Status as on- 20/02/2020
The National Company Law Tribunal, New Delhi Bench in the case of Earth Gracia Buildcon Private Limited vs. Earth Infrastructure Ltd., vide order dated 8th January,2020 dismissed the application audit was laid down that for any transaction to be treated as a financial debt, it should necessarily include the aforesaid elements as mentioned under section 5 (8) of the Insolvency and Bankruptcy Code 2016 i.e., time value of money, payment of interest, credit facility, note purchase facility, tease or hire purchase, receivables, any other transaction having the commercial effect of a borrowing, any amount raised from an allottee under a real estate project, derivative transaction, counter-indemnity obligation, and amount of any liability.
The fact that a company has advanced amount as loan is merely based on presumption without any proper proof (i) cannot be a ground to hold that the debt comes within the meaning of “Financial Debt” as defined under Section 5 (8) of the Insolvency and Bankruptcy Code, 2016; and (ii) cannot be termed as ‘disbursement of an amount for consideration for the time value of money‘.
BRIEF FACTS OF THE CASE
- Earth Gracia Buildcon Pvt. Ltd. (Applicant) claims to have advanced a sum of INR 16,82, 17,052/- to the Respondent/ Corporate Debtor viz., Earth Infrastructure Limited. It is contended that the amount advanced is a Financial Debt and accordingly the Applicant is a Financial Creditor (FC) of the CD in terms of Explanation to Section 5(8) of the Insolvency and bankruptcy Code, 2016 (‘the Code’).
- On 8.04.2019, Earth Gracia Buildcon Pvt. Ltd. has filed requisite Form ‘C’ dated before the Resolution Professional for collating the claim amounting to INR 20, 78, 13,695/-,
- On 25.07.2019, resolution professional rejected the claim for want of loan agreement and any documents substantiating the claim.
- Therefore, the Applicant filed the application before NCLT seeking a direction to the Resolution Professional for Respondent (CD) viz., Earth Infrastructure Limited, to recognize the claim made by the Applicant as a ‘Financial Debt’ under Section 5(8) of the I&B Code, 2016 and consequently, as “Financial Creditor” of the Corporate Debtor, which is undergoing CIRP w.e.f. 17.01.2019 under the code, 2016.
ISSUE BEFORE HON’BLE NCLT
The applicant approached the Hon’ble NCLT to decide the issue whether the amount claimed as advanced loan falls in the ambit of financial debt under section 5(8) of the Insolvency &Bankruptcy Code, 2016.
KEY OBSERVATIONS OF NCLT:
The Hon’ble NCLT while deciding the question raised in the application made certain observations on how to decide whether any claim falls in the category of financial debt or not. The Hon’ble NCLT held that for any transaction to be treated as a financial debt, it should necessary include the ingredients as mentioned under section 5 (8) of the Insolvency and Bankruptcy Code 2016. If any transaction is claimed to be ‘financial debt’ the same must have any one of the aforesaid elements being supported with the consideration for the time value of money. In other words, not every transaction can fall within the purview of the definition of the financial debt. Therefore, it is necessary that before treating any transaction as financial debt, we must look at the nature of the transaction to find out whether it includes any ingredients of the definition of financial debt being supported with the consideration of the time value for money is present or not.
The Hon’ble NCLT after considering all the documents placed before them, concluded that there is nothing on record to prove the that the nature of transaction falls within the definition of section of section 5(8) of the code. Transactions claim to be financial debt are not falling within the purview of the ingredients of the definition of the financial debt and not supported with the consideration for the time value of money, as claim by the Applicant company. Moreover, the claim is not substantiated with any documentary evidence. The Hon’ble NCLT held that these are sham transactions that involve round tripping of the huge amount and the Resolution Professional has rightly rejected the claim of the Applicant Company for want of loan agreement. Hence, dismissed the application.
The inference one may draw from the ratio of the NCLT in the matter is that in a situation where the Applicant is unable to prove the amount advanced as loan without proper documentations, such loan amount would not meet the requirements of a “Financial Debt“. The Applicant should satisfy that the nature of transaction shall be any one of the transactions enumerated in section 5(8) of the I&B code and should have time value of money as consideration.
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