Rashpal Singh Todd vs Volkswagen Finance Private Limited

(Arising out of Order dated 22nd March, 2021 passed by National Company Law Tribunal, Chandigarh Bench, Chandigarh in CP(IB) No. 262/Chd/Hry/2018 with CA Nos. 566/2019 & 1145/2019).

IN THE MATTER OF:

Mr. Rashpal Singh Todd Son of Sh. Ajit Singh (Shareholder/Director) E-26, South City-I Gurgaon, Haryana ...Appellant

Versus

1. M/s. Volkswagen Finance Pvt. Ltd. Having its Registered Office at: 3rd Floor, Silver Utopia, Cardinal Gracius Road ...Respondent No. 1 Off Andheri Kurla Road, Chakala Andheri (East) Mumbai - 400009

2. M/s. Zenica Performance Cars Pvt. Ltd. Through Interim Resolution Professional Sh. Rajender Kumar Jain At: House No. 3698/1, First Floor, Sector-46C, ...Respondent No. 2 Chandigarh - 160047. Email: amicusthe@gmail.com

3. Sh. Rajender Kumar Jain Interim Resolution Professional Registration No. IBBI/IPA-001/IP- ...Respondent No. 3 P00543/2017-18/10968 House No. 3698/1. First Floor, Sector 46C, Chandigarh - 160047. Email: amicusthe@gmail.com

Appellant: Mr. Amit Sibal, Sr. Advocate with Mr. Ajay Kohli, Mr. S.S. Sobti, Mr. Kaustubh Prakash, Mr. Saksham Dhingra, Mr. Vinay Tripathi and Ms. Priyanka Sethia, Advocates Respondents: Dr. Abhishek Manu Singhvi and Mr. Vikas Singh, Sr. Advocates with Ms. Nazia Parveen, Mr. Sanjeev Sagar, Mr. Utkarsh Singh, Mr. Vardhman Kausik, Mr. Abhishek Chand, Mr. Nishant Guatam, Mr. Dhruv Joshi, Azeem Samule, Advocates for R-1. Ms. Pallavi Singh, Advocate for RP -2-

With COMPANY APPEAL (AT) (INSOLVENCY) No. 313 of 2021

(Arising out of Order dated 22nd March, 2021 passed by National Company Law Tribunal, Chandigarh Bench, Chandigarh in CP(IB) No. 263/Chd/Hry/2018 with CA Nos. 565/2019 & 1146/2019).

IN THE MATTER OF:

Mr. Rashpal Singh Todd Son of Sh. Ajit Singh (Shareholder/Director) E-26, South City-I Gurgaon, Haryana ...Appellant

Versus

1. M/s. Volkswagen Finance Pvt. Ltd. Having its Registered Office at: 3rd Floor, Silver Utopia, Cardinal Gracius Road ...Respondent No. 1 Off Andheri Kurla Road, Chakala Andheri (East) Mumbai - 400009

2. M/s. Zenica Cars India Pvt. Ltd. Through Interim Resolution Professional Sh. Rajender Kumar Jain At: House No. 3698/1, First Floor, Sector-46C, ...Respondent No. 2 Chandigarh - 160047. Email: amicusthe@gmail.com

3. Sh. Rajender Kumar Jain Interim Resolution Professional Registration No. IBBI/IPA-001/IP- ...Respondent No. 3 P00543/2017-18/10968 House No. 3698/1. First Floor, Sector 46C, Chandigarh - 160047. Email: amicusthe@gmail.com

Appellant: Mr. Amit Sibal, Sr. Advocate with Mr. Ajay Kohli, Mr. S.S. Sobti, Mr. Kaustubh Prakash and Ms. Priyanka Sethia, Advocates Respondents: Dr. Abhishek Manu Singhvi and Mr. Vikas Singh, Sr. Advocates with Ms. Nazia Parveen, Mr. Sanjeev Sagar, Mr. Utkarsh Singh, Mr. Birendra Singh, Mr. Vardhman Kausik, Mr. Nishant Guatam, Mr. Prafful Singh, Mr. Dhruv Joshi, Azeem Samule, Advocates for R-1. Ms. Pallavi Singh, Advocate for RP

Company Appeal (AT) (Insolvency) No. 312 and 313 of 2021 -3-

JUDGEMENT

[Per: Shreesha Merla, Member (T)]

1. Challenging in these Appeals i.e. Company Appeal (AT) Ins. No. 312 of

2021 and Company Appeal (AT) Ins. No. 313 of 2021 is to the Impugned

Orders dated 22.03.2021 passed by the Learned Adjudicating Authority

(National Company Law Tribunal, Chandigarh Bench, Chandigarh) in

CP(IB) No. 262/Chd/Hry/2018 with CA Nos. 566/2019 & 1145/2019 and

CP(IB) No. 263/Chd/Hry/2018 with CA Nos. 565/2019 & 1146/2019

respectively. Since both these Appeals deal with common facts and

common parties, they are being disposed of by this common Order. By the

Impugned Orders dated 22nd March, 2021, the Adjudicating Authority has

admitted the Application filed under Section 7 of the Insolvency and

Bankruptcy Code, 2016 (hereinafter referred to as the 'Code') by M/s.

Volkswagen Finance Private Limited/Financial Creditor against M/s. Zenica

Performance Cars Private Limited (hereinafter referred to as 'ZPC/Dealer')

and M/s. Zenica Cars India Pvt. Ltd. (hereinafter referred as 'ZCI/Dealer').

2. Succinctly put, the facts in brief are:

 That the Corporate Debtor was appointed by Porsche India (M/s.

Volkswagen Group Sales India Pvt. Ltd.) as one of its Dealers for the

cars manufactured/trade by them; A preferred Financer Agreement

was executed between the Financial Creditor and Porsche India, on

account of which, the Corporate Debtor being a Dealer of Porsche

India applied for and was provided credit-Financial Facilities by the

Financial Creditor; the payment for the cars provided by Porsche

India was to be made by the Financial Creditor to the Manufacturer;

Company Appeal (AT) (Insolvency) No. 312 and 313 of 2021 -4-

All the cars provided by Porsche India to the Corporate Debtor under

this Financier Facility Agreement were hypothecated to the Financial

Creditor for the invoices raised by Porsche India; The Corporate

Debtor was to pay to the Financial Creditor the amount from the sale

proceeds of the cars towards repayment of the loan as well as agreed

upon interest. The Corporate Debtor was sanctioned a revolving

credit facility for purchase of new cars and also executed Facility

Agreements with the Financial Creditor for 'used cars' manufactured

by Porsche India. It is stated that the Corporate Debtor defaulted in

making payments under the Facility Agreements -Undertakings

executed by it and the Financial Creditor issued a Legal Notice on

10.05.201 recalling the loan and terminating the Agreements.

3. Submissions of the Learned Senior Counsel appearing on behalf

of the Appellant:

 Learned Sr. Counsel strenuously contended that M/s. Volkswagen

Finance Pvt. Ltd.- the First Respondent is not a 'Financial Creditor'

under Section 5 (7) of the Code as there is no 'Financial Debt' under

Section 5(8) of the Code as there is no disbursement or time value of

money. It is contended that there is no 'evidence of disbursement'

and no proof of 'debt' or 'default' and hence the Petition ought to not

have been admitted by the Adjudicating Authority.

 M/s. Porsche India was not made a party to the Petition though it

was pleaded that the payment for all the cars was to be made by the

Financial Creditor to Porsche India on behalf of the Corporate

Debtor.

Company Appeal (AT) (Insolvency) No. 312 and 313 of 2021 -5-

 In the absence of any evidence of the purported disbursement by the

First Respondent to the Manufacturer, the obligation on the part of

the Corporate Debtor to make the payment does not arise.

 A comparison of invoices raised by Porsche India show that for the

same vehicle, identified by VIN-Chassis, the First Respondent is

claiming purported 'debt' and 'default' and the Manufacturer is

raising invoices @ 21% penalty interest. It is the case of the First

Respondent that the Second Respondent has sold 39 cars and

malafidely did not pay for the same.

 It is raised in the counter affidavit by the First Respondent that the

fact that 'the cars were delivered to the Corporate Debtor is proof

enough that the payment was made to the Manufacturer'. The First

Respondent has also argued that 'cases are decided on pleadings'

and therefore it has to be construed that the First Respondent does

not have any other evidence to establish the 'disbursal of the

amount'.

 The alleged tax invoices do not bear the acknowledgment of the

Dealer and are raised by the Manufacturer referring to payment of

interest @ 21% and the same clearly contradicts the terms of the

Facility Agreement providing for payment of interest to the First

Respondent and that too at a floating rate of interest. Hence, the

element of disbursement is non-existent and the Petition is not

maintainable.

 The tabular form of pleadings as stated to be an excel-sheet does not

constitute any statement of account maintained in the ordinary

Company Appeal (AT) (Insolvency) No. 312 and 313 of 2021 -6-

course of business much less being of any evidentiary value and/or

even being admissible as 'evidence of disbursement' or 'debt' or

'default'. It is vehemently contended by the Learned Sr. Counsel that

mere pleadings do not constitute evidence and that the Excel-Sheet

is self-serving and created with self-service entries without any

material to substantiate the same and therefore, the requirement

under Section 7(3)(a) of the Code has not been met.

 The First Respondent has only given some identification numbers

without showing that such vehicles have in fact been delivered to the

Corporate Debtor.

 Though it is claimed in Part-IV of Form-1 that the date of default is

02.02.2018, the alleged default even as per the said tabulation refers

to only three instances and even in respect thereof it is shown that

principal and/or interest outstanding is 'NIL' and hence the said date

of default does not exist. It is denied that 39 cars have been sold

without accounting for the same. It is submitted that even as per

tabulation there are 15 instances wherein amounts shown against

the principal and/or interest outstanding is 'NIL', therefore it can be

said that the said Application has been filed to stifle the legitimate

claims raised on account of losses suffered by the Corporate Debtor

owing to the breaches committed by the Volkswagen Group.

 Even a certificate from the First Respondent is not filed to

acknowledge any such disbursement.

 The Application under Section 7 of the Code was incomplete and

does not comply with the mandatory requirements as envisaged

Company Appeal (AT) (Insolvency) No. 312 and 313 of 2021 -7-

under Section 7(2) of the Code, particularly under Form-1. The

Adjudicating Authority has directed on 10.09.2018 and on

19.09.2018 to furnish the accounts statement, but the First

Respondent failed to do so on the ground that the accounts

statement were voluminous.

 Prior to filing of the Section 7 Application, Arbitration Proceedings

between M/s. Volkswagen Group Sales India Pvt. Ltd. and M/s.

Zenica Cars India Pvt. Ltd. arising out of losses suffered by the

Zenica Group having regard to the 'Volkswagen Emissions Scandal'

and breach of warrantees were pending adjudication before the sole

Arbitrator-Hon'ble Mr. Justice S.J. Vazifdar, wherein Zenica Cars has

filed statement of defense along with a claim of Rs. 800 Crores

against M/s. Volkswagen Group Sales India Pvt. Ltd., a sister

concern of the first Respondent. It is contended that the present

Petition was merely an attempt to stall any recovery qua Volkswagen

Group. It is stated that the Arbitral Award in Comm Arb Pet 1497 of

2019, while deciding the validity of the appointment of Mr. D.K.

Sonawane as an arbitrator has been stayed by the Hon'ble High

Court of Bombay vide Order dated 23/12/2021.

 The Adjudicating Authority failed to consider Application I.A. No. 566

of 2019 prior to pronouncement of the Order in the main Application.

At best, the First Respondent could have filed the claim as an

'Operational Creditor', but intentionally filed an Application under

Section 7 of the Code fully aware that it had earlier invoked

Company Appeal (AT) (Insolvency) No. 312 and 313 of 2021 -8-

Arbitration and the same would amount to 'pre-existing dispute' as

defined under Sections 8 and 9 of the Code.

 It is submitted by Learned Sr. Counsel that M/s. Volkswagen Group

Sales Pvt. Ltd. while having initially filed a claim of Rs.

537,70,97,863/- has given up the claim of Rs. 524,91,60,000/-.

Therefore, it is apparent that the Application was filed with ulterior

motives with a view to avoid the liabilities and the Adjudicating

Authority failed to appreciate that merely because 'Notice' invoking

Arbitration has not been replied to, the said fact cannot amount to

admission of the contents of the said 'Notice' or facts.

 The Application was liable to be dismissed in as much as the First

Respondent suppressed that a Letter of Reference was issued by

them under Section 21 of the Arbitration and Conciliation Act, 1996

vide Reference dated 10.05.2018 against the Corporate Debtor as

well as the guarantors. The statement of claim was filed only qua the

guarantors before the Arbitral Tribunal. Therefore, the claims qua the

Corporate Debtor stood abandoned. The proceedings under this Code

were filed on 18.07.2018 subsequent to the Arbitral Proceedings and

hence are not maintainable. The First Respondent falsely represented

before the Arbitrator that the Corporate Debtor is undergoing

Insolvency Process and Moratorium had been issued and hence the

Corporate Debtor Company had not been arrayed as a party before

the Ld. Arbitrator. On strength of these submissions, the First

Respondent was able to get an Order in their favour. The Learned Sr.

Counsel submitted that on all these grounds the Petition filed under

Company Appeal (AT) (Insolvency) No. 312 and 313 of 2021 -9- Section 7 of the Code is not maintainable and hence the Impugned

Order ought to be set aside.

 Learned Sr. Counsel relied on Paragraph 64 of Judgment in 'Swiss

Ribbons Pvt. Ltd. & Anr. Vs. Union of India & Ors.', (2019) 4 SCC

17 in which the Hon'ble Apex Court has observed as under:

"64. The trigger for a financial creditor's application is non-payment of dues when they arise under loan agreements. It is for this reason that Section 433(e) of the Companies Act, 1956 has been repealed by the Code and a change in approach has been brought about. Legislative policy now is to move away from the concept of "inability to pay debts" to "determination of default". The said shift enables the financial creditor to prove, based upon solid documentary evidence, that there was an obligation to pay the debt and that the debtor has failed in such obligation"

 Learned Sr. Counsel also placed reliance on following Judgments in

support of his contentions:

1. Anuj Jain, IRP for Jaypee Infratech Limited Vs. Axis Bank & Ors. [Para 43, 46- 50], (2020) 8 SCC 401.

2. Surendra Trading Company Vs. Jugilal Kamplapat Jute Mills Company Limited & Ors. [Para 26], (2017) 1 SCC 407.

3. Innoventive Industries Limited Vs. ICICI Bank & Anr. [Para 27, 28, 30], (2018) 1 SCC 407.

4. Park Energy Pvt. Ltd. Vs. Syndicate Bank & Anr., 2020 SCC OnLine NCLAT 562

5. Supreme Commotrade LLP & Anr. Vs. Shree Sai Rolling India Ltd., 2020 SCC OnLine NCLAT 562

6. Urban Infrastructure Trustees Limited Vs. Neelkanth Realty Pvt. Ltd., 2019 SCC OnLine NCLAT 1232

7. Radha Exports (India) Pvt. Ltd. Vs. K.P. Jayaram & Anr. [Para 42], (2020) 10 SCC 538.

8. Nikhil Mehta and Infrastructure Ltd. [Para 17], 2017 SCC NCLAT 377.

9. Vishwa Nath Singh Vs. Visa Drugs & Pharmaceuticals Pvt. Ltd. [Para 16] 2017 SCC NCLAT 863 OnLine.

10. K.D. Sharma Vs. SAIL & Ors. [Para 38-39] (2008) 12 SCC 481.

11. S.P. Chengalvaraya Naidu (Dead) by LRS Vs. Jagannath (Dead) by LRS & Ors. [Para 6] 1994 1 SCC 1.

12. Charanji Lal & Ors. Vs. Financial Commissioner, Haryana, Etc. [Para 10 & 14] (1978) 2 ILR (PH) 361

13. Dr. Vishnu Kumar Agarwal Vs. Piramal Enterprises Ltd. [Para 29-33], 2019 SCC OnLine NCLAT 81.

Company Appeal (AT) (Insolvency) No. 312 and 313 of 2021 -10-

14. IFCI Ltd. Vs. ACCIL Hospitality Ltd. [Para 6-7], MANU/NL/0130/2020.

15. ICICI Bank Vs. Era Infrastructure India Limited [Para 19], MANU/NC/0186/2019.

16. Dena Bank Vs. West Haryana Highways Projects Pvt. Ltd. [Para 11-12], MANU/NC/2888/2019.

17. Oriental Bank of Commerce Vs. Helios Photo Voltec Limited NCLT [Para 8], CP (IB) No. 154 (PB)/2018.

18. Re Malcolm Robert Ross (a Bankrupt) Vs. Stonewood Securities Limited [Page 435-437], 2020 WL 491444.

4. Submissions of the Learned Sr. Counsel appearing on behalf of

the first Respondent

 Learned Sr. Counsel vehemently contended that the Tribunal has to

examine the limited issue of 'Debt' and 'Default' as this present

proceeding is not a recovery suit.

 The First Respondent entered into a preferred Financer Agreement

with M/s. Volkswagen Group Sales India Pvt. Ltd. whereby credit

facility was to be provided to the Dealers of Audi India and Porsche

India at reasonable interest rates. The Dealers of cars were free to

choose their Financers as it was voluntary facility available to various

Dealers.

 M/s. ZCI Limited was a Dealer of Porsche Cars and entered into

Facility Agreements with the First Respondent/Financial Creditor on

21.12.2011 whereby the Corporate Debtor was granted a revolving

facility of 84 Crores; Sanction Letter Dated 15.12.2011, Personal

Guarantee dated 21.12.2011 together with the deed of hypothecation

and the demand promissory note establish the sanctioning of the

loan to the Corporate Debtor.

 4 Facility Agreements were entered into between the Corporate

Debtor and the Financial Creditor on 20.02.2013, 17.07.2013,

Company Appeal (AT) (Insolvency) No. 312 and 313 of 2021 -11-

28.10.2013 for a credit amount of Rs. 10 Crores, 18 Crores and 9

Crores respectively.

 3 Facility Agreements were also executed for 'Used Audi Cars' on

27.04.2013, 20.10.2014 and 26.09.2015 for revolving credit facility

of Rs. 10 Crores, 2 Crores 50 Lacs and 1 Crore 40 Lacs respectively.

 M/s. ZPC Pvt. Ltd. entered into four Facility Agreements dated

03.09.2012, 03.10.2012, 06.09.2014 and 10.07.2015 for an

approximate value of Rs. 32.50 crores with respect to financing of

new cars.

 Four Supplementary Agreements dated 28.12.2012, 29.01.2013,

22.02.2013 and 08.02.2016 were executed for an approximate value

of Rs. 16.50 crores. It is submitted that the Dealer had used the

facility for a long period without any issues or problems, the total

amount of facility being Rs. 49 Crores with the first 30 days being

interest free. Additionally, the Corporate Debtor also entered into

Hypothecation Agreements, Personal Guarantors Deed and also

executed Demand Promissory Notes for both 'new' and 'used' cars.

 In view of the default committed by the Corporate Debtor, two Legal

Notices dated 10.05.2018 were issued but there was no reply.

 The Learned Sr. Counsel relies on the ratio laid down by the Hon'ble

Supreme Court of India in para 28 in 'M/s. Innovative Industries

Pvt. Ltd.' Vs. 'ICICI' (2018 SCC 407), in support of his contention

that the Adjudicating Authority has to be convinced only that a

'Default' has occurred and that there is a disbursal of debt. The

Corporate Debtor itself admitted that it has defaulted in repayment of

Company Appeal (AT) (Insolvency) No. 312 and 313 of 2021 -12-

the credit facilities and therefore no roving enquiry need be

conducted.

 As per the terms of the Agreement, the Financial Creditor disburses

the amount to the Manufacturer on behalf of the Corporate Debtor,

and on sale of the cars, the Dealer repays the Financial Creditor.

Hence disbursal of money and time value are equally present in the

terms of the Agreements and therefore the acceptance of the credit

facilities by the Corporate Debtor clearly comes under the definition

of 'Financial Debt'.

 The two I.A.s filed by the Corporate Debtor before the Ld.

Adjudicating Authority are irrelevant as the Arbitration Dispute in

respect of Emission Standards is against the Manufacturer of cars

and the Respondent has no role to play in the said dispute; It is the

Corporate Debtor who has opposed when an Application was filed by

the Financial Creditor giving clarification before the Ld. Arbitrator

regarding pending IBC proceedings against the Corporate Debtor.

 All the records which were maintained by the Financial Creditor in

the ordinary course of business to show evidence of default has been

filed along with the Petition.

 The Manufacturer does not need to be a party to the proceedings as

the credit facility arrangement was between the Financial Creditor

and the Corporate Debtor.

 The fact that 'cars were delivered to the Corporate Debtor is proof

enough that the payment was made' to the Manufacturer as without

payment there would be no delivery of vehicles. Further, the Stock

Company Appeal (AT) (Insolvency) No. 312 and 313 of 2021 -13-

Audit Report shows the presence of the vehicles at the Dealership of

the Corporate Debtor.

 More than one certificate is not required as details of default is

enumerated in the records. Further in the absence of any proof of

payment annexed by the Corporate Debtor, it is sufficient that the

Corporate Debtor did not make any payments to the Respondent.

 The date of default mentioned is only the first date of default

committed by the Corporate Debtor, though subsequently the

Corporate Debtor committed a series of defaults.

 Any dispute between the Manufacturer and the Corporate Debtor has

no relation to the repayment of credit facilities availed by the

Corporate Debtor. The Corporate Debtor was guilty of siphoning of

funds and there have been several FIRs registered against the

management. Arbitration Proceedings against the M/s. Volkswagen

Group Sales India Pvt. Ltd. has nothing to do with the Insolvency

Proceeding initiated against the Corporate Debtor.

 Learned Sr. Counsel during the conclusion of final arguments stated

that 'financing by some other Lenders' is a new plea taken by the

Appellant and further added that the Resolution Professional is not

permitting them to vote in the CoC.

5. Learned Sr. Counsel-Mr. Vikas Singh in his course of arguments has

strenuously contended that the Corporate Debtor has admitted before the

Adjudicating Authority that a loan was sanctioned and further argued that

'Value of Loan' is in the form of cars and by no stretch of imagination

would cars have been delivered without any disbursal of amount by the

Company Appeal (AT) (Insolvency) No. 312 and 313 of 2021 -14-

Financial Creditor. It is also submitted that the amount was disbursed by

the First Respondent to the Manufacturer on behalf of the Corporate

Debtor and therefore the question of making Manufacturer a Party does not

arise.

6. In compliance of the Order of this Tribunal dated 24.09.2021, the

Agreement executed between M/s. Volkswagen Finance Pvt. Ltd. and M/s.

Volkswagen Group Sales India Pvt. Ltd. dated 14.12.2011, was filed before

this Tribunal.

7. Submissions of Learned Sr. Counsel appearing on behalf of

Respondent No. 2-Resolution Professional for Respondent No. 3

 It is submitted that in pursuance to his duties the Resolution

Professional (RP) received various claims from the Creditors of the

Corporate Debtor. As per the Information Memorandum shared with

the Committee of Creditors (CoC in short) on 15.05.2021, the CoC

Members, during the course of discussion found that the Corporate

Debtor is not viable for Resolution and therefore Agenda for

Liquidation of the Corporate Debtor was to be placed before the CoC

on 28.07.2021, however in pursuance of the Order dated 27.07.2021

passed by this Tribunal, the same was not presented.

 It is further submitted that the Suspended Directors are refusing to

co-operate with the Resolution Professional to file an Application

under Section 19(2) of the Code before the Adjudicating Authority.

Section 19(2) of the Code are as under:

"19(2) Where any personnel of the corporate debtor, its promoter or any other person required to assist or cooperate with the interim resolution professional does not assist or cooperate, the interim resolution

Company Appeal (AT) (Insolvency) No. 312 and 313 of 2021 -15-

professional may make an application to the Adjudicating Authority for necessary directions."

(Emphasis Supplied)

8. Assessment:

The brief point that falls for consideration in this Appeal is:

 Whether the First Respondent/Lender/VWFPL falls

within the ambit of definition of 'Financial Creditor' as

defined under Section 5(7) of the Code and if the amount

claimed to be 'due and payable' falls within the ambit of

definition of 'Financial Debt' as defined under Section

5(8) of the Code, in view of the contention of the

Appellant that there was no direct/actual disbursement

of the amounts.

 Whether the prior invocation of the Arbitration

Proceedings against the Appellant/Personal Guarantor

bars the initiation of CIRP against the Company.

9. Keeping in view the submissions of both sides and the facts on

record, we are of the considered view that the first issue in question is to be

decided on the touchstone of what the Hon'ble Supreme Court has laid

down in paragraphs 27, 28 and 30 of 'M/s. Innoventive Industries Ltd.

Vs. ICICI & Anr.', (2018) 1 SCC 407 and in Paragraph 64 of 'Swiss

Ribbons Pvt. Ltd. & Anr.' Vs. 'Union of India & Ors.' (2019) 4 SCC 17

which read as under:

"27. The scheme of the Code is to ensure that when a default takes place, in the sense that a debt becomes due and is not paid, the insolvency resolution process begins. Default is defined in Section 3(12) in very

Company Appeal (AT) (Insolvency) No. 312 and 313 of 2021 -16-

wide terms as meaning non-payment of a debt once it becomes due and payable, which includes non- payment of even part thereof or an instalment amount. For the meaning of "debt", we have to go to Section 3(11), which in turn tells us that a debt means a liability of obligation in respect of a "claim" and for the meaning of "claim", we have to go back to Section 3(6) which defines "claim" to mean a right to payment even if it is disputed. The Code gets triggered the moment default is of rupees one lakh or more (Section

4). The corporate insolvency resolution process may be triggered by the corporate debtor itself or a financial creditor or operational creditor. A distinction is made by the Code between debts owed to financial creditors and operational creditors. A financial creditor has been defined under Section 5(7) as a person to whom a financial debt is owed and a financial debt is defined in Section 5(8) to mean a debt which is disbursed against consideration for the time value of money. As opposed to this, an operational creditor means a person to whom an operational debt is owed and an operational debt under Section 5 (21) means a claim in respect of provision of goods or services.

28. When it comes to a financial creditor triggering the process, Section 7 becomes relevant. Under the explanation to Section 7(1), a default is in respect of a financial debt owed to any financial creditor of the corporate debtor - it need not be a debt owed to the applicant financial creditor. Under Section 7(2), an application is to be made under sub-section (1) in such form and manner as is prescribed, which takes us to the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016. Under Rule 4, the application is made by a financial creditor in Form 1 accompanied by documents and records required therein. Form 1 is a detailed form in 5 parts, which requires particulars of the applicant in Part I, particulars of the corporate debtor in Part II, particulars of the proposed interim resolution professional in part III, particulars of the financial debt in part IV and documents, records and evidence of default in part V. Under Rule 4(3), the applicant is to dispatch a copy of the application filed with the

Company Appeal (AT) (Insolvency) No. 312 and 313 of 2021 -17-

adjudicating authority by registered post or speed post to the registered office of the corporate debtor.

...........

30. On the other hand, as we have seen, in the case of a corporate debtor who commits a default of a financial debt, the adjudicating authority has merely to see the records of the information utility or other evidence produced by the financial creditor to satisfy itself that a default has occurred. It is of no matter that the debt is disputed so long as the debt is "due" i.e. payable unless interdicted by some law or has not yet become due in the sense that it is payable at some future date. It is only when this is proved to the satisfaction of the adjudicating authority that the adjudicating authority may reject an application and not otherwise."

.....

"64. The trigger for a financial creditor's application is non-payment of dues when they arise under loan agreements. It is for this reason that Section 433(e) of the Companies Act, 1956 has been repealed by the Code and a change in approach has been brought about. Legislative Policy now is to move away from the concept of "inability to pay debts" to "determination of default".

The said shift enables the financial creditor to prove, based upon solid documentary evidence, that there was an obligation to pay the debt and that the debtor has failed in such obligation. Four policy reasons have been stated by the learned Solicitor General for this shift in legislative policy."

(Emphasis Supplied)

10. It is the case of the Appellants that since there is no direct/actual

disbursement of the amount by the Appellant herein to the First

Respondent, the ratio laid down by the Hon'ble Supreme Court in 'Anuj

Jain, IRP for Jaypee Infratech Limited Vs. Axis Bank & Ors.', (2020) 8

SCC 401 is squarely applicable to the facts of this case. The Appellant relied

on Paragraphs 46 to 50 of the Judgment of Hon'ble Supreme Court of India

in 'Anuj Jain' (Supra) are detailed as hereunder:

Company Appeal (AT) (Insolvency) No. 312 and 313 of 2021 -18-

"The essentials for financial debt and financial creditor

46. Applying the aforementioned fundamental principles to the definition occurring in Section 5(8) of the Code, we have not an iota of doubt that for a debt to become 'financial debt' for the purpose of Part II of the Code, the basic elements are that it ought to be a disbursal against the consideration for time value of money. It may include any of the methods for raising money or incurring liability by the modes prescribed in sub-clauses (a) to (f) of Section 5(8); it may also include any derivative transaction or counter-

indemnity obligation as per sub-clauses (g) and

(h) of Section 5(8); and it may also be 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). The requirement of existence of a debt, which is disbursed against the consideration for the time value of money, in our view, remains an essential part even in respect of any of the transactions/dealings stated in sub-clauses (a) to (i) of Section 5(8), even if it is not necessarily stated therein. In any case, the definition, by its very frame, cannot be read so expansive, rather infinitely wide, that the root requirements of 'disbursement' against 'the consideration for the time value of money' could be forsaken in the manner that any transaction could stand alone to become a financial debt. In other words, any of the transactions stated in the said sub-clauses

(a) to (i) of Section 5(8) would be falling within the ambit of 'financial debt' only if it carries the essential elements stated in the principal clause or at least has the features which could be traced to such essential elements in the principal clause. In yet other words, the essential element of disbursal, and that too against the consideration for time value of money, needs to be found in the genesis of any debt before it may be treated as 'financial debt' within the meaning of Section 5(8) of the Code. This debt may be of

Company Appeal (AT) (Insolvency) No. 312 and 313 of 2021 -19-

any nature but a part of it is always required to be carrying, or corresponding to, or at least having some traces of disbursal against consideration for the time value of money.

47. As noticed, the root requirement for a creditor to become financial creditor for the purpose of Part II of the Code, there must be a financial debt which is owed to that person. He may be the principal creditor to whom the financial debt is owed or he may be an assignee in terms of extended meaning of this definition but, and nevertheless, the requirement of existence of a debt being owed is not forsaken.

48. It is also evident that what is being dealt with and described in Section5(7) and in Section 5(8) is the transaction vis-à-vis the corporate debtor. Therefore, for a person to be designated as a financial creditor of the corporate debtor, it has to be shown that the corporate debtor owes a financial debt to such person. Understood this way, it becomes clear that a third party to whom the corporate debtor does not owe a financial debt cannot become its financial creditor for the purpose of Part II of the Code.

49. Expounding yet further, in our view, the peculiar elements of these expressions "financial creditor" and "financial debt", as occurring in Sections5(7) and 5(8), when visualised and compared with the generic expressions "creditor" and "debt" respectively, as occurring in Sections 3(10) and 3(11) of the Code, the scheme of things envisaged by the Code becomes clearer. The generic term "creditor" is defined to mean any person to whom the debt is owed and then, it has also been made clear that it includes a 'financial creditor', a 'secured creditor', an 'unsecured creditor', an 'operational creditor', and a 'decree-holder'. Similarly, a "debt" means a liability or obligation in respect of a claim which is due from any person and this expression has also been given an extended

Company Appeal (AT) (Insolvency) No. 312 and 313 of 2021 -20-

meaning to include a 'financial debt' and an 'operational debt'.

49.1. The use of the expression "means and includes" in these clauses, on the very same principles of interpretation as indicated above, makes it clear that for a person to become a creditor, there has to be a debt i.e., a liability or obligation in respect of a claim which may be due from any person. A "secured creditor" in terms of Section 3(30) means a creditor in whose favour a security interest is created; and "security interest", in terms of Section 3(31), means aright, title or interest or claim of property created in favour of or provided for a secured creditor by a transaction which secures payment for the purpose of an obligation and it includes, amongst others, a mortgage. Thus, any mortgage created in favour of a creditor leads to a security interest being created and thereby, the creditor becomes a secured creditor. However, when all the defining clauses are read together and harmoniously, it is clear that the legislature has maintained a distinction amongst the expressions 'financial creditor', 'operational creditor', 'secured creditor' and 'unsecured creditor'. Every secured creditor would be a creditor; and every financial creditor would also be a creditor but every secured creditor may not be a financial creditor. As noticed, the expressions "financial debt" and "financial creditor", having their specific and distinct connotations and roles in insolvency and liquidation process of corporate persons, have only been defined in Part II whereas the expressions "secured creditor" and "security interest" are defined in Part I.

50. A conjoint reading of the statutory provisions with the enunciation of this Court in Swiss Ribbons (supra), 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

Company Appeal (AT) (Insolvency) No. 312 and 313 of 2021 -21-

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 afunctional 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)

11. In the afore-noted 'Anuj Jain (Supra)', Jaypee Infratech Limited ('JIL')

had mortgaged these properties as collateral securities for the loans and

advances made by the Bankers to Jaiprakash Associates Limited ('JAL'), the

Holding Company of 'JIL'. The Resolution Professional (RP) rejected the

claim of the lenders of 'JAL' as 'Financial Creditors' of 'JIL', which decision

was challenged. The Adjudicating Authority agreed with the Resolution

Professional. This Tribunal allowed the Appeal. The Hon'ble Supreme Court

has set aside the Order of this Tribunal observing that the debts in

question are in the form of third party security, given by 'JIL' so as to

secure the loans obtained by 'JAL' from the said lenders and hence cannot

be covered under the expression 'Financial Debt' as defined under the

Company Appeal (AT) (Insolvency) No. 312 and 313 of 2021 -22-

Code. The Hon'ble Apex Court construed the meaning of the words 'mean'

and 'include' as provided under Section 5(8) of the IBC has held as follows:

1. The definition, by its very frame, cannot be read so expansive, rather infinitely wide; and

2. The root requirements of 'disbursement' against 'the consideration for the time value of money' could not be forsaken in the manner that any transaction could stand alone to become a financial debt."

For a fuller and a better appreciation of 'Anuj Jain (supra)', the facts

of this case has to be seen in the light of the relationship between the first

Respondent/Financial Creditor/VWFPL and the Dealer/Corporate Debtor

and the Manufacturer/VWGSIPL.

12. Several Facility Agreements were entered into between M/s. Zenica

Cars Pvt. Ltd and M/s. Zenica Performance Cars Pvt. Ltd. and M/s.

Volkswagen Finance Pvt. Ltd./the First Respondent. Some of the relevant

terms and conditions relied upon by the Learned Sr. Counsel for the

Appellant are being reproduced as hereunder:

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...................

Company Appeal (AT) (Insolvency) No. 312 and 313 of 2021 -24-

...................

............

Company Appeal (AT) (Insolvency) No. 312 and 313 of 2021 -25-

13. At this juncture, we find it relevant to refer to the definition of 'Claim'

as defined under Section 3(6) of the Code, definition of 'Debt' as defined

under Section 3(11) of the Code, definition of 'Default' as defined under

Section 3(12) of the Code and definition of 'Financial Creditor' and

'Financial Debt' as defined under Sections 5(7) and 5(8) of the Code

respectively as follows:

"Section 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;"

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"Section 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;"

"Section 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 repaid by the debtor or the corporate debtor, as the case may be;"

"Section 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;"

"Section 5(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 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;

f) any amount raised under any other transaction, including any forward sale or

Company Appeal (AT) (Insolvency) No. 312 and 313 of 2021 -27-

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;"

14. In compliance of an Order of this Tribunal, an Affidavit has been filed

by the First Respondent bringing on record the Preferred Financier

Agreement dated 01.01.2012 executed between M/s. Volkswagen Finance

Pvt. Ltd. (VWFPL) and M/s. Volkswagen Group Sales India Pvt. Ltd.

(VWGSIPL). It is stated in the Agreement that VWFPL is a Non-Banking

Finance Company engaged in the business of providing wholesale and retail

finance facilities and is willing to associate with VWGSIPL by providing

Finance Facilities to Dealers of VWGSIPL, which has accepted the terms

and conditions. 'Duties and Obligations of VWGSIPL' BS and 'Undertakings,

Representations and Warranties' are as under:

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This Document has been signed by the authorized signatories of both

VWFPL and VWGSIPL.

Company Appeal (AT) (Insolvency) No. 312 and 313 of 2021 -29-

15. The Sanction Letters between M/s. Volkswagen Finance Pvt. Ltd. and

M/s. Zenica Performance Cars Pvt. Ltd./M/s. Zenica Cars India Pvt. Ltd.

show the financial relationship between the two parties. For Ready

Reference one such Sanction Letter dated 30.08.2012 is detailed as

hereunder:

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Company Appeal (AT) (Insolvency) No. 312 and 313 of 2021 -31-

(Emphasis Supplied)

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Company Appeal (AT) (Insolvency) No. 312 and 313 of 2021 -33-

Company Appeal (AT) (Insolvency) No. 312 and 313 of 2021 -34-

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Company Appeal (AT) (Insolvency) No. 312 and 313 of 2021 -36-

Company Appeal (AT) (Insolvency) No. 312 and 313 of 2021 -37-

16. It is also relevant to reproduce the details of the Facility Agreement

dated 21st December, 2011 between M/s. Zenica Cars India Pvt. Ltd. and

M/s. Volkswagen Finance Pvt. Ltd./the First Respondent which is

appended in Schedule 1, for Ready Reference:

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Company Appeal (AT) (Insolvency) No. 312 and 313 of 2021 -39-

Company Appeal (AT) (Insolvency) No. 312 and 313 of 2021 -40-

Company Appeal (AT) (Insolvency) No. 312 and 313 of 2021 -41-

17. The Corporate Debtor was to be provided cars by the Manufacturer;

under the credit Financial Agreement entered into between the parties, the

payment for the vehicles provided by the Manufacturer to the Corporate

Debtor was to be made by the First Respondent to the Manufacturer on

behalf of the Dealer/Corporate Debtor. All such cars, payments for which

were made by the First Respondent were hypothecated to the First

Respondent. The Corporate Debtor sold the cars and paid from the sale

proceeds, the principal and the agreed interest, to the First Respondent. In

the instant case, the lender cannot be said to be the creditor of the

Manufacturer as it can be seen that the Facility Agreements and other

deeds are executed between the Dealer and the Lender/First Respondent. It

is significant to mention that the Manufacturer is not a Party to these

Facility Agreements/Sanction Letters. Merely because there is no Bank

Statement filed to show direct physical disbursement of money from the

bank account of the Lender to the bank account of the Dealer/Corporate

Debtor, it cannot be said that the amount claimed does not have the

essential ingredients of a 'Financial Debt' as defined under Section 5(8) of

the Code, having regard to the fact the root requirement of 'disbursement'

against 'consideration for time value of money' is met as the amount has

been disbursed, by operation of Agreements for and on behalf of the

Dealer/Corporate Debtor. In the factual matrix of the attendant case, the

Creditor/Lender/First Respondent is a 'financial creditor' as defined under

Section 5(7) of the Code as it cannot be narrowly construed that the debts

in question are in the form of only a third party security. In 'Anuj Jain

(supra)', it was observed that lenders of 'JAL' the Holding Company cannot Company Appeal (AT) (Insolvency) No. 312 and 313 of 2021 -42-

be recognised as 'Financial Creditors' of 'JIL' on the strength of the

mortgage created by 'JIL'. The moot question addressed to in 'Anuj Jain

(supra)' case is whether 'a person having only a security interest over the

assets of the corporate debtor, even if falling within the description of

'secured creditor', by virtue of collateral security extended by the Corporate

Debtor, would nevertheless stand outside the sect of 'financial creditors'. In

the case on hand, the lender has extended credit facilities to the

Dealer/Corporate Debtor and has disbursed amounts for and on behalf of

the Dealer/Corporate Debtor for purchase of cars. Simply put, the loan has

not been obtained by the Manufacturer/M/s. Volkswagen Group Sales

Company but by the Dealer/Corporate Debtor. At this juncture, we note that

the contention of the Appellant that the Petition is bad for non-joinder of

necessary party i.e. the Manufacturer, is unsustainable. The Preferred

Financial Agreement (the relevant extract of which is reproduced here in

para 12) does not anywhere state that the Manufacturer has borrowed the

money for and on behalf of the Dealer/Corporate Debtor. The Manufacturer

has confirmed to make a hypothecation/lien in favour of the lender VWFPL

on every product invoiced and released to a Dealer who has availed the

Finance Facility from VWFPL. Succinctly put, even if the First

Respondent/Lender VWFPL is a sister concern of VWGSIPL, it cannot be

treated on the same footing as the lenders/bankers in 'Anuj Jain' case,

specially in the light of the fact that the Dealer/Corporate Debtor is not a

part of the Holding Company, in comparison to 'JIL' (Corporate Debtor)

which is a part of 'JAL', 'the Holding Company'. For all the afore-noted

reasons, it is evident that the facts and circumstances in 'Anuj Jain' (supra)

are veritably different from the facts and circumstances of this case, Company Appeal (AT) (Insolvency) No. 312 and 313 of 2021 -43-

regarding the lender having only a 'security interest'. We hold that the Frist

Respondent/Lender in the instant case is a 'secured creditor' who is

involved right from the beginning as the Sanction Letters issued by the

lender establish the assessment of the viability of the Corporate Debtor and

therefore falls within the ambit of definition of 'Financial Creditor' as

defined under Section 7 of the Code. In the same lines, the Learned Sr.

Counsel also relied on other Judgements, which for the sake of brevity are

not being detailed.

18. It is the main contention of the Learned Sr. Counsel appearing for the

Appellant that 'mere claim of delivery of Cars is not proof of disbursement'

and there is no evidence of disbursement in the absence of a 'Disbursement

Request Form'. The preferred Financial Agreement dated 01.01.2012

executed between the M/s. Volkswagen Finance Pvt. Ltd. and M/s.

Volkswagen Group Sales India Pvt. Ltd. read together with the Facility

Agreements executed between 'ZPC' and 'ZCI' with the First

Respondent/M/s. Volkswagen Finance Pvt. Ltd. clearly establishes that the

cars which were purchased by the Dealers i.e. 'ZPC' and 'ZCI' were to be

financed by the First Respondent and after disbursal of the funds by the

Frist Respondent the cars were delivered to the Dealers. A brief perusal of

the Facility Agreements entered into between the First Respondent and

'ZPC' and 'ZCI' right from 21.12.2011 onwards till 08.02.2016 evidence this

arrangement of funds. At this juncture, we find it relevant to refer to one

such sample Invoice raised by the Manufacturer on 'ZPC' which is detailed

as hereunder:

Company Appeal (AT) (Insolvency) No. 312 and 313 of 2021 -44-

19. The afore-mentioned Invoice dated 06.09.2017 shows that the

'Vehicle' is held 'Under Agreement of Higher Purchased/Lease

/Hypothecation with M/s. Volkswagen Finance Pvt. Ltd'. The excel sheet is

reproduced hereunder to see if it has sufficient details with respect to the Company Appeal (AT) (Insolvency) No. 312 and 313 of 2021 -45-

cars delivered, the invoice numbers and the amount financed.

Company Appeal (AT) (Insolvency) No. 312 and 313 of 2021 -46-

The excel sheet refers to the Type of Facility, the vehicle identification

number, the amount disbursed and the date of disbursal together with the

Amounts payable. It is not the case of the Dealer/Corporate Debtor that all

the cars were never delivered. It is their case that the 'amount claimed' was

never disbursed. Though we are conscious of the fact that the excel sheet is

unsigned, it is to be read together with the Stock Audit Reports and

Invoices raised; as this Tribunal is to only to see whether there is a 'debt'

Company Appeal (AT) (Insolvency) No. 312 and 313 of 2021 -47-

and a 'default' as envisaged under the Code and if the threshold has been

met, but 'not quantify the amount of debt'.

20. It is the case of the First Respondent that the Statement of Account

read together with the Stock Audit Report show that six cars were

repossessed by First Respondent in the year 2019 and that the remaining

cars are still not traceable. This Tribunal does not wish to go into the issue

of the 'mystery of the missing cars'; the issue of faulty emission; the

traceable/untraceable cars; the other new Models giving stiff competition to

the Dealers as these aspects are of no relevance to the main issue raised in

this Appeal.

21. Learned Sr. Counsel for the Appellant asserted that the amount

claimed could be classified as an 'operational debt' and not a 'financial debt'

and only to skirt the 'Pre-Existing Dispute' i.e. the pending Arbitration

Proceedings, the First Respondent has with a malafide intention filed this

Application under Section 7. To address this issue, at this point, we find it

apropos to rely on the recent Judgment dated 04th February, 2022 of the

Hon'ble Supreme Court in 'M/s. Consolidated Construction Consortium

Limited Vs. M/s. Hitro Energy Solutions Private Limited.' (Civil Appeal

No. 2839 of 2020) in which the Hon'ble Apex Court has discussed in detail

the provisions in IBC relating to two different class of creditors: 'operational

and financial' and observed as follows:

"Legislative History

28. Unlike other foreign jurisdictions, which usually differentiate between secured and unsecured creditors only, the IBC is unique because it provides for two different classes of creditors: operational creditors and financial creditors. To understand the position of the

Company Appeal (AT) (Insolvency) No. 312 and 313 of 2021 -48-

former within the framework of the IBC, it is important to understand the distinction between these two classes.

29. The primary source is Volume I of the Report of the Bankruptcy Law Reforms Committee. It notes that "[e]nterprises have financial creditors by way of loan and debt contracts as well as operational creditors such as employees, rental obligations, utilities payments and trade credit". It provides that a corporate debtor will have financial and operational liabilities, and explains the difference as follows:

"Liabilities fall into two broad sets: liabilities based on financial contracts, and liabilities based on operational contracts. Financial contracts involve an exchange of funds between the entity and a counterparty which is a financial firm or intermediary. This can cover a broad array of types of liabilities: loan contracts secured by physical assets that can be centrally registered; loan contracts secured by floating charge on operational cash flows; loan contracts that are unsecured; debt securities that are secured by physical assets, cash flow or are unsecured. Operational contracts typically involve an exchange of goods and services for cash. For an enterprise, the latter includes payables for purchase of raw-materials, other inputs or services, taxation and statutory liabilities, and wages and benefits to employees."

(emphasis supplied)

Further, the Report also notes:

"Here, the Code differentiates between financial creditors and operational creditors.

Financial creditors are those whose relationship with the entity is a pure financial contract, such as a loan or a debt security. Operational creditors are those whose liability from the entity comes from a transaction on operations. Thus, the wholesale vendor of spare parts whose spark plugs are kept in inventory by the car mechanic and who gets paid only after the spark plugs are sold is an operational creditor. Similarly, the lessor that

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the entity rents out space from is an operational creditor to whom the entity owes monthly rent on a three-year lease. The Code also provides for cases where a creditor has both a solely financial transaction as well as an operational transaction with the entity. In such a case, the creditor can be considered a financial creditor to the extent of the financial debt and an operational creditor to the extent of the operational debt."

(emphasis supplied)

30. It is thus clear that operational creditors are those whose debt arises from operational transactions, i.e., transactions which are undertaken in relation to the operation of an enterprise. As the examples in the BLRC Report suggest, these generally include transactions involving goods or services which are considered necessary for the operational functioning of an entity.

31. The Joint Parliamentary Committee Report on the IBC differentiates between financial and operational creditors in the following terms:

"Clause 21 appended with the Bill which states as under:- "The committee has to be composed of members who have the capability to assess the commercial viability of the corporate debtor and who are willing to modify the terms of the debt contracts in negotiations between the creditors and the corporate debtor. Operational creditors are typically not able to decide on matters relating to commercial viability of the corporate debtor, nor are they typically willing to take the risk of restructuring their debts in order to make the corporate debtor a going concern. Similarly, financial creditors who are also operational creditors will be given representation on the committee of creditors only to the extent of their financial debts. Nevertheless, in order to ensure that the financial creditors do not treat the operational creditors unfairly, any resolution plan must ensure that the operational creditors receive an amount not less than the liquidation value of their debt (assuming the corporate debtor were to be liquidated).""

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(emphasis supplied)

32. This makes it clear that another point of difference between financial and operational creditors would be in the nature of their role in the Committee of Creditors, because it is assumed the operational creditors will be unwilling to take the risk of restructuring their debts in order to make the corporate debtor a going concern. Thus, their debt is not seen as a long-term investment in the going concern status of the corporate debtor, which would incentivize them to restructure it, but merely as a one-off transaction with the corporate debtor for certain goods or services.

D.3 Judicial Precedent

33. In Swiss Ribbons (P) Ltd. v. Union of India ("Swiss Ribbons"), the constitutionality of certain provisions of the IBC was challenged, with the focus being on the difference of rights provided to the financial and operational creditors. After observing the difference in the methods through which financial creditors and operational creditors trigger a proceeding under the IBC, the two-judge Bench of the Court noted that there was an intelligible differentia between financial and operational creditors. The Court held:

"50. 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

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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 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.

51. 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 reorganisation 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.

[...]

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75. Since the financial creditors are in the business of moneylending, banks and financial institutions are best equipped to assess viability and feasibility of the business of the corporate debtor. Even at the time of granting loans, these banks and financial institutions undertake a detailed market study which includes a techno- economic valuation report, evaluation of business, financial projection, etc. Since this detailed study has already been undertaken before sanctioning a loan, and since financial creditors have trained employees to assess viability and feasibility, they are in a good position to evaluate the contents of a resolution plan. On the other hand, operational creditors, who provide goods and services, are involved only in recovering amounts that are paid for such goods and services, and are typically unable to assess viability and feasibility of business. The BLRC Report, already quoted above, makes this abundantly clear."

(Emphasis Supplied)

22. In the instant case, the documentary evidence shows that the First

Respondent/Lender is involved in a 'New Car Unit Funding' and 'Inventory

Stock Funding' and also supports the 'Used Cars Funding'. The Sanction

Letter (reproduced in paragraph 15) establishes that the Credit

Limit/Loan/Sanction includes specific interest components and time

periods. It is seen that the liability is based on a financial contract; the loan

contract is secured; the credit facility, involving large sums of money,

extended by the lender enables the Dealer/Corporate Debtor to operate its

business; the Agreements entered into between the parties have specified

repayment schedule and defaults entitle the Lender to recall the Agreement;

the First Respondent/Lender being an NBFC is involved right from the

beginning in funding the Dealer/Corporate Debtor in setting up its

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business and hence we hold that the financial relationship between the

parties satisfies the ingredients to be termed as a 'Financial Creditor' as

observed in the aforenoted 'Swiss Ribbons' quoted in 'M/s. Consolidated

Construction' (supra).

23. It is not in dispute that the Finance Facility provided by the First

Respondent was also for 'used cars'. We find force in the contention of the

Learned Sr. Counsel for the First Respondent that the Registration of Used

Vehicle is of a date prior to the date of disbursal of loan for its second sale

vis-a-vis the Dealer. The details of the Invoices broadly match the Stock

Audit Report and the statement of account together with the details of the

cars, which we are of the view is sufficient documentary evidence to

establish that the cars were indeed delivered to the Dealer. Hence the

contention of the Appellant that in the absence of any 'Disbursement

Request Form', on record, the 'Disbursal' could not be construed and that

the excel sheet is self-serving, is untenable, in the light of the afore-

mentioned reasons.

24. Further, the Facility Agreements were entered into from time to time

both for the 'new' cars as well as 'used' cars right from 2011 onwards. The

Dealer never raised any dispute in respect of these Facility Agreements. It is

pertinent to mention that the First Respondent got issued a Legal Notice

dated 10.05.2018 demanding payment of the amounts of Rs. 42 Crores,

which was never replied to, by the Corporate Debtor. The Facility

Agreements, the Hypothecation Agreements, the Personal Guarantees and

finally the Demand Promissory Notes admittedly entered into between the

both parties establish the jural and financial relationship between the

parties. Section 5(8) of the Code defines 'Financial Debt' and includes 'any Company Appeal (AT) (Insolvency) No. 312 and 313 of 2021 -54-

amount raised by acceptance under any acceptance credit facility' hence we

are of the considered view that the amount disbursed to the Manufacturer

on behalf of the Dealers/Corporate Debtor falls within the definition of

Financial Debt as defined under Section 5(8) of the Code.

25. Now we address ourselves to the next issue raised in this Appeal as

to whether prior invocation of Arbitration Proceedings against the guarantor

bars initiation of CIRP against the Corporate Debtor Company. It is

submitted that the Arbitral Award dated 18.10.2019 is in favour of the First

Respondent against the 'Personal Guarantors' of the Corporate Debtor and

relies on the judgement of the Hon'ble Supreme Court in 'Lalit Kumar

Jain Vs. Union of India and Ors'. 2021 SCC Online SC 3969 wherein it is

observed as follows:

"135. In Kaupthing Singer and Friedlander Ltd. (supra) the UK Supreme Court reviewed a large number of previous authorities on the concept of double proof, i.e. recovery from guarantors in the context of insolvency proceedings. The court held that:

"The function of the rule is not to prevent a double proof of the same debt against two separate estates (that is what insolvency practitioners call "double dip"). The rule prevents a double proof of what is in substance the same debt being made against the same estate, leading to the payment of a double dividend out of one estate. It is for that reason sometimes called the rule against double dividend. In the simplest case of suretyship (where the surety has neither given nor been provided with security, and has an unlimited liability) there is a triangle of rights and liabilities between the principal debtor (PD), the surety (S) and the creditor(C). PD has the primary obligation to C and a secondary obligation to indemnify S if and so far as S discharges PD's liability, but if PD is insolvent S may not enforce that right in competition with C. S has an obligation to C to answer for PD's liability, and the secondary right of obtaining an indemnity from PD. C can (after due notice) proceed against either or both of PD and Company Appeal (AT) (Insolvency) No. 312 and 313 of 2021 -55-

S. If both PD and S are in insolvent liquidation, C can prove against each for 100p in the pound but may not recover more than 100p in the pound in all."

136. In view of the above discussion, it is held that approval of a resolution plan does not ipso facto discharge a personal guarantor (of a corporate debtor) of her or his liabilities under the contract of guarantee. As held by this court, the release or discharge of a principal borrower from the debt owed by it to its creditor, by an involuntary process, i.e. by operation of law, or due to liquidation or insolvency proceeding, does not absolve the surety/guarantor of his or her liability, which arises out of an independent contract."

26. It is the case of the Appellant that the 'Statement of Claim' was filed

only qua the Guarantors before the Arbitral Tribunal and therefore the

claims qua the Company 'Zenica Performance Cars Pvt. Ltd.' stood

abandoned. This argument does not hold good having regard to the ratio

laid down by the Hon'ble Supreme Court in the aforenoted 'Lalit Jain'

(Supra).

The term "coextensive" has been defined in the celebrated book of

Pollock and Mulla on Indian Contract and Specific Relief Act, 10th

End., at p. 728 as under:

"Coextensive.- Surety's liability is coextensive with that of the principal

debtor.

A surety's liability to pay the debt is not removed by reason of the

creditor's omission to sue the principal debtor. The creditor is not bound to

exhaust his remedy against the principal before suing the surety, and a suit

may be maintained against the surety though the principal has not been

sued.

Company Appeal (AT) (Insolvency) No. 312 and 313 of 2021 -56-

In Halsbury's Laws of England, 4th Edn., Vol. 20, para 159 at p.

87 it has been observed that:

"159. ....It is not necessary for the creditor, before proceeding against

the surety, to request the principal debtor to pay, or to sue him, although

solvent, unless this is expressly stipulated for."

27. The Hon'ble Apex Court in 'State Bank of India Vs. V.

Ramakrishnan', (2018 17 SCC 394) observed as follows:

""24. The scheme of Sections 60(2) and (3) is thus clear - the moment there is a proceeding against the corporate debtor pending under the 2016 Code, any bankruptcy proceeding against the individual personal guarantor will, if already initiated before the proceeding against the corporate debtor, be transferred to the National Company Law Tribunal or, if initiated after such proceedings had been commenced against the corporate debtor, be filed only in the National Company Law Tribunal. However, the Tribunal is to decide such proceedings only in accordance with the Presidency-Towns Insolvency Act, 1909 or the Provincial Insolvency Act, 1920, as the case may be. It is clear that sub-section (4), which states that the Tribunal shall be vested with all the powers of the Debt Recovery Tribunal, as contemplated under Part III of this Code, for the purposes of sub-section (2), would not take effect, as the Debt Recovery Tribunal has not yet been empowered to hear bankruptcy proceedings against individuals under Section 179 of the Code, as the said Section has not yet been brought into force. Also, we have seen that Section 249, dealing with the consequential amendment of the Recovery of Debts Act to empower Debt Recovery Tribunals to try such proceedings, has also not been brought into force. It is thus clear that Section 2(e), which was brought into force on 23.11.2017 would, when it refers to the application of the Code to a personal guarantor of a corporate debtor, apply only for the limited purpose contained in Section 60(2) and (3), as stated hereinabove. This is what is meant by strengthening the Corporate Insolvency Resolution Process in the Statement of Objects of the Amendment Act, 2018.

Company Appeal (AT) (Insolvency) No. 312 and 313 of 2021 -57-

25.Section 31 of the Act was also strongly relied upon by the Respondents. This Section only states that once a Resolution Plan, as approved by the Committee of Creditors, takes effect, it shall be binding on the corporate debtor as well as the guarantor. This is for the reason that otherwise, under Section 133 of the Indian Contract Act, 1872, any change made to the debt owed by the corporate debtor, without the surety's consent, would relieve the guarantor from payment. Section 31(1), in fact, makes it clear that the guarantor cannot escape payment as the Resolution Plan, which has been approved, may well include provisions as to payments to be made by such guarantor. This is perhaps the reason that Annexure VI(e) to Form 6 contained in the Rules and Regulation 36(2) referred to above, require information as to personal guarantees that have been given in relation to the debts of the corporate debtor. Far from supporting the stand of the respondents, it is clear that in point of fact, Section 31 is one more factor in favour of a personal guarantor having to pay for debts due without any moratorium applying to save him."

28. `This Tribunal in 'State Bank of India Vs. Athena Energy' (2020

SCC Online NCLAT 774) held as hereunder:

The ILC thus rightly observed that provisions are there in the form of Section 60(2) and (3) and no amendment or legal changes were required at the moment. We are also of the view that simultaneously remedy is central to a contract of guarantee and where Principal Borrower and surety are undergoing CIRP, the Creditor should be able to file claims in CIRP of both of them. The IBC does not prevent this. We are unable to agree with the arguments of Learned Counsel for Respondent that when for same debt 19 Company Appeal (AT) (Ins) No.633 of 2020 claim is made in CIRP against Borrower, in the CIRP against Guarantor the amount must be said to be not due or not payable in law. Under the Contract of Guarantee, it is only when the Creditor would receive amount, the question of no more due or adjustment would arise. It would be a matter of adjustment when the Creditor receives debt due from the Borrower/Guarantor in the respective CIRP that the same should be taken note of and adjusted in the other CIRP. This can be conveniently done, more so when Company Appeal (AT) (Insolvency) No. 312 and 313 of 2021 -58-

IRP/RP in both the CIRP is same. Insolvency and Bankruptcy Board of India may have to lay down regulations to guide IRP/RPs in this regard.

The issue involved in the matter of "Ramakrishnan" was whether Section 14 of IBC will provide for a moratorium for the limited period mentioned in the Code, on admission of an insolvency petition would the same apply to Personal Guarantor of a Corporate Debtor. The issue was answered in negative by the Hon'ble Supreme Court. The Hon'ble Supreme Court in such context made observations as above in Paragraphs - 24 and 25 of the Judgement. It is clear that in the matter of guarantee, CIRP can proceed against Principal Borrower as well as Guarantor. The law as laid down by the Hon'ble High Courts for the respective jurisdictions, and law as laid down by the Hon'ble Supreme Court for the whole country is binding."

29. The record evidences that Arbitration was invoked by VWGSIPL

against the Company 'M/s. Zenica Cars India Pvt. Ltd' too, wherein Sole

Arbitrator appointed is Hon'ble Justice S.J. Vazifdar. The Learned Sr.

Counsel appearing for the Appellant submitted that the Hon'ble High Court

of Bombay has granted a stay on the operation of the Arbitral Award vide

Order dated 23.12.2021 in Comm Arb Petition 1497/2019 holding the

appointment of Mr. D.K. Sonawane as illegal. It is further submitted that

though the VWGSIPL initially filed a claim of Rs. 537,70,97,863/- in the

said Arbitration Proceedings, give up the entire claim of Rs. 524,91,60,

000/-. We are not inclined to pass any observations regarding the

submissions/admissions made before the Learned Arbitrator as the issue

raised in this Appeal is whether the Adjudicating Authority was justified in

admitting the Application filed by VWFPL under Section 7 of the Code when

Arbitration Proceedings were pending against the Personal Guarantor.

Keeping in view the ratio laid down in the aforenoted Judgments, this

Tribunal is of the view that prior initiation of Arbitration Proceedings

Company Appeal (AT) (Insolvency) No. 312 and 313 of 2021 -59-

against the 'Personal Guarantor' by the Manufacturer does not bar the

'Financial Creditor' from subsequently filing an Application under Section 7

of the Code.

30. Additionally, it is the further case of the Appellants that the 'date of

default' is stated to be 28.04.2018 but again in Para 2 of Part-IV of Form-I,

the date of default is given as 02.02.2018 and hence this date of default is

imaginary and there are claims of disbursement even after the date of

default. Apart from the fact that 'limitation' is not the issue here, this date

of default does not subtract the fact that there was a loan taken, it had

time value of money, had a commercial effect of borrowing and fulfils all the

essential ingredients of a 'financial debt' as defined under the Code.

31. In conclusion, we aptly point out the observations of the Hon'ble

Supreme Court in 'Orator Marketing Pvt. Ltd. Vs. Samtex Desinz Pvt.

Ltd.' (2021 SCC Online SC 513), in which the Hon'ble Apex Court has

observed in Paras 19 to 22 and in para 31 as follows:

"19. Corporate Resolution Process gets triggered when a Corporate Debtor commits a default. A Financial Creditor may file an application for initiating a Corporate Insolvency Resolution Process against the Corporate Debtor, when a default has occurred.

20. A 'corporate debtor' means a corporate person who owes a debt to any person, as per the definition of this expression in Section 3(8) of the IBC. Section 3(11) defines 'debt' to mean "a liability or obligation in respect of a claim which is due from any person and includes a financial debt and operational debt." The word 'claim' has been defined in Section 3(6) to mean inter alia "a right to payment, whether or not such right is reduced to judgment, fixed, disputed,

Company Appeal (AT) (Insolvency) No. 312 and 313 of 2021 -60-

undisputed, legal, equitable, secured or unsecured."

'Default' is defined in section 3(12) to mean "non- payment of a debt when the 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." Under Section 5(7) of the IBC 'financial creditor' means any person to whom a financial debt is owed and includes a person to whom such debt has legally been assigned.

21. The definition of 'financial debt' in Section 5(8) of the IBC has been quoted above. Section 5(8) defines 'financial debt' to mean "a debt along with interest if any which is disbursed against the consideration of the time value of money and includes money borrowed against the payment of interest, as per Section 5(8) (a) of the IBC. The definition of 'financial debt' in Section 5(8) includes the components of sub- clauses (a) to (i) of the said Section.

22. The NCLT and NCLAT have overlooked the words "if any" which could not have been intended to be otiose. 'Financial debt' means outstanding principal due in respect of a loan and would also include interest thereon, if any interest were payable thereon. If there is no interest payable on the loan, only the outstanding principal would qualify as a financial debt. Both NCLAT and NCLT have failed to notice clause(f) of Section 5(8), in terms whereof 'financial debt' includes any amount raised under any other transaction, having the commercial effect of borrowing.

31. At the cost of repetition, it is reiterated that the trigger for initiation of the Corporate Insolvency Resolution Process by a Financial Creditor under Section 7 of the IBC is the occurrence of a default by

Company Appeal (AT) (Insolvency) No. 312 and 313 of 2021 -61-

the Corporate Debtor. 'Default' means non-payment of debt in whole or part when the debt has become due and payable and debt means a liability or obligation in respect of a claim which is due from any person and includes financial debt and operational debt. The definition of 'debt' is also expansive and the same includes inter alia financial debt. The definition of 'Financial Debt' in Section 5(8) of IBC does not expressly exclude an interest free loan. 'Financial Debt' would have to be construed to include interest free loans advanced to finance the business operations of a corporate body."

(Emphasis Supplied)

32. In the case of the Corporate Debtor who commits a default of a

Financial Debt, the Adjudicating Authority has merely to see the records of

the information utility or other evidence produced by the Financial Creditor

to satisfy itself that the default has occurred. In the instant case, we are of

the considered view that the amount mentioned in Part -IV and V of the

Section 7 Application falls within the definition of 'Financial Debt' as

defined in Section 5(8) of the Code. At the cost of repetition, it is clear that

under the Credit/Financing Facility Agreements the payment of the cars

provided for by the Manufacturer to the Dealer/Corporate Debtor was to be

made by the Financial Creditor to the Manufacturer for and on behalf of the

Corporate Debtor.

33. Having regard to the financial relationship between the parties and in

the light of the aforenoted reasons, the defense regarding proof of

'direct/actual disbursement' is not a plausible one worthy of acceptance.

This Tribunal concludes that in such a factual matrix, proof of

Company Appeal (AT) (Insolvency) No. 312 and 313 of 2021 -62-

actual disbursal vide 'Disbursement Request Form/Note' is not a sine qua

non enabling the Applicant to prefer the Section 7 Application. This

Tribunal is subjectively satisfied with the material/evidence available on

record that the amount 'due and payable' is a 'Financial Debt' and the First

Respondent is a 'Financial Creditor' as defined under Sections 5(8) and 5(7)

of the Code, respectively. Hence we do not find any illegality or infirmity in

the Orders Impugned.

For all the aforenoted reasons, these Appeals are dismissed,

accordingly. No order as to costs.

[Justice Anant Bijay Singh] Member (Judicial)

[Ms. Shreesha Merla] Member (Technical)

NEW DELHI 10.02.2022 Basant B.

Company Appeal (AT) (Insolvency) No. 312 and 313 of 2021