The Chennai Bench of the National Company Law Tribunal (NCLT) has held that, for admission of a Section 7 application, the applicant must establish that the claimed debt is a “financial debt” within the meaning of Section 5(8), namely a debt disbursed against consideration for the time value of money. Where the material on record shows a continuous commercial trading relationship supported by purchase and sales invoices, and there is no written loan agreement, no interest clause, and no contemporaneous evidence that the transaction was a loan at inception, the debt cannot subsequently be recharacterized as financial debt merely by later communications or unilateral assertions. Further, interest cannot be added without contractual basis to artificially cross the statutory threshold for maintainability under Section 7 of the IBC.
The Division Bench comprising Jyoti Kumar Tripati (Judicial Member) and Ravichandran Ramasamy (Technical Member) observed that the principal issue was whether the debt claimed by the applicant qualified as a “financial debt” under Section 5(8) of the Code. On examining the invoices on record, it found that the parties were engaged in a continuous business-to-business relationship and that the documents showed purchase and sales invoices indicative of an operational rather than a financial arrangement. It reiterated that, to qualify as a financial debt, the debt must be disbursed against consideration for the time value of money, and that the burden lay on the applicant to prove that the transaction was not merely a commercial payment but a loan carrying an inherent element of time value of money.
The Tribunal also found the material relied upon by the applicant insufficient. It observed that the NeSL report was not duly authenticated and that the ledger account produced was only the applicant’s own ledger statement. As regards the WhatsApp message stating, “Sir, please consider as loan, we will adjust within a month later,” the Tribunal held that the phrase “please consider as loan” implied that the amount was not a loan at its inception, but rather reflected an attempt to recharacterize a pre-existing commercial liability.
The Tribunal stated that the nature of a debt is sacrosanct and that the legal character of a transaction is determined at the time of its inception and cannot be shifted at the whims of the parties to suit the jurisdiction of the Adjudicating Authority. It further noted that no written loan agreement, interest clause, or board resolution had been produced to support conversion of commercial dues into financial debt.
The Tribunal additionally accepted the respondent’s challenge on the statutory threshold. While the applicant claimed Rs. 1.13 Crores, the respondent’s case was that only Rs. 99.13 lakhs had actually been transferred as principal, with the rest added as interest without any underlying agreement. The Tribunal held that, in the absence of any financial contract or provision for interest, inclusion of such interest to cross the Rs. 1 crore threshold was legally untenable. On that basis, it concluded that the applicant had failed to establish that the amount due and payable was a financial debt, and Section 7 application was dismissed.
Briefly, the application under Section 7 of the Insolvency and Bankruptcy Code, 2016 was filed by Supreme Plascare India Private Limited against Shiroo Polymers Private Limited seeking initiation of CIRP. The applicant claimed that a sum of Rs. 1.13 crores were due and payable as a financial debt, with the date of default stated as Oct 26, 2024. To support the claim, the applicant relied on the NeSL report, its ledger statement, and bank statements showing disbursement. The applicant’s case was that the corporate debtor had approached it for short-term loans to meet financial commitments and working capital requirements such as EMIs, electricity bills, bank interest, salaries and third-party payments.
The respondent opposed the petition on the ground that the applicant could not be treated as a financial creditor under the Code because the alleged debt did not satisfy the requirement of disbursement against consideration for the time value of money under Section 5(8) of the IBC. The respondent contended that both parties were engaged in the business of manufacture of plastic articles and had a purely commercial relationship involving supply of raw materials and purchase of finished goods. It was stated that the amounts reflected in the bank statements were payments made for purchase of plastic containers and not loan disbursements. The respondent further asserted that the actual funds transferred amounted only to Rs. 99.13 lakhs and that the balance had been unilaterally added as interest without any written contract, invoice, or communication evidencing an agreement to pay interest.
