Interest Bearing Refundable Advance Paid Under An MoU Which Has Lost Legal Force Can Still Be Categorized As Financial Debt: NCLT Ahmedabad

The National Company Law Tribunal (NCLT), Ahmedabad bench comprising of Dr. Madan B Gosavi (Judicial Member) and Mr. Ajai Das Mehrotra, (Technical Member) while adjudicating an application under Section 60(5) of Insolvency and Bankruptcy Code, 2016 (“IBC, 2016”) in Sheth Developers Pvt Ltd & Anr. Vs Dr. Vichitra Narayan Pathak categorized an advance amount which was paid under an MoU with no legal force and which was refundable with an interest @ 18% p.a. as ‘Financial Debt’Background Facts:Golden Tobacco Ltd. (“Corporate Debtor”) entered into an MoU dated 26.12.2009 with Sheth Developers Pvt. Ltd. and Suraksha Realty Limited (“Applicants”) for development of property of the Corporate Debtor at Vile Parle, Mumbai. Payment of Rs. 132 crores was made by the Applicants to the Corporate Debtor from 16.12.2009 till 15.03.2011. However, the Board for Industrial and Financial Reconstruction vide an order dated 31.03.2011 held that the MoU dated 26.12.2009 was entered in breach of the sanctioned scheme. The order was upheld by the Appellate Authority and even the Supreme Court vide an order dated 12.06.2016 held that the MoU dated 26.12.2009 had no legal force.An application under Section 7 of IBC, 2016 was filed before NCLT, Ahmedabad by M/s Arrow Engineering Ltd against the Corporate Debtor, which was admitted vide an order dated 07.06.2022 and an Interim Resolution Professional (IRP) was appointed. Both the applicants filed their claims as Financial Creditors before the IRP. However, the IRP rejected the claims of the Applicants on the ground that the disbursements made by the Applicants under the MoU were in consideration of Development Rights and this consideration is not the ‘time value of money’. Being aggrieved by the decision of the IRP, the Applicants filed the aforesaid application before the Tribunal seeking treatment as Financial Creditors. The Applicants contended that there was no dispute regarding the disbursement and receipt of Rs. 132 crores and under Section 65 of the Indian Contract Act, 1872, money given under a void contract is also to be refunded. Further, the MoU stipulated that if the Corporate Debtor fails to fulfil its obligations, the Applicants would have the option to terminate the MoU and upon such termination, the Corporate Debtor was bound to refund the money with interest @18% p.a. It was submitted that the MoU got terminated as it was declared void by the Supreme Court, thus the Applicants were entitled to refund of the money with interest @18% p.a. The Applicants also submitted that their case was similar to the case of Arrow Engineering Ltd which was a strategic investor for development of another property of the Corporate Debtor and has already been admitted as Financial Creditor.On the contrary, the IRP submitted that the MoU has been held to be void and no legal rights flow from the said MoU. Further, there are differences between the transactions of Arrow Engineering Ltd. and Corporate Debtor and between the transactions of the Applicants and the Corporate Debtor as the MoU with the Arrow Engineering Ltd. was held to be valid by the Supreme Court and the nature of agreement was finance and marketing.Findings of the Tribunal:The Tribunal observed that the amount of Rs. 132 crores is repayable to the Applicants under Section 65 of the Indian Contract Act, 1872 and hence was covered under the definition of ‘debt’ under Section 3(11) of IBC, 2016. The Tribunal further observed that the money was paid in consideration to development rights in the property of the Corporate Debtor and since the Applicants neither supplied any goods nor rendered any services to the Corporate Debtor, the advanced money is not an operational debt. The Tribunal observed that as per the MoU, if the Corporate Debtor fails to execute and register an irrevocable joint development agreement in favour of the Applicants, then the Applicants would have the option to terminate the MoU and the Corporate Debtor shall have to refund all amounts to the Applicants with interest @18% p.a. The MoU got terminated due to the judgment of the Supreme Court and the advance of Rs. 132 crores got converted into interest bearing refundable advance. Hence the Tribunal held the debt to be a Financial Debt.The Tribunal remarked that it is neither dwelling into whether the interest is payable or not as the MoU has no legal force, nor is it dwelling on whether the debt is secured or unsecured. It is only deciding on whether the said advance should be treated as operational debt or financial debt.With the aforesaid observations, the Tribunal allowed the application and directed the IRP to consider the claims of the Applicants as Financial Debts. Case:Sheth Developers Private Limited & Anr. vs Vichitra Narayana Pathak (IRP of Golden Tobacco Limited) in the matter of Arrow Engineering Limited vs Golden Tobacco LimitedCase No.:IA/690(AHM)2022 in CP(IB) 268 of 2020Counsel for the Applicant:Sr. Adv. Navin Pahwa a.w. Adv Jay Kansara...

Interest Bearing Refundable Advance Paid Under An MoU Which Has Lost Legal Force Can Still Be Categorized As Financial Debt: NCLT Ahmedabad

Udai Yashvir Singh

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