2026 (3) TMI 309 - AT - IBC

Financial debt: funds repayable with a profit share can constitute commercial borrowing, allowing insolvency admission despite arbitration.

Whether funds totalling the disbursed sum constituted financial debt was decided by characterising the agreement's refundable deposit plus 50:50 profit ... Financial debt under Section 5(8)(f) of the IBC - funding the development obligations of the Corporate Debtor - debt and default of the Corporate Debtor in repayment - interest free security deposit - pendency of arbitral proceedings bars initiation/admission of proceedings under Section 7 - Does the ₹ 13.20 crores disbursed constitute “financial debt” under Section 5(8) IBC in the facts and circumstances of the case? Financial debt under Section 5(8)(f) of the IBC - commercial effect of borrowing - The sum of Rs. 13.20 crores disbursed to the Corporate Debtor constitutes a financial debt. - HELD THAT: - The Tribunal examined the agreement dated 18.02.2014 as a whole and held that Clauses 6-9 provide for return of the disbursed amounts together with a 50% share of project profit as consideration for time value of money. The definition of 'financial debt' in Section 5(8) includes transactions having the commercial effect of a borrowing; the arrangement here contemplates refund of funds and a profit share in lieu of interest, and is therefore within Section 5(8)(f). The Adjudicating Authority's finding was supported by the Corporate Debtor's repeated admissions in board resolutions, termination letter, pleadings and arbitration filings describing the disbursements as financial assistance; those contemporaneous records and the contractual scheme show the disbursement had the commercial effect of borrowing. Distinguishing authorities relied upon by the Appellant, the Tribunal found them inapposite on facts and followed precedent recognising that interest-free financial assistance or amounts termed as 'security deposit' may nonetheless qualify as financial debt where the transaction has the commercial effect of borrowing. [Paras 74, 76, 80, 81] Rs. 13.20 crores is a financial debt within Section 5(8)(f) of the IBC. Default - Whether default by the Corporate Debtor has been established. - HELD THAT: - The Tribunal noted that the Corporate Debtor unilaterally terminated the agreement on 24.12.2022 but has not refunded the disbursed amounts. Once the agreement was terminated the obligation to refund crystallised; the Adjudicating Authority correctly treated non refund as non payment of a debt. The Tribunal relied on the contractual term providing for refund and the admitted receipt and utilisation of funds by the Corporate Debtor to conclude that a debt had become due and a default had occurred. [Paras 103] Default is established upon termination of the agreement and non refund of the disbursed amount. Pendency of arbitral proceedings not a bar to initiation of CIRP under Section 7 - Whether the pendency of arbitration proceedings prevents admission of a Section 7 petition. - HELD THAT: - The Tribunal applied settled precedents and held that pending arbitral proceedings do not preclude a Financial Creditor from invoking Section 7 if debt and default are otherwise established. Indus Biotech [2021 (3) TMI 1178 - SUPREME COURT] and subsequent authority were read to give primacy to the Section 7 process; the Adjudicating Authority is required first to record satisfaction on debt and default even where arbitration or Section 8 processes exist. The Tribunal found the invocation of arbitration by the Corporate Debtor to be an attempt to avoid liability and that arbitration pendency did not impede admission of the Section 7 petition in the present facts. [Paras 104] Pendency of arbitral proceedings does not bar admission of a Section 7 application when debt and default are made out. Final Conclusion: The Tribunal dismissed the appeal: the disbursed amount of Rs. 13.20 crores qualifies as a financial debt under Section 5(8)(f) of the IBC; default stands established upon termination of the agreement; and pendency of arbitration does not preclude admission of the Section 7 petition. The NCLT order admitting the Section 7 petition is affirmed. Issues: (i) Whether the sum of Rs.13.20 crores disbursed by Respondents constitutes a 'financial debt' within Section 5(8) of the Insolvency and Bankruptcy Code, 2016; (ii) Whether default has been established by the Corporate Debtor in respect of the said sum; (iii) Whether the pendency of arbitral proceedings bars initiation/admission of proceedings under Section 7 of the Insolvency and Bankruptcy Code, 2016.Issue (i): Whether the Rs.13.20 crores disbursed constitutes 'financial debt' under Section 5(8) of the Insolvency and Bankruptcy Code, 2016.Analysis: The agreement provided for an interest-free security deposit refundable after project completion and a 50:50 profit share in lieu of interest; clauses 6-9 manifest a right to refund with profit share representing consideration for time value of money. The disbursed funds were utilised for development and the Corporate Debtor repeatedly described the amounts as financial assistance in board resolutions, correspondence, pleadings and ledger entries; TDS entries and ledger treatment were part of the material. The definition of financial debt in Section 5(8), including clause (f) covering transactions having the commercial effect of a borrowing, and relevant precedents support treating transactions that effectuate consideration for time value of money as financial debt even if labelled otherwise.Conclusion: The Rs.13.20 crores disbursed qualifies as a financial debt within Section 5(8)(f) of the Insolvency and Bankruptcy Code, 2016.Issue (ii): Whether default has been established by the Corporate Debtor in respect of the Rs.13.20 crores.Analysis: The Corporate Debtor unilaterally terminated the agreement on 24.12.2022 while admitting receipt and utilisation of the funds; no refund was made after termination. The admitted receipt, termination and non-refund establish non-payment of the debt when it became due for repayment upon termination.Conclusion: Default is established against the Corporate Debtor in respect of the Rs.13.20 crores.Issue (iii): Whether pendency of arbitral proceedings precludes admission of a Section 7 petition under the Code.Analysis: Section 7 proceedings may proceed where debt and default are established; the pendency of arbitration does not bar initiation or admission of insolvency proceedings once the adjudicating authority is satisfied on debt and default, consistent with the statutory scheme and applicable authorities addressing primacy of Section 7 adjudication.Conclusion: Pendency of arbitral proceedings does not bar admission of the Section 7 petition.Final Conclusion: The disbursed amount of Rs.13.20 crores is a financial debt, default is established, and the Section 7 petition admitting CIRP was rightly upheld; the appeal is dismissed and the NCLT order admitting the Section 7 petition is affirmed.Ratio Decidendi: Where funds are disbursed under an agreement that provides for return of the amount with a profit share representing consideration for time value of money, such disbursement has the commercial effect of a borrowing and falls within Section 5(8)(f) of the Insolvency and Bankruptcy Code, 2016; once debt and default are established, pendency of arbitration does not bar admission under Section 7 of the Code.