2018 (8) TMI 1786 - Tri - Insolvency and Bankruptcy

Corporate Insolvency Resolution Process (CIRP) - existence of Financial Debt as defined u/s. 5(8) - Corporate Debtor committed default in making payment invoking the provisions of Section 7 of I & B Code read with Rule 4 of Insolvency & Bankruptcy (AAA) Rules, 2016 - argument advanced by the Counsel for the Corporate Debtor is that since there is no consideration prescribed for the time value of the money and the amount was not borrowed by the Corporate Debtor against the payment of interest, the Applicant cannot be called as a Financial Creditor and hence, there is no Financial Debt as defined u/s. 5(8) HELD THAT - Since the amount of default as shown in the Exhibit-D and E are admitted and constitute a debt as defined under the Code and hence the same is to be treated as a debt due to the financial Creditor to whom a debt is owed and admitted as per the books of account of the Corporate Debtor. Further to say that the same is a financial Debt, the most important words that are required to be considered in the definition is interest, if any which means a loan or a liability which is required to be payable by the corporate Debtor to the Financial or Operational Creditor, need not bear any interest. That simply means a loan advanced even without interest is a Financial Debt. Now, to call the same as loan advanced/disbursed against consideration for the time value of money, the point to be considered here is that there can be a mutual understanding between the parties to waive the right to receive interest and for the possible growth of the value of shares and to meet business requirement etc. It is a fact that there were certain business obligations between both the parties and the above said amount is arrived at after the parties mutually agreed and then the same is reflected in the books of the Corporate Debtor under the head Long Term Borrowings . So, it cannot be said that the same is not a financial debt just because there is no interest payable nor there is any consideration for the time value of money. As the debt is admitted and is reflected in the books of account of the Corporate Debtor as loan which clearly clinches the case on hand. This Bench having been satisfied with the Petition filed by the Operational Creditor which is in compliance of provisions of sections 8 & 9 of the Insolvency and Bankruptcy Code admits this Application declaring Moratorium thereof.

Summary

Issues Involved:
1. Whether the petitioner qualifies as a Financial Creditor.
2. Whether the debt claimed by the petitioner constitutes a Financial Debt.
3. Whether the Corporate Debtor defaulted on the payment of the debt.
4. Whether the Corporate Insolvency Resolution Process (CIRP) can be initiated against the Corporate Debtor.

Issue-wise Detailed Analysis:

1. Whether the petitioner qualifies as a Financial Creditor:
The petitioner, a former shareholder of the Corporate Debtor, provided unsecured loans to the Corporate Debtor which were repayable on demand. The petitioner claimed that the outstanding loan amount was ?1,45,36,475/-, which was confirmed by the Corporate Debtor in its financial statements and by its statutory auditor. The Corporate Debtor argued that the petitioner was not a Financial Creditor as the loans were part of a quasi-partnership arrangement without any term for repayment or interest. However, the tribunal noted that the amount was admitted and reflected in the books of the Corporate Debtor, making the petitioner a Financial Creditor as per Section 5(7) of the Insolvency and Bankruptcy Code (IBC).

2. Whether the debt claimed by the petitioner constitutes a Financial Debt:
The Corporate Debtor contended that the debt did not qualify as a Financial Debt under Section 5(8) of the IBC because it was not disbursed against consideration for the time value of money and did not bear any interest. The tribunal referred to the definition of Financial Debt, which includes any debt disbursed against the consideration for the time value of money, and noted that loans without interest could still be considered Financial Debt if they were advanced to meet business requirements. The tribunal concluded that the debt in question, admitted and reflected in the Corporate Debtor's books as a loan, qualified as a Financial Debt.

3. Whether the Corporate Debtor defaulted on the payment of the debt:
The petitioner sent a lawyer's notice to the Corporate Debtor on 22.01.2018, demanding repayment of the loan amount. The Corporate Debtor acknowledged the debt in its reply but claimed that it was part of an overall settlement involving cross-holdings in various companies. The tribunal found that the debt was admitted and constituted a default as the Corporate Debtor failed to repay the loan amount, satisfying the requirement under Section 7 of the IBC for initiating CIRP.

4. Whether the Corporate Insolvency Resolution Process (CIRP) can be initiated against the Corporate Debtor:
The tribunal, satisfied with the petition filed by the Financial Creditor, admitted the application under Sections 8 and 9 of the IBC. The tribunal declared a moratorium, prohibiting the institution or continuation of suits against the Corporate Debtor, and appointed an Interim Resolution Professional (IRP) to carry out the functions under the IBC. The order of moratorium would remain effective until the completion of the CIRP or until a resolution plan is approved or an order for liquidation is passed.

Conclusion:
The tribunal concluded that the petitioner is a Financial Creditor, the debt qualifies as a Financial Debt, and the Corporate Debtor defaulted on the repayment. Consequently, the tribunal admitted the petition and initiated the CIRP against the Corporate Debtor, appointing an IRP and declaring a moratorium to facilitate the resolution process.