NCLAT confirms written contract not required for Section 7 financial debt proof in insolvency proceedings

NCLAT upheld the Adjudicating Authority's decision to admit a Section 7 application for CIRP initiation. The tribunal held that a written financial contract is not mandatory to prove financial debt, as established in Agarwal Polysacks Ltd. precedent. Evidence from ledger accounts, balance confirmation statements, and partial repayments sufficiently demonstrated debt existence and acknowledgment. The corporate debtor's MoU defense failed as the financial creditor was not a party to it. Since debt exceeded the threshold limit and default was proven, all Section 7 prerequisites were satisfied. Appeal dismissed.

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Issues Involved:
1. Maintainability of Section 7 application in absence of a financial contract.
2. Discrepancy in the claimed debt amount and interest rate.
3. Allegation of Section 7 application being a counter-blast to another proceeding.
4. Refusal of the Financial Creditor to accept the amount deposited by the Corporate Debtor.

Issue-wise Detailed Analysis:

1. Maintainability of Section 7 Application:
The primary issue was whether the absence of a financial contract between the Corporate Debtor and Financial Creditor invalidated the Section 7 application. The Appellant argued that the Financial Creditor failed to prove the existence of a financial debt due to the absence of a formal financial contract. However, the Tribunal clarified that a written financial contract is not a mandatory precondition for establishing a financial debt. The Tribunal relied on the precedent set in Agarwal Polysacks Ltd. vs K. K. Agro Foods & Storage, which held that financial debt can be proven through other relevant documents. The Tribunal found sufficient evidence, including balance confirmations and ledger accounts, to establish the existence of a financial debt.

2. Discrepancy in Debt Amount and Interest Rate:
The Appellant contended that the amount due as per the ledger was Rs. 34.99 lakhs, whereas the Financial Creditor claimed Rs. 1.51 crore, citing an inflated interest rate. The Financial Creditor argued that interest was calculated on an accrual basis until 31.03.2017 and on a receipt basis thereafter. The Tribunal noted that the accounts confirmed by the Corporate Debtor included interest at 12% for FY 2016-17. The Tribunal emphasized that the presence of interest substantiates the financial debt, aligning with the Supreme Court's interpretation of financial debt involving time value of money. The Tribunal upheld that the quantum of debt is not a matter for adjudication at the admission stage, provided the debt exceeds the statutory threshold.

3. Allegation of Counter-blast Filing:
The Appellant alleged that the Section 7 application was filed as a counter-blast to a petition against Centrio, a sister concern of the Financial Creditor. The Appellant claimed that an MoU existed, adjusting the debts between the parties. The Tribunal found no evidence that the Financial Creditor was a party to the MoU, nor that it was binding on them. It reiterated that separate legal entities cannot be bound by agreements they are not party to, dismissing the Appellant's claim of debt adjustment through the MoU.

4. Refusal to Accept Deposited Amount:
The Appellant argued that the Financial Creditor's refusal to accept the deposited amount indicated a lack of bona fide intent. The Tribunal clarified that the amount deposited did not cover the entire debt, including interest from the due date. It distinguished the present case from Jag Mohan Daga Vs Bimal Kanti Chowdhary, where the entire claimed amount was offered. The Tribunal noted that once debt and default are established, the Adjudicating Authority must admit the Section 7 application if the debt exceeds the threshold, regardless of partial payments.

Conclusion:
The Tribunal affirmed the decision of the Adjudicating Authority to admit the Section 7 application, finding that all prerequisites for filing were met. The appeal was dismissed, and the interim stay on the constitution of the Committee of Creditors was vacated, allowing the Corporate Insolvency Resolution Process to proceed.

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