The Hon’ble National Company Law Appellate Tribunal, New Delhi dismissed an application filed by a Financial Creditor for admission of its claim holding that the transactions in question between Financial Creditor and Corporate Debtor were sham and also did not qualify as ‘financial debt’, for the purposes of Insolvency and Bankruptcy Code, 2016.
Earth Gracia Buildcon Pvt. Ltd. (Financial Creditor/Appellant) and Earth Infrastructure Ltd. (Corporate Debtor) are companies undergoing the Corporate Insolvency Resolution Process (CIRP). According to the Financial Creditor, they had advanced a sum of Rs. 16,82,17,052/- to the Corporate Debtor and the Resolution Professional (RP) of the Financial Creditor filed requisite form ‘C’ before the RP of Corporate Debtor for the claim amounting to Rs. 20,78,13,695/- along with the ledger and bank account statement of the Financial Creditor and loan account summary of the Corporate Debtor. The Resolution Professional rejected the claim of the Financial Creditor for want of a loan agreement. Hence, the RP of the Financial Creditor filed an application under section 60(5) of the Insolvency and Bankruptcy Code, 2016 (IBC) before the National Company Law Tribunal (NCLT). The NCLT held that the transactions did not fall within the purview of the definition of the ‘financial debt’ and were sham. Aggrieved thereof, the RP of the Financial Creditor filed this Appeal before the National Company Law Appellate Tribunal (NCLAT).
In support of the claim, the Financial Creditor filed ledger, bank account statements, balance sheet and Memorandum of Association of the Financial Creditor and loan account summary for the relevant period of the Corporate Debtor. On the other hand, the RP of the Corporate Debtor contended that since the Financial Creditor did not provide a loan agreement, the claim made by the Appellant did not qualify as Financial Debt.
Hence, the only issue which arose for consideration before NCLAT was whether the claim made by the Appellant was Financial Debt as defined under Section 5(8) of the IBC.
As per the definition given in Section 5(8) of IBC, ‘financial debt’ means a debt along with interest, if any, which is disbursed against the consideration for the time value of money. The essential requirement under the above definition is of disbursement of debt and consideration for the time value of money. In this case, the promoters and directors of both the companies were common and therefore, the NCLAT noted that from the ledger entries of the Financial Creditor, it could not be inferred that the money was disbursed to the Corporate Debtor. On the contrary, the entries of ledger reflected the inflow and outflow of funds which are in the nature of running account, indicating that the debit and credit balances lack any commercial effect of borrowing which is an essential element in terms of section 5(8)(f) of the IBC. The Financial Creditor also did not point out any consideration for the alleged debt and thus, it failed to prove that the transaction in question came within the definition of ‘financial debt’.
Further, the NCLAT enunciated the reasons why the transactions in question were sham and the same are as follows:
The transactions in question didn’t have the backing of the board resolution.
There was no record to show that the Corporate Debtor was in need of use money as Loan involved in the transactions.
There was neither agreement of loan and interest, nor documents to stipulate the period of repayment.
The Financial Creditor and Corporate Debtor are group companies and the directors and promoters are common in both companies.
The balance sheet of the Financial Creditor for the year ending March 31 2015 showed a loan and advance of INR 18,75,76,212/- to others but the name of the Corporate Debtor was not mentioned.
The Financial Creditor had filed a claim before the RP for an amount of INR 16,82,17,052/- plus interest @ 12 % which was not substantiated with any documentary evidence.
Accordingly, in view of the foregoing, the NCLAT held that the Appellant failed to prove that these transactions came within the definition of Financial Debt under section 5(8) of the IBC and Appellant Company was Financial Creditor as defined under Section 5(7) of the IBC. Resultantly, the NCLAT upheld the impugned order of NCLT and dismissed the present application.