Failure to Prove Time-Value Disbursal Defeats Section 7 Claim: Financial Debt Not Established under IBC
- REEDLAW
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REEDLAW Legal News Network reports: In a significant ruling clarifying the contours of financial debt under the Insolvency and Bankruptcy Code, the National Company Law Appellate Tribunal held that a Section 7 application cannot be admitted where the creditor fails to demonstrate that the money advanced carried the essential element of time value or the commercial effect of borrowing. The Tribunal underscored that without concrete evidence of repayment triggers or default, the statutory definition of financial debt remains unsatisfied.
The National Company Law Appellate Tribunal, New Delhi Bench, comprising Justice Ashok Bhushan (Chairperson) and Mr. Barun Mitra (Technical Member), while adjudicating a Company Appeal, held that the Appellant failed to establish that the amount advanced was disbursed against consideration for the time value of money or bore the commercial effect of borrowing. The Bench noted that in the absence of documentation evidencing repayment obligations, project completion triggers, or a demonstrable default, the requirements of Section 5(8) of the IBC were not fulfilled, thereby rendering the Section 7 application unsustainable.
The Appellant filed an appeal under Section 61 of the Insolvency and Bankruptcy Code, 2016, challenging the order of the Adjudicating Authority, which had dismissed a Section 7 application as non-maintainable. The Appellant had asserted that the Corporate Debtor had undertaken a construction project and had requested financial assistance of Rs. 1 crore, assuring repayment with interest at 18% per annum and an additional 15% share in project profits. The amount was transferred on 19.02.2010, and although the project was allegedly completed, the Corporate Debtor did not return the funds. The Appellant issued multiple legal notices between 2020 and 2022 demanding repayment of Rs. 6.30 crore, including interest, and eventually initiated a Section 7 petition on 13.04.2022. The Adjudicating Authority rejected the petition, prompting the appeal.
The Appellant argued that the disbursal of Rs. 1 crore was clearly a loan carrying the consideration of the time value of money. Reliance was placed on a bank certificate confirming the disbursal, audited financial statements of the Corporate Debtor acknowledging the amount, and TDS records reflecting the deduction of tax on interest. It was submitted that even if the agreement was oral, the transaction satisfied the statutory ingredients of financial debt under Section 5(8) of the IBC. The Appellant asserted that default occurred upon completion of the project on 01.09.2019, and therefore the Section 7 application filed in April 2022 was well within the limitation period. It was contended that the Adjudicating Authority erred in concluding that no financial debt or default existed.
The Corporate Debtor contended that the Appellant could not be treated as a Financial Creditor since the amount lacked the commercial effect of borrowing. It was argued that no written agreement existed describing repayment terms, tenure, or rate of interest, and that the money was advanced only as an investment for speculative profits, linked entirely to the completion of the project. The Corporate Debtor maintained that the project was still incomplete and therefore the alleged default had not arisen. It was further argued that no demand was raised by the Appellant for nearly a decade after the disbursal, and in the absence of any acknowledgement beyond 2011, the claim was hopelessly barred by limitation. The Corporate Debtor supported the Adjudicating Authority’s conclusion.
The Tribunal examined the statutory framework of Sections 3(6), 3(11), 3(12), 5(7), and 5(8) of the IBC and considered the settled principles laid down by the Supreme Court in Anuj Jain Interim Resolution Professional for Jaypee Infratech Limited v. Axis Bank Limited etc, REEDLAW 2020 SC 02502; Orator Marketing Private Limited v. Samtex Desinz Private Limited, REEDLAW 2021 SC 07562; and Innoventive Industries Limited v. ICICI Bank and Another, REEDLAW 2017 SC 08563. It reiterated that for a transaction to constitute financial debt, there must be a disbursal against the consideration of the time value of money and that Section 7 proceedings can be triggered only upon the occurrence of a default in repayment of such debt. The Tribunal noted the Appellant’s reliance on balance sheets, bank certificates, TDS deductions, and the claim of an oral understanding regarding interest and profit-sharing. The Appellant also relied on earlier NCLAT decisions holding that a written contract is not mandatory to establish a financial debt.
The Corporate Debtor maintained that no default had occurred because the project was still incomplete and that the Appellant had provided no evidence to the contrary. It was further argued that the very demand notice mentioned 18.02.2010 as the default date, resulting in the limitation period expiring long before the filing of the Section 7 petition. Given these submissions and the materials on record, the Tribunal proceeded to determine whether the sum advanced fulfilled the statutory definition of financial debt and whether default and limitation were established.
Mr. Jaimin K. Dave, Mr. Karan Valecha and Ms. Hirva Dave, Advocates, represented the Appellant.
Mr. Gaurav Mitra, Ms. Honey Satpal, Mr. Nipun Singhvi, Ms. Pooja Singh, Ms. Aarushi Mishra and Mr. Akash Agarwalla, Advocates, appeared for the Respondent.
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