2021 (1) TMI 717 - AT - Insolvency and Bankruptcy

Tribunal upholds Financial Creditor's petition under Section 7: Corporate Debtor's appeal dismissed

The Tribunal upheld the Adjudicating Authority's order admitting the petition under Section 7 of the I&B Code, as the Financial Creditor successfully ... Financial debt - Financial creditor - Default under the I&B Code - Inter-corporate deposit versus loan - Completeness of Form I/Application under Section 7 - Admission under Section 7 - Registration as NBFC and acceptance of public depositsFinancial debt - Inter-corporate deposit versus loan - Whether the transaction between the parties constitutes a financial debt under the I&B Code or is merely an inter-corporate deposit not covered by the definition of financial debt. - HELD THAT: - The Tribunal examined the nature of the transaction and the evidence of the parties: the money receipt acknowledging receipt of Rs. 25 lakhs as an inter corporate loan with a 90 day term and interest at 15% per annum, and the bank statement showing the fund transfer. Applying the statutory definition, a financial debt includes money borrowed against payment of interest and a debt disbursed against consideration for the time value of money. The Tribunal held that where an inter corporate deposit is made for a definite period and repayable with interest, it falls within the definition of financial debt; a written contract is not essential if the transaction's nature is otherwise proved by evidence. [Paras 6, 8, 11]The transaction is a financial debt under Section 5(8) of the I&B Code and not excluded as a mere inter corporate deposit.Default under the I&B Code - Admission under Section 7 - Whether the corporate debtor committed a default of at least the statutory threshold so as to justify admission of the application under Section 7. - HELD THAT: - The Tribunal noted the Corporate Debtor's admissions in responses to a demand notice under the Negotiable Instruments Act acknowledging receipt of financial assistance and partial repayments only, and the Financial Creditor's assertion of an outstanding balance exceeding the statutory minimum. The Tribunal applied the scheme explained by the Supreme Court in Innoventive Industries that a default occurs when a debt becomes due and is not paid and that the adjudicating authority must be satisfied of such default from records or evidence produced. Finding that the corporate debtor had failed to repay the amount as agreed and that more than the minimum amount remained unpaid, the Tribunal concluded that default had occurred. [Paras 16, 17, 19]The corporate debtor committed a default and the requirement for default under the Code is satisfied.Completeness of Form I/Application under Section 7 - Admission under Section 7 - Whether the Section 7 application was incomplete for want of a stated date of default and hence liable to be rejected. - HELD THAT: - The Tribunal examined Form I and found that Part IV, paragraph 11, expressly stated the date of default as 20th January 2018 and annexed the financial ledger. Reliance on the prescribed form and the requirement that an application be complete informed the Tribunal's conclusion that the application was not defective on the ground asserted by the appellant. The Tribunal further relied on the statutory scheme which permits the adjudicating authority to admit an application once satisfied that a default has occurred, or to seek rectification of any incomplete particulars within the prescribed time. [Paras 12, 20]The application was complete in that it specified the date of default; there was no ground to reject the petition as incomplete.Registration as NBFC and acceptance of public deposits - Financial debt - Whether the Financial Creditor's status as an NBFC not authorised to accept public deposits invalidated the claim that the advance was a loan/financial debt. - HELD THAT: - The Tribunal considered the Reserve Bank of India registration certificate filed by the appellant and observed that although the entity was registered as a Non Banking Financial Company, it was not authorised to accept public deposits. The Tribunal held that a short term inter corporate loan repayable with interest could not be equated to a public deposit and therefore the lack of authority to accept public deposits did not vitiate the transaction or the Financial Creditor's entitlement to treat the advance as financial debt. [Paras 11, 13, 14]The NBFC registration without authority to accept public deposits did not negate the character of the advance as a financial debt.Admission under Section 7 - Default under the I&B Code - Whether the Adjudicating Authority was justified in admitting the Section 7 petition. - HELD THAT: - Applying the evidence of the money receipt, bank statement, admissions in the demand notice reply, and the legal principle from Innoventive that the adjudicating authority must be satisfied of default from records or evidence produced, the Tribunal concluded that the Adjudicating Authority was properly satisfied that a default had occurred and that the application was complete. As the statutory threshold and procedural requirements were met, there was no ground for interference with the impugned admission order. [Paras 18, 20]The Adjudicating Authority was justified in admitting the Section 7 petition; the admission is upheld.Final Conclusion: The appeal is dismissed. The Tribunal affirms that the advance constituted a financial debt, that default occurred and was properly pleaded in the application, that the NBFC's lack of authority to accept public deposits did not invalidate the claim, and that the Adjudicating Authority rightly admitted the Section 7 petition. Issues Involved:1. Whether the Financial Creditor established a financial contract between the parties.2. Whether the transaction qualifies as a financial debt under the Insolvency and Bankruptcy Code (I&B Code).3. Whether the application under Section 7 of the I&B Code was complete and valid.4. Whether the Corporate Debtor committed a default.Issue-wise Detailed Analysis:1. Establishment of a Financial Contract:The Appellant argued that the Financial Creditor failed to show necessary Board approval before the disbursement of the alleged loan and did not establish any financial contract between the parties. It was contended that the oral agreement and payment of TDS cannot be taken as proof of financial debt. However, the Financial Creditor provided a copy of a Money Receipt, which acknowledged the inter-corporate loan of Rs. 25 lacs with 15% interest per annum for 90 days. This was further corroborated by the bank statement showing the transfer of Rs. 25 lacs to the Corporate Debtor's account. The Tribunal found that the nature of the transaction was sufficiently proven by these documents, even in the absence of a written contract.2. Qualification as Financial Debt:The Appellant contended that the transaction should be treated as an inter-corporate deposit, distinct from a loan, and not falling within the definition of financial debt. However, the Tribunal referred to Section 5(8) of the I&B Code, which defines financial debt as a debt disbursed against the consideration for the time value of money, including money borrowed against the payment of interest. The Tribunal concluded that the transaction, being repayable with interest, qualifies as financial debt under the I&B Code.3. Completeness and Validity of the Application:The Appellant argued that the application under Section 7 was incomplete as it did not mention the date of default. However, the Tribunal found that the application explicitly mentioned the date of default as 20th January 2018, with supporting financial ledgers annexed. The Tribunal also dismissed the objection regarding the Financial Creditor's certificate of registration, which did not authorize accepting public deposits, by clarifying that the inter-corporate loan for 90 days could not be treated as a public deposit.4. Default by the Corporate Debtor:The Appellant contended that no default had occurred. In response, the Financial Creditor provided evidence of the Corporate Debtor's acknowledgment of the loan and partial payments made. The Corporate Debtor admitted to receiving the loan and failing to repay the full amount with interest. The Tribunal, referencing the Supreme Court's judgment in Innoventive Industries Ltd. v. ICICI Bank, reiterated that non-payment of a debt once it becomes due and payable constitutes default under Section 3(12) of the I&B Code. The Tribunal found that the Corporate Debtor owed more than Rs. 1 lac and had defaulted in repaying the same.Conclusion:The Tribunal concluded that the Financial Creditor had established the existence of a financial debt and the occurrence of default. The application under Section 7 of the I&B Code was complete and valid. Consequently, the Tribunal upheld the Adjudicating Authority's order admitting the petition and dismissed the appeal, finding no merit in the arguments presented by the Appellant. No order as to costs was made.