NCLAT Quashes the Order of NCLT in Admitting Section 7 Application: Clarifying Financial Debt Definition in Family Business Disputes

The NCLAT quashed the order of the NCLT admitting the Section 7 application, clarifying the definition of financial debt in the context of family business disputes.

The National Company Law Appellate Tribunal (NCLAT), Principal Bench led by Justice Ashok Bhushan (Chairperson) and Mr. Barun Mitra (Technical Member) reviewed an appeal in family dispute and observed that a transaction does not qualify as a financial debt under Section 5(8) of the IBC unless it involves disbursement against the consideration of time value of money, and a mere acknowledgement of debt without evidence of interest or a loan agreement does not meet this criterion, especially when the principal amount has already been repaid.

In this case, the appellant, Sushil Kumar Bajaj, challenged the decision of the NCLT Kolkata Bench admitting a Section 7 application filed by the respondent, Ajay Kumar Bajaj, a financial creditor. The background to the case involved a family dispute, culminating in a Memorandum of Understanding (MoU) in 2021, which divided control over 12 family-run companies between the two brothers. As part of this arrangement, the Corporate Debtor, under Sushil Kumar's control, had previously taken financial assistance amounting to ₹9.13 crores from Ajay Kumar between 2010 and 2017. By 2021, a balance of ₹1.22 crores remained unpaid, but the Financial Creditor later claimed ₹18.06 crores, including a substantial interest component, leading to the filing of the Section 7 application.

The appellant contended that the loan in question arose out of a family arrangement and should not be considered a financial debt. Moreover, the Corporate Debtor disputed the authenticity of a letter dated September 20, 2010, which allegedly laid out the loan terms and interest obligations. Despite the Financial Creditor’s failure to produce the original letter or prove its authenticity, the NCLT admitted the application based on the Corporate Debtor’s acknowledgement of the principal debt.

Upon reviewing the appeal, the NCLAT emphasized that for a transaction to qualify as a financial debt under Section 5(8) of the Insolvency and Bankruptcy Code, it must involve disbursement against the consideration of the time value of money. The NCLAT noted that the Financial Creditor had made no demand for interest between 2010 and 2021, and there was no supporting evidence for the substantial interest claim. Additionally, the Tribunal recognized that the Corporate Debtor had already paid the admitted principal amount of ₹1.22 crores, further weakening the case for insolvency proceedings.

The NCLAT ultimately found that the NCLT had erred in admitting the application without properly scrutinizing the nature of the debt and the dispute over the letter. The Tribunal concluded that the Financial Creditor had failed to demonstrate that the transaction constituted a financial debt, leading to the conclusion that the Section 7 application should not have been admitted.

Mr. A.K. Thakur, Mr. Santosh Kumar, Mr. Shekhar Kumar and Mr. Rishi Raj, Advocates represented the Appellant.

Mr. K. Datta, Senior Advocate with Mr. Awnish Kumar, Advocate appeared for the Respondent.

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REEDLAW 2024 NCLAT Del 09505