NCLAT Delhi: Definition Of Financial Debt U/S 5(8) Does Not Provide Disbursal To Be Made To Corporate Debtor Only
The National Company Law Appellate Tribunal ('NCLAT') New Delhi, comprising Justice Ashok Bhushan (Chairperson) and Mr. Naresh Salecha (Technical Member) held that the definition of Financial Debt under Section 5(8) of Insolvency and Bankruptcy Code, 2016 ('IBC') does not use the expression that disbursal should be made to the Corporate Debtor only. Background Facts: Unicast...
The National Company Law Appellate Tribunal ('NCLAT') New Delhi, comprising Justice Ashok Bhushan (Chairperson) and Mr. Naresh Salecha (Technical Member) held that the definition of Financial Debt under Section 5(8) of Insolvency and Bankruptcy Code, 2016 ('IBC') does not use the expression that disbursal should be made to the Corporate Debtor only.
Background Facts:
Unicast Autotech Pvt. Ltd. (Corporate Debtor) carries out the business of manufacturing aluminum die casts, whereas Uno Minda Limited (Respondent 1) is in the business of supplying automotive solutions to original equipment manufacturers ('OEM').
A Business Support Agreement ('BSA') was entered into between the Corporate Debtor and its Promoters including Mr. Rajeev Kumar Jain (Appellant) and Respondent 1 for a sale 100% stake in the Corporate Debtor and to supply raw material funding and critical capital working requirements. It was decided that all the money lent to be treated as unsecured debts to the Corporate Debtor only payable by the Promoters.
The Appellant contended that all transactions happened between Respondent 1 and the Promoters with no involvement of the Corporate Debtor since no financial assistance was availed by the Corporate Debtor from Respondent No.1.
Aggrieved by the Order of NCLT New Delhi allowing the Corporate Insolvency Resolution Process ('CIRP') application against the Corporate Debtor, the Appellant, the Ex-Director and one of the Shareholders of the Corporate Debtor, has filed the appeal before NCLAT.
NCLAT Verdict:
The NCLAT Delhi dismissed the appeal and held that the payment of raw material made by a third party at the instructions of a Corporate Debtor or financial assistance towards working capital constitutes 'Financial Debt' under IBC.
The Appellate Tribunal observed that the meaning of 'Financial Debt' is a debt along with interest, if any, which is disbursed. Thus, interest is not sine-qua non, therefore, interest may or may not be payable by the Corporate Debtor. It pointed out that what is relevant and significant is the understanding between the parties to ascertain the existence of the time value of money which can be in several forms, other than pure payment of interest.
It held that disbursal of funds is required but the definition does not use the expression that disbursal should be made to the Corporate Debtor only. This implies that any disbursal made on behalf of the Corporate Debtor or at the instructions of the Corporate Debtor may also be tantamount to disbursal made to the Corporate Debtor.
NCLAT noted that the Corporate Debtor is the ultimate beneficiary of such disbursal. Presently, there is no dispute that the Corporate Debtor used to procure raw material from vendors for which Respondent 1 made the payments, at the instructions of the Corporate Debtor and thus, assuming the character of “financial debt”.
In conclusion, NCLAT held that NCLT New Delhi's Order is valid and the Appellant's contention that the Corporate Debtor was not a party to the agreement cannot be accepted.
Case Title: Mr. Rajeev Kumar Jain vs. Uno Minda Ltd. and Anr.
Case No.: Company Appeal (AT) (Insolvency) No. 947 of 2022 & I.A. No. 2682, 2683 of 2022 & 1652 of 2023
Counsel for Appellant: Mr. Swetab Kumar, Mr. Shashank Agarwal, Advocates.
Counsel for Respondents: Mr. Mahip Singh, Mr. Karan Kohli, Mr. Krishan Kumar, Mr. Varun, Advocates.