GLOBAL CREDIT CAPITAL LTD VS SACH MARKETING PVT LTD : REAL NATURE OF TRANSACTION HAS TO BE ASCERTAINED TO DETERMINE WHETHER A CREDITOR IS OPERATIONAL OR FINANCIAL CREDTIOR

The Supreme Court in Global Credit Capital Ltd Vs Sach Marketing Pvt. Ltd.  (Civil Appeal No 1143 of 2022 ) has held that real nature of transaction has to be ascertained for classifying whether a creditor is Operational Creditor or Financial Creditor.

FACTS OF THE CASE

Sach Marketing Pvt. Ltd.  and M/s Mount Shivalik Industries Ltd. (Corporate Debtor) entered into two agreements. These agreements were in form of letters addressed by the Corporate Debtor to Sach Marketing Pvt. Ltd. Sach Marketing Pvt, Ltd. was appointed as sales promotors vide these letters.  First Agreement provided that Sach Marketing will be paid Rs. 4000/- per month for working as sales promotor. It also provided that Sach marketing will deposit minimum security of Rs. 53,15,000/- which will carry interest of @21% per annum. The second agreement also had identical terms with the difference that Sach marketing had to deposit minimum security of Rs. 38,50,285/- which was to carry interest of 21%.

Insolvency proceedings were initiated against the Corporate Debtor under Section 7 of the Insolvency and Bankruptcy Code, 2016 vide order dated 12^th June, 2018 passed by NCLT on application filed by Oriental Bank of Commerce. After initiation of insolvency proceedings, Sach Marketing filed claim as Financial Creditor which was rejected by the Resolution Professional. Sach Marketing filed Application before the NCLT for directing the Resolution Professional to treat its debt as Financial Debt, which was rejected by NCLT.  An appeal was filed before the NCLAT which was allowed and First Respondent was held to be Financial Creditor. Against the same several appeals were filed before the Supreme Court.

FINDINGS OF THE SUPREME COURT

The Supreme Court surveyed judgments dealing with classification of creditors in Financial Creditors and Operational Creditors including Anuj Jain, Interim Resolution Professional for Jaypee Infratech Ltd Vs Axis Bank Ltd (2020) 8 SCC 401, Phoenix ARC Pvt Ltd Vs Spade Financial Services (2021) 3 SCC 475 , Pioneer Urban Land and Infrastructure Ltd. Vs Union of India & Ors (2019)8 SCC 416.

The Supreme Court observed that a  written agreement cannot be taken at face value. It is necessary to examine the real nature of the transaction on plain reading of agreements. In the instant case  agreement provided for payment of paltry sum of Rs. 4000/- per month for acting as sales promotor of the beer manufactured by the Corporate Debtor. There is no provision for commission. There is provision for payment of security deposit of huge sum. There is no clause for forfeiture of security deposit as such Corporate Debtor is liable to refund the security deposit. Thus,  security deposit clause has no nexus with any other clause in the agreement.

The security deposit can not fall under the definition of operational debt under Section 5 (21) of the Code. In case of contract of service there must be correlation between service to be provided and the claim. If both the agreements are treated as genuine only claim of 4000/- per month can be treated as operational debt as only this amount is related with provision of service.

The Supreme Court held that the transaction is covered under definition of Financial Debt under Section 5 (8) (f). The provision for interest payment shows that there exists elemment for time value of money.  The transaction has commercial effect of borrowing as there is arrangement in writing for transfer of funds to the corporate debtor. Financial Statements of the Corporate Debtor has shown the deposits of the Sach Marketing as long term liabilities which shows that the Corporate Debtor has dealt the security deposit as borrowings.

The Supreme Court concurred with the view of the NCLAT.

______________________________________________