Financial creditor fails to prove debt under Section 5(8) IBC as CIRP application gets rejected

NCLAT Principal Bench dismissed appeal challenging rejection of Section 7 application for CIRP initiation. Adjudicating Authority correctly found appellant failed to establish financial debt under Section 5(8) IBC, as no evidence showed disbursal against consideration for time value of money. Absence of balance confirmation for alleged unsecured loan, non-reflection of receivables in balance sheet from 2017-18, and lack of substantiation regarding disbursement for time value supported rejection. Confirmation letter dated 25.05.2014 deemed irrelevant without proper documentation. Debt and default not established in clear, precise terms as mandated under Section 7 IBC.

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Issues Involved:
1. Existence of Financial Debt
2. Default in Payment of Financial Debt
3. Validity of Deed of Assignment

Summary:

Existence of Financial Debt:
The Appellant, Metamorphosis Trading LLP, filed an appeal u/s 61 of the Insolvency and Bankruptcy Code 2016 (IBC) against the order of the National Company Law Tribunal (NCLT), which rejected the initiation of Corporate Insolvency Resolution Process (CIRP) against Sankalp Engineering & Services Pvt. Ltd. The Appellant claimed that Sankalp owed a financial debt of Rs. 5.10 crore, initially due to Innovative Industries Ltd. (IIL), which was assigned to the Appellant via a Deed of Assignment dated 21.07.2021. The Appellant provided evidence such as financial statements, an email dated 24.05.2014, and balance confirmation letters to substantiate the debt.

Default in Payment of Financial Debt:
The Respondent argued that there was no documentary evidence of the financial debt, no proof of disbursement, and no loan agreement. The NCLT found inconsistencies in the financial statements and noted that from 2017-18 onwards, no debt was reflected in the Corporate Debtor's accounts. The statutory auditor and the Liquidator of IIL confirmed that there were no specific trade receivables from the Corporate Debtor in the financial statements post-2017-18. The NCLT concluded that the Appellant failed to prove the existence of financial debt and default.

Validity of Deed of Assignment:
The Appellant contended that as an assignee, they were not required to prove the existence of the debt. However, the NCLT noted that the Deed of Assignment was executed on an "as is where is" basis, and the amount was classified as "trade receivables" rather than a loan. The NCLT held that the Deed of Assignment did not establish the debt as a financial debt and lacked the necessary elements of disbursement for the time value of money.

Conclusion:
The NCLT dismissed the Section 7 application filed by the Appellant, concluding that the Appellant failed to demonstrate the existence of financial debt and default. The appeal was dismissed, and no costs were awarded.

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