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Appellants' Invoice Discounting Actions do not Qualify as Financial Debt but Instead Made Them OC

The National Company Law Appellate Tribunal (NCLAT), New Delhi Bench comprising Justice Rakesh Kumar Jain, Judicial Member and Naresh Salecha, Technical Member was hearing an appeal and held that the appellants' invoice discounting actions did not qualify as financial debt but instead made them operational creditors (OC), thus, their Section 7 application was rightly dismissed and they were directed to seek recourse under Section 9 of the IBC.

The National Company Law Appellate Tribunal (NCLAT) issued a judgment addressing two appeals: Company Appeal (AT) (Ins) No. 572 of 2022 titled 'Minions Ventures Pvt. Ltd. v. TDT Copper Ltd.' (Appeal No. 1) and Company Appeal (AT) (Ins) No. 780 of 2022 titled 'V.R Ashok Rao & Ors. v. TDT Copper Ltd.' (Appeal No. 2). Both appeals contested an order from the Adjudicating Authority (National Company Law Tribunal, New Delhi, Bench–V) dated 11.03.2022 in CP (IB) No. 1093(ND)/2020. The order dismissed the application by the Appellants in Appeal No. 2, who were Financial Creditors under Section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC), against the Corporate Debtor (TDT Copper Ltd.), granting them liberty to file an application under Section 9 of the IBC instead.

The dispute involved TDT Copper Ltd., the Corporate Debtor, purchasing copper products from M/s Ashoka Creations Pvt. Ltd. The Appellants were registered with KredX, an online platform for invoice discounting. Agreements were executed between the Seller, Corporate Debtor, and Appellants for invoice discounting. The Appellants financed the invoices, depositing amounts in an escrow account, and the Seller's liability was paid. The Corporate Debtor allegedly defaulted on the payment.

The primary issue was whether the Appellants were Financial Creditors or Operational Creditors. The Adjudicating Authority rejected the Section 7 application on the grounds that the Appellants were akin to Operational Creditors and should approach under Section 9 instead. The NCLAT deliberated on whether the Appellants' action constituted a financial debt under Section 5(8)(e) of the IBC. The Appellants argued that the invoices were discounted on a recourse basis, rendering them Financial Creditors.

The NCLAT analyzed Section 5(7), 5(8)(e), 5(20), and 21(5) of the IBC. It concluded that the Appellants' actions did not meet the criteria for financial debt under Section 5(8)(e) as there was no disbursement against the time value of money. The NCLAT further found that the Appellants effectively stepped into the shoes of the Seller as Operational Creditors under Sections 5(20) and 21(5).

In conclusion, the NCLAT dismissed the appeals, upholding the Adjudicating Authority's decision. It emphasized that the Appellants' actions did not meet the definition of financial debt, and they were correctly considered Operational Creditors. Therefore, the Appellants were directed to pursue their remedy under Section 9 of the IBC if necessary.

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