The NCLAT held that a debt is to be considered a financial debt under the Insolvency and Bankruptcy Code, even if it does not carry interest.
The National Company Law Appellate Tribunal (NCLAT), Principal Bench of Justice Ashok Bhushan (Chairperson) and Barun Mitra (Technical Member) was hearing an appeal and observed that a debt to be considered a financial debt under the Insolvency and Bankruptcy Code (IBC), it must involve the disbursal of money to the borrower against consideration for the time value of money, irrespective of whether it carries interest.
The National Company Law Appellate Tribunal (NCLAT) reviewed an appeal under Section 61 of the Insolvency and Bankruptcy Code 2016 (IBC) against an order admitting a Section 7 application filed by Awaita Properties Private Limited against Tarapur Textile Park Ltd. The application was based on a default amount of Rs. 8,56,30,137/-. The Ex-Director of the Corporate Debtor challenged this order.
The Appellant argued that the amount transferred by Awaita Properties Private Limited wasn't a loan but a part payment for a joint venture project. They claimed the absence of documents proving it was a loan or carrying interest. They also disputed the validity of the financial statements presented by Awaita Properties Private Limited.
Awaita Properties Private Limited countered, asserting that the amount constituted a loan disbursed with the expectation of repayment with interest. They provided evidence of the transaction, including bank records. They argued that the loan was independent of any other transactions involving SKIL Infrastructure Limited.
The NCLAT examined relevant provisions of the IBC and past judgments, emphasizing that a financial debt under the IBC encompasses any disbursal against consideration for the time value of money. Appellate Authority clarified that financial debt could include interest-free loans.
Ultimately, the NCLAT ruled that the amount disbursed by Awaita Properties Private Limited to the Corporate Debtor qualified as a financial debt under the IBC. The appeal was dismissed, affirming the Adjudicating Authority's decision to admit the Section 7 application.
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The judgment establishes that for a debt to be considered a financial debt under the Insolvency and Bankruptcy Code (IBC), it must involve the disbursal of money to the borrower against consideration for the time value of money, irrespective of whether it carries interest. The occurrence of a default triggers the insolvency resolution process, where default means non-payment of a debt once it's due and payable. Additionally, the lack of a formal financial contract does not negate the classification of a disbursal as a loan, provided there is evidence of the transaction. Furthermore, draft agreements without execution hold no legal standing in determining the nature of the transaction.