Case Law Details
Canbank Factors Limited Vs Brijesh Singh Bhaduria (NCLAT Delhi)
The appeal was filed under Section 61 of the Insolvency and Bankruptcy Code, 2016 (IBC) challenging the order of the National Company Law Tribunal (NCLT), New Delhi, which had dismissed the appellant’s application seeking recognition of its claim as a Financial Creditor in the corporate insolvency resolution process (CIRP) of the Corporate Debtor. The appellant had also sought acceptance of its claim of ₹6.35 crore as financial debt.
The appellant, a Non-Banking Financial Company (NBFC) engaged in trade receivables discounting/factoring, had provided factoring facilities to the Corporate Debtor through the TReDS platform (M1 Exchange). Under the arrangement, suppliers uploaded invoices for goods supplied to the Corporate Debtor, the appellant discounted those invoices by paying the suppliers, and thereafter sought recovery of the invoice amounts from the Corporate Debtor. Following commencement of CIRP, the appellant filed its claim in Form C as a Financial Creditor. The Resolution Professional (RP) rejected that classification and advised the appellant to submit its claim as an Operational Creditor in Form B, stating that the underlying debt remained operational despite assignment of receivables.
The appellant contended that it qualified as a Financial Creditor under Section 5(8) of the IBC and argued that the RP could not reject its claim merely because it had been filed in the wrong form. Relying on the Supreme Court judgment in Greater Noida Industrial Development Authority, it submitted that the prescribed claim form is directory and not mandatory, and that once a claim is supported by proof, the RP must verify and admit it in the appropriate category. The appellant further argued that its application before the NCLT had been filed before the Committee of Creditors (CoC) approved the resolution plan, and therefore subsequent approval of the plan should not affect consideration of its claim.
The RP and the Successful Resolution Applicant (SRA) opposed the appeal, contending that the appellant had merely purchased trade receivables arising from supply of goods and had stepped into the shoes of the suppliers. They maintained that the assignment of receivables did not alter the nature of the debt, which continued to be an operational debt. They further submitted that the appellant had repeatedly been advised to file its claim as an Operational Creditor but persisted in claiming Financial Creditor status. The respondents also pointed out that the CoC had approved the resolution plan with 98.05% voting share, and no fresh or reclassified claim could be entertained thereafter.
The National Company Law Appellate Tribunal (NCLAT) identified the principal issue as whether a debt arising from factoring or invoice discounting through the TReDS platform constitutes a financial debt or an operational debt. The Tribunal observed that the appellant had paid suppliers directly and had not disbursed any money to the Corporate Debtor. The Corporate Debtor’s liability arose from purchase of goods from its suppliers, and the appellant merely acquired the suppliers’ right to recover the outstanding dues. The Tribunal held that assignment of trade receivables does not change the intrinsic nature of the debt. Since there was no disbursement to the Corporate Debtor against consideration for the time value of money, the essential ingredients of financial debt under Section 5(8) were absent. Instead, the debt continued to fall within the definition of operational debt under Section 5(21) of the IBC.
The Tribunal relied on its earlier decision in Mudraksh Investfin Pvt. Ltd., which had held that invoice discounting or factoring transactions on the TReDS platform do not convert operational debt into financial debt. It found the factual matrix of the present case to be identical and held that the earlier decision squarely governed the dispute. The Tribunal also noted that the appellant had ignored repeated advice from the RP to file its claim as an Operational Creditor and continued to pursue Financial Creditor status.
With regard to the appellant’s reliance on the Greater Noida Industrial Development Authority judgment, the Tribunal observed that the decision was delivered after the RP had already rejected the claim and that it related to a secured Operational Creditor, making it distinguishable on the facts. The Tribunal further observed that, even assuming the claim were treated as an Operational Creditor’s claim, the resolution plan had already been approved by the CoC, and no fresh or reclassified claim could be entertained at that stage.
The Tribunal concluded that the debt arising from factoring transactions remained an operational debt, the appellant could not be treated as a Financial Creditor, and the NCLT had correctly dismissed the application. Finding no legal or factual infirmity in the impugned order, the NCLAT dismissed the appeal and affirmed the order of the Adjudicating Authority.
FULL TEXT OF THE NCLAT JUDGMENT/ORDER
The Appellant M/s Canbank Factors Limited has filed an Appeal under Section 61 of the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as “the Code”) against the impugned order dated 13.02.2025 which was passed by the National Company Law Tribunal, New Delhi in I.A. No. 2208/2023 in C.P. (IB) No. 2688(ND)/2019, dismissing the IA. The Appellant prays to set aside the impugned order dated 13.02.2025.
2. The prayer in the I.A. No. 2208/2023 in C.P(IB) No. 2688(ND)/2019 before NCLT was follows:
“IA-2208/2023
This application has been filed seeking the following prayers: –
a. Declare and set aside the decision of the Resolution Professional whereby the claim of the Applicant as a financial creditor of the Corporate Debtor has been rejected by the Resolution Professional;
b. Direct the Resolution Professional to accept the claim of the Applicant as a Financial creditor of the Corporate Debtor to the extent of the amount of debt of ₹6,35,51,473/- to the Canbank Factors Facility submitted vide its Form C dated 17.12.2022; and
c. pass such other orders and directions that may be deemed appropriate in the interest of justice and the facts and circumstances of the present case.”
3. While dismissing the IA, the Adjudicating Authority had returned the following findings:
“Mr. Abhishek Anand, Ld. Counsel appearing on behalf of the Respondent-Resolution Professional submitted that the issue involved in this application is covered by the order dated 10.11.2023 passed by this Adjudicating Authority in IA – 1990/2023 in the matter of “M/s. Mudraksh Investfin Private Limited Vs. Mr. Brijesh singh Bhadauriya”, which has been upheld by the Hon’ble NCLAT in Company Appeal (AT) (Insolvency) No. 1671 of 2023, vide order dated 05.01.2024.
Mr. Vijay Kumar, Ld. Counsel appearing on behalf of the Applicant submitted that the facts of the present case are distinguishable from the facts of the case decided vide order dated 10.11.2023 in IA-1990/2023 which has been upheld by the Hon’ble NCLAT in Company Appeal (AT) (Insolvency) No. 1671 of 2023, vide order dated 05.01.2024 and the Applicant ought to be treated as Financial Creditor.
He also made an alternative submission that the Applicant be treated as the Operational Creditor and be given liberty to file its claim in the category of the Operational Creditor.
Mr. Abhishek Anand, Ld. Counsel on the contrary submitted that the CoC has already approved the resolution plan on 17.08.2024 and therefore, such a prayer cannot be allowed at this stage.
IA-2208/2023 is accordingly, dismissed in the light of the order dated 10.11.2023 in IA-1990/2023.”
4. The Appellant claims that it is a subsidiary of Canara Bank, registered as a “Non-Banking Financial Company” under Section 45IA of the Reserve Bank of India Act, 1934. The Appellant claims to have provided Trade Receivables discounting/factoring facilities to the Respondent Company – M/s RCI Industries & Technologies Limited. This was done through Mynd Solutions Private Limited (M1 Exchange). The Appellant had entered into a Master Buyer Agreement (MBA) with M1 Exchange. As per this factoring facilities, the Appellant factored 8 invoices for Respondent No.2 Company with a total value of ₹3,97,32,433/-. Thereafter, Respondent No. 2 – M/s RCI Industries & Technologies Limited failed to make the payment of ₹3,97,32,433/- on the due date and the Appellant issued a letter dated 06.09.2019 calling upon the Respondent to pay the outstanding amount. Later, the Appellant issued a demand notice dated 19.09.2019 under Section 25(1) of the Payment & Settlement System Act, 2007 seeking recovery of dues. The Respondent No. 2 claimed that it is in a financial crisis and is unable to clear the liability and sought time of 6 months to regularize the payment.
5. On a different conspectus on an application of Standard Chartered Bank Singapore (Ltd.) under Section 9 of the Code, CIR proceedings were initiated against Respondent No. 2 – M/s. RC Industries & Technologies Limited on 25.11.2022. In the CIR proceedings, the Appellant had filed its claim for ₹6,35,51,472.63 in Form C alongwith the proof of claim with the RP/R1. Respondent No.1/RP vide email dated 18.12.2022 did not admit the claim of the Appellant as a Financial Creditor and had been advising them to do so in different form as an Operational Creditor and not as a Financial Creditor.
6. Subsequently on April 2023, the Appellant filed an Application under Section 60(5) of the Code before the Adjudicating Authority seeking to set aside the decision of the Respondent No.1 and directing the Respondent No.1 to accept the claim of the Appellant as a Financial Creditor. Vide order dated 13.02.2025 the Adjudicating Authority had dismissed the application.
7. In his Appeal, the Appellant again claims that they are a Financial Creditor of the Respondent No.2 – M/s RCI Industries & Technologies Limited under Section 5(8) of the Code. They contend to have filed its claim before the Resolution Professional on 17.12.2022, which was within time. The Appellant had filed its claim as a Financial Creditor in Form ‘C’, but RP had advised to file the claim as an Operational Creditor. Appellant further claims that Respondent No.1 – RP cannot overlook the claim just because the claim was filed in the form not specified in the CIRP Regulation. Appellant claims that it had filed the claim as per Regulation 8 of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 and the claim was submitted based on their own understanding of their claim as a Financial Creditor and accordingly it had filed Form ‘C’ before the Respondent No. 1 – RP. Appellant also claims that once the claim is submitted with proof, the RP has to verify the claim and include the name of the Appellant in the list of the Creditors along with the amount claim.
8. Appellant places reliance on the judgment of Hon’ble Supreme Court in the matter of Greater Noida Industrial Development Authority Vs. Prabhjit Singh Soni and Anr. (2024) 6 SCC 767, wherein it was ruled that the Form in which a claim is to be submitted is directory and not mandatory.
9. Appellant also claims that at the stage of filing the application before the Adjudicating Authority, the resolution plan had not been approved by the CoC. Therefore, the arguments of Respondent No.1 – RP that the Resolution Plans stand approved during the pendency of the Application should not affect the inclusion of the claim. In view of the above, Appellant contends that the impugned order dated 13.02.2025 by the Adjudicating Authority is illegal, arbitrary and contrary to law and therefore should be set aside.
10. Respondent No.2 – RP in his reply reminds us that the Appellant is engaged in the business of factoring, which involves the purchase of trade receivables from suppliers. Under such transactions, the Appellant as the “Factor”, acquires invoices raised by suppliers on their respective buyers and, upon request, advances payments to the suppliers against those invoices. The Appellant then undertakes to recover the corresponding amounts directly from the buyers, thereby facilitating liquidity for the suppliers while assuming the collection risk.
11. Furthermore, Mynd Solutions Private Limited operates a Trade Receivables Discounting System (hereinafter referred to as “TReDS”) platform under the brand name “M1” which facilitates the discounting and rediscounting of trade receivables payable by buyers to suppliers, through financiers registered on the platform. The Corporate Debtor entered into a Master Buyer Agreement dated 21.12.2018 with Mynd Solutions Private Limited to participate in the said platform. The Appellant, in its capacity as a financier, also entered into a Master Financer Agreement with Mynd Solutions Private Limited for participation on the M1 platform. In furtherance of the aforesaid agreements, the Corporate Debtor participated in the Trade Receivables E-Discounting/Factoring Facility on the M1 Platform during the months of May and June 2019, in respect of receivables raised by its suppliers. In the course of this process, the Appellant submitted bids for the invoices uploaded by the Corporate Debtor on the M1 Platform. These bids were duly accepted, thereby signifying its commitment to make payment to the Appellant on the respective due dates, in lieu of the payments originally payable to its suppliers for goods supplied to the Corporate Debtor. In this process the Appellant purchased the operational debts of the Corporate Debtor i.e., Buyer and released payments to the suppliers of the Corporate Debtor. Having received goods from these suppliers, the Corporate Debtor became liable to discharge the corresponding operational dues in respect of the invoices factored by the Appellant, in accordance with the terms of the Master Buyer Agreement dated 21.12.2018. The Appellant has averred in the Application and in the present Appeal that the Corporate Debtor was obligated to make payment on the respective due dates specified against each factoring unit. It is further submitted that the NACH mandate registered with the Corporate Debtor’s bank failed to process due to insufficient funds in the Corporate Debtor’s account. Consequently, the electronic fund transfer initiated by the Corporate Debtor could not be executed for want of adequate balance to honour the transfer instruction. It is brought to our notice that the Appellant, by way of an email dated 01.12.2022, addressed the Respondent – RP and asserted its status as a Financial Creditor of the Corporate Debtor. In the said communication, the Appellant expressed its intention to submit a claim in such capacity and requested the Respondent to provide details regarding the procedure for submission of claims. The Appellant further sought appropriate guidance to ensure that its claim could be filed within the prescribed timeline. Subsequently, the Appellant, vide email dated 17.12.2022, submitted its claim in the CIRP of the Corporate Debtor before the Respondent – RP. Although the Appellant was an Operational Creditor of the Corporate Debtor, but the claim was submitted in Form C, indicating the Appellant’s asserted status as a Financial Creditor.
12. Respondent No.2 in its capacity as the Resolution Professional of the Corporate Debtor, sent an email dated 18.12.2022 in response to the Appellant’s email dated 17.12.2022, and informed the Appellant that the Corporate Debtor had incurred operational debt towards various suppliers, and such debts had been assigned to the Appellant through the TReDS platform. It was further clarified that, pursuant to the assignment, the amounts payable under the relevant invoices stood assigned to the Appellant; however, the underlying nature of the debt remained operational, as it originated from the supply of goods or services to the Corporate Debtor. The Respondent further emphasized that the mere assignment of an operational debt does not alter its character into a financial debt. Accordingly, the Appellant was advised to submit its claim in the capacity of an Operational Creditor, using Form B as prescribed under the CIRP Regulations, 2016.
13. The Appellant issued multiple communications to the Respondent, to treat its claim filed in Form C’ should be admitted as a financial debt in the CIRP of the Corporate Debtor, despite the Appellant’s clear knowledge that the underlying transactions remained operational in nature. The very basis of the Appellant’s claim lies in the discounting of trade receivables owed by the Corporate Debtor to its suppliers for goods received in the ordinary course of business transactions that squarely fall within the ambit of operational debt under the Code.
14. Thereafter, the Appellant filed the Application bearing I.A. No. 2208 of 2023 on 19.04.2023 before the Ld. Adjudicating Authority in the Company Petition against the Corporate Debtor under Section 60(5) of the Code inter alia seeking reliefs as noted by us herein earlier.
15. In the meanwhile, the Respondent had convened the 22nd CoC meeting qua the Corporate Debtor on 05.06.2024, wherein the CoC members approved the Resolution Plan submitted by M/s JTL Industries Limited with 98.05% votes in favour, which is more than the requisite threshold of 66%. Consequently, the Respondent No.2 – RP filed an application under Section 30 of the Code inter alia seeking approval of the Resolution Plan as approved by the CoC qua the Corporate Debtor. It is pertinent to mention here that the same is pending adjudication before the Ld. Adjudicating Authority.
16. SRA – M/s JTL Industries Limited, which is Respondent No.3 brings to our notice that the Resolution Plan has already been approved by the CoC with the requisite majority in its 22nd CoC meeting held on 05.06.2024. The application under Section 30 of the Code for approval of the Resolution Plan is currently pending adjudication. In view of the binding decisions of the Hon’ble Supreme Court and this Hon’ble Appellate Tribunal, no claim whether fresh or reclassified can be entertained at this belated stage, after the Resolution Plan has been approved by the CoC and is pending before the Adjudicating Authority. SRA canvasses arguments similar to that of RP and contends that the Appellant, M/s Canbank Factors Limited, is engaged in the business of factoring, which involves the purchase of trade receivables from suppliers. Under such arrangements, the Appellant, acting as the ‘Factor’, acquires invoices raised by suppliers on their respective buyers and advances payments to such suppliers against those invoices. The Appellant then assumes the responsibility of recovering the corresponding amounts directly from the buyers, thereby providing liquidity to suppliers while undertaking the collection risk associated with such receivables. The core dispute revolves around the characterization of the debt while the Appellant claims status as a ‘Financial Creditor’ under Section 5(8) of the Code and the Respondents maintain that the underlying transaction represents an operational debt under Section 5(21) of the Code, being essentially an assignment of trade receivables arising from supply of goods. It is claimed by SRA that Section 5 (8) of the Code does not expressly exclude an interest free loan. That the present is a case of transaction, wherein, seller, buyer and financers are registered and transaction takes place for sale and purchase of goods and discounting of invoices, payments and recoveries of payment by Financers. In the present case, no disbursement was made to the Corporate Debtor, hence, the transactions cannot be held to be a ‘financial debt”.
17. Successful Resolution Applicant has submitted its plan in accordance with the timelines stipulated by the Respondent No. I herein. Time is of the essence under the Code as observed by the Hon’ble Supreme Court in the judgment titled as “Ebix Singapore (P) Ltd. V. Educomp Solutions Limited, (2022) 2 SCC 401”. It is further contended that the Hon’ble Supreme Court in the matter of “Mobilox Innovations (P) Ltd. V. Kirusa Software Pvt. Ltd., (2018) 1 SCC 353” observed that the timelines are sacrosanct under the Code as it is in the best interest of all the stakeholders of the process that the resolution or liquidation of the company happens in a time bound manner and is not protracted.
18. SRA further brings to our notice that this Appellate Tribunal in the matter of “Peccon Developers Pvt. Ltd. vs. Bimal Agarwal RP (CA (AT) (Ins) No. 756 of 2021)” has clarified that if the claims filed at belated stage are entertained, it will not only be unfair to the other creditors who could not file their claim with the RP because of the delay but would also dilute the purpose of publication of Form-A. CIRP is a time bound process and if the Adjudicating Authority sets the clock back, it would certainly go against main objective of the Code.
19. Respondent No. 3 – SRA further contends that the debt in question is an operational debt coming within the meaning of Section 5(21) of the Code, having arisen from the Corporate Debtor’s procurement of goods from its suppliers during the ordinary course of business operations. The mere subsequent assignment of these trade receivables to the Appellant does not change the fundamental nature of the debt from operational to financial. This Appellate Tribunal has settled the legal proposition in the matter of “Mudraksh Investfin Pvt. Ltd. V. Brijesh Singh Bhadauriya, Resolution Professional of RCI Industries and Technologies Ltd., CA (AT) Ins. No. 1671 of 2023), wherein it was held that the participation in invoice discounting arrangements through electronic platforms does not alter the intrinsic character of operational debts. The Appellant’s attempt to re-characterize what is patently an operational debt as a financial debt constitutes a fundamental misapprehension of both statutory provisions and binding judicial precedent.
20. Further, it is a matter of record that the Appellant’s counsel before the Adjudicating Authority made a submission that the Applicant/ Appellant herein be treated as the “Operational Creditor” and be given liberty to file its claim in the category of the “Operational Creditor”.
21. The Respondent No. 3 – SRA filed its resolution plan with the Resolution Professional which was approved by the Committee of Creditors in its 22nd meeting convened on 05.06.2024. The resolution plan of the Answering Respondent / Successful Resolution Applicant was approved by 98.05% votes in favour which is more than requisite threshold of 66%.
22. The Respondent / Successful Resolution Applicant has proposed the payment of the unpaid CIRP cost in priority to all other debts of the Corporate Debtor under the approved resolution plan compliance of Section 30(2) (a) of the Code. Further, the approved resolution plan does not contravene any of the provisions of the law for the time being in force.
23. Respondent No. 3 – SRA further contends that the Hon’ble Supreme Court in the case of “Arcellor Mittal India Pvt Ltd V. Satish Kumar Gupta, Civil Appeal No. 9402-940155 of 2018”, has held that the only reasonable construction of the Code is the balance to be maintained between timely completion of the CIRP and the Corporate Debtor, otherwise being put into liquidation and if there is a Resolution Applicant who can continue to run the Corporate Debtor as a going concern, every effort must be made to try and see that this is made possible. In facts and circumstances of the case the Respondent No. 1/ Resolution Professional has examined the resolution plan and has certified the resolution plan as being compliant with the provisions of the Code and CIRP Regulations, 2016.
24. Furthermore, despite the Respondent No. 1’s/ Resolution Professional’s explicit direction to file the claim as an “Operational Creditor” in Form B, as is evident from the contents of the present appeal, the Appellant is deliberately trying to mislead this Appellate Tribunal by filing the frivolous appeal. The Appellant’s conduct not only violates the established framework under the Code but also demonstrates an attempt to subvert the orderly resolution mechanism by claiming an elevated creditor status to which it is not legally entitled under the factual matrix of the case.
25. The present Appeal represents a flagrant abuse of the judicial process, wherein the Appellant, having exhausted its remedies before the Adjudicating Authority without success, now attempts to re-agitate the very same issues before this Appellate Tribunal without demonstrating any new substantive grounds or legal infirmities in the Impugned Order. Such conduct warrants stern judicial disapproval to preserve the integrity of the Corporate Insolvency Resolution Process and deter frivolous litigation that obstructs timely resolution. The Appeal merits summary rejection with exemplary costs to uphold the authority of the adjudicatory process under the Code. In light of the above, any such attempt by the Respondent No. 1/Resolution Professional to suo motu reverse or reconsider his position would be null and void, being in breach of both the statutory framework and settled principles of law. In the present case, the application filed for seeking approval of the resolution plan approved by the CoC in its 22nd CoC meeting
of the Corporate Debtor ie. Respondent No. 2 is pending final adjudicating before the Adjudicating Authority and the present appeal is nothing but a futile attempt to push Corporate Debtor into the Liquidation and to mislead this Hon’ble Appellate Tribunal.
26. In another judgment of this Appellate Tribunal in CA (AT) (Insolvency) No. 572 of 2022, it was held that:
“….
13. The Agreement (COR) was entered into between the Seller, Financier and the Corporate Debtor (As customer). As per the agreement, the Seller had agreed for discounting of invoice of the customer (CD) for the creation of the right and interest in the invoice receivables in favour of the Financier (Appellant). Upon execution of agreement of COR, the Appellant as a Financier discounted the invoice and deposited the amounts into an escrow/nodal account maintained by KredX with an escrow/nodal agent, namely, Yes Bank Limited who further transferred the said amount to the account of the Seller and on receiving, the Seller transferred its right to receive the money under the invoices in favour of the Financiers/Appellants. In this transaction, the money was never disbursed much less for the time value as a financial debt to the Corporate Debtor and by virtue of discounting the invoice of the Seller of an amount of Rs.3,42,03,903/- for amount of Rs. 1,75,23,133/-the Financiers/Appellants entered into shoes of the Seller and had become Operational Creditors in terms of Section 5(20) as well as 21(5) and Section 5(7) and 5(8)(e) of the Code is not at all applicable.”
Appraisal
27. We have heard Counsels of both sides and also perused materials placed on record.
28. The main issue for our consideration is whether the claim of ₹6,35,51,472.63 by the Appellant is to be considered as a financial debt instead of operational debt in a situation wherein the Appellant had provided factoring services to the Corporate Debtor.
29. Briefly speaking, we note that Appellant, M/s Canbank Factors Limited, is engaged in the business of factoring, which involves the purchase of trade receivables from suppliers. Under such arrangements, the Appellant, acting as the ‘Factor’, acquires invoices raised by suppliers on their respective buyers and advances payments to such suppliers against those invoices. The Appellant then assumes the responsibility of recovering the corresponding amounts directly from the buyers, thereby providing liquidity to suppliers while undertaking the collection risk associated with such receivables. The core dispute revolves around the characterization of the debt while the Appellant claims status as a ‘Financial Creditor’ under Section 5(8) of the Code and the Respondents maintain that the underlying transaction represents an operational debt under Section 5(21) of the Code, being essentially an assignment of trade receivables arising from supply of goods.
30. We observe that the debt claimed by the Appellant arises out of the discounting of trade receivables originally payable by the Corporate Debtor to its suppliers for goods received in the ordinary course of business. Under the TReDS platform operated by Mynd Solutions Private Limited under the brand name “M1,” the Appellant, acting as a Factor, purchased such receivables by paying the suppliers upfront, thereby stepping into their shoes for the limited purpose of recovery of dues from the Corporate Debtor.
The Appellant and the Corporate Debtor had executed a Master Financer Agreement and a Master Buyer Agreement respectively with Mynd Solutions Pvt. Ltd., to enable participation on the M1 platform. In terms of the mechanism adopted, the suppliers of the Corporate Debtor uploaded invoices for goods supplied to the Corporate Debtor. The Appellant placed bids on these invoices, and upon acceptance by the Corporate Debtor, payments were made to the suppliers by the Appellant. The Corporate Debtor, in turn, was obligated to repay the Appellant the amounts that were originally due to the suppliers. The entire basis of the Appellant’s claim stems from trade payables owed by the Corporate Debtor to its suppliers debts that are squarely operational in nature as per the definition under Section 5(21) of the Code. The mere assignment of such operational debts to a third party, including a financial institution or factor, does not convert the nature of the debt into a financial debt. As defined under Section 5(8) of the Code, a “financial debt” involves disbursement against the consideration for the time value of money, such as loans, debentures, bonds, etc. In the present case, the transaction in question does not involve any loan or disbursement made to the Corporate Debtor, nor does it involve any element of consideration for the time value of money between the Appellant and the Corporate Debtor. The Appellant merely stepped into finance the suppliers, and any recovery from the Corporate Debtor was in lieu of its operational dues payable to said suppliers. The debt that arose in the above-mentioned transactions between the Corporate Debtor and the Supplier are for the purchase of goods in the normal course of business of the Corporate Debtor, and therefore according to the definition of the Operational Debt given under Section 5(21) of the Code, the debt is Operational in nature. The relevant portion of Section 5 of the Code is reproduced herein below:
“Section 5 – In this Part, unless the context otherwise requires –
(20) “Operational Creditor” means a person to whom an Operational Debt is owed and includes any person to whom such debt has been legally assigned or transferred.
(21) “Operational Debt” means a claim in respect of the provision of goods or services including employment or a debt in respect of the payment of dues arising under any law for the time being in force and payable to the Central government, any State Government or any local authority.”
31. The definition of Operational Creditor includes any person to whom such Operational Debt has been legally assigned or transferred which in this case is an admitted position by the Applicant that the Trade Receivables were assigned/transferred from the Supplier of the Corporate Debtor to the Applicant. Therefore, the debt owed by the Corporate Debtor is an Operational Debt within the meaning of Section 5 (21) of the Code.
32. Furthermore, Master Buyer Agreement dated 21.12.2018 executed between the Corporate Debtor and Mynd Solutions Pvt. Ltd. merely facilitated this arrangement by acknowledging the Corporate Debtor’s obligation to repay the assigned receivables to the financer i.e., the Appellant upon the due date. The relevant extract of Clause 7.3 of the agreement is reproduced herein below:
“The Buyer agrees to pay all the monies underlying a discounted Factoring Unit to the relevant Financer on the due date, along with any expenses or interest amount arising up to the date of payment of the monies to the Financers.”
Thus, it is evident from the above that the Corporate Debtor acknowledged its obligation to make payment in respect of goods received from its suppliers and, following the discounting arrangement, to the Appellant. At no point was any amount disbursed by the Appellant to the Corporate Debtor, nor was there any consideration for the time value of money core requirement under Section 5(8) of the Code to constitute a “financial debt.” The nature of a debt under the Code is determined by the substance of the underlying transaction and not by the identity of the party asserting the claim. In this case, the transaction remains squarely within the realm of an operational liability, despite the assignment. The Appellant merely stepped into the shoes of the suppliers and thereby acquired the right to recover an operational debt, not a financial one.
33. We also observe that the issues raised by the Appellant in the present matter are squarely covered and conclusively determined by this Appellate Tribunal in Company Appeal (AT) (Insolvency) No. 1671 of 2023 in the matter of Mudraksh Investfin Pvt. Ltd. vs. Brijesh Singh Bhadauriya, arising out of order dated 10.11.2023 passed by the Adjudicating Authority in IA No. 1990/2023 in Company Petition. In this case, Mudraksh Investfin Pvt. Ltd., an RBI-registered NBFC engaged in factoring transactions through the TReDS platform, had claimed that the amounts due to it pursuant to discounting of invoices raised by suppliers of the Corporate Debtor ought to be treated as Financial Debt. The Mudraksh Investfin Pvt. Ltd therein had advanced similar arguments as raised in the present case that by virtue of assignment of receivables through TReDS, it stood in the position of a financier to the Corporate Debtor and thus ought to be treated as a Financial Creditor under Section 5(8) of the Code. This Appellate Tribunal, after examining the substance of the transaction, the nature of the disbursal, and the definition of Financial Debt, held categorically that the amounts paid by the NBFC i.e., Mudraksh Investfin Pvt. Ltd. under the invoice discounting/factoring arrangement were in the nature of Operational Debt. This Tribunal had affirmed the order of the Adjudicating Authority and held that the assignment of receivables does not alter the underlying character of the debt, which originally arose from the supply of goods or services. Therefore, the NBFC could only be classified as an Operational Creditor, not a Financial Creditor. Following is the relevant extract of the same:
“21. It was held that Section 5 (8) does not expressly exclude an interest free loan. The above judgment of the Hon’ble Supreme Court was on entirely different facts, where Lender had advanced a loan without any interest. The present is not a case of financing any loan, rather present is a case of transaction of MI Platform, on which Platform, both Seller, Buyer and Financers are registered and transaction takes place for sale and purchase of goods and discounting of invoices, payments and recoveries of payment by Financers. The transaction emanates from sale and purchase of goods in the present case. No disbursement was made to the Corporate Debtor, hence, the transactions cannot be held to be a financial debt. We do not find any error in the order of the Adjudicating Authority agreeing with the view of the RP that claim of the Appellant is only an ‘operational debt’.
22. In view of the above, we do not find any ground to interfere with the impugned order. There is no merit in the Appeal. The Appeal is dismissed. No order as to costs.”
34. The factual matrix in the present case is identical into the facts before this Appellate Tribunal in the Mudraksh matter (supra). In both cases:
- The transaction involved discounting of invoices on the TReDS platform;
- The Appellant did not disburse any funds to the Corporate Debtor;
- The Corporate Debtor was liable to pay amounts originally owed to suppliers; and
- The claim was filed under Form C asserting the status of Financial Creditor, which was rejected by the Resolution Professional and further affirmed by the Ld. Adjudicating Authority.
35. We further note that instead of complying with the Resolution Professional’s direction to submit the claim in the correct form i.e., Form B, the Appellant persisted with its erroneous position and, on 19.04.2023, filed I.A. No. 2208 of 2023 before the Adjudicating Authority under Section 60(5) of the Code seeking admission of its claim as a Financial Creditor.
36. Perusal of the records, indicate that this is a fit case wherein the claim cannot be classified as financial debt. It is to be noted that RP had repeatedly advised the Appellant to file the claim in an appropriate Form to be considered as an operational debt. But the Appellant didn’t do so and continued to file its claim as financial debt.
37. Appellant places reliance on the judgment of Hon’ble Supreme Court in the matter of Greater Noida Industrial Development Authority Vs. Prabhjit Singh Soni and Anr. (2024) 6 SCC 767, wherein it was ruled that the Form in which a claim is to be submitted is directory and not mandatory and what is important is the claim must be supported by proof. Therefore, if a claim is submitted by an Operational Creditor, claiming itself as a Financial Creditor, it would have to be accorded consideration in the category to which it belongs provided is verifiable. The Appellant relies on the following paragraphs of the above mentioned judgment:
“….
20. The use of the words “a person claiming to be an operational creditor” in the opening part of Regulation 7, and the words “a person claiming to be a financial creditor” in Regulation 8, indicate that the category in which the claim is submitted is based on the own understanding of the claimant. Thus, there could be a situation where the claimant, in good faith, may place itself in a category to which it does not belong. However, what is important is, the claim so submitted must be with proof. As to what could form proof of the debt/ claim is delineated in sub-regulation (2) of Regulations 7 and 8 of the CIRP Regulations, 2016.
21. Once a claim is submitted with proof under any of the Regulations (i.e., Regulations 7, 8, 8-A, 9 and 9-A), the IRP or the RP, as the case may be, as per Regulation 13, has to verify the claim, as on the insolvency commencement date, and thereupon maintain a list of creditors containing names of creditors along with the amount claimed by them, the amount of their claims admitted and the security interest, if any, in respect of such claims, and update it in terms of Regulation 12A.
22. As it could be noticed from the CIRP Regulations, 2016, on submission of a claim with proof, the IRP or the RP, as the case may be, has to verify the claim and prepare a list of creditors containing names of creditors along with the amount claimed by them and security interest, if any, the logical conclusion derivable from the provisions analysed above would be that the Form in which a claim is to be submitted under the CIRP Regulations 2016 is directory and not mandatory. What is important is, the claim must be supported by proof.
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54.1 The resolution plan disclosed that the appellant did not submit its claim, when the unrebutted case of the appellant had been that it had submitted its claim with proof on 30.01.2020 for a sum of Rs.43,40,31,951/-No doubt, the record indicates that the appellant was advised to submit its claim in Form B (meant for operational creditor) in place of Form C (meant of financial creditor). But, assuming the appellant did not heed the advice, once the claim was submitted with proof, it could not have been overlooked merely because it was in a different Form. As already discussed above, in our view the Form in which a claim is to be submitted is directory. What is necessary is that the claim must have support from proof. Here, the resolution plan fails not only in acknowledging the claim made but also in mentioning the correct figure of the amount due and payable. According to the resolution plan, the amount outstanding was Rs. 13,47,40,819/-whereas, according to the appellant, the amount due and for which claim was made was Rs. 43,40,31,951/- This omission or error, as the case may be, in our view, materially affected the resolution plan as it was a vital information on which there ought to have been application of mind. Withholding the information adversely affected the interest of the appellant because, firstly, it affected its right of being served notice of the meeting of the COC, available under Section 24 (3) (c) of the IBC to an operational creditor with aggregate dues of not less than ten percent of the debt and, secondly, in the proposed plan, outlay for the appellant got reduced, being a percentage of the dues payable. In our view, for the reasons above, the resolution plan stood vitiated. However, neither NCLT nor NCLAT addressed itself on the aforesaid aspects which render their orders vulnerable and amenable to judicial review.”
38. Appellant’s reliance on the above judgment by the Appellant may not be relevant as Greater Noida Industrial Development Authority (supra) was pronounced on 12.02.2024 and by that time RP had already taken a decision to reject the claim. Moreover, that judgment relates to secured Operational Creditor and may not be strictly applicable in the facts of the case. Presuming it is applicable and the claims are treated as Operational Creditor, Resolution Plan provides 0.11% for Operational Creditor which works out to be ₹6,500 only.
39. We observe that Resolution Plan has already been approved by the CoC with the requisite majority in its 22nd CoC meeting held on 05.06.2024. The application under Section 30 of the Code for approval of the Resolution Plan is currently pending adjudication. We also observe that no claim whether fresh or reclassified can be entertained at this belated stage, after the Resolution Plan has been approved by the CoC and is pending before the Adjudicating Authority.
Conclusions
40. The present is a case of transaction, wherein, seller, buyer and financers are registered and transaction takes place for sale and purchase of goods and discounting of invoices, payments and recoveries of payment by Financers. In the present case, no disbursement was made to the Corporate Debtor, hence, the transactions cannot be held to be a ‘financial debt”. The debt in question is an operational debt coming within the meaning of Section 5(21) of the Code, having arisen from the Corporate Debtor’s procurement of goods from its suppliers during the ordinary course of business operations. The mere subsequent assignment of these trade receivables to the Appellant does not change the fundamental nature of the debt from operational to financial.
41. In the facts and circumstances of the present case, we find that the Adjudicating Authority has rightly dismissed the Appellant’s claim under Form C and correctly held that the nature of the debt in question is operational. There exists no legal or factual basis for treating the Appellant as a Financial Creditor in the present case. The Impugned Order, therefore suffers from no infirmity and is in conformity with the statutory scheme under the Code.
Orders
42. We accordingly dismiss the Appeal and confirm the order of the Adjudicating Authority and all the related IAs are disposed of.
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