Phulchand Exports

Pvt. Ltd. would be a debt under the definition given section 3(11) of

the IBC, it should have the commercial effect of borrowing, and more

so a borrowing that helps in ensuring financial viability of the

corporate debtor for it to qualify as 'financial debt' under the IBC.

Therefore, we are of the view the amount provided by PEC Ltd. as

interest-bearing advance to the Respondent does not qualify to be a

'financial debt' as defined under the IBC.

22. Another point raised by the Learned Senior Counsel for

Respondent is that no clear date of default is provided in Part IV of

the section 7 application. We note that the Adjudicating Authority

has gone at length in inferring the date of default even though no

date of default of the financial debt is explicitly stated in section 7

application. We have earlier noted that the payment is to be made

by the buyer of iron ore fines after their shipment to PEC Ltd. No

repayment schedule is included in the Associate Supplier Agreement

and in the absence of any obligation of repayment there is no clear

date of default. Thus it remains a moot point whether the so-called

debt is in default of repayment.

Company Appeal (AT) (Insolvency) No. 1071 of 2021 Page 23 of 25

23. The Learned Senior Counsel for Respondent has also argued

that the actual shipment did not take place since the iron ore fines

slated for shipment were confiscated by the Government

Authorities. Hence, neither any shipment of iron ore fines took place

from the Mormugao Port to China nor any payment in connection

with the proposed shipment was received by PEC Ltd. The said

event is covered under the 'Force Majeure' clause of the foreign

contract and the parties are entitled to enforce their rights in such

an event of 'force majeure' in accordance with the Associate Supplier

Agreement and not as financial creditor/debtor.

24. We note that in the judgment dated 13.12.2017 in the matter

of PEC Ltd. vs. M/s. Sree Ramakrishna Alloys Ltd. (supra) and

PEC Ltd. vs. M/s. Sri Gangadhara Steels Limited (supra) wherein

this tribunal had considered the amount given by PEC Ltd. to the

Respondent to be financial debt. The issue of a debt being financial

debt was considered in detail by the Hon'ble Supreme Court in the

judgments dated 25.1.2019 in the matter of Swiss Ribbons Pvt.

Ltd. & Anr. Vs. Union of India & Ors. (supra) and judgment dated

26.2.2020 in the matter of Anuj Jain, Interim resolution

Professional for Jaypee Infratech Ltd. vs. Axis Bank Ltd. (supra)

respectively. In the light of the ratio in both these judgments of

Hon'ble Supreme Court which has been reproduced earlier in this

Company Appeal (AT) (Insolvency) No. 1071 of 2021 Page 24 of 25 judgment, we consider the amount advanced by M/s. PEC Ltd. to

M/s. Phulchand Exports Pvt. Ltd. as not being financial debt under

the IBC.

25. In view of the detailed aforementioned discussion, we are of

the view that the amount as claimed by the Appellant does not fall

in the category of 'financial debt' as defined in the IBC. Since the

debt in question in this appeal is not classified as a 'financial debt'

and the Appellant has sought relief under Section 7 of the IBC, we

do not consider it necessary to go into the issue of repayment and

default of such a debt. We, therefore, hold the clear view that the

Adjudicating Authority has not erred in passing the Impugned

Order, whereby the Section 7 application of the Appellant has been

dismissed. The appeal, thus, fails and is accordingly dismissed.

26. There is no order as to costs.

(Justice Rakesh Kumar Jain) Member (Judicial)

(Dr. Alok Srivastava) Member (Technical) New Delhi 22nd August, 2022 /aks/

Company Appeal (AT) (Insolvency) No. 1071 of 2021 Page 25 of 25