Tribunal rules advance property payment not financial debt under IBC

The National Company Law Tribunal, Chennai Bench, dismissed an application under Section 7 of the Insolvency and Bankruptcy Code, ruling that the advance payment made for the purchase of properties did not constitute a financial debt as defined in Section 5(8) of the IBC. The Tribunal found that the transaction between the parties was for the purchase of properties, altering the nature of the relationship and excluding it from the scope of financial debt under the IBC. Consequently, the application for Corporate Insolvency Resolution Process was rejected.

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Issues:
Application filed under Section 7 of the Insolvency and Bankruptcy Code for initiation of Corporate Insolvency Resolution Process based on default in repaying financial debt. Whether the advance paid for the purchase of immovable properties constitutes a financial debt under Section 5(8) of the IBC.

Analysis:
The judgment by the National Company Law Tribunal, Chennai Bench, involved an application filed under Section 7 of the Insolvency and Bankruptcy Code, 2016, seeking the initiation of Corporate Insolvency Resolution Process against a Corporate Debtor for defaulting on repaying a financial debt of a specific amount plus additional interest. The Financial Creditor, a lending financial institution, extended financial assistance to the Corporate Debtor through inter-corporate deposit transactions, leading to a due amount. Despite attempts by the Corporate Debtor to sell properties to offset the debt, issues arose regarding the release of title documents and subsequent interest obligations.

The Financial Creditor issued a notice of termination of sale agreements due to non-compliance by the Corporate Debtor, who later agreed to refund the balance amount but failed to do so. The Corporate Debtor's contention was that the advance paid for the property purchase did not constitute a financial debt under the IBC, as it was an advance for an agreement of sale and not for the time value of money, as defined in Section 5(8) of the IBC.

The Corporate Debtor argued that the advance payment was for the purchase of properties, changing the relationship to that of a Purchaser and Vendor, and the interest paid due to noncompliance with the agreement was not related to outstanding financial debt. Additionally, the due date for repayment was not agreed upon, leading to a dispute over the amount's current status. The Corporate Debtor relied on a judgment by the NCLAT regarding the definition of financial debt in a similar context.

After considering the submissions and documents presented by both parties, the Tribunal concluded that the advance payment for the purchase of properties did not fall under the definition of financial debt as per Section 5(8) of the IBC. Therefore, the application was dismissed, and the Registry was directed to communicate the order to the parties involved promptly.

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