2025 (2) TMI 905 - AT - IBC

NCLAT rules fund infusion without explicit interest clause constitutes financial debt under Section 5(8) IBC

Adhunik Corporation Limited Versus Shivam India Limited

The NCLAT held that fund infusion by the Appellant to the Corporate Debtor constituted financial debt under Section 5(8) of IBC, making the Appellant a ... Seeking dismissal of Section 7 application filed by the Appellant seeking initiation of Corporate Insolvency Resolution Proceedings (CIRP) of the Respondent-Corporate Debtor - credit facility provided by the Appellant to the Respondent was in the nature of a financial debt falling within the meaning of Section 5(8) of the IBC or not. Whether the infusion of funds by the Appellant in the Corporate Debtor was in the nature of financial debt and, if so, whether the Appellant, being a financial creditor, was entitled to file the Section 7 application? - HELD THAT:- For a debt to be treated as financial debt there has to be an element of disbursal of money and the disbursal must be against the consideration for time value of money. The concept of time value of money has been further explained to also include a transaction which does not necessarily culminate into interest being paid in respect of money that has been borrowed. The nature of underlying transaction is therefore a determinative factor in deciding whether infusion of funds can be classified as financial debt or not. To find out whether any element of commercial borrowing for time value of money is noticeable in the transactions which have taken place in the present facts of the case, it is required to study the various relevant clauses of the MoA since it is the MoA which constitutes the underlying edifice of the transactions. Whether money disbursed by the Appellant to the Corporate Debtor to operationalize its business can be treated as a financial debt? - HELD THAT:- In the present facts of the case, there is sufficient material on record to prove that there was disbursal of funds by the Appellant to the Corporate Debtor in their account. The bank transaction details have been placed at page 248-284 of Appeal Paper Book (APB) to substantiate their contention that money was actually disbursed to the Corporate Debtor, which was in dire financial straits, towards working capital to make the Corporate Debtor operational - an abstract of commission on sales received by the Appellant from the Corporate Debtor for Rs 2.95 Cr. along with tax invoices have been placed from pages 366 to 375 of APB. It has also been indicated that an amount of Rs 11.54 lakhs was still due from the Corporate Debtor towards commission. This leaves no doubts that there was fund infusion into the Corporate Debtor by the Appellant. Whether this disbursal was made by the Appellant against consideration for time value of money? - HELD THAT:- It is an undisputed fact that payment of interest against disbursal was not specifically mentioned in the clauses. Be that as it may, the IBC does not provide for any prescriptive requirement for the Financial Creditor to place on record formal written agreements/documents between the parties to establish that the disbursal made was in the form of loan with interest. It would be misconceived to hold that the fund infusion did not qualify to be a financial debt merely because loan component was not explicitly mentioned in the MoA. It is a well settled proposition of law that interest on loan is not the only binding criterion for determining time value of money. The question whether a credit facility without charging interest can be considered to be a financial debt in terms of Section 5(8) of the IBC is no longer res integra and has already been decided by the Hon’ble Supreme Court in Orator judgment [2021 (8) TMI 314 - SUPREME COURT] to hold that the definition of “financial debt” in Section 5(8) IBC does not expressly exclude an interest free loan. Viewed against this backdrop, the contention of the Respondent that the disbursal of the fund was bereft of loan component and hence not in the nature of a financial debt does not have legs to stand on. Whether the disbursal made by the Appellant in the present context reflected consideration for time value of money? - HELD THAT:- Time value of money is not only a regular or timely return received for the duration for which the amount is disbursed as an amount in addition to the principal but also covers any other form of benefit or value accruing to the creditor as a return for providing money for a long duration. It is required to see if the Appellant had envisioned enhancement of economic prospect in return for the funds disbursed and if so then the sum advanced would qualify to entail time value of money and acquire the colour and character of commercial borrowing. The disbursals clearly display commercial effect of borrowing. In our considered opinion the Adjudicating Authority committed an error in holding the transaction to be a business arrangement and non-suiting of the Appellant on the ground of not being a financial creditor. The Appellant has been wrongfully ousted by the Adjudicating Authority on the ground that the Appellant was not a financial creditor and the infusion of fund was not in the nature of financial debt. There are no hesitation to observe that this is a case of financial debt and the Appellant is clearly a financial creditor in terms of statutory provisions of IBC. The Appellant has brought on record the Section 7 application filed by them. In Part-IV of the Section 7 application, the amount claimed to be in default as well as date of default has been clearly depicted therein. Part-IV also contains the pleadings and submissions made pertaining to debt and default. In Form-1 filed by the Appellant under Section 7 of IBC read with Rule 4 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016, the principal amount of loan advanced as ‘Financial Assistance’ by the Appellant is shown as Rs.39,84,72,111/- and the amount claimed in default to be Rs.42,47,32,067/- including interest - The Adjudicating Authority is obliged to determine whether default has occurred and whether the debt which was due and payable has remained unpaid. Clearly enough, the rival contentions of the two parties with respect to default in repayment of debt has not been considered and adjudicated upon by the Adjudicating Authority. Conclusion - The infusion of funds by the Appellant constituted a financial debt under the IBC, and the Appellant was a financial creditor entitled to file a Section 7 application. The absence of an interest clause does not preclude a transaction from being a financial debt if it has the commercial effect of borrowing. The matter remanded to the Adjudicating Authority to exercise its satisfaction as to whether financial debt has crossed the threshold limits and has become due and payable and basis these findings decide to accept or refuse admission of the Section 7 application of the Appellant - appeal allowed by way of remand. ISSUES PRESENTED and CONSIDEREDThe judgment primarily revolves around two interconnected issues:(a) Whether the infusion of funds by the Appellant in the Corporate Debtor was in the nature of financial debt and, if so, whether the Appellant, being a financial creditor, was entitled to file the Section 7 application.(b) Whether in dismissing the Section 7 application of the Appellant, the Adjudicating Authority had committed an error in passing the impugned order.ISSUE-WISE DETAILED ANALYSISIssue (a): Nature of Infusion of Funds as Financial DebtRelevant Legal Framework and Precedents:The judgment considers the definitions and interpretations under the Insolvency and Bankruptcy Code (IBC), particularly Sections 3 and 5, which define 'financial debt,' 'financial creditor,' and related terms. The Court also references several Supreme Court judgments, including Pioneer Urban Land & Infrastructure Ltd. v. Union of India, Jaypee Infratech Ltd. Vs Axis Bank Ltd., Phoenix ARC Pvt. Ltd. Vs Spade Financial Services Ltd., and Orator Marketing (P) Ltd. Vs Samtex Desinz (P) Ltd., to elucidate the characteristics of financial debt.Court's Interpretation and Reasoning:The Court analyzed whether the disbursal of funds by the Appellant to the Corporate Debtor constituted a financial debt. It emphasized the requirement of disbursal against consideration for the time value of money, which does not necessarily require the payment of interest. The Court noted that the MoA between the parties did not explicitly mention interest but contained provisions for commissions and liens, suggesting a commercial effect of borrowing.Key Evidence and Findings:The Court examined the Memorandum of Agreement (MoA) and found that the Appellant had infused funds and supplied raw materials to the Corporate Debtor. The MoA stipulated that the funds were fully refundable and provided for the Appellant to receive sales commissions, indicating a commercial transaction.Application of Law to Facts:The Court applied the principles from the cited precedents, particularly focusing on the commercial effect of borrowing and the time value of money. It concluded that the transaction had the characteristics of a financial debt, as the funds were infused with the expectation of economic returns, despite the absence of an explicit interest clause.Treatment of Competing Arguments:The Respondent argued that the MoA was a business arrangement, not a loan agreement, and lacked consideration for time value of money. The Court rejected this argument, noting that the absence of interest did not preclude the transaction from being a financial debt, as established in the Orator judgment.Conclusions:The Court concluded that the infusion of funds by the Appellant was indeed a financial debt, and the Appellant qualified as a financial creditor under the IBC.Issue (b): Error in Dismissing the Section 7 ApplicationRelevant Legal Framework and Precedents:The Court referred to the statutory requirements under Section 7 of the IBC, which necessitates establishing a default for initiating Corporate Insolvency Resolution Proceedings (CIRP).Court's Interpretation and Reasoning:The Court found that the Adjudicating Authority had erred in dismissing the Section 7 application by mischaracterizing the transaction as a business arrangement rather than a financial debt.Key Evidence and Findings:The Court noted that the Appellant had provided evidence of disbursal and claimed default, which the Adjudicating Authority failed to adequately consider.Application of Law to Facts:The Court emphasized the need for the Adjudicating Authority to determine whether a default had occurred and whether the debt was due and payable.Treatment of Competing Arguments:The Respondent contended that the Appellant had already recovered the funds and that the application was a counterblast to arbitration proceedings. The Court did not delve into these arguments, as the primary issue was the characterization of the debt.Conclusions:The Court set aside the impugned order and remanded the matter to the Adjudicating Authority to determine the existence of default and decide on the admission of the Section 7 application.SIGNIFICANT HOLDINGSThe Court held that the infusion of funds by the Appellant constituted a financial debt under the IBC, and the Appellant was a financial creditor entitled to file a Section 7 application. The Court emphasized that the absence of an interest clause does not preclude a transaction from being a financial debt if it has the commercial effect of borrowing.Core Principles Established:The judgment reinforced the principle that the time value of money in financial debt can encompass various forms of economic return, not limited to interest. It also clarified that transactions with the commercial effect of borrowing fall within the ambit of financial debt under the IBC.Final Determinations on Each Issue:The Court determined that the Appellant's infusion of funds was a financial debt, and the Appellant was a financial creditor. It remanded the case to the Adjudicating Authority to assess the existence of default and decide on the Section 7 application accordingly.