2020 (2) TMI 1078 - AT - Insolvency and Bankruptcy

Maintainability of petition - initiation of CIRP - Status of Financial Debt - application dismissed taking into consideration the nature of transaction held that it is a pure and simple advancement of loan denuded of any element of time value for money - HELD THAT - From the pleadings made by the parties, it is found that the amount allegedly stated to be the debt is a) Was not borrowed against the payment of interest. b) It is not the amount accepted/ raised under any credit facility. c) The amount has not been raised pursuant to any Note Purchase Facility or issue of Bonds, Debentures, loan stock etc. d) The amount does not arise of any liability in respect of hire purchase contract, or lease or any other instrument to suggest that the Appellant is deemed as finance or capital lease. e) The amount has not been raised under any other transaction including any forward sale or purchase agreement having the commercial effect of borrowing. f) It is not the amount of any derivatives transaction entered into. g) The amount is not against any counter indemnity. h) It is not the amount of any liability in respect of any guarantee. In view of the aforesaid position of fact and there being a disputed question of fact relating to payment of amount for the purpose, there is no ground to interfere with the decision of the Adjudicating Authority (National Company Law Tribunal), Principal Bench, New Delhi - appeal dismissed.

Summary

Issues:
1. Whether the transaction between the Financial Creditor and the Corporate Debtor qualifies as a 'financial debt' under the Insolvency and Bankruptcy Code, 2016.

Detailed Analysis:
The Appellant, claiming to be a Financial Creditor, filed an application under Section 7 of the Insolvency and Bankruptcy Code, 2016 against the Corporate Debtor seeking initiation of the Corporate Insolvency Resolution Process. The Adjudicating Authority dismissed the application, determining that the transaction was merely an advancement of a loan without the element of time value for money, thus not constituting a 'financial debt' under the Code.

The Appellant contended that a professional fee agreement was entered into between his company and the Corporate Debtor, where the Corporate Debtor sought advisory services. Subsequently, the Corporate Debtor requested a short-term loan from the Appellant to acquire a trademark, which was agreed upon and documented in a Memorandum of Understanding. However, the cheque issued by the Corporate Debtor to repay the loan was dishonored twice, leading to a legal notice under the Negotiable Instrument Act.

The Corporate Debtor argued that the loan was intended for a specific purpose related to resolving a trademark dispute and was to be repaid upon the completion of a deal or within three months. The Appellant's claim that the debt falls under the definition of 'financial debt' was disputed based on various factors, including the absence of interest payment, credit facility, note purchase facility, or any other financial transaction indicators.

The Tribunal, after considering the contentions and facts presented, found that the transaction did not meet the criteria to be classified as a 'financial debt' under the Insolvency and Bankruptcy Code. Due to the disputed nature of the purpose and terms of the loan, and in the absence of merit in the appeal, the decision of the Adjudicating Authority was upheld, and the appeal was dismissed without costs.