Mere Recording Of Transaction As 'Inter-Corporate Deposit' In Balance Sheets Insufficient To Prove Financial Debt : NCLT Principal Bench

The bench noted that the an application under Section 7 of the IBC can be initiated by Financial Creditor (FC) for initiating the Corporate Insolvency Resolution Process (CIRP) against Corporate Debtor (CD) when there is an existence of 'debt' and consequent 'default.' The AA Rules prescribe the manner in which such applications should be filed which requires the FC file the application in Form-1 with accompanying documents and records as specified in CIRP Regulation, 2016.

Regulation 8 of the CIRP Regulations 2016 elucidates that the existence of debt can be demonstrated through various documents such as records with an information utility, financial contracts, court orders, or financial statements. Therefore, the NCLT noted that the regulation uses the term “or” which indicates that not all documents are necessary but any relevant document can suffice to prove the existence of debt.

Further, the NCLT referred to Agarwal Polysacks Ltd. v. K.K. Agro Foods & Storage Ltd where the NCLAT clarified that a financial debt could be proven through various relevant documents and not exclusively by a written financial contract. Therefore, it was held that proving financial debt did not necessitate a written contract.

In PV Potluri Ventures (P) Ltd. v. Benita Industries Ltd. it was observed that the appellant failed to provide any documents that could substantiate the existence of financial debt or the occurrence of default. In contrast, Agarwal Polysacks Ltd. demonstrated that debt could be proven through balance sheets and bank statements.

On the second issue, whether the transaction of Rs. 2,00,00,000 qualifies as financial debt under Section 5(8) of the IBC, the CD argued that the transaction did not meet the criteria of disbursal against the consideration for time value of money. Section 5(8) defines financial debt as a debt that includes disbursement against time value of money, encompassing a range of financial arrangements.

The NCLT referred to the decision of the Supreme Court in Jaypee Infratech Ltd. Interim Resolution Professional v. Axis Bank Ltd. Where it was held that for a debt to be classified as financial debt, it must involve a disbursal against the time value of money, which is essential even for transactions listed under Section 5(8). This was further held in Orator Marketing (P) Ltd. v. Samtex Desinz (P) Ltd where it was accepted that interest-free loans could also qualify as financial debt if they had the commercial effect of borrowing.

The NCLT noted that the transfer of Rs. 2,00,00,000 was substantiated by bank records and acknowledged in the CD's balance sheets from 2013 to 2021 listing it as “Inter Corporate Deposit” or “Unsecured Loans.” However, the balance sheet for 2021-22 excluded this amount purportedly due to the FC's failure to pay a balance amount for a property purchase. The FC contended that the removal was unilateral following a demand notice while the CD claimed forfeiture.

The NCLT noted that mere recording of the transaction as “Inter-Corporate Deposit” in balance sheets was insufficient to establish it as financial debt without supporting documentation. The FC relied only on the balance sheet and demand notice which were not conclusive proofs of repayment obligations. Further, the bench noted that the absence of explanatory notes in the balance sheet regarding repayment terms further weakened the FC's claim.

In M/s IFCI Limited v. Sutanu Sinha, the NCLAT held that while balance sheet entries might suggest the existence of a financial debt, such evidence alone does not necessarily establish the debt's character. The determination of whether an entry constitutes financial debt depends on the specific facts and circumstances of each case. In Sutanu Sinha, the balance sheet entry was not sufficient to prove financial debt because the terms of the agreement indicated that the amount was treated as equity rather than debt.

Similarly, in Agarwal Polysacks, the balance sheet entries clearly indicated that the debt was “repayable on demand” and was classified as an unsecured loan. The NCLT noted that the balance sheet entries in Agarwal Polysacks were detailed and supported by additional evidence.

In contrast, the FC failed to present sufficient evidence regarding the terms of the alleged loan. The bench noted that the balance sheet for the relevant financial years merely listed the amount as “Advance Against Property” without any detailed explanation or documentation supporting the claim that it was a financial debt. The FC did not provide a loan agreement, financial contract, or any document indicating the nature, repayment terms, or interest of the alleged loan.

Further, the NCLT noted that the absence of a loan agreement or relevant documentation raised doubts about the authenticity and nature of the alleged financial debt.

Therefore, the petition was dismissed.

Brief Facts:

Proplarity Infratech Private Limited, Financial Creditor (FC), claimed that Sky High Technobuild Private Limited, Corporate Debtor (CD), approached it for a short-term loan facility of Rs. 2,00,00,000 for its real estate business which was advanced via RTGS with an interest rate of 18% per annum. The FC alleged that the CD neither repaid the loan amount nor the interest which led to a total outstanding debt of Rs. 4,70,00,000/-. Despite sending a demand notice, the CD failed to make any payment. The FC further argued that the loan amount was acknowledged by the CD in its financial statements and auditor's reports from FY 2013-2014 to FY 2019-2020. Therefore, the FC approached the NCLT and filed a petition under Section 7 of the Insolvency and Bankruptcy Code, 2016 for initiating Corporate Insolvency Resolution Process.

The CD contended that no financial contract existed between the parties and the FC imposed an arbitrary interest rate of 18% without any agreement to that effect. The CD argued that the FC failed to provide a record of default as mandated by Section 7(3)(a) of the Insolvency and Bankruptcy Code and Rule 3(1)(d) of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016. The CD also claimed that the transaction did not constitute a "financial debt" and alleged that the FC initially approached the CD to purchase a plot of land valued at Rs. 25,00,00,000 with a token payment of Rs. 2,00,00,000. The CD stated that the remaining amount was to be paid within three years and due to non-payment of the balance, the token amount was forfeited as communicated in letters.

The CD further argued that the amount received was recorded as an Inter-Corporate Deposit and not as a loan or financial debt. The CD contended that the FC did not satisfy the requirements of Sections 5(7) and 5(8) of the Insolvency and Bankruptcy Code, and that no default had occurred as defined under Section 3(12) of the Code.

Case Title: Proplarity Infratech Private Limited vs Sky High Technobuild Private Limited

Case Number: CP (IB) No.607/(PB)/2023 & I.A. No. 595 of 2024 I.A. No. 1097 of 2024

For the Financial Creditor: Sr. Adv. P. Nagesh, Adv. Akshay, Adv Kamal Kapoor, Adv. Aditya Nayyar

For the Corporate Debtor: Sr. Adv. Ashish Dholakia, Adv. Harsh Gattani, Adv. Anubhav Singh

Date of Judgment: 23.07.2024

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