The NCLAT dismissed the Section 7 application, affirming that a sale transaction lacking financial debt is not subject to insolvency proceedings under the IBC.
The National Company Law Appellate Tribunal (NCLAT), Principal Bench led by Justice Ashok Bhushan (Chairperson) and Technical Members Mr. Barun Mitra and Mr. Arun Baroka reviewed a bunch of two appeals filed by the Suspended Director of the Corporate Debtor and observed that a sale transaction involving the purchase of assets through instalment payments does not constitute a "financial debt" under Section 5(8) of the Insolvency and Bankruptcy Code (IBC), as there was no disbursement of money for the time value of money. Consequently, the Section 7 application for initiating insolvency proceedings was dismissed, as the transaction was a sale agreement, not a loan agreement.
The National Company Law Appellate Tribunal (NCLAT) dealt with two appeals filed by the suspended directors and promoters of M/s Ganpati Pulp and Paper Ltd. (GPPL), challenging the admission of a Section 7 application by the National Company Law Tribunal (NCLT), New Delhi, dated 13.12.2023. The Section 7 application was filed by ASREC (India) Ltd., seeking to initiate insolvency proceedings against the corporate debtor. The appellants argued that the transaction in question, dating back to 1990, was not a financial debt but a sale agreement, and no money had been disbursed to the corporate debtor.
The transaction involved the sale of GPPL’s assets to M/s Rama Finance Limited (later Shree Industries Limited), following GPPL's default on term loans taken from financial institutions, including Bank of Baroda. The assets were seized by Gujarat State Financial Corporation (GSFC) under Section 29 of the State Financial Corporation Act, 1951, and subsequently sold to Rama Finance. The sale agreement, executed on 27.11.1990, included provisions for instalment payments and interest, which became the basis for ASREC’s financial debt claim after acquiring Bank of Baroda’s debt. However, the appellants contended that this was a sale transaction, and no loan was involved.
The NCLAT examined the nature of the transaction and concluded that the agreement was a sale and purchase transaction of GPPL’s assets, not a loan arrangement. The Tribunal found that the Corporate Debtor had purchased the assets through an auction conducted by GSFC, and the payments made were part of the purchase price, not a financial disbursement. The financial creditor's reliance on the agreement’s instalment and interest provisions did not convert the transaction into a loan, as the sale agreement was structured as a payment plan for the asset purchase.
Citing relevant Supreme Court judgments, the NCLAT held that property disbursement does not qualify as financial debt under Section 5(8) of the Insolvency and Bankruptcy Code (IBC) without the disbursement of money for the time value of money. The Tribunal emphasized that the true nature of the transaction was determined by the original agreements and contemporaneous actions, rejecting the claim that the transaction constituted financial debt. As a result, the Tribunal set aside the NCLT’s order admitting the Section 7 application and dismissed the case, directing the respondent to pay costs to the appellants.
Mr. Krishnendu Datta and Mr. Ratan Singh, Sr. Advocates with Mr. Rahul Gupta, Ms. Pallavi Anand, Advocates represented for the Appellant.
Ms. Vibha Datta Makhija, Sr. Advocate with Ms. Usha Singh, Mr. Shahrukh Inam, Mr. Karan, Ms. Geeta, Ms. Nidhi Mehrotra, Mr. Rajesh, Mr. Karan Mamgain, Advocates appeared for the Respondent No. 1.
Mr. Ravi Raghunath, the Advocate appeared for Respondent No. 3.
Mr. Vishal Ganda, Mr. Srijan Jain, Advocates appeared with Mr. Gautam Singhal, RP in person
Mr. Gaurav Mitra, Sr. Advocate with Mr. Pervinder, Mr. Shikher Upadhyay, Ms. Lavanya Pathak, Mr. Avinash Bhati, Advocates represented the Intervenor-GIIC
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