Financial creditor's Section 7 CIRP petition upheld as equity investment claim rejected by NCLAT

The NCLAT dismissed an appeal challenging the rejection of applications seeking dismissal of a Section 7 CIRP petition filed by a financial creditor. The corporate debtor argued that Rs.1.85 crores disbursed by the financial creditor was for equity investment in a US company, not a loan. The NCLAT held that subsequent agreements superseded the original letter of intent, the amount was recorded as borrowing in the corporate debtor's balance sheet, and partial repayment of Rs.25 lakhs proved the debt nature. The tribunal found no grounds to interfere with the adjudicating authority's order rejecting the dismissal applications.

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Issues Involved:
1. Maintainability of Section 7 application filed by the Financial Creditor.
2. Nature of the amount disbursed by the Financial Creditor to the Corporate Debtor.
3. Admissibility of evidence and documents presented by both parties.
4. Relevance and impact of the receiver's report and U.S. court proceedings.
5. Validity of the Adjudicating Authority's decision to reject the Corporate Debtor's applications.

Summary:

Issue 1: Maintainability of Section 7 application filed by the Financial Creditor
The Corporate Debtor challenged the maintainability of the Section 7 application filed by the Financial Creditor, claiming that the amount disbursed was not a financial debt but an investment for obtaining equity in a U.S. Company, Selma Precision Technologies NC, LLC (SPT). The Adjudicating Authority rejected this claim, stating that the amount disbursed was acknowledged as unsecured borrowing in the Corporate Debtor's balance sheets for financial years 2017-18 and 2018-19.

Issue 2: Nature of the amount disbursed by the Financial Creditor to the Corporate Debtor
The Corporate Debtor argued that the amount of Rs.1,95,00,000/- disbursed by the Financial Creditor was meant for equity investment in SPT and not a financial debt. The Financial Creditor could not obtain RBI permission to transfer the money abroad and hence transferred Rs.1,85,00,000/- to the Corporate Debtor in India. This amount was reflected as unsecured borrowing in the Corporate Debtor's balance sheets. The Adjudicating Authority held that the disbursed amount was a financial debt, as evidenced by the balance sheets and the partial repayment of Rs.25,00,000/-.

Issue 3: Admissibility of evidence and documents presented by both parties
The Adjudicating Authority considered various agreements, including the Letter of Intent dated 23.12.2017, and agreements dated 14.02.2018 and 14.07.2018. The Letter of Intent indicated an initial plan for equity participation, but subsequent agreements and the balance sheets reflected the amount as unsecured borrowing. The Adjudicating Authority also noted the acknowledgment of the debt in the agreement dated 14.07.2018, where the Corporate Debtor agreed to return the amount to the Financial Creditor.

Issue 4: Relevance and impact of the receiver's report and U.S. court proceedings
The Corporate Debtor relied on the receiver's report and U.S. court proceedings, which disallowed the claim of Surya Testing Services Ltd. (Financial Creditor) regarding SPT. However, the Adjudicating Authority found that these proceedings did not alter the nature of the transaction between the Financial Creditor and the Corporate Debtor. The amount disbursed was treated as borrowing in the Corporate Debtor's balance sheets, and the Financial Creditor's claim was valid under Section 7.

Issue 5: Validity of the Adjudicating Authority's decision to reject the Corporate Debtor's applications
The Adjudicating Authority rejected the Corporate Debtor's applications (IA No.651/JPR/2022 & IA No.652/JPR/2022) seeking dismissal of the Section 7 application. The Authority concluded that the amount disbursed was a financial debt, supported by the balance sheets and partial repayment. The Tribunal upheld the Adjudicating Authority's decision, finding no infirmity in the reasoning provided.

Conclusion:
The Appeal was dismissed, affirming the Adjudicating Authority's order that the Section 7 application was maintainable and the amount disbursed by the Financial Creditor was a financial debt. The Corporate Debtor's applications for dismissal were rightly rejected.

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