The New Delhi bench of the National Company Law Appellate Tribunal ( NCLAT) has ruled that, in accordance with section 5(8) of the Insolvency and Bankruptcy Code, 2016 ( C ), the security amount deposited under a Memorandum of Understanding (the “MoU”) without any intention of commercial effect of borrowing and time value of money cannot be classified as financial debt.
The appellant, Global Indian School Education Services Pvt. Ltd., contested the National Company Law Tribunal’s ( NCLT ) ruling. The appellant and Housing Development and Infrastructure Ltd. ( Corporate Debtor ) signed a Memorandum of Understanding (or MoU ). According to the MoU, the appellant was to have a “built to suit” school building constructed by the corporate debtor on a piece of property in Village Nahur, Taluka Kurla (“the said land”).The ‘MoU’ was intended to establish a school by the Corporate Debtor that the Appellant could run for thirty years.
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An ‘MOU’ provision mandated that the appellant pay a specific sum to the corporate debtor. Before transferring the rights to the property and building, the corporate debtor had to fulfill a number of requirements. The appellant could end the MOU with a written notice if these requirements weren’t fulfilled. The corporate debtor must return the whole amount paid within 30 days of the “MOU” ending, plus 9% annual interest.
The appellants argued that the Respondent illegally dismissed the Appellant’s claims, labeled him an Operational Creditor, and instructed the Applicant to resubmit its claim using Form B, which is reserved for Operational Creditors, in an email received on September 1, 2020.
It was further maintained that the corporate debtor was required to return the money plus interest in accordance with the terms of the Memorandum of Understanding. The sum formed a financial debt because it involved borrowed cash with a commercial consequence of borrowing, even though the proposed never came to be.
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Contrarily, the respondents argued that the “MoU” makes it clear that the money paid was a security deposit subject to certain conditions and does not specify that the money was paid in consideration of the time value of money. As a result, the claim that the amount represents a financial transaction based on the time value of money is without merit.
Additionally, it was contended that although the appellant did disburse a sum, the other two requirements outlined in Section 5(8) of the Code were not met in this instance, and the transaction lacked the commercial impact of borrowing because the time worth of money was not taken into account.
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The Coram, which was made up of Mr. Naresh Salecha, a technical member, Justice Rakesh Kumar Jain, a judicial member, and Mr. Indevar Pandey, a technical member, noted that for commercial effect, the lenders’ and the corporate debtor/borrower’s intent should be clear and should specify the purpose of such financial facilities. These types of financial facilities and loans are common when financial creditors lend money with conditions that specify the loan’s duration, its intended use, and the interest and other repayment obligations.
The tribunal viewed that in order to maintain commercial effect and “time value of money,” the corporate debtor cannot rely on the appellant terminating the “MoU” because the corporate debtor has not fulfilled certain requirements in the past. Instead, the corporate debtor must pay interest on a regular basis starting from the date the amount was disbursed or as agreed upon.
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Since the security deposit lacks the features of a financial transaction, the Tribunal concluded that “the interest clause could only be involved upon a breach or termination of the agreement, indicating that the security deposit does not qualify as a financial debt under the Code.”
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