2023 (1) TMI 1473 - AT - IBC

Admission of Application under Section 7 of Insolvency and Bankruptcy Code 2016 - existence of financial debt or not - no loan agreement entered into between the Corporate Debtor and the Respondents - service of demand notice - time limitation - HELD THAT - From the Reply given by the Corporate Debtor the conclusions are inescapable firstly the Corporate Debtor admitted grant of loan. The plea taken in the Reply was that loan was granted for a tenure of 5 years. The second conclusion which may be drawn from the Reply is that the claim of interest which was claimed by the Demand Notice was not refuted. Corporate Debtor did not take any plea that no interest is payable. In Section 7 Application the Financial Creditors have also brought on record Form 16-A for the financial year ending 31st March 2018 which Form 16-A indicates that TDS was deducted by the Corporate Debtor and deposited under Section 194-A of Income Tax Act 1961. It is true that deduction of TDS and deposit by the Corporate Debtor does not itself prove that there is any financial debt but deduction of TDS and deposit in Form 16-A under Section 194-A of Income Tax Act clearly proves that the deduction which was deposited was TDS relating to Interest other than interest on securities . Form 16-A which was filed by the Financial Creditor along with Section 7 Application at least support the case of the Financial Creditors that loan which was granted to the Corporate Debtor was with interest. Loan was granted by the Financial Creditors to the Corporate Debtor which was proved from the materials brought on record by the Financial Creditors. Submission of Learned Counsel for the Appellant that the Respondents Financial Creditors has no license under Section 22 of Banking Regulation Act 1949 hence no Financial Facility could have been extended by the Financial Creditors - HELD THAT - Section 22 contains the prohibition that no Company shall carry on banking business unless it holds a license issued on behalf of bank. Section 22 of the Banking Regulation Act 1949 prohibits banking business. Present is not a case that Respondents are carrying on any banking business hence advancing a loan by the Respondents to the Corporate Debtor is not prohibited by Section 22 of the Banking Regulation Act - The definition of Financial Debt as contained in Section 5(8) of the Code is expansive definition and use of the expression any other transaction is a wide enough to cover the loan advanced by the Respondents to the Corporate Debtor and we are satisfied that loan advanced by Respondents cannot be disregarded relying on Section 22 of the Banking Regulation Act 1949. The Adjudicating Authority after considering the materials on record and submissions of parties rightly came to the conclusion that the Financial Debt as claimed by the Respondents were disbursed against the consideration for the time value of money. Conclusion - The definition of Financial Debt as contained in Section 5(8) of the Code is expansive. The loan advanced by Respondents cannot be disregarded relying on Section 22 of the Banking Regulation Act 1949. The ingredients of financial debt were fully proved in the facts of the present case. There are no error in the Order of the Adjudicating Authority warranting any interference in this Appeal. There is no merit in the Appeal the Appeal is dismissed.

ISSUES PRESENTED and CONSIDERED

The core legal issues considered in this judgment are:

Whether the absence of a formal loan agreement between the Corporate Debtor and the Financial Creditors negates the existence of a financial debt under the Insolvency and Bankruptcy Code, 2016.
Whether the deduction of TDS by the Corporate Debtor on the alleged loan amount can be construed as evidence of a financial debt.
Whether the Financial Creditors, not being registered under the Banking Regulation Act, 1949, are prohibited from advancing a loan to the Corporate Debtor.

ISSUE-WISE DETAILED ANALYSIS

1. Existence of Financial Debt in Absence of Formal Loan Agreement

Relevant Legal Framework and Precedents: The definition of "financial debt" under Section 5(8) of the Insolvency and Bankruptcy Code, 2016, requires a debt to be disbursed against the consideration for the time value of money. The Tribunal referenced Section 5(8)(f), which includes any transaction having the commercial effect of a borrowing.
Court's Interpretation and Reasoning: The Tribunal noted that the definition of "financial debt" is inclusive and does not strictly require a formal written agreement. It emphasized that financial debt can be proved through other documents and evidence.
Key Evidence and Findings: Demand notices and replies, Form 16-A indicating TDS deductions, and balance sheets were submitted as evidence. The Corporate Debtor admitted to receiving a loan but contested the tenure.
Application of Law to Facts: The Tribunal found that despite the absence of a formal loan agreement, the evidence collectively demonstrated the existence of a financial debt.
Treatment of Competing Arguments: The Appellant argued that the lack of a formal agreement and reliance on TDS deductions were insufficient to establish a financial debt. The Tribunal dismissed these arguments, citing the inclusive nature of the legal definition and supporting documents.
Conclusions: The Tribunal concluded that the loan was a financial debt under the Code, supported by the materials on record.

2. TDS Deduction as Evidence of Financial Debt

Relevant Legal Framework and Precedents: The Tribunal acknowledged that TDS deduction alone does not conclusively prove a financial debt but can support the existence of such a debt when considered with other evidence.
Court's Interpretation and Reasoning: The deduction of TDS under Section 194-A of the Income Tax Act, 1961, indicated interest payments, suggesting a loan with interest.
Key Evidence and Findings: Form 16-A was presented, showing TDS deductions categorized as "Interest other than interest on securities."
Application of Law to Facts: The Tribunal considered TDS deductions as corroborative evidence of a financial debt, alongside other documents.
Treatment of Competing Arguments: The Appellant's reliance on previous judgments was noted, but the Tribunal distinguished the present case based on the cumulative evidence.
Conclusions: The Tribunal found that TDS deductions supported the existence of a financial debt when viewed with the totality of evidence.

3. Absence of Banking License and Ability to Advance Loans

Relevant Legal Framework and Precedents: Section 22 of the Banking Regulation Act, 1949, prohibits unauthorized banking business but does not restrict non-banking entities from advancing loans.
Court's Interpretation and Reasoning: The Tribunal clarified that the prohibition on banking business does not extend to the act of loan advancement by non-banking entities.
Key Evidence and Findings: The Tribunal found no evidence suggesting the Respondents were conducting banking business.
Application of Law to Facts: The Tribunal determined that the Respondents' actions did not violate the Banking Regulation Act, allowing them to advance loans.
Treatment of Competing Arguments: The Appellant's argument regarding the lack of a banking license was rejected, as the Tribunal found it irrelevant to the issue of loan advancement.
Conclusions: The Tribunal held that the Respondents were not prohibited from advancing loans due to the absence of a banking license.

SIGNIFICANT HOLDINGS

Core Principles Established: The Tribunal reinforced that a financial debt under the Insolvency and Bankruptcy Code can be established through various forms of evidence, not limited to a formal loan agreement.
Final Determinations on Each Issue: The Tribunal dismissed the appeal, upholding the Adjudicating Authority's decision to admit the Section 7 application, confirming the existence of a financial debt.
Verbatim Quotes of Crucial Legal Reasoning: The Tribunal stated, "The definition of Financial Debt as contained in Section 5(8) of the Code is expansive...we are satisfied that loan advanced by Respondents cannot be disregarded relying on Section 22 of the Banking Regulation Act, 1949."