Infusion Of Funds In Corporate Debtor With Intention Of Earning Profits Would Fall Within Definition Of Financial Debt: NCLAT

Brief Facts:

The Appellant-Adhunik Corporation Limited was approached by Shivam India Limited-Respondent for financial assistance towards operationalization of their factory which had been shut down for financial constraints and want of working capital.

A fresh Memorandum of Agreement ('MoA') was executed on 23.06.2020 for a further period of five years which was entered into between Adhunik Corporation Limited, Shivam India Limited and promoters of Shivam India Limited.

According to the terms mentioned in the MoA, a financial assistance of Rs. 27.85 crore was provided to the respondent by the appellant. Subsequently, an application under section 7 of the code was filed by the appellant in which the date of default was mentioned as October 11, 2021.

The Section 7 application was dismissed by the Adjudicating Authority on 11.10.2023 by holding that the purported debt claimed by the Appellant was not a financial debt and that the Appellant was not a financial creditor. Aggrieved by the impugned order, the Appellant has come up in appeal.

Contentions:

The appellant submitted that the Appellant having provided financial assistance/credit to the Respondent which was required to be repaid by the Respondent and this outstanding financial debt was not paid back and which sum was beyond the threshold limit of Rs.1 crore stipulated by the Section 4 of the IBC, this was a fit case for attracting Section 7.

It was also argued that since the MoA provided for collection of sales commission from the sale of finished products, there was a clear element of commercial effect of borrowing which constituted time value for money.

The NCLAT in Sanjay D. Kakade Vs. HDFC Ventures Trustee Co. Ltd. held that interest free loans advanced to finance the business operations of a corporate body can as well be construed to be treated as financial debt.

Per contra, the respondent submitted that the Appellant had control both over the finances of the Respondent-Corporate Debtor and also the sale of finished products as well as for recovery of the funds infused from the sale proceeds of the finished goods.

It was also argued that the Appellant had been collecting sales commission on sale proceeds in return for the sum infused. Hence the sum infused was not in the nature of financial debt.

The NCLAT in Mukesh N. Desai Vs. Piyush Patel held that a Section 7 application is not maintainable when the MoU entered between parties contains reciprocal rights and obligation in which the parties are involved profit sharing. In the present case too, the Appellant was the owner of the finished products as per terms of the MoA, hence, the investment was not a financial debt.

Observations:

The Tribunal at the outset referred to the Supreme Court judgments in Orator Marketing (P) Ltd. Versus Samtex Desinz (P) Ltd. (2023) and 'Pioneer Urban Land & Infrastructure Ltd. v. Union of India (2019) to understand what exactly constitutes a financial debt.

It observed that before a debt can be categorised as a financial debt, there must be a disbursal and the disbursal must be against consideration for time value of money. The time value of money does not necessarily mean that the interest would be paid on the amount that has been borrowed.

It also observed that the nature of underlying transaction is therefore a determinative factor in deciding whether infusion of funds can be classified as financial debt or not.

The Tribunal after perusing the relevant documents observed that there is sufficient material on record to prove that there was disbursal of funds by the Appellant to the Corporate Debtor in their account.

It further observed that It would be misconceived to hold that the fund infusion did not qualify to be a financial debt merely because loan component was not explicitly mentioned in the MoA. It is a well settled proposition of law that interest on loan is not the only binding criterion for determining time value of money.

It further added that in Orator (supra) the Supreme Court held that the definition of “financial debt” in Section 5(8) IBC does not expressly exclude an interest free loan. In light of above discussion, the contention of the Respondent that the disbursal of the fund was bereft of loan component and hence not in the nature of a financial debt cannot be accepted.

The Tribunal said that as per the Insolvency Law Report, 2018, time value of money means compensation or the price paid for the length of time for which money has been disbursed.

It further observed that time value of money is not only a regular or timely return received for the duration for which the amount is disbursed as an amount in addition to the principal but also covers any other form of benefit or value accruing to the creditor as a return for providing money for a long duration.

The Tribunal further opined that the right of the Appellant to enjoy sales commission was also a form of return for the amount financed. In the case of Pioneer(supra), the apex Court held that the ratio is clear and that even if the transactions are not necessarily loan transactions, they would still attract Section 5(8) of the IBC so long as the transactions have the commercial effect of a borrowing.

The Tribunal observed that the disbursement must be against the consideration for the time value of money. In the present case, the fund that has been infused by the appellant has a direct bearing on the business carried out by the corporate debtor which makes the transaction with a commercial effect of borrowing. The clauses of the MoA also indicated that the fund was infused with the purpose of earning profits therefore the investment was for consideration for the time value of money.

The Tribunal concluded that “we remand the matter to the Adjudicating Authority to exercise its satisfaction as to whether financial debt has crossed the threshold limits and has become due and payable and basis these findings decide to accept or refuse admission of the Section 7 application of the Appellant.”

Case Title: Adhunik Corporation Limited Versus Shivam India Limited

Case Number: Company Appeal (AT) (Ins) No. 1427 of 2023

Judgment Date: 19/02/2025

For Appellant : 'Mr. Ramji Srinivasan (Senior Advocate) with Mr. Anup Kumar, Ms. Pragya Choudhary, Ms. Neha Jaiswal, Ms. 'Nisha Adhikari, Mr. Arjun Bhatia and Ms. Shefali Munde, Advocates'

For Respondent : Mr. Rishav Banerjee, Advocate.