2025 (11) TMI 11 - AT - IBC

Section 7 petition dismissed where advance qualified as financial debt but default and exigibility of debt were not proven

M/s Meck Pharmaceuticals And Chemicals Pvt. Ltd. Versus M/s Accurate Infrabuild Pvt. Ltd.

NCLAT (PB) dismissed the appeal and upheld the Adjudicating Authority's rejection of the Section 7 application. The Tribunal held the advance satisfied ... Dismissal of section 7 application - financial debt - sum of Rs 1 Cr. advanced by the Appellant to the Corporate Debtor satisfied the ingredients of financial debt of disbursal, time value of money and commercial effect of borrowing or not - HELD THAT:- For any debt to be treated as financial debt there has to take place disbursal of money against consideration for time-value of money. It may be pertinent to add here that the Hon’ble Supreme Court in Orator Marketing (P) Ltd. Vs Samtex Desinz (P) Ltd. [2021 (8) TMI 314 - SUPREME COURT] also clarified that the definition of financial debt in Section 5(8) of the IBC does not expressly exclude an interest free loan. Thus, for a transaction to be treated as financial debt under the statutory framework of IBC, it is not necessary that interest has to be paid in respect of money that has been borrowed. As long as the commercial effect of borrowing is decipherable in the disbursal, the transaction can always qualify to be treated as financial debt. Another relevant judgment delivered by the Hon’ble Apex Court wherein it has been explained as to when a Financial Creditor can invoke the provisions of Section 7 against the Corporate Debtor is the Innoventive Industries Ltd. Vs ICICI Bank [2017 (9) TMI 58 - SUPREME COURT] wherein it has been observed that 'in the case of a corporate debtor who commits a default of a financial debt, the adjudicating authority has merely to see the records of the information utility or other evidence produced by the financial creditor to satisfy itself that a default has occurred. It is of no matter that the debt is disputed so long as the debt is “due” i.e. payable unless interdicted by some law or has not yet become due in the sense that it is payable at some future date. It is only when this is proved to the satisfaction of the adjudicating authority that the adjudicating authority may reject an application and not otherwise.' Under the ambit of Section 7 of the IBC, the Adjudicating Authority is only required to determine whether a default has occurred and whether the debt, which may still be disputed, was due and remained unpaid. It is a well settled proposition of law that only two alternative courses of action are available to the Adjudicating Authority under Section 7(5) of the IBC which is to either admit the application under Section 7(5)(a) or reject the petition under Section 7(5)(b). The moment the Adjudicating Authority is satisfied that a default has occurred, the Application is to be admitted unless it is incomplete. It is an admitted fact that there was no written contract or agreement between the Appellant and the Corporate Debtor governing the terms and conditions by which the sum was advanced by the Appellant and disbursed to the account of the Corporate Debtor. Be that as it may we are guided by the decision of this Tribunal in Agarwal Polysacks [2023 (11) TMI 832 - NATIONAL COMPANY LAW APPELLATE TRIBUNAL, PRINCIPAL BENCH, NEW DELHI] wherein it has been held by that requirement of written financial contract between parties is not a pre-condition for determining whether any amount disbursed is financial debt or not. When there are no written agreements or financial contract between the parties as in the present case, the real nature of transaction becomes the key to decide as to whether the transaction is in nature of financial debt or not. Thus, even if there is no agreement/contract between the parties, nothing precludes the Adjudicating Authority or this Tribunal from looking into the real nature of transaction to determine whether the transaction in question is in the nature of financial debt in terms of the statutory construct of IBC. The basis of arriving at the occurrence of default by the Appellant has been the purported completion of Madina Project. This unilateral fixing of date of default has been vehemently contested by the Respondent by stating that the Madina project was not complete. It was contended that the Appellant merely by adverting reference to the agenda item of a Board Meeting called by Corporate Debtor inter alia inviting Meck to participate regarding execution of Sale Deeds in favour of the allottees of the said project cannot substantiate that the project was complete. It has been contended by the Corporate Debtor that the Madina project was still in progress and compliances, both procedural and regulatory, were still pending and hence we are inclined to agree that no occasion for default can be said to have occurred as the debt was not due or payable. The debt and default not having been clearly established, we are of the considered opinion that there is no infirmity in the impugned order rejecting the Section 7 application. There are no grounds have been made out to interfere with the order passed by the Adjudicating Authority. There is no merit in the Appeal. Appeal dismissed. ISSUES PRESENTED AND CONSIDERED 1. Whether the sum of Rs. 1 Crore disbursed to the corporate debtor constituted a 'financial debt' under Section 5(8) of the Insolvency and Bankruptcy Code by satisfying the elements of disbursal, consideration for the time value of money and the commercial effect of borrowing. 2. Whether a Section 7 application was maintainable where (a) there is no written contract evidencing terms of repayment and (b) the creditor relies on oral understandings, accounting entries and limited evidence of TDS to prove that the disbursal was interest-bearing. 3. Whether a default had occurred such that the debt became due and payable, including whether the date of default was the date of disbursal, or the date of alleged completion of the project purportedly triggering repayment, and whether the claim was time-barred. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Existence of Financial Debt (disbursal, time value of money, commercial effect) Legal framework: Section 5(8) requires disbursal against consideration for the time value of money; other clauses describe forms that may qualify if the principal requirement is met. Definitions of 'debt', 'default' and 'financial creditor' are relevant. Precedent Treatment: The Court relied on leading authority of the Apex Court which holds that the essential elements of financial debt are disbursal and consideration for the time value of money, and that sub-clauses are only within Section 5(8) if such elements can be traced to the principal clause. Tribunal precedents accept that absence of a written contract is not determinative. Interpretation and reasoning: The Tribunal accepted that disbursal of Rs. 1 Crore occurred (bank certificate and corporate balance sheets for 2010-11). However, the element of time value of money was not conclusively established. Evidence of TDS on interest exists only for two financial years (2010-11); no sustained evidence (interest payments, periodic TDS entries, reminders, subsequent accounting entries) was produced to show continuous enforcement or accrual of interest as a contractual adjunct. The absence of contemporaneous documentary proof of an ongoing interest obligation and omission of profit-share from the Section 7 claim weakened the argument that the disbursal had the commercial effect of borrowing. The Tribunal emphasized that where no written contract exists, the 'real nature' of the transaction must be discerned from available records, and here those records did not incontrovertibly demonstrate the disbursal was made against consideration for time value of money. Ratio vs. Obiter: Ratio - disbursal alone is insufficient; claimant must demonstrate the time value of money element by reliable, probative financial or transactional records. Obiter - observations on corroborative value of limited TDS evidence and on the role of balance-sheet entries when not placed before the adjudicating authority. Conclusion: The Tribunal concluded that while disbursal is proved, the requirement of disbursal against consideration for the time value of money was not satisfactorily established; therefore the transaction could not be conclusively treated as a 'financial debt' under Section 5(8). Issue 2 - Maintainability of Section 7 without written agreement Legal framework: Section 7 procedure requires the adjudicating authority to be satisfied that default has occurred in respect of a financial debt; writs and statutory definitions govern what constitutes debt and default. Tribunal law recognises that written contract is not strictly necessary if the real nature of the transaction demonstrates financial debt. Precedent Treatment: Tribunal precedents cited permit reliance on oral arrangements and accounting entries where the real nature of the transaction supports classification as financial debt. Apex Court precedent mandates that once a default on a financial debt is shown, admission follows unless incomplete. Interpretation and reasoning: The Tribunal applied the principle that absence of a written agreement does not preclude a finding of financial debt, but stressed that the evidentiary burden remains on the creditor to prove the essential elements (disbursal + time value). The creditor's selective omission (not claiming profit-share in the petition) and lack of continuous documentary evidence undermined the contention that the transaction had commercial effect of borrowing. Therefore permissibility to file Section 7 in the absence of written proof is conditional on compelling alternative evidence of the debt's financial character. Ratio vs. Obiter: Ratio - written contract not mandatory, but creditor must establish, by available contemporaneous records, that the transaction had the commercial effect of a borrowing and carried consideration for time value of money. Obiter - procedural advice about what financial records would be persuasive. Conclusion: Section 7 is maintainable without a written contract in principle, but on the facts the creditor failed to discharge the evidentiary burden required to treat the advance as financial debt for purposes of Section 7. Issue 3 - Occurrence and date of default; limitation Legal framework: 'Default' is non-payment when a debt or part thereof has become due and payable. Limitation consequences follow where date of default is antecedent and no acknowledgement or fresh cause of action arises later. Precedent Treatment: Apex Court guidance indicates the adjudicating authority's role is limited to verifying documents showing default; if debt is due and unpaid, admission ordinarily follows. Authorities recognize that pleaded date of default in notices and petition must be consistent and supported by evidence. Interpretation and reasoning: The Tribunal observed inconsistent pleadings: a demand notice referenced a date of default as the disbursal date (18.02.2010) while the Section 7 petition pleaded default as of project completion (01.09.2019). The creditor asserted the earlier demand notice was served under wrong advice and corrected the date in the petition. The Tribunal treated the corrected date as the operative date for limitation purposes and found the petition, as filed in 2022, to be within three years from the claimed date of default. However, on the substantive question of whether the project was completed (thus making the debt due), available material did not conclusively show completion; procedural and regulatory compliances were alleged to be pending. In absence of clear proof that liability had crystallised on project completion, default was not clearly established. Ratio vs. Obiter: Ratio - inconsistent allegations of date of default undermine the claim; where date of default is corrected, limitation may be computed from the corrected date if bona fide. Obiter - discussion on the creditor's burden to prove project completion and consequent crystallisation of debt. Conclusion: Limitation was not fatal given the petition was within three years of the pleaded date; nonetheless, default was not clearly established because the creditor failed to prove that the project completion rendered the debt due and payable. Overall conclusion The Court upheld the Adjudicating Authority's rejection of the Section 7 application: disbursal was proved but the creditor failed to establish that the advance was disbursed against consideration for the time value of money and that the debt had become due and payable. The Section 7 petition was therefore rightly dismissed for lack of proven debt and default. No costs ordered.