NCLAT sets aside CIRP admission under Section 7 IBC finding no financial debt due after settlement adjustments

NCLAT allowed the appeal and set aside NCLT's order admitting CIRP application under Section 7 of IBC. The tribunal found that no financial debt was due to the respondent creditor as all outstanding dues had been settled through adjustments per the LLP agreement dated 31.12.2015. The respondent's claim of Rs. 38,73,94,501/- was disputed, with only Rs. 5,16,55,842/- actually due at retirement, which was already adjusted. NCLAT held that disputed claims should be adjudicated in civil court through recovery suits, not through IBC proceedings, as IBC is not meant to facilitate debt recovery for creditors.

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Issues Involved:
1. Whether the Corporate Debtor owed any financial debt to the Respondent Shankar Khandelwal.
2. Whether the transactions between the Corporate Debtor and the Respondent Shankar Khandelwal constituted "financial debt" under the Insolvency and Bankruptcy Code, 2016.
3. Whether the Adjudicating Authority erred in admitting the application under Section 7 of the Code.

Summary:

1. Financial Debt Owed:
The Appellant argued that all amounts owed by the Corporate Debtor to Shankar Khandelwal had been repaid, emphasizing that the balance sheet for the Financial Year 2015-16 showed the balance due and payable to Shankar Khandelwal was Rs. 5,16,55,842/-, which was repaid by the Corporate Debtor. The Respondent Shankar Khandelwal contended that the LLP agreement dated 31.12.2015 was forged and that he was coerced into signing it. He claimed that Rs. 1,03,58,590/- remained due and payable to him.

2. Nature of Transactions:
The Appellant argued that the transactions were not "financial debt" as defined under the Code, citing judgments that emphasized the need to investigate the real nature of the transaction. The Appellant also highlighted that there was no written agreement specifying the terms of the debt, including the interest rate, and thus, the transaction did not constitute a "financial debt." The Respondent Shankar Khandelwal, however, maintained that the debt was valid and outstanding.

3. Adjudicating Authority's Error:
The Appellant contended that the Adjudicating Authority ignored the decision of the Hon'ble Supreme Court in Phoenix Arc Pvt Ltd v Spade Financial Services Ltd & Ors, which held that the Adjudicating Authority must investigate the real nature of the transaction when admitting a Section 7 application. The Appellant also argued that the Adjudicating Authority failed to consider that the Respondent was not a financial creditor under Section 5(8) of the Code. The Respondent Shankar Khandelwal argued that the FIR and chargesheet filed by the Enforcement Directorate were pending adjudication and did not bar him from initiating CIRP.

Judgment:
The Appellate Tribunal held that the balance sheet of the Corporate Debtor acknowledged debts due towards Shankar Khandelwal, and thus, the lack of an express loan agreement did not bar the financial creditor from initiating CIRP. However, the Tribunal noted that the LLP Agreement dated 31.12.2015, which was signed by all concerned parties, including Shankar Khandelwal, indicated that all outstanding dues had been settled. The Tribunal also emphasized that the payment to third-party entities, as specified in the LLP Agreement, was valid for settling the debt.

The Tribunal concluded that no amount of financial debt was due to Shankar Khandelwal on the date of filing the application under Section 7 of the Code. Therefore, the Adjudicating Authority erred in admitting the application, and the Impugned Order dated 13.10.2021 was set aside. The Appeals succeeded, and no costs were awarded. Interlocutory Applications, if any, were closed.

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