Debt Cannot Be Classified as a Loan in the Absence of a Contract or Agreement – NCLAT Delhi

Introduction

The National Company Law Appellate Tribunal (‘NCLAT’) in Metamorphosis Trading LLP v. Sankalp Engineering and Services (P.) Ltd[i], analysed the meaning of ‘financial debt’, along with the criteria that a creditor must necessarily meet, to be recognised as a ‘financial creditor’, as per the provisions mentioned under s. 5(7) of the Insolvency and Bankruptcy Code, 2016 (‘Code’).

Facts

• The Appellant entered into a deed of assignment with Innovative Industries Limited (‘IIL’), wherein the debt of Rs. 5.10 crores of the corporate debtor (‘CD’) was transferred in favour of the Appellant. A legal was notice issued by the Appellant against the CD, wherein the claims made by the Appellant were denied by the CD.

• The petition filed by the Appellant under s.7 of the IBC was rejected by the National Company Law Tribunal, Mumbai, wherein considering that because debt and default did not exist, the petition was not maintainable.

• The proof of the existence of debt was challenged by the CD and it was submitted that no debt existed during the time of assignment. The CD also submitted that the proof of the existence of debt and the subsequent default in repayment constituted an essential ingredient to initiate CIRP against a CD.

• The Appellant submitted that the factum of the existence of a debt was acknowledged by the CD vide email dated 25.04.2014.  Further, the books of the IIL were examined, wherein it was noted that no trade receivables since the financial year 2017-18, were specifically earmarked to the CD and the assets were assigned on ‘as is where is basis’ and ‘no recourse’ basis.

Held

• The NCLAT, while deciding in favour of the CD, rejected the said appeal, and held that nothing was placed on record to substantiate that the debt was disbursed in consideration for the time value of money, which is an essential ingredient to qualify as a financial debt.

• Furthermore, it was held that the position of IIL was no better than the Appellant and in the absence of any contract/agreement, the debt could not be said to qualify as a loan and as financial debt under the provisions of the Code.

• Reliance was placed on the decision of the Hon’ble Supreme Court[ii], wherein it was held that if the tribunal is satisfied that a default has occurred, a petition under s.7 of the IBC may be admitted. However, the default is only said to have occurred when it becomes due but remains unpaid by the CD.

Our Analysis

This judgment highlights the essential ingredients for a debt to qualify as a financial debt. It has been held that a written agreement or a contract, stating terms of repayment, may be required to substantiate the nature of debt.

The concept of ‘time value of money’ has been discussed in this judgment, stating that the value of money appreciates over a period of time, meaning that the money available with a lender now is worth more than the same amount of money in the future. Therefore, in general business practice, this leads to the conclusion that the lender should expect a return on the money disbursed as a debt.

This principle has been discussed in light of the provisions of the Insolvency and Bankruptcy Code and it has been held that if nothing has been placed on record to substantiate that the disbursement was made and the concept of ‘time value of money’ was taken into account, then it is not to be classified as a financial debt.

End Notes

[i] [2024] 162 taxmann.com 504 (NCLAT- New Delhi) dated 08.05.2024.

[ii] Innoventive Industries Ltd. v. ICICI Bank [2018] 1 SCC 407.

Authored by Rosy Gupta, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinion.