2024 (4) TMI 118 - AT - Insolvency and Bankruptcy

Corporate debtor's appeal dismissed as Rs. 5 crore disbursement constitutes financial debt under Section 7 IBC

NCLAT Principal Bench dismissed an appeal challenging admission of a Section 7 application under IBC. The tribunal held that Rs. 5 crore disbursed to the ... Admission of section 7 application - financial debt or not - financial creditor or not - default or not in the re-payment of the loan by the Corporate Debtor which entitled the Respondent No. 1 to file a Section 7 application in the capacity of a Financial Creditor qua the Corporate Debtor - when a debt is to be treated as a financial debt in the context of IBC? - HELD THAT:- In PIONEER URBAN LAND AND INFRASTRUCTURE LIMITED & ANOTHER VERSUS UNION OF INDIA & OTHERS [2019 (8) TMI 532 - SUPREME COURT], it has been held that any debt to be treated as financial debt, there must happen disbursal of money and the disbursal must be against consideration for time value of money. The concept of time value of money has been further explained to also include a transaction which does not necessarily culminate into money being returned to the lender or interest being paid in respect of money that has been borrowed. Holding Section 5(8) to be a residuary provision which has a catch-all nature, it held that it can include anything which is equivalent to the money that has been loaned as long as commercial effect of borrowing or profit as the aim is discernible. The Hon’ble Supreme Court while dilating on this subject in the matter of PROFESSIONAL FOR JAYPEE INFRATECH LIMITED VERSUS AXIS BANK LIMITED ETC. ETC. [2020 (2) TMI 1259 - SUPREME COURT] propounded that in terms of Section 5(8) of the IBC, the essential condition of financial debt is disbursement against the consideration for time value of money. Having taken cognizance of the statutory provisions of IBC and the reigning judgements of the Hon’ble Apex Court, it can be safely concluded that it is settled law that for any debt to be treated as financial debt, the pre-requisite is disbursal of money to the borrower for utilization by the borrower and that the disbursal must be against consideration for time value of money even if it is not interest bearing. When a Financial Creditor who has disbursed money to a Corporate Debtor against consideration for time value of money can trigger the insolvency resolution process against the Corporate Debtor? - HELD THAT:- As per the scheme of IBC, that stage arises when a default takes place, in the sense that a debt which has become due, in fact and in law, but has not been paid. “Default” as defined in Section 3(12) of IBC means non-payment of a debt once it becomes due and payable, and non-payment could be of the whole amount or even part thereof. This has been elaborately discussed by the Hon’ble Supreme Court in the case of SWISS RIBBONS PVT. LTD. AND ANR. VERSUS UNION OF INDIA AND ORS. [2019 (1) TMI 1508 - SUPREME COURT] holding that What is important is that at this stage, if an application is filed before the adjudicating authority for initiating the corporate insolvency resolution process, the corporate debtor can prove that the debt is disputed. When the debt is so disputed, such application would be rejected. In the present case, it is an undisputed fact that a sum of Rs. 5 crore was transferred to the account of Corporate Debtor and the disbursal of this amount took place on 01.01.2014. Sufficient material has been placed on record by the Respondent No. 1 to prove that money was actually disbursed to the Corporate Debtor - Neither has any claim been made that any part of this sum was repaid by the Corporate Debtor. Respondent No. 1 has thus produced incontrovertible and unimpeachable evidence to prove the existence of debt liability on the part of the Corporate Debtor. The IBC does not provide for any prescriptive requirement for the Financial Creditor to place on record formal written agreements/documents between the parties to establish that the disbursal made was in the form of loan with interest. Given this background we therefore find that the Adjudicating Authority committed no error in holding that there was a financial debt owed by the Corporate Debtor to Respondent No. 1. The essential ingredients of financial debt in the context of IBC consists of disbursal accompanied by consideration for time value of money. We now proceed to examine whether in the present case, disbursement of money took place against the consideration for time value of money and whether commercial effect of borrowing is found to underpin the transaction. The concept of time value of money has nowhere been defined in the IBC. Time value of money is not only a regular or timely return received for the duration for which the amount is disbursed as an amount in addition to the principal, but also covers any other form of benefit or value accruing to the creditor as a return for providing money for a long duration - Once the Adjudicating Authority is subjectively satisfied that there is a debt and a default has been committed by the Corporate Debtor and the Section 7 application is complete in all respects, the Adjudicating Authority in the exercise of summary jurisdiction has to admit the Section 7 application - this is a case where all the pre-requisites for filing a Section 7 stood fulfilled and the Adjudicating Authority cannot be held to have committed an error in admitting the Corporate Debtor into CIRP for having defaulted in repaying a financial debt which was above the threshold limit. The Adjudicating Authority has rightly come to the conclusion that the Respondent No.1 has successfully proved the financial debt and default on part of the Corporate Debtor in admitting the Section 7 application and initiating the CIRP process - there are no reason to interfere in the impugned order passed by the Adjudicating Authority - appeal dismissed. Issues Involved:1. Nature of the Rs. 5 crore disbursed by Respondent No. 1 to the Corporate Debtor.2. Whether the disbursed amount qualifies as a 'financial debt' u/s 5(8) of IBC.3. Default in repayment of the alleged financial debt.4. Admission of Section 7 application by the Adjudicating Authority.5. Cooperation of the Appellant with the Resolution Professional.Summary:1. Nature of the Rs. 5 crore Disbursed:The Appellant contended that the amount of Rs. 5 crore disbursed by Respondent No. 1 was not a loan but a part payment deposit for developing a land project. It was argued that the disbursal was not against the consideration of time value of money but was related to a joint venture project involving SKIL Infrastructure Limited.2. Financial Debt u/s 5(8) of IBC:The Tribunal examined the definition clauses in Sections 3 and 5 of IBC and relevant judgments. It was emphasized that for a debt to be treated as a financial debt, there must be a disbursal of money against the consideration for time value of money. The Tribunal found that the disbursal of Rs. 5 crore was indeed a loan as evidenced by the balance sheets of the Corporate Debtor, which showed the amount under 'Long Term Borrowings - Unsecured loan from Related Parties'. The Tribunal concluded that the transaction had the commercial effect of borrowing and thus qualified as a financial debt.3. Default in Repayment:The Tribunal noted that Respondent No. 1 had provided sufficient evidence, including RTGS transfer details and a bank certificate, to prove the disbursal of Rs. 5 crore. The Corporate Debtor did not deny the receipt of this amount nor claimed any repayment. The Tribunal held that there was a clear default in repayment, thus fulfilling the conditions for initiating CIRP u/s 7 of IBC.4. Admission of Section 7 Application:The Tribunal upheld the Adjudicating Authority's decision to admit the Section 7 application, stating that the Financial Creditor had successfully proved the financial debt and default. It was noted that the Adjudicating Authority had given the Corporate Debtor an opportunity to produce their books of accounts to defend their case, which they failed to do.5. Cooperation with the Resolution Professional:The Tribunal addressed the issue of non-cooperation from the Appellant with the Resolution Professional, which was causing difficulties in the verification of claims. The Tribunal directed the Appellant to extend sufficient cooperation as per the Adjudicating Authority's earlier direction.Conclusion:The appeal was dismissed, and the Tribunal found no reason to interfere with the impugned order passed by the Adjudicating Authority. The Resolution Professional was allowed to continue with the CIRP process in accordance with the law.