NCLAT Holds Refundable Fund Infusion as Financial Debt Under IBC Even Without Interest, Where Transaction Reflects Time Value of Money

The NCLAT held that a refundable fund infusion qualifies as financial debt under the IBC, even without interest, where the transaction reflects the time value of money.

The National Company Law Appellate Tribunal (NCLAT), Principal Bench, comprising Justice Ashok Bhushan (Chairperson) and Mr. Barun Mitra (Technical Member), held that a disbursal of funds—though lacking an explicit interest clause—qualifies as "financial debt" under Section 5(8) of the Insolvency and Bankruptcy Code (IBC) if it is refundable and carries the commercial effect of borrowing. Indicators such as the provision of collateral, commission structure, and economic benefit were considered sufficient to establish the time value of money. Consequently, the Appellant was recognised as a financial creditor, and the matter was remanded to the Adjudicating Authority for the determination of actual default.

In the matter concerning Adhunik Corporation Limited’s appeal under Section 61 of the Insolvency and Bankruptcy Code, 2016, the National Company Law Appellate Tribunal (NCLAT) addressed the core issue of whether the funds infused by the Appellant into Shivam India Limited constituted a “financial debt” under Section 5(8) of the Code. The NCLT, Kolkata Bench, had earlier dismissed the Appellant’s Section 7 application for initiation of Corporate Insolvency Resolution Process (CIRP), holding that the disbursal lacked the requisite characteristics of a financial debt and that the Appellant could not be treated as a financial creditor.

The underlying dispute arose from a Memorandum of Agreement (MoA) dated 23.06.2020, whereunder the Appellant infused ₹27.85 crore into the Respondent, partly in cash and partly through raw material, to restart its non-functional manufacturing unit. This infusion was backed by security in the form of pledged shares and the right to receive commission from sale proceeds. Upon the Respondent’s failure to repay the amount, the Appellant issued a demand notice and subsequently filed a Section 7 application claiming a total default of ₹42.47 crore, inclusive of interest. Meanwhile, the Respondent initiated arbitration proceedings and challenged the maintainability of the insolvency proceedings, alleging that the arrangement was in the nature of a business partnership, not a loan.

The NCLAT, in its decision, examined the nature of the transaction by referring to authoritative precedents including Phoenix Arc Private Limited v. Spade Financial Services Limited and Others, REEDLAW 2021 SC 02501 and Orator Marketing Pvt. Ltd. v. Samtex Desinz Pvt. Ltd., REEDLAW 2021 SC 07562, both of which emphasized that the essential element of a financial debt is the disbursal of money against consideration for time value of money, even if interest is not explicitly stipulated. The Tribunal noted that in the present case, despite the absence of an express interest clause, there were significant indicators of financial debt — the refundability of funds, provision of collateral, sales commission structure, and the economic advantage flowing to the Appellant — which collectively demonstrated the commercial effect of borrowing.

Contrary to the findings of the NCLT, the NCLAT held that the transaction was not merely a business collaboration but had all the trappings of a financial arrangement. The Appellant had infused funds with an expectation of return, and the structure of the MoA supported the conclusion that the disbursal had been made with the commercial effect of a loan. The Tribunal thus concluded that the Appellant was indeed a financial creditor and the disbursal in question amounted to financial debt under the IBC.

However, since the issue of default — whether the debt was due and payable and had actually not been repaid — had not been adjudicated by the NCLT, the NCLAT remanded the matter to the Adjudicating Authority for fresh consideration on this limited point. The appeal was allowed, and the impugned order was set aside, with a direction to the NCLT to re-examine whether a default had occurred, keeping in mind the finding that the Appellant is a financial creditor.

Mr. Ramji Srinivasan, Sr. Advocate with Mr. Anup Kumar, Ms. Pragya Choudhary, Ms. Neha Jaiswal, Ms. Nisha Adhikari, Mr. Arjun Bhatia and Ms. Shefali Munde, Advocates, represented the Appellant.

Mr. Rishav Banerjee, Advocate, appeared for the Respondent.

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