NCLAT Declares Sale Agreement Not A Financial Debt, Dismisses Insolvency Petition

Brief Facts:

Gujarat State Financial Corporation (“GSFC”), Gujarat Industrial Investment Corporation (“GIIC”), Bank of Baroda, and Dena Bank provided term loans amounting to Rs. 30 lakhs, Rs. 60 lakhs, Rs. 16.50 lakhs, and Rs. 16.50 lakhs, respectively, to M/s Ganpati Pulp and Paper Ltd. (“GPPL”) located in Bavla, Ahmedabad.

GPPL created a charge over its immovable assets in the village Rajoda, Bavla, Ahmedabad, measuring approximately 24 acres. Due to a default by GPPL, GSFC took possession of these assets and issued a sale notice under Section 29 of the State Financial Corporation Act, 1951.

Shree Industries Limited (“SIL” or “Corporate Debtor”) offered Rs. 3.88 crores to purchase the GPPL assets. An agreement dated 27.11.1990 was executed between SIL and GSFC, acting for itself and other financial institutions. The agreement stipulated a down payment of Rs. 50 lakhs and the balance amount of Rs. 3.38 crores to be paid in 20 quarterly installments.

SIL was declared a sick industrial company on 12.11.1997. A Special Civil Application was filed by GSFC before the Gujarat High Court, seeking the return of assets from SIL, which was dismissed, and a one-time settlement (“OTS”) was reached between GSFC and SIL. Guarantors of GPPL challenged the OTS through a writ petition, which was dismissed by the Gujarat High Court. The High Court directed transferring the winding-up proceedings to the NCLT, Ahmedabad, for a complete adjudication.

Bank of Baroda assigned its debt to ASREC (India) Ltd. (“Respondent No. 1” or “Financial Creditor”) on 29.03.2011. On 15.03.2016, SIL submitted an OTS proposal to ASREC for Rs. 5.50 crores, which was not complied with. ASREC sent a notice of default to SIL on 01.03.2021 for the outstanding amount.

ASREC filed a Section 7 application before the NCLT, New Delhi, on 23.11.2022, claiming an amount of Rs. 92,35,21,674/- as of 30.06.2022. SIL contended that the debt was not a financial debt but a sale consideration due to the vendor. The Corporate Debtor had made payments over Rs. 3 crores towards the sale consideration. The NCLT adjudicated that the Sale Agreement dated 27.11.1990 constituted a “financial debt” and not merely a sale consideration. Consequently, it admitted the Section 7 application for insolvency.

The appellants challenged the impugned order dated 13.12.2023, which admitted the application under Section 7 of the Insolvency and Bankruptcy Code.

Observations by the Tribunal:

The core issue was whether the transaction dated 27.11.1990 constituted a “financial debt” under Section 7 of the IBC, allowing the Respondent No. 1 to file an insolvency application as a financial creditor against the corporate debtor.

The tribunal noted that Section 5(8) of the IBC defines “financial debt” as a debt disbursed against consideration for the time value of money. This includes various forms of financial transactions such as loans, bonds, receivables sold, and other similar instruments. In this context, the tribunal referred to the Hon'ble Supreme Court's judgment in Pioneer Urban and Infrastructure Ltd. v. Union of India [(2019) 8 SCC 416], which held that the term “disbursed” refers to money paid out with the expectation of repayment over time. In Global Credit Capital Limited and Anr. v. Sach Marketing Pvt. Ltd. [(2024) SCC OnLine SC 649], the Supreme Court reiterated that a debt is considered 'financial' if it meets the criteria set out in Section 5(8) of the IBC, which includes the existence of a debt along with interest, which is disbursed against the time value of money.

The tribunal reviewed the agreements and documents provided by the Financial Creditor, and found that the critical document was the letter dated 07.11.1990 from GSFC, which indicated the sale of assets under Section 29 of the SFCs Act, 1951. According to the Tribunal, the letter was an offer to purchase assets, which was accepted by GSFC, suggesting that the transaction was indeed a sale rather than a loan. Thus, the transaction constituted a sale of assets.

The NCLAT observed that the transaction dated 27.11.1990 was structured to transfer ownership of assets rather than to create a loan obligation. It was observed that the Deed of Guarantee dated 12.12.1990, relied upon by the Financial Creditor in the Section 7 Application, proved that the transaction was for sale and purchase of assets. According to the Deed of Guarantee, the offer by SIL to purchase assets of GPPL for Rs. 388 lakhs and the payment terms reflected the nature of the transaction as a sale. The Tribunal noted that the irrevocable and unconditional guarantee provided by the Corporate Debtor was for the payment of the balance purchase price. This guarantee could not be construed as a financial debt.

The Tribunal reiterated the Hon'ble Supreme Court's decision in Pioneer Urban and Infrastructure Ltd., where the court confined the interpretation of “financial debt” to transactions involving money, thereby excluding transactions involving only the disbursement of property from this definition.

The Counsel for Respondent No. 1 had relied on a letter dated 04.03.2021 from the Corporate Debtor, which described a transaction where sale consideration was converted into a loan by consortium members. However, the tribunal observed that the letter from the Corporate Debtor, drafted 30 years post-transaction, cannot redefine the nature of the original transaction conducted on 27.11.1990. The tribunal held that documents reflecting the transaction and subsequent correspondence clearly described the transaction as a sale and not a financial debt.

In this context, the tribunal, referring to the Supreme Court's judgment in Yellapu Uma Maheshwari and Anr. vs. Buddha Jagadheeswararao and Ors. [(2015) 16 SCC 787], held that the nature of the transaction must be determined from the documents reflecting the transaction rather than pleadings set up by the parties.

Thus, the NCLAT allowed the Appeals, and set aside the impugned order dated 13.12.2023 passed by the Adjudicating Authority, which admitted the Section 7 application for insolvency, holding that the true nature of the transaction was a sale of assets, not a loan.

Case Title: Sandeep Mittal vs. M / s ASREC (India) Ltd. & Ors.

Case Number: Company Appeal (AT) (Insolvency) No. 37 & 573 of 2024

Date of Judgment: September 9, 2024