NCLT Mumbai: Substance Of A Transaction Is Important Over Its Form, Accounting Entries Can Not Determine Character And Nature Of Transaction

Background Facts

Mr. Rakesh Bothra ('Applicant'), the Resolution Professional of Makalu Trading Ltd. filed an application to direct the Interim Resolution Professional ('IRP') of Topworth Urja & Metals Ltd. (Corporate Debtor) to accept its interest claim of Rs. 6.32 crores in the Corporate Insolvency Resolution Process ('CIRP') of the Corporate Debtor.

During the pendency of the CIRP application against the Corporate Debtor, the Corporate Debtor had submitted before NCLT Mumbai that they would be issuing the Demand Draft for the value of the principal amount in favor of Applicant for Rs. 4.52 Crores, and the same was issued also, however, without the payment of the interest.

The Applicant had paid the invoices raised upon Maharashtra State Electricity Distribution Company Ltd. ('MSEDCL') against the Corporate Debtor and the payment of the same was to by the Applicant.

NCLT Verdict:

The NCLT Mumbai pointed out that no dispute existed as to the discounting of invoices by the Applicant raised upon by MSEDCL. There is acknowledgment of debt since the Corporate Debtor had paid the interest to the Applicant in the past as evidenced from the TDS entries appearing in form 26AS u/s 194A of the Income Tax Act, 1961, of deduction of tax at source on interest, and this fact is also evidenced from a letter dated 01.03.2016 written by the Corporate Debtor to the Applicant certifying that an amount of Rs. 79,92,329/- has been paid towards interest.

Further, there is an acknowledgment of Rs. 9.46 Crores as due and payable by the Corporate Debtor to the Applicant on 29.3.2017 wherein the Applicant has also sought confirmation of the balance amount of Rs. 10.48 Crores as per the ledger account of the Applicant.

The Tribunal observed that the substance of a transaction is important rather than its form, and accounting entries can not determine the character and nature of a transaction Further, the evidence presented demonstrates that money was advanced by the Applicant which was repayable along with interest in the form of realization from MSEDCL, and in case of default, the same was to be repaid by the Corporate Debtor,

The NCLT also pointed out that Section 5(8) of the IBC includes “receivables sold or discounted other than any receivables sold on the nonrecourse basis” under the definition of financial debt. In the instant case, no dispute exists that the money disbursed to the Corporate Debtor in consideration of the assignment of such invoices and assignment of such invoices was not on a non-recourse basis as evidenced by and acknowledged by the payment of the principal amount by Corporate during the pendency of Section 7 application filed by the Applicant.

In conclusion, the Tribunal asked the Corporate Debtor to deduce the rate of interest via its ledger entries up to the period to which interest was provided in its books as no agreement is placed to deduce the rate of interest. It also directed the Applicant to file a copy of the ledger account along with narration in its books of account to the Corporate Debtor for verification.

Case Title: Mr. Rakesh Bothra vs. Mr. Alok Kailash Saksena

Case No.: I.A. 812 of 2023 in C.P.(IB) No. 1807/MB/2018

Counsel for the Applicant: Ms. Akansha Agarwal, Advocate

Counsel for the Respondent: Mr. Viraj Parik, Advocate

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