The Principal Bench of the National Company Law Appellate Tribunal ( NCLAT ) has held that a security refund of advance amount can’t change the nature of the transaction into financial debt. It was observed that the security of refund of advance amount cannot change the nature of the transaction for supply of sugar into financial debt.
Sainik Industries Private Limited, the Appellant engaged in the business of purchasing sugar from various sugar factories, and corporate companies and selling said sugar to sugar brokers, consumers, confectioneries etc. The Respondent- ‘M/s. Indian Sugar Manufacturing Company Limited’ ( Corporate Debtor ) is engaged in the business of manufacturing and sale of sugar. An Agreement dated 28.07.2016 was entered between the Appellant and the Corporate Debtor for the supply of 5200 MT of sugar produced in the crop year 2016-2017.
The agreement contained certain other clauses providing for a penalty in the event the second party refuses or fails to deliver the entire/part quantity of sugar. The agreement also contemplated giving of security cheques by the Corporate Debtor towards refund of the advance amount.
The appellant advanced an amount of Rs.10 Crores in the year 2016 to the Corporate Debtor. Upon failure of the Corporate Debtor to meet its obligations, the Appellant issued a legal notice dated 31.01.2017 calling upon the Corporate Debtor to pay applicable interest and damages. Corporate Debtor having failed to deliver sugar as well as make payment of applicable interest, Appellant deposited the security cheques which were dishonoured.
Consequently, the Appellant initiated proceedings under Section 138 of the Negotiable Instruments Act, 1881 against the Corporate Debtor. The appellant filed a Company Petition No. 469 of 2020 against the Corporate Debtor under Section 9 of the Code seeking initiation of the CIRP of the Corporate Debtor.
Shri Krishnendu Datta, Senior Counsel appearing for the Appellant submitted that the Adjudicating Authority committed an error in appreciating the real nature of the transaction between the parties and has erroneously held that the claim of the Appellant is an operational debt whereas terms and conditions of the Agreement between the parties made it clear that it was financial debt.
Recovery in difference of price is natural consequence of Agreement between the parties for supply of white sugar on fixed price of 6000 per MT as has been mentioned in the Agreement. Clause 5 provide that in case of default by the second party in adjustment of advance, the second party of the second part shall also pay the above mentioned amount along with interest at the rate of Rs. 30/-PMT per day till refund of the advance amount.
It was observed that the security of refund of advance amount cannot change the nature of the transaction for supply of sugar into financial debt. Security for advance in the supply of goods is also an accepted mode and manner for protecting the advance but the said clause has no bearing on the nature of the transaction. Clause 11 deals with the collateral security where the second party shall also pledge 10% of its equity share capital with the first party via a separate agreement and in case the second party defaults on any provisions of this agreement, the first shall automatically be entitled for a right to sell the pledged shares to such person at such price and such terms and condition as it may deem fit without any obligation for prior information to the second party. It is not shown any separate agreement for pledging of shares was entered. Furthermore, the pledge of share is at best the security measures to protect the advance and to ensure that the obligation of second party is performed.
It was viewed that the Adjudicating Authority has rightly concluded that the claim which was filed by the Appellant was a claim of operational debt and the Resolution Professional has rightly treated the claim as operational debt.
The Tribunal comprising Justice Ashok Bhushan, Chairperson, Barun Mitra, Member ( Technical ) and Arun Baroka, Member ( Technical ) held that “Appellant’s claim has rightly been held to be operational debt.” The upheld the impugned order and dismissed the appeal.
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