Financial debt classification upheld for ₹35 lakh advance secured by promissory note under Section 7 IBC

The NCLAT dismissed an appeal challenging the maintainability of an application under Section 7 of the Insolvency and Bankruptcy Code, 2016. The tribunal held that an amount of ? 35 lakh advanced by the respondent constituted financial debt, not operational debt. The respondent had provided upfront financial contribution to the corporate debtor for purchasing specialized painting equipment and facility upgrades, secured by a demand promissory note with 12% annual interest. The agreement required the debtor to procure materials worth ? 1 crore over four years. The tribunal rejected the appellant's argument that the debt's connection to goods transactions would classify it as operational debt under Section 5(21). Following the SC precedent in Global Credit Capital Ltd., the tribunal emphasized examining the transaction's real nature as reflected in the written agreement, confirming the debt's financial character.

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ISSUES:

Whether the amount advanced by the creditor constitutes a financial debt or an operational debt under the Insolvency and Bankruptcy Code, 2016.Whether an application under Section 7 of the Code is maintainable when the debt arises from an agreement involving supply of goods and an upfront financial contribution secured by a promissory note.The determination of the nature of the transaction based on the agreement and promissory note executed between the parties.

RULINGS / HOLDINGS:

The amount advanced by the creditor was held to be a "financial debt" and not an operational debt, as it represented a commercial effect of borrowing covered under Section 5(8)(f) of the Code.The application under Section 7 of the Code was maintainable since the debt in question was secured by a promissory note with agreed interest and was not an amount due for the supply of goods or services.The real nature of the transaction was determined by a plain reading of the agreement and promissory note, which showed that the amount was an upfront financial contribution to support purchase commitments, not a payment for goods or services.

RATIONALE:

The Court applied the definition of "financial debt" under Section 5(8) of the Insolvency and Bankruptcy Code, 2016, particularly clause (f), which includes transactions having the commercial effect of borrowing not covered under other sub-clauses.Reliance was placed on the Supreme Court precedent that emphasized determining the real nature of the transaction from the written agreement rather than its incidental connection to goods or services.The Court distinguished operational debt (arising from supply of goods or services) from financial debt by noting that the amount was advanced as a financial contribution secured by a promissory note with interest, and the debtor had an obligation to repay irrespective of goods supplied.The decision reaffirmed that the existence of a promissory note and agreed interest rate are significant indicators of financial debt under the Code.No dissent or doctrinal shift was indicated; the Court followed established legal principles and recent Supreme Court rulings to resolve the issue.

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