NCLAT allows Section 7 application after finding account confirmation genuine and debt acknowledgment within limitation period

NCLAT Principal Bench set aside the Adjudicating Authority's dismissal of Section 7 IBC application. The tribunal found that confirmation of accounts was not forged despite respondent's claims, as it was issued by the group company's Chief Accountant with proper email correspondence. The petition was not barred by limitation since acknowledgment of debt through confirmation of accounts and TDS deductions in FY 2020-21 provided fresh starting point, making the December 2022 application timely. The amount qualified as financial debt under Section 5(8) IBC with sufficient material establishing debt and default. Corporate debtor ordered to proceed under Section 7 of the Code.

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Issues Involved:

I. Whether the amount advanced by the Appellant qualifies as a financial debt under Section 5(8) of the IBC with the confirmation of accounts, TDS deduction, and other material on recordRs.

II. Whether the Appellant's Petition is barred by limitationRs.

III. Whether the dismissal of the Section 7 Petition by the Adjudicating Authority is sustainable or notRs.

Issue-wise Detailed Analysis:

I. Qualification as Financial Debt:

The primary issue is whether the amount advanced by the Appellant qualifies as a "financial debt" under Section 5(8) of the Insolvency and Bankruptcy Code (IBC). The definition includes money borrowed against the payment of interest. In this case, the Appellant disbursed a loan of Rs. 1.5 crores in five installments, supported by bank statements. Although there was no written agreement specifying the interest rate, the Respondent paid interest at 12% per annum, as evidenced by a payment of Rs. 14,69,688 on 14.02.2017 and TDS deductions under Section 194A of the Income Tax Act. The Respondent also acknowledged its liability through confirmations of accounts for the financial years 2014-15, 2016-17, and subsequent years. The Tribunal found sufficient material to conclude that the loan transaction met the "time value of money" test, thus qualifying as a financial debt.

II. Limitation:

The Appellant's Petition was challenged on the grounds of being barred by limitation. However, the Tribunal noted that the Respondent acknowledged the debt through confirmations of accounts and TDS deductions, with the latest acknowledgment in FY 2020-21. This acknowledgment provided a fresh starting point for the limitation period. The demand notice was issued on 12.03.2022, and the Section 7 Application was filed on 02.12.2022, both within the three-year limitation period from the last acknowledgment. Therefore, the Tribunal rejected the Respondent's argument of the Petition being barred by limitation.

III. Sustainability of Dismissal by Adjudicating Authority:

The Adjudicating Authority dismissed the Section 7 Petition due to the absence of a formal written loan agreement, citing RBI guidelines that mandate written agreements for NBFCs. However, the Tribunal emphasized that the IBC does not mandate a written agreement to establish financial debt. The IBC, enacted in 2016, holds supremacy over the RBI Circular dated July 2015, as per Section 238 of the IBC, which provides an overriding effect over other laws. The Tribunal also referred to judgments in 'Narendra Kumar Aggarwal v. Monotrone Leasing Pvt. Ltd.' and 'Agarwal Polysacks Ltd. v. K.K. Agro Foods and Storage Ltd.', which supported the validity of oral agreements for inter-corporate loans under the IBC if supported by other relevant documents. The Tribunal concluded that the absence of a written agreement does not negate the existence of a financial debt.

Conclusion and Order:

The Tribunal found that the debt and default were established based on the material on record, and the Respondent's failure to appear before the Tribunal further supported this conclusion. Consequently, the Tribunal set aside the Adjudicating Authority's order dated 21.11.2023, dismissing the Section 7 Petition. The Corporate Debtor, Brick and Mortar Realty Private Limited, was ordered to be proceeded against under Section 7 of the IBC, with the NCLT, Kolkata Bench, directed to issue the necessary order within 30 days.

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