The Intricacies of Financial Debt: A Case Study of Akzo Nobel India Ltd vs. Stan Cars Pvt Ltd
In a recent case before the National Company Law Tribunal (NCLT), New Delhi Bench Court-II, the nature of financial debt and the concept of time value of money were examined in detail. The case, Akzo Nobel India Ltd vs. Stan Cars Pvt Ltd., was presided over by Shri Ashok Kumar Bhardwaj (Member Judicial) and Shri L.N. Gupta (Member Technical).
Parties to the Case
The case was initiated by Akzo Nobel India Ltd., the Financial Creditor, against M/s Stan Cars Pvt. Ltd., the Corporate Debtor. The case citation is (2023) ibclaw.in 322 NCLT and the application/appeal number is Company Petition No. (IB)-812(ND)/2022. The judgment was delivered on July 4, 2023.
The Case Background
According to the petitioner, Akzo Nobel India Ltd., the respondent, Stan Cars Pvt. Ltd., had approached it with a business proposal which led to the execution of an agreement dated November 21, 2017. In terms of the agreement, the petitioner extended a trade advance of Rs. 2,40,00,000/- to the respondent. The amount was to be utilized by the respondent for purchasing and installing equipment required at its workshop/place of business to carry the business with new and improved means. The term of the agreement was five years or till the material produced by the petitioner for a value of Rs. 6,50,00,000/- could be purchased except otherwise terminated.
The Concept of Time Value of Money
The case delved into the concept of time value of money, a core principle of finance. This principle suggests that a sum of money in hand at a given point of time may be worth more in the future due to its earning potential in the interim. The increase in the value of money over time is attributed to time and is called the time value of money. The investor prefers to receive money today rather than the same amount of money in the future. A sum of money once invested grows over time. If it is not invested, the value of money erodes over time. The utility of a particular amount of money for a given point of time, which may help in escaping inevitable loss or fetch profit, is also considered as the time value of money.
The judgment in this case was based on the examination of the nature of the transaction between the petitioner and the respondent. The court found that the transaction involved the time value of money and was covered by sub-clause (f) of Clause 8 of Section 5 of IBC, 2016. The case provides a detailed understanding of the concept of time value of money in the context of financial debt under the Insolvency and Bankruptcy Code. It highlights the importance of the nature of transactions and the intention behind them in determining the nature of the debt.
The judgment references several cases and legal principles:
1. The judgment of Hon’ble Supreme Courts in the case of Collector of Central Excise, Calcutta vs. Alnoori Tobacco Products and Ors. This case emphasised the importance of context in interpreting court decisions and warned against treating observations of courts as provisions of a statute.
2. The case of London Graving Dock Co. Ltd, v. Horton, where Lord Mac Dermot observed that the words of judges should not be treated as part of an Act of Parliament and applied the rules of interpretation appropriate thereto.
3. The case of Home Office v. Dorset Yacht Co., where Lord Reid stated that Lord Atkin’s speech is not to be treated as if it was a statute definition and that it will require qualification in new circumstances.
4. The case of Snook v. London and West Riding Investments Ltd., which provided a useful elaboration of “sham transactions”. According to Diplock LJ, for acts or documents to be a “sham,” all the parties thereto must have a common intention that the acts or documents are not to create the legal rights and obligations which they give the appearance of creating.
5. The case of Yorkshire Railway Wagon Co. v. Maclure and Stoneleigh Finance Ltd. v. Phillips, which further elaborated on the concept of “sham transactions”.
6. The judgment also refers to the Real Estate (Regulation and Development) Act, 2016 in the context of defining financial debt.
Important Observations of the NCLT
- “The money which is important for a borrower at given/crucial point of time, in commercial term may have value to the extent it helps the borrower to escape loss or gain profit. Such gain or escape of loss is time value of money.” (Page 11, Para 11)
- “The Parties agree that STAN CARS continuing to fulfil its obligations under this Agreement, would be entitled to the adjustment of the trade advance as “trade discount”, per the following: Purchase targets as mentioned in Schedule I hereof % Adjustment of trade advance as trade discount Upon accomplishing purchase targets for the first year and having released the payment in respect thereof as per clause 5 of this Agreement. 11%” (Page 6, Para 7)
- “As can be seen from the aforementioned definition of the financial debt, it includes money borrowed against the payment of interest; any amount raised by acceptance under any acceptance credit facility or its dematerialized equivalent; the amount raised pursuant to any note purchase facility or the issue of bonds, notes, debentures, loan, stock or any similar instruments.” (Page 8, Para 11)
- “It is not in dispute that the Respondent had not achieved the purchase target. Thus, the amount of paid advance which was to be adjusted as a discount remained unadjusted and in terms of the provisions of Clause 7 of the Agreement was to be deemed as a loan extended by Petitioner to Respondent in respect of which an interest @ 1% per month (12% per annum) was liable to be paid by Respondent to Petitioner, which was to be calculated from the date of release of date advance, as per Clause 1 of the Agreement.” (Page 7, Para 8)
- “The Respondent also executed a Promissory Note dated 21.11.2017, in terms of which it agreed to pay on demand to Petitioner, a sum of Rs. 2,53,50,000/- in consideration of value received.” (Page 7, Para 9)
- “To appreciate the involvement of the time value of money in the transaction entered into between the parties, we need to appreciate the definition of financial debt. The definition as given in Section 5(8) of IBC, 2016 reads thus…” (Page 7, Para 10)
- “In the light of the proposition laid down by the Hon’ble Supreme Court, we have examined the impugned order. Ld. Adjudicating Authority in para 13 to 16 discussed the reasons for holding that the transactions in question are sham.” (Page 16, Para 23)
- “On the aforesaid grounds, Ld. Adjudicating Authority held that all these transactions are sham and involved round tripping of the huge amount. We are in agreement with the reasoning of Ld. Adjudicating Authority. Hence, we uphold the findings.” (Page 16, Para 12)
- “In the present case, the Petitioner was not a purchaser but it had given the money as an incentive to increase its supply and improve its business. Thus, the order passed by Hon’ble Supreme Court relied upon by the Petitioner is distinct in facts.” (Page 20, Para 15)
- “For acts or documents to be a “sham,” with whatever legal consequences follow from this, all the parties thereto must have a common intention that the acts or documents are not to create the legal rights and obligations which they give the appearance of creating.” (Page 15, Para 22)
These observations provide a comprehensive understanding of the court’s reasoning and the legal principles applied in the judgment. They highlight the importance of the nature of transactions, the intention behind them, and the concept of time value of money in determining the nature of the debt.
Summary of Judgment and Conclusion
The court, after examining the nature of the transaction between the parties, concluded that the transaction involved the time value of money and was covered by sub-clause (f) of Clause 8 of Section 5 of IBC, 2016. The court found that the Respondent had not achieved the purchase target. Thus, the amount of paid advance, which was to be adjusted as a discount, remained unadjusted. In terms of the provisions of Clause 7 of the Agreement, it was deemed as a loan extended by the Petitioner to the Respondent. The Respondent was liable to pay an interest @ 1% per month (12% per annum) to the Petitioner, calculated from the date of release of the advance, as per Clause 1 of the Agreement.
The Respondent also executed a Promissory Note dated 21.11.2017, in terms of which it agreed to pay on demand to the Petitioner, a sum of Rs. 2,53,50,000/- in consideration of value received.
The court also referred to several judgments and legal principles to support its conclusion. It emphasized the importance of context in interpreting court decisions and warned against treating observations of courts as provisions of a statute.
In conclusion, the court upheld the findings of the Adjudicating Authority that the transactions in question were not sham and involved round tripping of a huge amount.