Family company transactions lacking time value element don't qualify as financial debt under Section 5(8) IBC

The NCLAT Principal Bench allowed the appeal against admission of a Section 7 application by a financial creditor. The tribunal held that the transaction between family companies was not a financial debt under Section 5(8) of IBC as it lacked the essential element of disbursal for time value of money. While the corporate debtor admitted the debt of Rs.1,22,50,000, it denied the loan letter dated 20.09.2010 with 12% interest. The adjudicating authority erred in admitting the application without examining the true nature of the transaction. The creditor was allowed to retain the amount already received via draft.

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Issues Involved:

1. Validity of the financial transaction and the nature of the debt.
2. Admissibility of the Letter dated 20.09.2010.
3. Admission of debt and default by the Corporate Debtor.
4. The role of family disputes in the transaction.
5. Compliance with Section 5(8) of the Insolvency and Bankruptcy Code (IBC).
6. The decision of the Adjudicating Authority and its correctness.

Issue-wise Detailed Analysis:

1. Validity of the financial transaction and the nature of the debt:
The Appellant contended that the transaction between the parties was not a financial transaction but a family arrangement without any loan or interest payment. The Corporate Debtor admitted to owing Rs. 1,22,50,000 but denied the existence of any financial debt or interest obligations.

2. Admissibility of the Letter dated 20.09.2010:
The Financial Creditor relied on a Letter dated 20.09.2010, allegedly signed by Ajay Kumar Bajaj, to establish the terms and conditions of the loan, including a 12% interest rate. However, the Corporate Debtor argued that Ajay Kumar Bajaj was not a director on the date the letter was issued, making the letter fabricated and unauthorised. The Adjudicating Authority directed the Financial Creditor to produce the original letter, which was not done.

3. Admission of debt and default by the Corporate Debtor:
The Corporate Debtor admitted owing Rs. 1,22,50,000 but denied that it was a financial debt. The Adjudicating Authority admitted the Section 7 Application based on the admission of debt by the Corporate Debtor, despite the dispute over the nature of the debt and the validity of the Letter dated 20.09.2010.

4. The role of family disputes in the transaction:
The Appellant argued that the transaction was part of a family arrangement, with no intent of creating a financial debt. The Financial Creditor denied this characterization, asserting that the debt was a financial transaction. The MoU/family partition on 17.02.2021 was not specifically denied by the Financial Creditor, suggesting its acceptance.

5. Compliance with Section 5(8) of the Insolvency and Bankruptcy Code (IBC):
For a debt to qualify as a financial debt under Section 5(8) of the IBC, it must involve disbursal against the consideration for the time value of money. The Financial Creditor's claim relied on the disputed Letter dated 20.09.2010, which was not proven. The Supreme Court's rulings in relevant cases emphasized the need for disbursal against the time value of money to constitute a financial debt.

6. The decision of the Adjudicating Authority and its correctness:
The Adjudicating Authority admitted the Section 7 Application based on the admission of debt by the Corporate Debtor without addressing the dispute over the nature of the debt and the validity of the Letter dated 20.09.2010. The Appellate Tribunal found that the Adjudicating Authority erred in not considering the impeached letter and the real nature of the transaction. The Tribunal concluded that the transaction was not a financial debt but a family arrangement, and the Corporate Debtor had admitted the debt of Rs. 1,22,50,000, which was not a financial debt.

Conclusion:
The Tribunal allowed the appeal, set aside the order admitting the Section 7 Application, and permitted the amount of Rs. 1,22,50,000 to be retained by the Financial Creditor to give a quietus to the issue. The Tribunal emphasized the need for disbursal against the time value of money to constitute a financial debt and found that the Adjudicating Authority had erred in its decision.

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