Written Financial Contract Is Not A Pre-Condition For Proving Existence Of Debt U/S 5(8) Of IBC: NCLAT New Delhi

Brief Facts

The present appeal filed under Section 61 of Insolvency and Bankruptcy Code 2016 ('IBC' in short) by the Appellant arises out of the Order dated June 27, 2022 (hereinafter referred to as 'Impugned Order') passed by the Adjudicating Authority (National Company Law Tribunal).

By the impugned order, the Adjudicating Authority has admitted the Section 7 application filed by Gajendra Investment Ltd. (financial creditor) against the Corporate Debtor-Rushabh Civil Contractors Pvt. Ltd on the ground of non-payment of debt that had become due and payable. Aggrieved by the impugned order, the present appeal has been preferred by the ex-Director of the Corporate Debtor.

The Respondent No. 1-Financial Creditor had given an amount of Rs 3.77 Cr. to the Appellant-Corporate Debtor on September 14, 2016. Thereafter, the Corporate Debtor having failed to repay the outstanding sum, a Demand Notice was issued to the Corporate Debtor seeking repayment of the outstanding amount along with interest.

Since the amount was not paid back by the Corporate Debtor within the stipulated time of 3 days, Financial Creditor claimed that a default had occurred on June 19, 2019 amounting to Rs 1.51 Cr. in their Section 7 application which was admitted by the Adjudicating Authority on June 27, 202.

Contentions

The appellant contended that the Financial Creditor had failed to prove the existence of any financial contract between them and the Corporate Debtor and in the absence of any agreement or financial contract, the Respondent No.1 has clearly failed to establish the existence of any debt or default.

• It was further submitted that the amount claimed by the Financial Creditor both in the Demand Notice as well as in the Section 7 application was different from the amount reflected in the Ledger Account of the Corporate Debtor as maintained in their own books of account.
• It was further argued that while no interest was claimed in the books of account of the Financial Creditor after 31.04.2017, however, the Section 7 application was filed claiming 18% interest thereby inflating the debt amount arbitrarily to Rs 1.51 Cr.
• It was also submitted that the transaction between the Corporate Debtor and Financial Creditor were in the nature of mere advances and not a loan and therefore not a financial debt.

Per contra, the respondent submitted that The Financial Creditor had addressed a letter dated June 14, 2019 to the Corporate Debtor asking the Corporate Debtor to pay the outstanding debt of Rs 1.51 Cr being the debt outstanding as on May 31, 2019.

• It was further argued that the Corporate Debtor neither responded to the letter nor made payment to the Financial Creditor following which the Financial Creditor filed the Section 7 application holding the date of default to be May 19, 2019 which has been correctly admitted by the Adjudicating Authority.
• It was further contended that the Corporate Debtor had clearly acknowledged the receipt of assistance from the Financial Creditor in their balance sheet for the year ending March 31, 2017 which was filed with the Registrar of Companies (“RoC” in short).
• It was further argued that the assistance to the Corporate Debtor was an interest-bearing loan.

NCLAT's Analysis

The tribunal perused the relevant provisions dealing with insolvency petition filed by the financial creditor. The tribunal observed that a petition under section 7 of the IBC has to be admitted the moment the debt and default are proved.

The court referred to the Supreme Court judgment in Innoventive Industries Ltd. Vs ICICI Bank (2018) wherein it was held that the moment the adjudicating authority is satisfied that a default has occurred, the application must be admitted unless it is incomplete, in which case it may give notice to the applicant to rectify the defect within 7 days of receipt of a notice from the adjudicating authority.

The tribunal further addressed the contention that a written contract is a pre-condition for the existence of the debt. However, this argument was rejected by the tribunal and held that it is not sina qua non that a written instrument outlining the debt must be accompanied with a insolvency petition. The debt can be proved from other documents.

The tribunal referred to its own judgment in Agarwal Polysacks Ltd. vs K. K. Agro Foods & Storage (2022) wherein it was held that it has been held that written financial contract is not a pre-condition or an exclusive requirement for proving existence of debt. It has been further amplified therein that the Application to Adjudicating Authority) Rules, 2016 and CIRP Regulations makes it clear that financial debt can be proven from other relevant documents and it is not mandatory that written financial contract can be the only basis for proving the financial debt.

The tribunal further perused relevant documents like balance sheet and demand notices and held that we have no doubt in our mind that Respondent No. 1 has produced incontrovertible and unimpeachable evidence to prove the existence of debt liability on the part of the Corporate Debtor.

The tribunal further addressed the contention with respect to whether disbursal of amount qualifies to be a financial debt. The tribunal referred to the Supreme Court judgment in Pioneer Urban Land and Infrastructure Ltd. v. Union of India (2019) wherein it was held that any debt to be treated as financial debt, there must happen disbursal of money and the disbursal must be against consideration for time value of money. Undoubtedly, the most typical illustration of time value of money is in the form of interest on the principal amount that has been borrowed.

The tribunal further observed that the present is a case where the disbursal of monies was clearly accompanied by interest amount leviable thereon, the disbursal has all the trappings of a financial debt and squarely falls within the purview of Section 5(8) of IBC.

Based on the above, the tribunal further held that we have no reasons to disagree with the findings of the Adjudicating Authority that it has concluded the existence of debt on the basis of documents/records like the balance confirmation statement in the balance sheet of the Corporate Debtor to establish existence of debt.

The tribunal further rejected the adjustment argument and held that we are of the view that the submission advanced of adjustment of loan by virtue of the terms contained in the MoU and consequential non-requirement for the Corporate Debtor to repay the Respondent No.1 does not inspire our confidence.

The tribunal concluded that this is a case where all the pre-requisites for filing a Section 7 stands fulfilled and the Adjudicating Authority cannot be held to have committed an error in admitting the Corporate Debtor into CIRP for having defaulted in repaying a financial debt which was above the threshold limit.

Accordingly, the present application was dismissed.

Case Title: Rahul H. Mehta v. Gajendra Investment Ltd. and Ors.

Case Reference: Company Appeal (AT) (Insolvency) No. 739 of 202

Court: NCLAT, New Delhi

Judgment Date: 15/10/2024

Click Here To Read/Download The Order