The Learned Counsel-Newsletter

Court: NCLAT, New Delhi

Case Details: Company Appeal (AT) (Insolvency) No. 460 of 2024

Can an amount shown as 'trade receivable'in the deed of assignment be treated as a loan, and thus a financial credit under the Insolvency and Bankruptcy Code, 2016?

The Corporate Debtor (CD) approached it's parent company for financial assistance of Rs.5.58 Cr, which was granted. The parent company was later admitted into CIRP.

The Resolution Professional showed Rs. 5.11 cr as receivable from the CD. While the reply given by the CD to the parent company shows Rs.5.16 as receivables.

The Auditor of the CD confirmed sought was for Rs.2.26 cr as on 31.03.2017 as appearing in the books of account of the Corporate Debtor.

In the liquidation proceedings of the parent company, the process memorandum issued by the liquidator showed the amount in default by the Corporate Debtor as Rs 5.10 Cr.

The appellant (Financial Creditor), had bid for the assets/receivables of the parent company and entered into a Deed of Assignment on 21.07.2021 with the Liquidator of the parent company whereby the assets of the parent company weretransferred in favour of the Appellant.

In terms of the Deed of Assignment, the debt of Rs.5.10 cr of the CD was transferred in favour of the Appellant/Financial Creditor.

The Appellant issued legal notice on calling upon the CD to pay up, and the CD denied the claims. The appellant filed a Section 7 application.The said application was rejected by the Adjudicating Authority on the ground that debt and default does not exist.

The appellants argued on the failure of the Adjudicating authority to appreciate the statements of liquidator and auditor.

It was also argued that the Appellant that being an assignee, is not required to prove the existence of the debt specially because the debt was an admitted position between the Corporate Debtor and parent company.

The respondents argued that at the time of execution of the Deed of Assignment on 21.07.2021, no debt was due and payable by the Corporate Debtor to the parent company as the financial statements from the year 2017-18 onwards reflect no debt on the part of the Corporate Debtor payable to the parent company.

Also, that the block of assets assigned to the Appellant under this Deed of Assignment, by which the purported financial debt was assigned to the Appellant included trade receivables.

When the alleged debt has been shown as trade receivable, it cannot be held as a loan particularly so when there is no contract/agreement between the Corporate Debtor and the parent company recording advance of any loan.

The NCLAT while interpreting Section 5 (8) of the IBC opined that Use of expression ‘if any’ as suffixed to the word ‘interest’ leaves no shadow of doubt that the component of interest is not a sine qua non for bringing the debt within the fold of financial debt.

What is material however is that the disbursement of debt should be against consideration for the time value of money irrespective of whether the debt is interest bearing or not.

Thus to become financial creditor under Section 5(7) of IBC, there must be a financial debt which is owed to that person and such a person can either be the principal creditor to whom the financial debt is owed or may be a legal assignee to whom such debt has been transferred.

Furthermore, for a debt to become financial debt under the various transactions stated in subclauses (a) to (i) of Section 5(8) of IBC, the basic non-negotiable ingredients are that there has to be a disbursal against the consideration for time value of money as carved out in the principal clause.

In the instant case, the Liquidator had clarified that receivables assigned to the Appellant under the Deed of Assignment was on ‘as is where is’, ‘as is what is’ and ‘whatever there is’ and ‘no recourse’ basis and no representation or warranties was provided with respect to the receivables including its amount, outstanding balances or recoverability.

A plain reading of the Deed of Assignment shows that ‘receivables’ of the parent company were assigned at a sum of Rs.25 lakh only on an ‘as is where is’, ‘as is what is’ and ‘whatever there is’ and ‘no recourse’ basis.

It is well settled that an assignee steps into the shoes of the assignor and the rights of the assignee are no better than that of the assignor, we find substance in the contention of the Respondent that when the assigned amount has been clearly shown as trade receivable in the Deed of Assignment, it cannot be viewed as a loan particularly so when there is no contract/agreement between the Corporate Debtor and the parent company, recording advance of any loan.

The appellant thus failed to place on record either by the Appellant to substantiate that the disbursement had been made for consideration for time value of money.

Case Details: Tarsem Lal v. ED, Jalandhar Zonal Office [2024 INSC 434]

What are the implications of the latest interpretation of the Supreme Court of India, on the interaction of CrPC with PMLA?

1. Once a complaint under Section 44 (1) (b) of the PMLA is filed, it will be governed by Sections 200 to 205 of the CrPC as none of the said ? provisions are inconsistent with any of the provisions of the PMLA.
2. If the accused was not arrested by the ED, till filing of the complaint while taking cognizance on a complaint under Section 44(1)(b), as a normal rule, the Court,should issue a summons to the accused and not a warrant. Even in a case where the accused is on bail, a summons must be issued;
3. After a summons is issued under Section 204 of the CrPC on taking cognizance of the offence punishable under Section 4 of the PMLA on a complaint, if the accused appears before the Special Court pursuant to the summons, he shall not be treated as if he is in custody. Therefore, it is not necessary for him to apply for ? bail. ? However, ? the ? Special ? Court ? can ? direct ? the accused to furnish bond in terms of Section 88 of the CrPC;
4. In a case where the accused appears pursuant to a summons before the ? Special Court, on a sufficient cause being shown, the Special Court can grant exemption from personal appearance to the accused by exercising power under Section 205 of the CrPC;
5. If the accused does not appear after a summons is served or does not appear on a subsequent date, the Special Court will be well within its powers to issue a warrant in terms of Section 70 of the CrPC. Initially, the Special Court should issue a bailable warrant. If it is not possible to effect service of the bailable warrant, then the recourse can be taken to issue a non-bailable warrant
6. A bond furnished according to Section 88 is only an undertaking by an accused who is not in custody to appear before the Court on the date fixed. Thus, an order accepting bonds ? under Section 88 from the accused does not amount to a grant of bail;?
7. In ? a ? case ? where ? the ? accused ? has ? furnished ? bonds under Section 88 of the CrPC, if he fails to appear on subsequent dates, the Special Court has the powers under Section 89 read with Sections 70 of the CrPC to issue a warrant directing that the accused shall be arrested and produced before the Special Court; If such a ? warrant ? is ? issued, ? it? will ? always ? be ? open ? for? the accused to apply for cancellation of the warrant by giving an undertaking to the Special Court to appear before the said Court on all the dates fixed by it. While cancelling the warrant, the Court can always take an undertaking ? from ? the ? accused ? to ? appear ? before ? the Court on every date unless appearance is specifically exempted. When the ED has not taken the custody of the ? accused ? during ? the ? investigation, ? usually, ? the Special Court will exercise the power of cancellation of the warrant without insisting on taking the accused in custody provided an undertaking is furnished by the accused to appear regularly before the Court. When the Special Court deals with an application for cancellation of a warrant, the Special Court is not dealing with an application for bail. Hence, Section 45(1) will have no application to such an application;
8. When an accused appears pursuant to a summons, the Special ? Court ? is ? empowered ? to ? take ? bonds ? under Section 88 of the CrPC in a given case. However, it is not mandatory in every case to? direct furnishing of bonds. However, if a warrant of arrest has been issued on account of nonappearance or proceedings under Section 82 and/or Section 83 of the CrPC have been issued? against? an? accused,? he? cannot be? let? off? by taking a bond under Section 88 of the CrPC, and the accused ? will ? have ? to ? apply ? for ? cancellation ? of ? the warrant;?
9. After ? cognizance ? is ? taken ? of ? the ? offence ? punishable under Section 4 of the PMLA based on a complaint under Section 44 (1)(b), the ED and its officers are powerless to exercise power under Section 19 to arrest a person shown as an accused in the complaint;
10. If the ED wants custody of the accused who appears after service ?of ? summons ? for ? conducting ? further investigation in the same offence, the ED will have to seek custody of the accused by applying to the Special Court. After hearing the accused, the Special? Court must pass an order on the application by recording brief reasons. While hearing such an application, the Court may permit custody only if it is satisfied that custodial interrogation at that stage is required, even though the accused was never arrested under Section 19. However, when the ED wants to conduct a further investigation ? concerning ? the ? same ? offence, ? it ? may arrest ? a ? person ? not ? shown ? as ? an ? accused ? in ? the complaint already filed under Section 44(1)(b), provided the requirements of Section 19 are fulfilled.

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