NCLAT upholds rejection of Section 7 application as debt below Rs 1 crore threshold after removing inflated interest and commission

The NCLAT dismissed an appeal challenging rejection of a Section 7 application for initiating CIRP against a corporate debtor. The Appellant claimed outstanding dues of Rs. 1,11,63,151/- but the Adjudicating Authority found the actual debt to be only Rs. 78,40,000/-, below the Rs. 1 crore threshold limit under Section 4 of IBC. The NCLAT upheld findings that the Appellant inflated interest calculations beyond the one-year agreement period and improperly included commission on sale amounts, which do not qualify as financial debt under Section 5(8) of IBC as they lack time value of money characteristics. The tribunal concluded this was misuse of IBC provisions to resolve contractual disputes.

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Issues Involved:
1. Whether the outstanding amount met the threshold limit under Section 4 of the IBC.
2. Whether the "commission on sale" qualifies as "financial debt" under Section 5(8) of the IBC.
3. Whether the Adjudicating Authority erred in its computation of the outstanding financial debt.

Summary:

Issue 1: Threshold Limit Under Section 4 of the IBC

The Appellant filed a Section 7 petition seeking initiation of Corporate Insolvency Resolution Process (CIRP) against the Respondent, which was dismissed by the Adjudicating Authority on the ground that the outstanding amount did not meet the threshold limit under Section 4 of the IBC. The Appellant claimed outstanding dues amounting to Rs. 1,11,63,151/-, but the Adjudicating Authority held the default amount to be less than the prescribed threshold limit. The Adjudicating Authority noted that the principal amount in both the Section 7 applications remained constant at Rs. 70,00,000/-, and the interest calculation in the present application was inflated to cross the threshold limit.

Issue 2: "Commission on Sale" as "Financial Debt"

The Adjudicating Authority referred to the definition of "financial debt" under Section 5(8) of the IBC and concluded that the "commission on sale" does not qualify as "financial debt." The relevant findings stated that "financial debt" must include debt along with interest, disbursed against the consideration for the time value of money. The "commission on sale" neither has the time value of money nor is covered under any type of transactions specified under sub-clauses (a) to (i) of Section 5(8).

Issue 3: Computation of Outstanding Financial Debt

The Adjudicating Authority computed the principal and interest amount, concluding that the Appellant was entitled to receive interest payment only for a period of one year. The total amount of unpaid financial debt, including the principal and interest, was calculated to be Rs. 78,40,000/-, which is below the threshold limit. The Adjudicating Authority found that the Appellant inflated the interest calculation to meet the threshold limit, which was unjustified and irrational.

Conclusion:

The Adjudicating Authority did not err in its conclusion that the outstanding financial debt was only Rs. 78,40,000/-, below the threshold limit of Rs. 1 crore under Section 4 of the IBC. The "commission on sale" does not qualify as "financial debt." The appeal was dismissed, and the imposition of costs of Rs. 1,00,000/- on the Appellant was affirmed due to the misuse of IBC provisions to resolve a contractual dispute.

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