National Company Law Appellate Tribunal
Pec Limited vs Phulchand Exports Private Limited on 22 August, 2022
NATIONAL COMPANY LAW APPELLATE TRIBUNAL, NEW DELHI
Company Appeal (AT) (Insolvency) No. 1071 of 2021
In the matter of
PEC Ltd. ... Appellant
A Government of India Enterprise,
MMTC DRO, Block F, Third Floor,
Flatted Factory Complex,
Jhandewalan Extension,
Karol Bagh, Delhi 110055.
Versus
M/s. Phulchand Exports Pvt. Ltd. ...Respondent
2nd Floor, West Wing Electric Mansion, Appasaheb Marathe Marg, Worli, Mumbai - 400025.
Present For Appellant: Mr. Krishan Kumar, Mr. Nitin Pal, Advocates For Respondent: Mr. Arun Kathpalia, Sr. Advocate, Ms. Natasha Dalmia, Mr. Umang Mehta and Mr. Suchakshu Jain, Advocates Judgment (Date:22.08.2022) (Per: Dr. Alok Srivastava) This appeal has been filed by PEC Limited ('Appellant') under section 61 of the Insolvency and Bankruptcy Code, 2016 (hereinafter called 'IBC') aggrieved by the order dated 27.8.2021 Company Appeal (AT) (Insolvency) No. 1071 of 2021 Page 1 of 25 (hereinafter called 'Impugned Order') passed by the NCLT, Mumbai Bench - (C-III) (the Adjudicating Authority) in CP. (IB)-63/MB/2020.
2. In brief, the facts of the case are that six contracts for procurement, shipping and export of iron ore, were entered into between M/s. Phulchand Exports Pvt. Ltd. (Corporate Debtor) and PEC Limited (so-called Financial Creditor) between 3.11.2010 and 12.7.2012 (called 'Associate Supplier Contract') leading to a disbursement of Rs. 63.57 crores. This amount was advanced by the so-called Financial Creditor/Appellant to the Corporate Debtor as packing credit. This agreement was preceded by a back to back contract (hereinafter called 'Foreign Contract') entered into between M/s. Networth Trading Pte Ltd., Singapore (buyer) and PEC Ltd, New Delhi (seller) for supply of iron ore fines on 2.11.2010. It is stated by the Appellant that before he could export the iron ore fines to the buyer in China, the Hon'ble Supreme Court issued directions imposing ban on export of iron ore from Goa and hence the shipment could not be done.
3. It is further claimed by the Appellant that it sent a letter on 8.9.2014 to M/s. Phulchand Exports Pvt. Ltd./Respondent for making payment of the outstanding amount of Rs. 73,84,12,693/- in respect of the above-mentioned six contracts, to which the Respondent sent a reply dated 15.9.2014 admitting that the said Company Appeal (AT) (Insolvency) No. 1071 of 2021 Page 2 of 25 amount was due and proposing to repay the outstanding dues in instalments. Since the Respondent failed to make payment of the outstanding amount as promised, he was sent reminders vide e-mail dated 8.10.2014 and letters dated 31.12.2014, 13.1.2015 and 5.2.2015 to the Respondent asking for outstanding payment. Thereafter, both the parties entered into negotiations to arrive at a settlement of pending dues, but these efforts were unsuccessful, whereupon, the Appellant filed an application under section 7 of the IBC for insolvency resolution of the Corporate Debtor. This application was dismissed vide Impugned Order dated 27.8.2021. Grounds of Appeal
4. The Appellant has preferred the appeal claiming that he, as Financial Creditor, has provided financial assistance in the form of packing credit to the Respondent/Corporate Debtor for procurement of iron ore to be exported to a foreign buyer, retaining a trade margin @ 1% of the Free on Board (FOB) value of the shipment. The Appellant had earlier entered into a buyer-seller contract with a foreign buyer M/s Networth Trading Pte Ltd. for supply of iron ore fines at a port in China. In accordance with clause 6 of the Associate Supplier Contract, the Appellant gave interest-bearing finance to the Respondent. Upon demanding payment of the amounts so given by the Appellant, cheques were issued by the Respondent for Company Appeal (AT) (Insolvency) No. 1071 of 2021 Page 3 of 25 repayment (which were later dishonoured), which show that the debt is due and payable. Further, the Respondent has given confirmation of the debt, though 'without prejudice', which should be taken as admission of his liability to repay the outstanding amount. Further, the liability is admitted/ acknowledged by the Respondent through various e-mails and letters, which are stated in clause (G) of para 9 at page 30 of the appeal paperbook, Vol. I. Furthermore, the Associate Supplier Agreement is basically an agreement for financial assistance and since the outstanding debt was acknowledged within a period of 3 years from the date of filing the section 7 application, it is within limitation and in accordance with clause (f) of the sub-section 8 of section 5 of the IBC, the outstanding amount payable by the Respondent is covered in the definition of 'financial debt'.
5. We heard the arguments of the learned counsels of both the parties and perused the record.
6. The Learned Counsel for Appellant has argued that six agreements were signed between the Appellant and Respondent during the period 3.11.2010 to 12.7.2012 and in accordance with these agreements a total amount of Rs.62.57 crores was disbursed to the Respondent. He has referred to one such agreement dated 3.11.2010 between the Appellant and Respondent (hereinafter Company Appeal (AT) (Insolvency) No. 1071 of 2021 Page 4 of 25 called 'Associate Supplier Agreement') to argue his case. The Associate Supplier Agreement provided that the Associate Supplier (Respondent) shall perform, fulfill and observe all the obligations, covenants and agreements and observe under, in terms so of or by virtue of the foreign contract, in consultation with the Associate Supplier. He has further argued that financial assistance in the form of interest bearing advance was given by the Appellant to the Respondent in accordance with clause 5 of the Associate Supplier Agreement (attached at pp. 77-78 of the appeal paperbook Vol. I), and, thus, this financial assistance was given for time value of money.
7. He has further referred to the judgment of this tribunal in the matter of PEC Ltd. vs. M/s. Sree Ramakrishna Alloys Ltd. [CA (AT) (INS) 225 of 2017) and PEC Ltd. vs. M/s. Sri Gangadhara Steels Limited [CA (AT) (Ins.) No. 236 of 2017] in which by a common judgment dated 13.12.2017 the financial assistance provided by PEC Ltd. was held to be financial credit. He has also claimed that the agreements under consideration in the aforementioned cases were similar to the agreement in the present appeal and, hence, the financial assistance provided by the Appellant in this appeal should be classified as a financial debt on the same basis. In this connection, he has referred to paragraph 19 Company Appeal (AT) (Insolvency) No. 1071 of 2021 Page 5 of 25 of the judgment dated 13.12.2017 in aforementioned matters to emphasize that in a similar situation M/s. PEC Limited was considered as Financial Creditor.
8. On the point of limitation, the Learned Counsel for Appellant has referred to the acknowledgment dated 15.9.2014 sent by the Respondent (attached at pp.126-127 of the appeal paperbook, Vol.I), wherein the Respondent had agreed to repay Rs. 12 crores towards old outstanding dues between 30.9.2014 to 5.10.2014 and Rs. 50 crores each in quarterly instalments starting from October, 2014 till June, 2015 for a total of Rs. 57 crores. He has also stated that the Financial Creditor vide his e-mail dated 8.10.2014, addressed to the Corporate Debtor, provided the details of the outstanding dues contract-wise. He has further referred to the letters of the Appellant dated 8.9.2014 (attached at pg. 125 of the appeal paperbook, vol. I) and 17.9.2014 (attached at pg. 128 of the appeal paperbook, vol. I) to emphasize that the outstanding payments due to the appellant from the respondent were communicated to the Respondent/ Corporate Debtor, who accepted this position and agreed to make repayment vide letter dated 15.9.2014. He has strongly argued that since the financial credit was provided to the Corporate Debtor and the outstanding payments are due to the Appellant/Financial Creditor as admitted by the Corporate Debtor in the aforesaid Company Appeal (AT) (Insolvency) No. 1071 of 2021 Page 6 of 25 communications. The financial debt is due and payable to the Financial Creditor, and, therefore section 7 application filed by the Appellant ought to have been admitted by the Adjudicating Authority.
9. The Learned Senior Counsel for Respondent has argued that the main contract for supply of iron ore fines was executed between the Networth Trading Pte Limited, Singapore and PEC Limited, New Delhi as buyer and seller respectively (attached at pp.39-56 of the reply of Respondent, submitted vide dy. No. 34278 dated 14.3.2022), wherein the seller PEC Limited has contracted to supply 1,00,000 WMTS ± 5% at seller option to the buyer Networth Trading Pte. Ltd. He has argued that in connection with the supply to the foreign party, the Appellant has entered into an agreement on 3.11.2010 with the Respondent (called the 'Associate Supplier') (attached at pp. 77-80 of the appeal paperbook, Vol.I) whereby the Respondent, as Associate Supplier, has undertaken to fulfill, perform and discharge obligations and responsibilities of PEC Ltd. as per aforementioned foreign contract, and therefore, the relationship between the Appellant and Respondent is that of Principal and Agent and not of a Financial Creditor and Corporate Debtor.
Company Appeal (AT) (Insolvency) No. 1071 of 2021 Page 7 of 25
10. The Learned Senior Counsel for Respondent has also referred to paragraphs 23 and 24 of the Impugned Order to point out that the Adjudicating Authority has surmised that the contract between the Appellant and Respondent is akin to one between Principal and Agent and the Respondent works as Agent of the Appellant (who is the Principal), who has been given an interest bearing advance to fulfill all obligations and responsibilities of the Principal/PEC Limited. He has further pointed out that in Part-IV of section 7 application (attached at pp.187-220 of the appeal paperbook, Vol.II), no date of default has been explicitly stated in Part IV of this application. He has thus claimed that in the absence of any date of default even the amount claimed as financial debt cannot be said to be due and payable to the Financial Creditor. He has referred to para 28 of the Impugned Order, where the Adjudicating Authority has held as follows:-
"Therefore, it again reinforces the fact that this advance has not been made for the time value of money, but for procurement of iron ore and shipping it to the foreign buyer as per the foreign contact entered between the parties. This also clearly shows that it is an operational debt, an advance bearing a rate of interest to procure goods on behalf of the Petitioner to supply to the foreign buyer, where, the Petitioner is the 'Supplier', on a given shipment date i.e., 31.12.2013."
11. The Learned Senior Counsel for Respondent has also submitted that the Foreign Contract has a 'Force Majeure' clause, Company Appeal (AT) (Insolvency) No. 1071 of 2021 Page 8 of 25 which according to clause 3 of the Associate Supplier contract has to be abided by the Associate Supplier. He has stated that the 'Force Majeure' condition in clause 14 of the Foreign Contract' entitles either of the parties, which is unable to fulfill any obligation under the contract, to inform the other party of the existence of the circumstances preventing the performance of the contract within 15 days of occurrence of any of the causes of 'Force Majeure'. He has further pointed out that the 'Force Majeure' clause covers 'act of Government' among other causes/events as valid causes of inability to perform whole or in part any obligation under the contract. He has also referred to the 'Terms of Payment' included in the Foreign Contract and Associate Supplier Contract which entitles PEC Ltd. to receive payment within 7 days from the dispatch of documents and proceeds from the foreign buyer, and after due deductions of the payments made by the PEC directly to the Associate Supplier or to the vendors on the advice of Associate Supplier including PEC's trading margin, taxes, duties, levies, interest, ocean freight, etc. due amounts are to be paid to the Associate Supplier. He has pointed out that reading the 'Terms of Payment' included in both the contracts/agreements together, it is quite clear that the payment is to be first received by PEC Limited and after making due deductions for payments made by PEC directly, the remaining amount is to be paid to the Associate Supplier.
Company Appeal (AT) (Insolvency) No. 1071 of 2021 Page 9 of 25
12. It is thus clear that there is no repayment schedule stipulated in the Associate Supplier Agreement and the payment will be made to PEC Ltd. only after the shipment of the iron ore fines, which was not made in the present case, as the iron ore was confiscated by the government authorities and, therefore, no payment was received from the foreign buyer. He has strongly argued that in such a situation when no payment was received from the foreign buyer in the event of 'force majeure' how could PEC Ltd, realise the amount given to the Associate Supplier and so there was no actual default in payment by the Respondent to the Appellant.
13. The main issue that arises in this appeal is whether the said amount given by the so-called Financial Creditor (Appellant) to the Corporate Debtor (Respondent) is a financial debt under the IBC, and if it is so, then is the repayment of the debt in respect of the claim in default and due and payable to the Appellant.
14. We reproduce below the definitions given in IBC which are relevant for the present appeal:-
"3. Definitions. In this Code, unless the context otherwise requires, -
Xxxx xxxx xxxx Company Appeal (AT) (Insolvency) No. 1071 of 2021 Page 10 of 25 (11) "debt" means a liability or obligation in respect of a claim which is due from any person and includes a financial debt and operational debt.
(12) "default" means non-payment of debt when whole or any part or instalment of the amount of debt has become due and payable and is not paid by the debtor or the corporate debtor, as the case may be."
"5. Definitions - In this Part, unless the context otherwise requires, -
(8) "financial debt" means a debt alongwith interest, if any, which is disbursed against the consideration for the time value of money and includes -
(f) any amount raised under any other transaction, including any forward sale or purchase agreement, having the commercial effect of a borrowing.
Xxx xxx xxx xxx (21) "operational debt' means a claim in respect of the provision of goods or services including employment or a debt in r4espect of the payment of dues arising under any law for the time being in force and payable to the Central Government, any State Government or any local authority."
15. The Associate Supplier Agreement dated 3.11.2010 and the Foreign Contract dated 2.11.2010 are also relevant for disposal of this appeal (attached at pp.77-80 of the appeal paperbook, Vol. I) and the relevant portions of both the agreement and contract are reproduced below:
Company Appeal (AT) (Insolvency) No. 1071 of 2021 Page 11 of 25 I. Extracts from ASSOCIATE SUPPLIER AGREEMENT Xxx xxx xxx xxx AND WHEREAS the 'Associate Supplier' has agreed to fulfill, perform and discharge the obligations and responsibilities of PEC under, in terms of and by virtue of the above said Foreign Contract in the manner and on the terms and conditions as contained in the Foreign Contract and/or which PEC have imposed.
Xx xx xx xx
1. SCOPE OF AGREEMENT
The 'Associate Supplier' shall, unless inconsistent with the provisions of the Agreement perform, fulfill and observe all the obligations covenants and agreements and observe under, in terms of or by virtue of the 'Foreign contract' including obligations, agreement and covenants, as made in consultation with the 'Associate Supplier' be modified or provided for in the Foreign contract in future. The obligations, covenants and agreements as have been agreed to be performed, fulfilled and observed by the 'Associate Supplier', shall include, without being restricted to procure and supply iron ore fines, undertake all logistics involved, in export of iron ore fines to China right from the loading into trucks at pithead in the Mines upto loading into the ship at Panjim/Mormugao, Goa loading port, chartering of vessel if any including inspection and fulfilling of warranties/guarantees under the Foreign Contract.
Xx xx xx xx
3. TERMS OF FOREIGN CONTRACT:
The 'Associate Supplier' shall abide by all the terms and conditions of the foreign contract appended as ANNEXURE - I. The 'Foreign Contact' shall form an integral and inseparable part of this agreement contents of 'foreign contract' shall not be Company Appeal (AT) (Insolvency) No. 1071 of 2021 Page 12 of 25 disclose to any third party without PEC's written permission to this effect.
Xx xx xx xx
5. FINANCIAL ASSISTANCE:
5.1 At the request of Associate Supplier PEC may consider to give an interest bearing advance to Associate Supplier so as to facilitate them to fulfill, perform and discharge all the obligations and responsibilities of PEC under, in terms of and by virtue of the Order, in the matter and on the terms and conditions therein contained and/or by which PEC have imposed.
5.2 In such an event, Associate Supplier shall make payment to various vendors and submit the receipts to PEC. PEC shall make the interest bearing advance payment for such expenses equal to the value for which receipts have been submitted subject to 90% of the contract value as packing credit. Iron Ore fines with value addition at each stage shall remain pledged to PEC till it is exported.
5.3 Interest @ 9% p.a on monthly rest basis shall be chargeable on the amounts advanced to the associate Supplier and if for any reason Associate Supplier are not able to supply the material as per foreign contract, Associate supplier shall pay to PEC interest @ 11.5% p.a. on monthly rest on the payments already made by PEC on their advice and refund the principal and interest amount immediately.
6. PEC'S TRADING MARGIN PEC's trading margin shall be @ net 1% (one percent) of FOB value of the 'Foreign Contract' which along with other PEC dues shall be deducted from the realization of each negotiation, balance amount of any, due to Associate Supplier shall be paid thereafter.
Company Appeal (AT) (Insolvency) No. 1071 of 2021 Page 13 of 25
7. TERMS OF PAYMENT PEC shall receive the payment within seven days from dispatch of documents and proceeds will be given to Associate Supplier after deducting all the payments made by PEC directly to the Associate Supplier or to the vendors on the advise of Associate Supplier, including PEC's trading margin, taxes (illegible) levies, interest, ocean freight, if paid by PEC etc. The difference in the Account shall be settled and paid to Associate Supplier within 5 banking days of settlement of each shipment.
II. Extracts from FOREIGN CONTRACT
Xxx xxx xxx xxx
The contract is made by and between the buyer and seller whereby the Buyer agrees to buy and the Seller agrees to sell the under mentioned goods for China, on the terms and conditions stated below:-
CLAUSE 1 NAME OF COMMODITY: 50.00% FE IRON ORE
FINES
COUNTRY OF ORIGIN: India
PACKING: In bulk
Port of loading: Mormugao, India
Port of Destination: One Main Port, China
CLAUSE 2 SHIPMENT PERIOD AND QUANTITY
Quantity: 1,00,000 WMTS ± 5% at Seller's option
Shipment: On or before 31st Dec. 2010
Partial Shipment: Allowed
Company Appeal (AT) (Insolvency) No. 1071 of 2021 Page 14 of 25 CLAUSE 6 PAYMENT Buyer shall arrange payment within 7 days from the dispatch of documents from sellers bank.
CLAUSE 14 FORCE MAJEURE If at any time during the existence of this contract either party is unable to perform whole or in part any obligation under this contract, because of war, hostility, military operation of any character, and commotion's, sabotage, quarantine restriction, acts of Government, acts of God, fie, floods, explosions, epidemics, strikes or other labour trouble, embargoes including all natural calamities then the date of fulfillment of any obligation shall be postponed during the time when such circumstances are operative.
Any waiver/extension of time in respect of the delivery of any installment or part of the goods shall not be deemed to be waiver/extension of time in respect of the remaining deliveries. If operation of such circumstances exceeds two months, either party will have the right to refuse further performance of the contract in which case neither party shall have the right to claim eventual damages.
The party which is unable to fulfill its obligations under the present contract must within 15 days of occurrence of any of the causes mentioned in this clause, shall inform the other party of the existence of the circumstances preventing the performances of the contact. Certificate issued by a Chamber of Commerce or any other competent authority connected with the cause in the country of the Seller or the buyer shall be sufficient proof of the existence of the above circumstances and their duration. Non-availability of material will not be an excuse to the Sellers for not performing their obligations under this contract." Company Appeal (AT) (Insolvency) No. 1071 of 2021 Page 15 of 25
16. It is clear from the pleadings and documents submitted by the parties that the Foreign Contract was entered into between the buyer Networth Trading Pte Limited and seller PEC Ltd. on 2.11.2010. Thereafter, for fulfillment of this contact, an agreement (referred as 'Associate Buyer Agreement') was signed on the next day i.e. 3.11.2010 between the Appellant and Respondent. The Foreign Contract is regarding procurement and shipment of 1,00,000 WMTS ± 5% at seller's option of iron ore fines from Mormugao Port, India to a port in China. The payment condition included on the contract mentions that the buyer shall arrange payment within 7 days from the date of dispatch of documents from seller bank. Thus, payment is to be made by the buyer Networth Trading Pte Ltd. to the seller PEC Ltd. after shipment from Mormugao Port in India. The other contract, which is the Associate Supplier Agreement' states that the Associate Supplier shall fulfill, perform and discharge obligations and responsibilities of PEC Ltd. in terms of and by virtue of the foreign contract, which include procurement and supply of iron ore fines, undertake all logistics involved in export of iron ore fines to China right from the loading into trucks at pithead in the mines upto loading into the ship at Panjim/Mormugao, Goa loading port, chartering of vessel if any including inspection and fulfilling of warranties/guarantees under the Foreign Contract. The Foreign Contract also stipulates that the Associate Supplier shall abide by Company Appeal (AT) (Insolvency) No. 1071 of 2021 Page 16 of 25 the terms and conditions of the foreign contract and foreign contract shall form an integral and inseparable part of this agreement i.e. Associate Supplier agreement (reference clause 4 of the Associate Supplier Agreement).
17. The financial assistance, which is included in clause 5 of the Associate Supplier Agreement, provides that PEC Ltd. may consider to give an interest-bearing advance to Associate Supplier so as to facilitate them to fulfill, perform and discharge all the obligations and responsibilities of PEC under, in terms of and by virtue of the order, in the manner and on the terms and conditions therein contained and/or by which PEC have imposed. Furthermore, the iron ore fines shall remain pledged to PEC till they are exported. Clause 5.3 provides for payment of interest @ 9% p.a. on the amount advanced to the Associate Supplier and if, for any reason, the Associate Supplier is not able to supply the material as per foreign contract, Associate Supplier shall pay to PEC interest @ 11.5% p.a. on monthly rest on the payments already made by PEC on their advice and refund the principal and interest amount immediately. Furthermore, the clause 7 - 'Terms of Payment' - in the Associate Supplier Agreement stipulates that PEC shall receive the payment within seven days from the dispatch of documents and proceeds will be given to Associate Supplier after deducing all the payments made Company Appeal (AT) (Insolvency) No. 1071 of 2021 Page 17 of 25 by PEC directly to the Associate Supplier or to the vendors, including PEC's trading margin of 1% of FOB value, taxes, levies, interest, ocean freight, if paid by PEC. The difference in the account will be paid to the Associate Supplier by PEC Ltd.
18. From the above discussion, it is abundantly clear that a buyer-seller contract was entered into between the Networth Trading Pte Limited, Singapore and PEC Limited on 2.11.2010 and in furtherance of contract, PEC entered into an agreement with the Associate Supplier Phulchand Exports Pvt. Ltd. (Respondent) through a separate agreement dated 3.11.2010. The financial assistance provided to the Associate Supplier by PEC Ltd. is to fulfill, perform and discharge the obligations and responsibilities of PEC under the foreign contract. It is clear that the amount provided by PEC as financial assistance, and claimed by it as financial debt under IBC, is basically for purchase, shipment and export of iron ore fines in fulfilment of the foreign contract. This amount is certainly not an amount given by PEC Ltd. as a financial creditor to a corporate entity M/s Phulchand Exports to ensure its overall financial viability.
19. In this regard, the following two judgments of Hon'ble Supreme Court provide much clarity regarding the purpose of Company Appeal (AT) (Insolvency) No. 1071 of 2021 Page 18 of 25 financial debt in ensuring the financial viability of the corporate debtor:
I. Swiss Ribbons Pvt. Ltd. & Anr. Vs. Union of India & Ors.
[2019 SCC OnLine SC 73, decided on 25.01.2019] "27. According to us, it is clear that most financial creditors, particularly banks and financial institutions, are secured creditors whereas most operational creditors are unsecured, payments for goods and services as well as payments to workers not being secured by mortgaged documents and the like. The distinction between secured and unsecured creditors is a distinction which has obtained since the earliest of the Companies Acts both in the United Kingdom and in this country. Apart from the above, the nature of loan agreements with financial creditors is different from contracts with operational creditors for supplying goods and services.
Financial creditors generally lend finance on a term loan or for working capital that enables the corporate debtor to either set up and/or operate its business. On the other hand, contracts with operational creditors are relatable to supply of goods and services in the operation of business.
Financial contracts generally involve large sums of money. By way of contrast, operational contracts have dues whose quantum is generally less. In the running of a business, operational creditors can be many as opposed to financial creditors, who lend finance for the set up or working of business. Also, financial creditors have specified repayment schedules, and defaults entitle financial creditors to recall a Company Appeal (AT) (Insolvency) No. 1071 of 2021 Page 19 of 25 loan in totality. Contracts with operational creditors do not have any such stipulations. Also, the forum in which dispute resolution takes place is completely different. Contracts with operational creditors can and do have arbitration clauses where dispute resolution is done privately.
Operational debts also tend to be recurring in nature and the possibility of genuine disputes in case of operational debts is much higher when compared to financial debts. A simple example will suffice. Goods that are supplied may be substandard. Services that are provided may be substandard. Goods may not have been supplied at all. All these qua operational debts are matters to be proved in arbitration or in the courts of law. On the other hand, financial debts made to banks and financial institutions are well-documented and defaults made are easily verifiable.
28. Most importantly, financial creditors are, from the very beginning, involved with assessing the viability of the corporate debtor. They can, and therefore do, engage in restructuring of the loan as well as reorganization of the corporate debtor's business when there is financial stress, which are things operational creditors do not and cannot do. Thus, preserving the corporate debtor as a going concern, while ensuring maximum recovery for all creditors being the objective of the Code, financial creditors are clearly different from operational creditors and therefore, there is obviously an intelligible differentia between the two which has a direct relation to the objects sought to be achieved by the Code."
(Emphasis supplied) Company Appeal (AT) (Insolvency) No. 1071 of 2021 Page 20 of 25 II. Anuj Jain, Interim Resolution Professional for Jaypee Infratech Ltd. V. Axis Bank Ltd. (2020) 8 SCC 401 "50. A conjoint reading of the statutory provisions with the enunciation of this Court in Swiss Ribbons [Swiss Ribbons (P) Ltd. v. Union of India, (2019) 4 SCC 17] , leaves nothing to doubt that in the scheme of the IBC, what is intended by the expression "financial creditor" is a person who has direct engagement in the functioning of the corporate debtor; who is involved right from the beginning while assessing the viability of the corporate debtor; who would engage in restructuring of the loan as well as in reorganisation of the corporate debtor's business when there is financial stress. In other words, the financial creditor, by its own direct involvement in a functional existence of corporate debtor, acquires unique position, who could be entrusted with the task of ensuring the sustenance and growth of the corporate debtor, akin to that of a guardian. In the context of insolvency resolution process, this class of stakeholders, namely, financial creditors, is entrusted by the legislature with such a role that it would look forward to ensure that the corporate debtor is rejuvenated and gets back to its wheels with reasonable capacity of repaying its debts and to attend on its other obligations. Protection of the rights of all other stakeholders, including other creditors, would obviously be concomitant of such resurgence of the corporate debtor."
(Emphasis supplied) Company Appeal (AT) (Insolvency) No. 1071 of 2021 Page 21 of 25
20. The terms of payment included in the Foreign Contract and Associate Supplier Agreement make it clear that the payment is to be received by PEC Limited from the buyer Networth Trading Pte Limited and after deduction of amount advanced to M/s. Phulchand Exports Pvt. Ltd., the trading margin and other taxes and related expenses paid by PEC Ltd., the remaining amount shall be paid to M/s Phulchand Exports Pvt. Ltd. Therefore, the financial assistance provided by PEC Ltd. is for the express purpose of buying, shipping and exporting iron ore fines limited to the performance of the Foreign Contract and is in no way to be used for assessing the financial viability of the corporate debtor and in ensuring the financial strength of the corporate debtor. Moreover, as has been noted earlier, the payment from the buyer is to be received by PEC Ltd. and remaining amount is to be made to M/s Phulchand Exports after making due adjustment of payments already made by PEC Ltd. It is clear that there is no repayment schedule of the financial assistance given nor there is any clear event of default (except in a Force Majeure situation) or a date of default. Thus we find no force in the argument of the Learned Counsel of Appellant that since the amount given by the Appellant to the Respondent is interest bearing, it is a financial debt.
Company Appeal (AT) (Insolvency) No. 1071 of 2021 Page 22 of 25
21. An examination of the debt given as advance by PEC Ltd. in the light of the definitions provided in sub-section 11 of section 3 and clause (f) of sub-section 8 of section 5 of the IBC makes it clear that while the amount advanced by PEC to M/s. Phulchand Exports Pvt. Ltd. would be a debt under the definition given section 3(11) of the IBC, it should have the commercial effect of borrowing, and more so a borrowing that helps in ensuring financial viability of the corporate debtor for it to qualify as 'financial debt' under the IBC. Therefore, we are of the view the amount provided by PEC Ltd. as interest-bearing advance to the Respondent does not qualify to be a 'financial debt' as defined under the IBC.
22. Another point raised by the Learned Senior Counsel for Respondent is that no clear date of default is provided in Part IV of the section 7 application. We note that the Adjudicating Authority has gone at length in inferring the date of default even though no date of default of the financial debt is explicitly stated in section 7 application. We have earlier noted that the payment is to be made by the buyer of iron ore fines after their shipment to PEC Ltd. No repayment schedule is included in the Associate Supplier Agreement and in the absence of any obligation of repayment there is no clear date of default. Thus it remains a moot point whether the so-called debt is in default of repayment.
Company Appeal (AT) (Insolvency) No. 1071 of 2021 Page 23 of 25
23. The Learned Senior Counsel for Respondent has also argued that the actual shipment did not take place since the iron ore fines slated for shipment were confiscated by the Government Authorities. Hence, neither any shipment of iron ore fines took place from the Mormugao Port to China nor any payment in connection with the proposed shipment was received by PEC Ltd. The said event is covered under the 'Force Majeure' clause of the foreign contract and the parties are entitled to enforce their rights in such an event of 'force majeure' in accordance with the Associate Supplier Agreement and not as financial creditor/debtor.
24. We note that in the judgment dated 13.12.2017 in the matter of PEC Ltd. vs. M/s. Sree Ramakrishna Alloys Ltd. (supra) and PEC Ltd. vs. M/s. Sri Gangadhara Steels Limited (supra) wherein this tribunal had considered the amount given by PEC Ltd. to the Respondent to be financial debt. The issue of a debt being financial debt was considered in detail by the Hon'ble Supreme Court in the judgments dated 25.1.2019 in the matter of Swiss Ribbons Pvt. Ltd. & Anr. Vs. Union of India & Ors. (supra) and judgment dated 26.2.2020 in the matter of Anuj Jain, Interim resolution Professional for Jaypee Infratech Ltd. vs. Axis Bank Ltd. (supra) respectively. In the light of the ratio in both these judgments of Hon'ble Supreme Court which has been reproduced earlier in this Company Appeal (AT) (Insolvency) No. 1071 of 2021 Page 24 of 25 judgment, we consider the amount advanced by M/s. PEC Ltd. to M/s. Phulchand Exports Pvt. Ltd. as not being financial debt under the IBC.
25. In view of the detailed aforementioned discussion, we are of the view that the amount as claimed by the Appellant does not fall in the category of 'financial debt' as defined in the IBC. Since the debt in question in this appeal is not classified as a 'financial debt' and the Appellant has sought relief under Section 7 of the IBC, we do not consider it necessary to go into the issue of repayment and default of such a debt. We, therefore, hold the clear view that the Adjudicating Authority has not erred in passing the Impugned Order, whereby the Section 7 application of the Appellant has been dismissed. The appeal, thus, fails and is accordingly dismissed.
26. There is no order as to costs.
(Justice Rakesh Kumar Jain) Member (Judicial) (Dr. Alok Srivastava) Member (Technical) New Delhi 22nd August, 2022 /aks/ Company Appeal (AT) (Insolvency) No. 1071 of 2021 Page 25 of 25