2024 (5) TMI 424 - AT - Insolvency and Bankruptcy

Seeking initiation of Corporate Insolvency Resolution Process (CIRP) - proof of existence of financial debt - incidence of default or not - HELD THAT - For any creditor to become financial creditor under Section 5(7) of IBC, there must be a financial debt which is owed to that person and such a person can either be the principal creditor to whom the financial debt is owed or may be a legal assignee to whom such debt has been transferred. Furthermore, for a debt to become financial debt under the various transactions stated in subclauses (a) to (i) of Section 5(8) of IBC, the basic non-negotiable ingredients are that there has to be a disbursal against the consideration for time value of money - If there is a financial debt, which is more than the prescribed threshold level and there is a default and if the application is complete, the application is required to be admitted by the Adjudicating Authority. It is for the Adjudicating Authority to look into the various documents, records and evidence of default as furnished in Part V of Form 1 of the application filed under Section 7 of IBC. There is no balance confirmation of the alleged unsecured loan coupled with admitted fact that the receivables due from the Corporate Debtor was no longer reflected separately in the balance sheet of IIL from 2017-18 onwards, we are of the view that the Adjudicating Authority has not erred in holding that confirmation letter of 25.05.2014 lacks relevance and cannot be relied upon to establish debt - there are no cogent reasons to differ with the findings of the Adjudicating Authority that debt and default on the part of the Corporate Debtor has not been brought out in clear, precise and specific terms which is the mandate of Section 7 of IBC. Nothing has been placed on record either by the Appellant to substantiate that the disbursement had been made for consideration for time value of money. There are no good reasons to disagree with the findings of the Adjudicating Authority that the facts of the present case are such that the debt qua the Appellant lack the trappings of a financial debt and that it had become due and payable and that there has arisen non-payment of the same beyond the threshold limit. The Adjudicating Authority did not commit any error in rejecting the Section 7 application filed by the Appellant. The impugned order does not warrant any interference - Appeal dismissed.

Summary

Issues Involved:
1. Existence of Financial Debt
2. Default in Payment of Financial Debt
3. Validity of Deed of Assignment

Summary:

Existence of Financial Debt:
The Appellant, Metamorphosis Trading LLP, filed an appeal u/s 61 of the Insolvency and Bankruptcy Code 2016 (IBC) against the order of the National Company Law Tribunal (NCLT), which rejected the initiation of Corporate Insolvency Resolution Process (CIRP) against Sankalp Engineering & Services Pvt. Ltd. The Appellant claimed that Sankalp owed a financial debt of Rs. 5.10 crore, initially due to Innovative Industries Ltd. (IIL), which was assigned to the Appellant via a Deed of Assignment dated 21.07.2021. The Appellant provided evidence such as financial statements, an email dated 24.05.2014, and balance confirmation letters to substantiate the debt.

Default in Payment of Financial Debt:
The Respondent argued that there was no documentary evidence of the financial debt, no proof of disbursement, and no loan agreement. The NCLT found inconsistencies in the financial statements and noted that from 2017-18 onwards, no debt was reflected in the Corporate Debtor's accounts. The statutory auditor and the Liquidator of IIL confirmed that there were no specific trade receivables from the Corporate Debtor in the financial statements post-2017-18. The NCLT concluded that the Appellant failed to prove the existence of financial debt and default.

Validity of Deed of Assignment:
The Appellant contended that as an assignee, they were not required to prove the existence of the debt. However, the NCLT noted that the Deed of Assignment was executed on an "as is where is" basis, and the amount was classified as "trade receivables" rather than a loan. The NCLT held that the Deed of Assignment did not establish the debt as a financial debt and lacked the necessary elements of disbursement for the time value of money.

Conclusion:
The NCLT dismissed the Section 7 application filed by the Appellant, concluding that the Appellant failed to demonstrate the existence of financial debt and default. The appeal was dismissed, and no costs were awarded.