Property purchase payment to ex-director cannot trigger insolvency proceedings under Section 7 IBC

NCLAT dismissed an appeal challenging NCLT's rejection of a section 7 application under IBC. The appellant had paid Rs. 1.25 crores to a company's ex-director for property purchase at Teen Batti, Mumbai, claiming it constituted financial debt. NCLAT held the transaction was for property acquisition, not a financial debt under IBC, as no liability or default was established. The property's development potential exceeded Rs. 15 crores, making the claimed consideration inadequate. The appellant failed to assert rights within the three-year limitation period for property contracts. The tribunal distinguished the case from Sanjay D. Kakade precedent, finding no written agreement evidencing financial debt.

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Issues Involved:
1. Whether the amount of Rs. 1.25 crores paid by the Appellant constitutes a financial debt under the IBC.
2. Whether the Section 7 application filed by the Appellant was within the limitation period.
3. Whether the Adjudicating Authority erred in dismissing the Section 7 application.

Summary:

Issue 1: Financial Debt
The main issue for adjudication was whether the amount of Rs. 1.25 crores paid by the Appellant to Shri Shabir Nirban, ex-Director of the Respondent Company, constitutes a financial debt as defined in the Insolvency and Bankruptcy Code (IBC). The Appellant argued that the amount was an advance for the purchase of shares of the Respondent Company and was acknowledged in the balance sheets of both parties. The Respondent contended that there was no agreement, written or oral, regarding the debt, and the transaction did not qualify as a financial debt under the IBC.

The Tribunal examined the definitions of "debt," "default," and "financial debt" under the IBC. It found that the Appellant failed to provide any document evidencing a Share Purchase Agreement or any commercial effect of borrowing. The Tribunal concluded that the transaction did not constitute a financial debt as defined in Section 5(8) of the IBC.

Issue 2: Limitation Period
The Appellant claimed that the Section 7 application was filed within the limitation period, as the debt was acknowledged in the balance sheet for the financial year ending March 31, 2019. The Respondent argued that the claim was time-barred as the Appellant should have sought enforcement within three years from December 2014.

The Tribunal noted that the Appellant's reminder to execute the Share Purchase Agreement in January 2018, after a gap of over four years, could not be taken as conclusive proof of any oral agreement made in 2014. Therefore, the Tribunal found that the claim was barred by limitation.

Issue 3: Dismissal of Section 7 Application
The Appellant argued that the Adjudicating Authority dismissed the Section 7 application without proper reasoning. The Respondent maintained that the application did not establish the existence of any debt or default.

The Tribunal reviewed the transaction details and concluded that the Appellant failed to prove the existence of a financial debt or default. It also noted that the transaction was related to the purchase of property with significant redevelopment potential, making the Appellant's claim untenable.

Conclusion:
The Tribunal upheld the Adjudicating Authority's decision to dismiss the Section 7 application, stating that the appeal was devoid of merit. The appeal was dismissed with no order as to costs.

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