Interest Not Essential For Debt To Qualify As Financial Debt Under IBC: NCLT Mumbai

The bench held that the definition of financial debt under Section 5(8) of the Insolvency and Bankruptcy Code, 2016, does not explicitly exclude interest-free loans.

Brief Facts:

Spenta Enclave Private Limited, through its Resolution Professional Mr. Rajesh Jhunjhunwala (Financial Creditor/Petitioner) sought the initiation of the Corporate Insolvency Resolution Process (CIRP) against Spenta Sun City Private Limited (Corporate Debtor/Respondent) for resolution of an unresolved financial debt amounting to Rs. 6,43,04,016/- along with further interest at 18% per annum until payment. The Petitioner was admitted into the CIRP by an NCLT order and Rajesh Jhunjhunwala was appointed as the Resolution Professional (RP) in place of the existing Interim Resolution Professional (IRP).

The Petitioner sanctioned and disbursed a total amount of Rs. 7,85,98,065/- in favor of the Respondent against which the Corporate Debtor repaid Rs. 1,42,94,049/-. The Petitioner, through its Resolution Professional, issued a Demand Notice which was served via mail calling upon the Corporate Debtor to repay Rs. 6,43,04,016/- along with further interest at 18% per annum within 15 days. The Corporate Debtor defaulted on the payment which lead to a final reminder mail and a subsequent Legal Notice. Under Section 25 of the IBC, the Resolution Professional of the Petitioner was required to take control and custody of all the Petitioner's assets for the successful realization of the CIRP process. Given the Corporate Debtor's default, the Resolution Professional filed a petition in NCLT under Section 7 of the IBC seeking initiation of CIRP against the Corporate Debtor.

In reply, the Corporate Debtor denied all allegations and contentions made by the Petitioner. The Corporate Debtor submitted that the Company Petition was not maintainable as there was no financial debt or default. It argued that the Petitioner's claim of debt default was based on documents such as the Subsidiary Ledger, Confirmation of Accounts, Share Purchase Agreement, Demand Notice, and Record of Financial Information, which were disputed and considered misleading. The Respondent contended that there was no evidence of any loan sanctioned by Spenta Enclave Private Limited, and that Spenta Enclave was not in the business of lending.

Observations by the NCLT:

The NCLT noted that the advancement of the unsecured loan by the Financial Creditor to the Corporate Debtor was evident from the ledger which showed disbursement of Rs. 7,85,98,065/- between October 28, 2016, and May 4, 2018. Despite the absence of a formal loan document, the NCLT held that it was not always necessary to execute a loan agreement at the time of advancement. The NCLT found the Corporate Debtor's argument that the transaction was not a loan transaction to be untenable especially since the Corporate Debtor acknowledged the amount received from time to time.

The NCLT also addressed the contention that the absence of a loan document prevented ascertaining the terms of repayment and interest. Referring to the case of Orator Marketing Private Limited Vs. Samtex Desinz Private Limited, the NCLT held that an interest-free term loan with the commercial effect of borrowing falls under the definition of financial debt per Section 5 (8) of the IBC. It noted that the absence of interest does not exclude a loan from being a financial debt. The NCLT also referred to the decision in Shailesh Sangani Vs. Joel Cardoso and Priority Marketing Private Limited which held that the presence of interest is not a prerequisite for classifying a debt as financial.

Therefore, the NCLT held that the Financial Creditor successfully established the existence of financial debt and the Corporate Debtor's default. Therefore, the NCLT ruled in favor of the Financial Creditor.

The NCLT appointed Mr. Gajesh Labhchand Jain as the Interim Resolution Professional. The Financial Creditor was directed to deposit an amount of Rs. 3,00,000/- towards the initial CIRP cost by way of a Demand Draft drawn in favor of the Interim Resolution Professional.

Case Title: In the matter of Spenta Enclave Private Limited (Through its Resolution Professional, Mr. Rajesh Jhunjhunwala) vs Spenta Sun City Private Limited

Case Number: C.P. (IB) 1066/MB/2023

For the Financial Creditor : Adv. Manoj Mishra

For the Corporate Debtor : Adv. Chintan Gandhi

Date of Judgment: 10.07.2024

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