Saregama India Ltd vs Home Movie Makers Pvt. Ltd

M/s Saregama India Limited 33, Jessore Road, Dum Dum, Kolkata- 700 028 West Bengal .. Appellant

Versus

M/s Home Movie Makers Private Limited No. 65, Santhome High Road, Mylkapore, Chennai - 600 004 Tamil Nadu .. Respondent.

Present:

For Appellant: Mr. Darpan Wadhwa, Sr. Advocate along with Mr. Aseem Chaturvedi, Ms. Wamika Trehan, and Mr. Millind Sharma, Advocates

For Respondent: Mr. Aditya Verma, Mr. Shrey Patnaik, Mr. Jayant K. Mehta, Advocates

JUDGMENT

KANTHI NARAHARI, MEMBER(TECHNICAL)

M/s Saregama India Limited - Appellant filed the present appeal

aggrieved by the order of the Adjudicating Authority (National

Company Law Tribunal, Division Bench, Chennai) dated 14th

Company Appeal(AT)(Insolvency) No. 359 of 2019 Page 1 of 17 February, 2019 whereby the Adjudicating Authority dismissed the

application of the Appellant.

2. The Appellant filed application before the Adjudicating Authority

(National Company Law Tribunal, Division Bench, Chennai) under

Section 7 of Insolvency and Bankruptcy Code, 2016 (hereinafter

referred to as 'IBC') against the Corporate Debtor - M/s Home Movie

Makers Private Limited (Respondent herein) for initiation of Corporate

Insolvency Resolution Process.

3. The Adjudicating Authority, after hearing the parties, dismissed

the Application holding that the claim made by the Appellant (Financial

Creditor) is not a 'financial debt'. Paragraphs-9 & 10 of the impugned

order is extracted hereunder:

....

"9. In view of the reasons aforementioned, we

believe that it is not a financial debt and the petitioner

tried to masquerade it as financial debt when reply

came to section 8 Notice from the corporate debtor.

Therefore, this Bench having felt that this petitioner

should not have concealed the facts and tried to

metamorphose this petition as petition u/s 7 of the

Code, this Company Petition is hereby dismissed by

imposing costs of ₹ 1,00,000 payable to the Corporate

Debtor within 15 days hereof.

Company Appeal(AT)(Insolvency) No. 359 of 2019 Page 2 of 17

10. Accordingly this Company Petition is hereby

dismissed"

......

4. The Appellant in support of their grounds argued that the

transaction between the parties clearly establishes it is a financial

debt.

5. Per contra, the Respondent (Corporate Debtor) denied the stand

of the Appellant and states that it is not a financial debt in terms of

Section 5(8) of the IBC and there was no Time Value of Money as

consideration therefore the application of the Appellant was rightly

rejected by the Adjudicating Authority.

6. After hearing the learned Counsel for the respective parties,

perused, the pleadings, documents filed in support of their case, the

only point for consideration is whether the claim of the Appellant fall

under the category of financial debt or not. Before adverting to the

point narration of brief facts are essential to decide the point.

7. The Appellant Company is a marketing agency and in the

business, inter alia, marketing television programmes and serials in

the form of episodes for telecasting over various television channels

and for distribution through various other media. The Respondent

Company is a Producer inter alia producing a television

programme/serial in Tamil titled as 'PASALMAR' and 'GANGA' being

telecasted on SUN TV Channel as a daily serial.

Company Appeal(AT)(Insolvency) No. 359 of 2019 Page 3 of 17

8. The Appellant and the Respondent initially entered into an

agreement dated 28.09.2013 (Page 56 of the Paper Book) whereby the

Respondent (Producer) sold its rights exclusively to the Appellant i.e.

(Marketing Agency), the entire "Free Commercial Time" (In short "FCT")

available of the programme and in consideration of the same, the

Appellant has to pay amount as agreed for availing the FCT to the

Respondent in telecasting the serial produced by the Respondent.

While doing so, the Appellant and the Respondent entered into another

marketing agreement dated 09.12.2016 (page 69 of the Paper Book) as

per the terms and conditions as mentioned therein specifically sale of

FCT to the Appellant which was available to the Respondent.

9. The Appellant contended that in pursuance of the understanding

between them, the Appellant paid a sum of Rs. 30,00,000/- by way of

advance to the Respondent and the same has been communicated vide

its letter dated. 31.1.2017. It is also contended that the said written

understanding failed due to various and new arrangement for

repayment of advance given by the Appellant to the tune more than Rs.

1 crore. The parties have exchanged various correspondences

including e-mails.

10. The fact is that the Appellant in its letter dated 31.01.2017

addressed to the Respondent stated that as per the request made by

the Respondent, they will pay an amount of Rs. 30 lakhs by way of

advance towards their (Respondent's) entitlement from sale of FCT in

Company Appeal(AT)(Insolvency) No. 359 of 2019 Page 4 of 17 relation to telecasting of serial viz., PASALMAR/GANGA which will be

telecasted during the period from 01.01.2017 to 31.01.2017 (Page 81

of Paper Book).

11. The Appellant issued notice in Form-3 under Section 8(1) of the

IBC dated 15.11.2018 to the Respondent claiming an amount of Rs.

57,55,799/- shown as Operational Debt and relied on the marking

agreement dated 09.12.2016 and in continuation thereof, relied on

letters dated 31.01.2017, 29.05.2017 and 07.11.2017. The Appellant

clearly stated that the claim is an Operational Debt. However, the

Appellant having issued notice under Section 8(1) of the IBC filed a

petition in Form-1 i.e., under Section 7 of the IBC whereby a Financial

Creditor is entitled to file application under the said Section, claiming

an amount of Rs. 57,55,799/- plus interest and shown as disbursed

on 28.09.2013, 30.11.2016, 09.12.2016 and 31.01.2017.

12. The Respondent contended and not denied the agreement dated

09.12.2016 with respect to the marking of FCT in connection with

telecasting of Tamil Commercial Serial titled Ganga on SUN TV

channel. It is also stated that in terms of the said marking agreement,

the Appellant were to market and sell 240 seconds of FCT in each half

an hour episode of the Respondent's serial that was to telecast in the

said television Channel. It is also stated that in terms of the marketing

agreement, the Appellant was to pay the telecast fee of Rs. 1,80,000

per half an hour episode of the serial and the telecasting fee was to be

Company Appeal(AT)(Insolvency) No. 359 of 2019 Page 5 of 17 paid by the Appellant to the Respondent which in turn was to be paid

to the Channel which would be telecasting. The entire marking

agreement was dependent on the Channel granting the time slot. A

Security Deposit payment was provided under the clauses of the said

agreement so as not to have any default in payment of telecast fee to

the Channel. The Respondent in reply has categorically stated that

non-selling of the FCT by the Appellant adversely impacted the

production of the serial by the Respondent as the only payment was to

be received by the Respondent under the marketing agreement from

the Appellant was from their sale of FCT. However, the Respondent has

stated that the FCT remains unsold by the Appellant and no amount

was payable by the Respondent as indicated by them in their email

dated 27.08.2018 (at page 107 of the Paper Book). Further the

Respondent claimed that it reserved its right to recover the damages

against the Appellant for flagrant breach of the marking agreement for

the abject failure to market the FCT's available, thereby causing loss

to the Respondent's business and breach in failure to make payment

of the telecasting fee.

13. From the perusal of the document and notice issued by the

Appellant in Form -3 dated 15.11.2018, the Appellant relied upon the

Marketing Agreement dated 09.12.2016 and corresponding letters as

mentioned therein. However, in Form-1, i.e., Application under section

7 of IBC, the Appellant relied upon the Marketing Agreement dated

Company Appeal(AT)(Insolvency) No. 359 of 2019 Page 6 of 17 28.09.2013 and 09.12.2016 and claimed an amount of Rs.

57,55,799/- which was shown as default.

14. To determine the issue whether the claim of the Appellant falls

under the category of 'financial debt' and whether the debt is due which

has been disbursed against the consideration for Time Value of Money.

As in depth perusal of the agreement dated 28.09.2013 entered

between the Appellant and the Respondent wherefrom in Clause -5 of

the said agreement, it is specifically mentioned "in consideration of the

rights granted to the Marketing Agency under Clauses 3 & 4

hereinabove, the Marketing Agency (Appellant) agrees to pay the

Producer (Respondent) as mentioned in Annexure-1 in detail. As per

the Agreement the Appellant referred as 'Marketing Agency' and the

Respondent referred as 'Producer'. In Annexure-1 of this Agreement it

has been clearly mentioned that in consideration of the rights granted

to the Appellant (Marketing Agency) under Clauses 3 & 4, the Appellant

shall pay to the Respondent (Producer) in the manner as stated therein.

However, from the clauses of the Annexure, an amount of Rs.

1,80,000/- per episode as telecast fee of the Programme, shall be paid

in advance on a weekly basis. However, there is no clause with respect

to payment of interest in case of default. Further clause-6 of the

agreement dated 09.12.2016 entered between the Appellant and the

Respondent, same amount i.e., Rs. 1,80,000/- as consideration and

payment has been mentioned towards telecast fee. From the aforesaid

agreement it is clear that the Appellant had not disbursed the money

Company Appeal(AT)(Insolvency) No. 359 of 2019 Page 7 of 17 against the consideration for the time value of money and the

Respondent has not received the money as a financial debt. On the

other hand, it is a contract between the Appellant and the Respondent

for utilisation of FCT which was available to the Respondent (Producer)

while telecasting their serials. However, it is the case of the Respondent

that the Appellant has to pay the consideration for utilisation of FCT.

15. Under the IBC, the Adjudicating Authority or this Appellate

Tribunal will not go into the aspects of the veracity of the agreement,

its breach, void, voidable etc. The Adjudicating Authority is not a Civil

Court to decide the breach of the contract between the parties. The IBC

is a code by itself and will have to go strictly by the provisions of the

Code, whether a claim is made under Section 9 by the Operation

Creditor and under Section 7 by Financial Creditor and under Section

10 by a Corporate Applicant. The Appellant having issued notice under

Section 8(1) of the IBC, however filed an Application under Section 7

of IBC for the reasons best known to the Appellant. Before initiation of

an Application under Section 9 of the IBC by an Operational Creditor,

there is a mandatory provision to issue notice under Section 8(1) of the

IBC. After expiry of the period of 10 days after delivery of the notice or

the invoice demanding payment under the above provision, if the

Operational Creditor does not receive payment from the Corporate

Debtor or notice of the dispute under Section 8(2), the Operational

Creditor may file an Application before the Adjudicating Authority for

initiating the 'Corporate Insolvency Resolution Process'. While Section

Company Appeal(AT)(Insolvency) No. 359 of 2019 Page 8 of 17 7 of the IBC entitles the Financial Creditor to initiate 'Corporate

Insolvency Resolution Process'.

16. Now, we deal with the relevant provisions of law.

Section 5(7) of the IBC defines as under:

..

"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) of the IBC is excerpted hereunder:

...

"(8) "financial debt" means a debt alognwith

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;

Company Appeal(AT)(Insolvency) No. 359 of 2019 Page 9 of 17

(d) The amount of any liability in respect of any lease

or hire purchase contract which is deemed as

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 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;

Company Appeal(AT)(Insolvency) No. 359 of 2019 Page 10 of 17

(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;"

...

17. From the records and from Form-1, the Appellant claims to be a

Financial Creditor which means Respondent owe a debt to the

Appellant. Admittedly, the Appellant has not given any debt to the

Respondent. Apart from the above, the terms and conditions and the

clauses in the Marketing Agreement speaks 'Self' and no interpretation

is required. Albeit, the payments as made under the terms of

Agreements cannot be termed as Financial Debt. To define it as a

Financial Debt, the criteria as required under law need to be fulfilled.

As per Section 5(8) of IBC, supra, a Financial Debt means a debt along

with interest, if any, which is disbursed against the consideration for

the time value of money and includes (a) to (i) supra.

18. This Appellate Tribunal in Company Appeal (AT)(Insolvency) No.

142 of 2017 in the matter Sh. Neeraj Bhatia Vs. Davinder Ahluwalia

and others referred to Judgment of this Tribunal in the matter of

"Nikhil Mehta and Sons (HUF) Vs. AMR Infrastructure Ltd. -

Company Appeal (AT) (Insolvency) No. 07 of 2017" dealing with the

similar issue held as under:

"17. The first question arises for consideration is

as to who is a 'Financial Creditor'. Learned

Company Appeal(AT)(Insolvency) No. 359 of 2019 Page 11 of 17 Adjudicating Authority, for determination of the

aforesaid issue examined the definition provided in

section 5(7) and 5(8) and in the impugned Judgement

rightly observed: -

"12. A perusal of definition of expression

'Financial Creditor' would show that it refers to a

person to whom a financial debt is owed and includes

even a person to whom such debt has been legally

assigned or transferred to. In order to understand the

expression 'Financial Creditor', the requirements of

expression 'financial debt' have to be satisfied which

is defined in Section 5(8) of the IBC. The opening words

of the definition clause would indicate that a financial

debt is a debt along with interest which is disbursed

against the consideration for the time value of money

and it may include any of the events enumerated in

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

requirement of financial debt has to be met viz. that the

debt is disbursed against the consideration for the time

value of money and which may include the events

enumerated in various sub-clauses. A Financial

Creditor is a person who has right to a financial debt.

The key feature of financial transaction as postulated

by section 5(8) is its consideration for time value of

Company Appeal(AT)(Insolvency) No. 359 of 2019 Page 12 of 17 money. In other words, the legislature has included

such financial transactions in the definition of

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

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

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

sum of money invested today to be repaid over a period

of time in a single or series of instalments to be paid in

future. In Black's Law Dictionary (9th edition) the

expression 'Time Value' has been defined to mean "the

price associated with the length of time that an investor

must wait until an investment matures or the related

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

outflows are distanced by time and there is a

compensation for time value of money. It is significant

to notice that in order to satisfy the requirement of this

provision, the financial transaction should be in the

nature of debt and no equity has been implied by the

opening words of Section 5(8) of the IBC. It is true that

there are complex financial instruments which may not

provide a happy situation to decipher the true nature

and meaning of a transaction. It is pertinent to point

out that the concept 'Financial Debt' as envisaged

under Section 5(8) of the IBC is distinctly different than

the one prevalent in England and provided in its

Company Appeal(AT)(Insolvency) No. 359 of 2019 Page 13 of 17 Insolvency Act, 1986 and the 'rules' framed

thereunder. It appears that in England there is no

exclusive element of disbursement of debt laced with

the consideration for the time value of money.

However, forward sale or purchase agreement as

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

regarded as a financial transaction. A forward contract

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

financial contract. It is essentially a contract for sale of

specified goods. It is true that some time financial

transactions seemingly restructured as sale and

repurchase. Any repurchase and reverse repo

transaction are sometimes used as devices for raising

money. In a transaction of this nature an entity may

require liquidity against an asset and the financer in

return sell it back by way of a forward contract. The

difference between the two prices would imply the rate

of return to the financer. (See Taxman's Law Relating

to IBNC, 2016 by Vinod Kothari & Sikha Bansal)."

19. In "Dr. B.V.S. Lakshmi vs. Geometrix Laser Solutions

Private Limited" - Company Appeal (AT) (Insolvency) No. 38 of 2017,

this Appellate Tribunal having noticed the aforesaid provision by

judgment dated 22nd December, 2017 held as follows: Company Appeal(AT)(Insolvency) No. 359 of 2019 Page 14 of 17

"29. For coming within the definition of 'Financial

Debt' as defined under sub-section (8) of Section

5, the Claimant is required to show that (i) there

is a debt alongwith interest, if any, which has

been disbursed and (ii) such disbursement has

been made against the 'consideration for the

time value of money'. Thereby, if the Claimant

claims to be 'Financial Creditor' he will have to

show that debt is due which he has disbursed

against the 'consideration for the time value of

money' and that the borrower has raised the

amount directly or through other modes like

credit facility or its de-materialised equivalent,

note purchase facility or the issue of bonds,

notes, debentures, loan stock or any other

similar instrument. 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 can also be referred

to by the Creditor to claim that there is a

'financial debt' due to him which has been

disbursed against the 'consideration for the time

value of money'.

Company Appeal(AT)(Insolvency) No. 359 of 2019 Page 15 of 17

To show that there is a debt due which was

disbursed against the 'consideration for the time

value of money', it is not necessary to show that

an amount has been disbursed to the 'Corporate

Debtor'. A person can show that the

disbursement has been made against the

'consideration for the time value of money'

through any instrument. For example, for 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 for which only the market value of

such transaction shall be taken into account, it

is not necessary to show that amount has been

disbursed. The disbursement against the

'consideration for the time value of money' is the

main factor."

20. By relying on the aforesaid Judgment of this Appellate Tribunal,

we are of the view that the Appellant, who claims to be a Financial

Creditor, however, claims made by it, is not a Financial Debt. It is

reiterated that in the marketing agreements and subsequent

correspondence exchanged between the Appellant and the

Company Appeal(AT)(Insolvency) No. 359 of 2019 Page 16 of 17 Respondent, no way it is mentioned that the amount paid by the

Appellant to be repayable along with interest over a period of time in a

single or series of payments in future. However, we are of the firm

opinion that the Appellant has not disbursed money against the

consideration for the time value.

21. Accordingly, we hold that the claim of the Appellant is not a

Financial Debt within the meaning of Section 5(8) of IBC.

22. For the aforesaid reasons, we are not inclined to interfere with

the impugned order passed by the Adjudicating Authority dated

14.02.2019 and the appeal is dismissed. No order as to costs.

[Justice S.J. Mukhopadhaya] Chairperson

(Kanthi Narahari) Member(Technical)

New Delhi 23rd October, 2019

AKC

Company Appeal(AT)(Insolvency) No. 359 of 2019 Page 17 of 17