The National Company Law Appellate Tribunal (NCLAT), New Delhi, dismissed the petition filed by the financial creditor under Section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC), and clarified that if the financial creditor had failed to muster clinching proof and evidence in terms of financial records to show that sum advanced by them to corporate debtor was indisputably interest-bearing and that interest had continued to accrue and was being realized as consideration for time value of money, then such sum advanced by financial creditor to corporate debtor did not satisfy ingredients of financial debt of disbursal, time value of money and commercial effect of borrowing.
The Tribunal explained that for any debt to be treated as financial debt, the prerequisite is disbursal of money to the borrower for utilisation by the borrower and that the disbursal must be against consideration for the time value of money, even if it is not interest-bearing. As to when a Financial Creditor who has disbursed money to a Corporate Debtor against consideration for time value of money can trigger the insolvency resolution process against the Corporate Debtor, as per the scheme of IBC, that stage arises when a default arises in that a debt which has become due, in fact and in law, but has not been paid in whole or part thereof.
The Division Bench comprising Justice Ashok Bhushan (Chairperson) and Barun Mitra (Technical Member) found that the Appellant had disbursed Rs 1 crore to the account of the Corporate Debtor in 2010, which was not controverted by the Corporate Debtor. However, there was no written contract or agreement between the Appellant and the Corporate Debtor governing the terms and conditions by which the sum was advanced by the Appellant and disbursed to the account of the Corporate Debtor. Thus, the Bench reiterated that the requirement of a written financial contract between parties is not a precondition for determining whether any amount disbursed is financial debt or not.
The Bench went on to observe that though the expression ‘time value of money’ finds mention in Section 5(8) of the IBC, the term has not been defined in the said enactment. It is well recognised that the most typical example of ‘time value of money’ is in the form of interest charged on the principal amount that has been borrowed. In the present case, to substantiate the fact that the loan was actually interest-bearing, the Appellant has placed the TDS certificates on record to corroborate that the interest amount was paid by the Corporate Debtor.
However, for the transaction to have been interest-bearing in the true sense, the interest payment should have been paid annually, and by logical corollary, corresponding TDS deductions ought to have been reflected, clarified the Bench, while emphasising that deduction of TDS for only two years is insufficient to determinatively conclude that interest liability was a quintessential adjunct of the sum disbursed by the Appellant.
Coming to the averment made by the Appellant that the Corporate Debtor had agreed to repay the outstanding amount, along with 15 per cent share of profits on the Madina project, the Bench at first instance, agreed that prima facie, investment made to derive profit on the completion of the Madina Project can be viewed as a transaction having consideration for time value for money thus reflecting commercial effect of borrowing. However, this share of profit has not been made part of the claim in the petition filed under Section 7 of the IBC, which was limited to the principal and the interest amount.
Thus, the Bench pointed out that when the Appellant, on their own volition, have chosen not to exclude a share in profit from Part-IV of Section 7 application, the Appellant cannot be seen to claim that the disbursal of Rs. 1 crore had been made by them with a view to have a share in the profits arising out of the Madina Project. Accordingly, while concluding that no debt and default have been established, the Tribunal refused to interfere with the order passed by the Adjudicating Authority and dismissed the appeal.
Briefly, the appellant-financial creditor advanced a loan of Rs. 1 crore to the respondent, a real estate company, for the construction of a project ‘Madina Heights’, on the assurance by the respondent to repay the loan with interest @ 18 per cent per annum, besides offering 15 per cent share in the profit of the project. However, the respondent failed to repay the loan, resulting in the issuance of the demand notice. Since payments were still not forthcoming from the respondent, the appellant filed a petition under Section 7 of IBC seeking admission of the respondent into the corporate insolvency resolution process (CIRP), which was rejected by the Adjudicating Authority (NCLT) as non-maintainable.
Appearances:
Advocates Karan Valecha, Jaimin K. Dave, and Hirva Dave, for the Appellant
Advocates Gaurav Mitra, Honey Satpal, Nipun Singhvi, Pooja Singh, Aarushi Mishra and Akash Agarwalla, for the Respondent
