Home » Between The Lines » NCLAT: Definition of financial debt under IBC does not use the expression that disbursement should be made to corporate debtor only

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The National Company Law Appellate Tribunal (“NCLAT”), vide its order dated January 2, 2024, in the matter of Rajeev Kumar Jain v. Uno Minda Limited [2024 SCC OnLine NCLAT 28], has held that the definition of financial debt does not use the expression that disbursement should be made to the corporate debtor only. It further observed that the disbursement made on behalf, or at the instructions, of the corporate debtor will tantamount to disbursal made to the corporate debtor.

Facts

M/s. Unicast Autotech Private Limited (“Corporate Debtor”) was engaged in the business of manufacturing aluminium die casts and M/s. Uno Minda Limited (“Respondent”) was engaged in the business of supplying automotive solutions to original equipment manufacturers. Mr. Rajeev Kumar Jain (“Appellant”) was an ex-director and one of the shareholders of the Corporate Debtor.

The Corporate Debtor and its promoters including the Appellant approached the Respondent to discuss sale of 100% stake in the Corporate Debtor to the Respondent. The Appellant and other promoters of the Corporate Debtor agreed to transfer the Corporate Debtor along with its asset for INR 3 Crores against its outstanding dues through a Non-Binding Offer made by the Respondent (“NBO”).

In furtherance of the NBO, the Corporate Debtor and its promoters entered into a Business Support Agreement (“BSA”) with the Respondent. The BSA provided that the Respondent will acquire 100% shareholding of the Corporate Debtor and further agreed to supply raw material funding and critical capital working requirements and it was decided that all such money lent would be considered as unsecured debts given by the Respondent to the Corporate Debtor.

In May 2021, the Corporate Debtor approached the Respondent for further financial assistance. During discussions, the Respondent asked the promoters to pledge their entire shareholding in the Corporate Debtor and also furnish respective guarantees and accordingly the promoters along with its sister concern, M/s. Kiran Udyog Private Limited (collectively referred to as “Promoter Group”) pledged their shares, vide a Share Pledge Agreement dated May 12, 2021 (“SPA”), and issued the deed of guarantee.

The Respondent continued to provide support to the Corporate Debtor in acquiring goods required for its operations and between April, 2021 to May, 2021 certain payments were made by the Respondent amounting to INR 1.15 Crores. However, due to financial distress of the Corporate Debtor, the same could not be repaid to the Respondent.

Respondent issued a notice terminating the BSA and called upon the Promoter Group to repay INR 1.43 Crores as outstanding amount along with interest as per the BSA. The Appellant did not reply to the said notice. However, the Corporate Debtor repaid INR 24 Lakhs to the Respondent. The Respondent issued a legal notice for invoking guarantee furnished by the Promoter Group and calling them to pay outstanding dues and ultimately filed an application under Section 7 (Initiation of corporate insolvency resolution process by financial creditor) of the Insolvency and Bankruptcy Code, 2016 (“IBC”) which was admitted by the National Company Law Tribunal, New Delhi (“NCLT”), vide its order dated July 8, 2022 (“Impugned Order”).

Being aggrieved by the Impugned Order, the Appellant filed an appeal before the NCLAT.

Issue

Whether the debt given by the Respondent to the Corporate Debtor was a financial debt or an operational debt.

Arguments

Contentions of the Appellant:

The Appellant argued that the Impugned Order is illegal as there was no financial debt against the Corporate Debtor and the money owed to the Respondent could not have been treated as financial debt as no financial assistance has been provided by the Respondent and there was no time value of money involved.

The Appellant stated that the NCLT erred in concluding that the debt was a financial debt because it is secured by SPA and deed of guarantee, whereas the Corporate Debtor never agreed to repay the debt to the Respondent. The Appellant submitted that the understanding between the parties was that such unsecured debts would become payable only from the promoters.

The Appellant argued that except the BSA, the Respondent was also in charge of the Corporate Debtor, both in respect to company affairs and financial affairs and the Respondent cannot assume the character of a financial creditor.

Contentions of the Respondent:

The Respondent argued that the default was committed in making repayment to the Respondent and referred to several clauses of the BSA and SPA in support of its arguments that there was clear financial debt and not operational debt. The Respondent argued that the debt and the liability of the borrowers was an admitted position between the parties and once default takes place, it is the right of the financial creditors to approach NCLT. The Respondent contended that BSA was entered into by both the Corporate Debtor and its promoters and only the Corporate Debtor had been repaying the amount so far to the Respondent.

The Respondent highlighted that the BSA stated that both the Corporate Debtor as well as its promoters were to make the payments and also defined the joint and several liability on both the Corporate Debtor as well as its promoters.

Respondent denied that it was looking after the management of the Corporate Debtor and submitted that clause 3.2 of BSA was incorporated only to protect the financial interest of the Respondent, which provided that any withdrawal and borrowing of money or operation of the bank account of the Corporate Debtor was required to be approved by two persons, one from the Corporate Debtor and one from the Respondent.

Observations of the NCLAT

The NCLAT observed that financial debt means debt along with interest, if any. This means that interest is not sine qua non, therefore, interest may or may not be payable by the Corporate Debtor and it is the understanding between the parties which is significant and relevant to ascertain the existence of time value of money which can be in several forms, other than pure payment of interest.

The NCLAT observed that the definition of financial debt under Section 5(8) (Definition of ‘financial debt’) of IBC does not use the expression that disbursal should be made to a corporate debtor only. Hence, it can be implied that any disbursal made on behalf of the Corporate Debtor or at the instructions of the Corporate Debtor may also tantamount to disbursal made to the Corporate Debtor. The NCLAT also observed that the Corporate Debtor was the beneficiary of such disbursal made by the Respondent.

The NCLAT observed that the BSA, SPA and deed of guarantees were made jointly by the Corporate Debtor, its promoters and the Respondent. The Corporate Debtor procured raw material from vendors for which payments were made by the Respondent, at the instructions of the Corporate Debtor and therefore it assumes the character of financial debt. The NCLAT also observed that the Respondent was only supplying funds for working capital needs of the Corporate Debtor which is nothing but financial debt. The NCLAT observed that any financial assistance towards working capital cannot be treated as operational debt and has to be taken only as financial debt.

Decision of the NCLAT

In view of the above, the NCLAT held that there was a financial debt and default which was rightly appreciated by NCLT in the Impugned Order and accordingly the appeal was dismissed by NCLAT.

VA View:

The NCLAT has rightly observed that while ‘financial debt’ under IBC means a debt along with interest, if any, however the element of interest is not absolutely necessary and it is the understanding between the parties which is significant and relevant to ascertain the existence of time value of money which can be in several forms, other than pure payment of interest.

Further, NCLAT has correctly noted that the definition of financial debt under IBC does not use the expression that disbursement shall only be made to a corporate debtor. Therefore, NCLAT was correct in arriving at the conclusion that disbursement made on behalf, or at the instructions, of a corporate debtor will tantamount to disbursement made to a corporate debtor. Since the corporate debtor is the beneficiary in these scenarios, the disbursed amount shall assume the character of financial debt.

For any query, please write to Mr. Bomi Daruwala at [email protected]

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