Financial Creditor's Case Dismissed Due to Lack of Written Agreement

The Tribunal found that the Financial Creditor failed to establish the transaction as a Financial Debt due to the absence of a written agreement and failure to specify essential terms. As a result, the order initiating Corporate Insolvency Resolution Process (CIRP) against the Corporate Debtor was set aside, and the Corporate Debtor was released from CIRP, allowed to function independently. The Adjudicating Authority was directed to regulate the fees of the Insolvency Resolution Professional (IRP) in accordance with Insolvency and Bankruptcy Code provisions. The Appeal was allowed, declaring all orders pursuant to the impugned order as illegal and setting them aside.

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Issues Involved:
1. Whether the transaction in question is a Financial DebtRs.

Issue-wise Detailed Analysis:

1. Whether the transaction in question is a Financial DebtRs.

The Appellant, an ex-director of the Corporate Debtor, challenged the order admitting the Financial Creditor’s Application under Section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC) and initiating Corporate Insolvency Resolution Process (CIRP) against the Corporate Debtor.

Arguments by Appellant:
- The Financial Creditor did not produce any loan agreement or instrument with its Application under Section 7 of the IBC.
- There were no pleadings regarding the basic terms of the alleged Financial Contract or Financial Debt, including the date of repayment, applicable interest, and date of default.
- The Financial Creditor failed to establish that the amount shown was a Financial Debt as per Sections 5(7) and 5(8) of the IBC.
- The transaction cannot be termed as Financial Debt in the absence of a written agreement, as required under clause 5 of part (v) of Form I and Rule 3(1)(d) of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016.
- Previous judgments were cited to support the argument that mere payment of interest and deduction of TDS cannot impose liability on the Corporate Debtor.
- The demand notice indicated regular business transactions, not a loan, implying the transaction was in the normal course of business.

Arguments by Respondent (Financial Creditor):
- The Financial Creditor is a Non-Banking Financial Company (NBFC) and, as per Section 10 of the Contract Act, oral agreements are valid and enforceable.
- Written agreements are not required for NBFCs under Section 186(11) of the Companies Act, 2013.
- The Financial Creditor provided banking entries, which were not disputed by the Corporate Debtor.
- The Corporate Debtor paid interest and deducted TDS, indicating the loan was disbursed for the time value of money.
- Judgments from various courts were cited to support the validity of the Financial Debt.

Tribunal’s Analysis:
- Essential conditions for a Financial Debt under Sections 5(7) and 5(8) of the IBC include disbursal of loan amount, consideration for time value of money, and default by the Corporate Debtor.
- The Financial Creditor transferred Rs. 6.10 Crs. to the Corporate Debtor’s bank account, corroborated by bank entries, confirming the disbursal.
- Payment of interest and deduction of TDS indicated consideration for time value of money.
- However, the absence of a written agreement and failure to specify terms of the loan, such as tenure, interest payable, and repayment date, meant the Financial Creditor could not establish the transaction as a Financial Debt.
- The Financial Creditor did not provide evidence of default as required under Section 7(3)(a) of the IBC.
- The Tribunal emphasized the need to investigate the real nature of the transaction to prevent misuse of IBC provisions, referencing judgments from the Supreme Court.

Conclusion:
- The Adjudicating Authority erroneously admitted the Application under Section 7 of the IBC.
- The Financial Creditor failed to establish the transaction as a Financial Debt and the default by the Corporate Debtor.
- The order initiating CIRP against the Corporate Debtor and appointing an Insolvency Resolution Professional (IRP) was set aside.
- The Corporate Debtor was released from CIRP and allowed to function independently.
- The Adjudicating Authority was directed to fix the fees of IRP/RP/Liquidator, with payment regulated as per IBC provisions.

The Appeal was allowed, and all orders pursuant to the impugned order were declared illegal and set aside. The Corporate Debtor was released from the rigour of law and allowed to function independently.

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