| Headnote |
Insolvency and Bankruptcy Code, 2016: ss. 21, 27, 28, 30 – Proceedings involving Corporate Debtor – Committee of Creditors – Importance and Procedure – In the idea of resurrecting an ailing corporate debtor, the Code contemplates the formation of Committee of Creditors as per s.21 – The Committee consists of financial creditors as per s. 27 – The Committee is conferred with the duty to appoint Resolution Professionals – The Resolution Plan scrutinized by such professionals then awaits the decision of the Committee as per s. 30 – It is a fundamental aspect of the committee that it consists of Financial Creditors and not operational Creditors – Therefore. the one seeking to exercise the powers of such Committee, must, at the very first instance, establish the fact of being a Financial Creditors. Insolvency and Bankruptcy Code, 2016: Financial Creditors and Operational Creditors – Distinction with respect to Privileges – s.5(7) defines ‘financial creditor’ as person to whom a financial debt is due besides an assignee or transferee from such person – Financial Creditors constitutes the Committee of Creditors as per the policy of IBC – Such policy does not includes Operational Creditors in the aforesaid constitution of committee – Hence Operational creditors, unlike Financial Creditors, do not enjoy the powers of the Committee – Apart from this aspect, the peculiar benefit of being Operational Creditor is that they enjoy priority over Operational Creditors in matters of payment of amount. Insolvency and Bankruptcy Code, 2016 – s. 2(20) – Operational Creditor – A person is operational creditor to whom the operational debt (a debt in respect of dues arising under any law for the time being in force and payable to any local authority) is owed and includes any person to whom such debt has been legally assigned or transferred. Insolvency and Bankruptcy Code, 2016: s. 5 (8) – Financial Debt – When an amount could be termed as such – The policy of law under IBC requires “Disbursement” leading to a debt along with interest – Interest, as such, is not a necessary requirement of s. 5(8), but the fact of disbursement from the creditor to the debtor is a necessity for looking a debt as financial debt, as contemplated by the said section – Such Disbursement has to be understood in terms of money which has been paid by the creditor and debtor. Insolvency and Bankruptcy Code, 2016: ss 5(8), 3(33) – Words ‘Transaction’ and ‘Disbursed’ – Distinguished – The word “transaction” includes transfer of assets, funds or goods and services from or to the corporate debtors – But imposing such a meaning of the word “Transaction” as inclusive in the word “Disbursed” will lead to unnecessary straining of the provision – Interpretation of the term Disbursed, as occurring u/s.5(8), should mean the payment of money, which flows to the debtor. Insolvency and Bankruptcy Code, 2016: ss 3(6), 5(8) – Words ‘Claim’ and ‘Debt’ – Claim, as defined u/s.3(6), may or may not be fixed, disputed or undisputed, secured or unsecured but it bears an indispensable element of “right to payment” – Claim cannot exists independent of the element of “right to payment” – The source of such “right to payment” can be either under a judgment or under any other circumstance – When claim is accompanied by liability it gives rise to debt – Debt, as defined under the Code includes financial as well as operational debt and the same appears to be intertwined with the definition of “claim” – Debt denotes a liability or obligation which relates to a claim. Insolvency and Bankruptcy Code, 2016: s.5(8)(d) – Indian Accounting Standards – rr.61 to 67 – Financial Lease – Financial lease as such is not defined under IBC – s.5(8)(d) refers lease as inclusive of Financial lease as given under Indian Accounting Standards – r.62 declares that a lease is classified as a financial lease if it transfers, substantially, all the risks and rewards incidental to ownership of an underlying asset – As per r.63, what matters for a lease to be financial lease is its substance and not the form – In the instant case, the rights are transferred in favour of the allotees only by way of a sub-lease, and therefore there is no transfer of ownership of the underlying asset (plot) by the end of the lease terms – Further the criteria u/r.63 that the lease will be a financial lease even if the title is not transferred provided the lease term is for the major part of economic life – In the instant case the “principle of economic life of underlying asset” is inapposite as here the underlying asset is land and the economic life of the land is not limited as the land does not depreciate with the passage of time – In the instant case, there is no substantial transfer of risks and rewards incidental to ownership since the appellant (lessor) has reserved the right of cancellation of lease in larger public interest and therefore such appellant is not a financial lessor u/s.5(8)(d) of IBC. Lessee and sub-lease – Rights and Limitations – Lessee can assign his rights as a lessee which amounts to assignment of his rights and, therefore, can create a sub-lease – But the creation of such sub-lease has limitation and it must conform to the terms of contract between the lessor and lessee. Lessee and his right to Mortgage – Extent and Limitation – A lease may enable the lessee to mortgaged the leased property – But in cases where the mortgage by the lessee can be only with the prior permission of lessor, his rights are not absolute and is conditional upon the approval or denial by the lessor of the permission to make such mortgage. Insolvency and Bankruptcy Code, 2016: s.5(8)(f) – Interpretation – “Financial Debt includes any amount raised under any other transaction, including any forward sale or purchase agreement, having the commercial effect of a borrowing” – Scope of – The phrase has a relevance as the same is residuary in nature – For this phrase to apply so as to enable a person for being termed as Financial Creditor, there has to be a raising of funds in a transaction which has a commercial effect – The first and foremost rule for making such phrase to apply there has to be “raising of funds” – The raising of funds can be by issuing bonds, notes, debentures or loan stock etc – In the instant case, the raising of funds was done by the lessee from the allottees and not by the appellants and hence the appellant is not entitled to the application of the said residuary provision and therefore he cannot avail the benefit of being called a “Financial Creditor” |
