2019 (3) TMI 1192 - AT - Insolvency and Bankruptcy

Corporate insolvency process - existence of financial debt - unsecured loan outstanding - debt and default on the part of the Corporate Debtor - whether the amount claimed by Respondent No. 1 is not a Financial Debt within the meaning of Section 5(8) and Respondent No. 1 cannot be treated as a Financial Creditor for the purposes of I&B Code? - HELD THAT - The balance sheet as on 31st March, 2017 as of the reply affidavit filed by Respondent No.1, inter alia, reflects a non-current liability of ₹ 4,72,76,182/- treated as long term borrowings and not treated as shareholder s funds. Same factual position is reflected in the communication made by the Company Auditor Ganesh Mehta , Partner Ganesh and Rajendra Associates addressed to Respondent No.1 in his communication dated 5th December, 2017 forming Annexure D to the reply affidavit of Respondent no.1. Communication reflects total unsecured loan of ₹ 4,72,76,182/- against the Corporate Debtor in the books of the Company as on 31st March, 2017, the breakup showing the loan amount of ₹ 1,45,36,475/- in the name of Respondent No.1. In the face of this documentary evidence it is abundantly clear that the amount disbursed by Respondent No.1 to the Corporate Debtor was in the nature of debt treated as long term loan and not as an investment in the nature of share capital or equity. Such disbursement cannot either be treated as largesse. We are convinced that the aforesaid amount outstanding as against Corporate Debtor, default whereof is not in issue, has all the trappings of a financial debt and falls within the purview of Section 5(8)(f) of the I&B Code and Respondent No.1 is covered by the definition of Financial Creditor . Appeal dismissed.

Issues Involved:
1. Whether the amount claimed by Respondent No. 1 constitutes a 'Financial Debt' under Section 5(8) of the Insolvency and Bankruptcy Code, 2016 (I&B Code).
2. Whether Respondent No. 1 can be considered a 'Financial Creditor' for the purposes of the I&B Code.
3. The significance of interest in determining the nature of debt.
4. The implications of the balance sheet and financial statements on the characterization of the debt.

Issue-wise Detailed Analysis:

1. Whether the amount claimed by Respondent No. 1 constitutes a 'Financial Debt' under Section 5(8) of the Insolvency and Bankruptcy Code, 2016 (I&B Code):

The appellant challenged the order of the Adjudicating Authority, which admitted the petition under Section 7 of the I&B Code, arguing that the amount claimed by Respondent No. 1 is not a 'Financial Debt' as defined in Section 5(8) of the I&B Code. The appellant contended that there was no consideration for the time value of money, no interest was claimed or paid, no TDS was deducted, and no tenure for repayment was specified. However, the Adjudicating Authority found that the amount advanced as a loan was admitted, reflected in the accounts, and confirmed by the Corporate Debtor, thereby qualifying as 'financial debt' irrespective of the absence of interest.

2. Whether Respondent No. 1 can be considered a 'Financial Creditor' for the purposes of the I&B Code:

Respondent No. 1 argued that the money provided to the Corporate Debtor was in the form of interest-free unsecured loans, which were reflected in the balance sheet as unsecured loans. The statutory auditor confirmed the outstanding loan amount, and the ledger account maintained by the Corporate Debtor reflected the loan amounts and repayments. The Adjudicating Authority held that the loans provided by Respondent No. 1 fell within the purview of 'financial debt' under Section 5(8)(f) of the I&B Code, thereby making Respondent No. 1 a 'Financial Creditor.'

3. The significance of interest in determining the nature of debt:

The tribunal clarified that the component of interest is not a sine qua non for a debt to be classified as 'financial debt.' The definition of 'financial debt' under Section 5(8) includes debts disbursed against the consideration for the time value of money, with or without interest. The tribunal emphasized that the disbursement of debt should be against consideration for the time value of money, which can be inferred from the enhancement of assets, increase in production, growth in profits, share value, or equity.

4. The implications of the balance sheet and financial statements on the characterization of the debt:

The tribunal examined the balance sheet and financial statements of the Corporate Debtor, which reflected the loan amounts provided by Respondent No. 1 as unsecured loans under 'long term borrowings.' The confirmation of accounts and the statutory auditor's communication further corroborated the outstanding loan amount. The tribunal concluded that the amount disbursed by Respondent No. 1 was in the nature of debt treated as long-term loan and not as an investment in share capital or equity, thereby qualifying as 'financial debt.'

Conclusion:

The tribunal dismissed the appeal, finding no merit in the appellant's arguments. The tribunal upheld the Adjudicating Authority's decision, stating that the amount claimed by Respondent No. 1 constituted a 'financial debt' under Section 5(8) of the I&B Code, and Respondent No. 1 was a 'Financial Creditor.' The tribunal emphasized that interest is not a mandatory factor for determining the nature of debt and that the disbursement of debt against the consideration for the time value of money is sufficient. The appeal was dismissed with no orders as to costs.

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