Application U/S 7 IBC not maintainable if Financial Creditor steps into the shoes of Operational Creditor; NCLAT upholds NCLT’s order

National Company Law Appellate Tribunal

National Company Law Appellate Tribunal: While upholding the order of rejection of a S. 7 application by Adjudicating Authority, the Division Bench comprising of Rakesh Kumar Jain*, J. and Naresh Salecha (Technical Member), held the application filed by the appellants in the second appeal as Financial Creditor under S. 7 of the Insolvency and Bankruptcy Code, 2016 is not maintainable but they can avail their remedy by filing an application under S. 9 IBC as Operational Creditor in relation to the invoices generated by the seller.

Factual Matrix

In the instant matter, the appellant/Minions Ventures (P) Ltd. in the first appeal, is a private limited company which provides an online platform ‘KredX’ for invoice-discounting/reverse invoice discounting to raise working capital and the appellants in the second appeal are registered as the ‘Financiers’ on KredX who provide finance to the concerned party.

An ‘Agreement for Creation of Rights’ (COR) was executed between the appellants in the second appeal, respondent/Corporate Debtor – TDT Copper Ltd., Seller (M/s Ashoka Creations (P) Ltd.) and the Appellant in the first appeal, for creating rights in the receivables under the invoices in favour of the Appellants in the second appeal.

The appellants in the second appeal discounted the invoices and deposited the amounts in an escrow account maintained by KredX and the said amount was then transferred to the account of the Seller, as a result the Corporate Debtor’s liability to pay towards Seller stood extinguished and shifted towards the appellants in the second appeal. Despite communication by the appellant in the first appeal, the Corporate Debtor did not service the debt amount due to appellants in the second appeal, resulting in filing of S. 7 application by the appellants in the second appeal as Financial Creditor before the Adjudicating Authority.

The Adjudicating Authority vide dated 11-03-2022, rejected S. 7 application on the ground that the appellants have stepped into shoes of the Operational Creditor/Seller, therefore, their application under S. 7 IBC as a Financial Creditor is not maintainable and gave them the liberty to file an appropriate application under S. 9 IBC in accordance with law. Aggrieved by the impugned order passed by the Adjudicating Authority, the appellants filed separate appeals challenging the same before the NCLAT.

Moot Point

Whether the Appellants in the second appeal (Financiers) are the Financial Creditors as against the Corporate Debtor or have stepped into the shoes of Seller as an Operational Creditors?

Sections Touched Upon

S. 5(7) – Financial Creditor: Any person to whom a financial debt is owed and includes a person to whom such debt has been legally assigned or transferred to.

S. 5(8)(e) – Financial Debt: A debt alongwith interest if any which is disbursed against the consideration for the time value of money and includes (e) receivables sold or discounted other than any receivables sold on non-recourse basis.

S. 5(20) – Operational Creditor: A person to whom an operational debt is owed and includes any person to whom such debt has been legally assigned or transferred.

S. 21(5) – Where an operational creditor has assigned or legally transferred any operational debt to a financial creditor, the assignee or transferee shall be considered as an operational creditor to the extent of such assignment or legal transfer.

NCLAT’s Observation

NCLAT observed that as per COR, the appellants in the second appeal discounted the invoice as a Financier and deposited the amounts into an escrow/nodal account under Yes Bank Limited maintained by KredX. The deposited amount was further transferred to the account of the Seller and then the Seller transferred its right to receive the money under the invoices in favour of the Financiers/appellants. NCLAT further observed that in this transaction no money was disbursed much less for the time value as a financial debt to the Corporate Debtor and due to discounting the invoice of the Seller the Financiers/Appellants entered into shoes of the Seller and became Operational Creditors in terms of Ss. 5(20) and 21(5) IBC and not Financial Creditor in terms of Ss. 5(7) and 5(8)(e) IBC.

NCLAT’s Verdict

NCLAT upheld the impugned order passed by the Adjudicating Authority rejecting the S. 7 application but relegated the appellants (Financiers) to avail their remedy under S. 9 IBC in accordance with law as their claim can only be maintainable as an Operational Creditor in relation to the invoices generated by the seller.

[Minions Ventures (P) Ltd. v. TDT Copper Ltd., 2023 SCC OnLine NCLAT 171, decided on 28-03-2023]

*Judgment by Justice Rakesh Kumar Jain


Advocates who appeared in this case :

Mr. Mayank Mikhail Mukherjee, Ms. Gayatri Virmani, Mr. Abhishek Vikram, Counsel for the Appellants;

Mr. Ninad Laud, Ms. Anshula Grover, Mr. Ivo D’Costa, Ms. Rashika Narain, Mr. Avinash Mathews, Ms. Nitika Grover, Counsel for the Respondent.

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