preloader image

Loading...

The Legal Affair

Let's talk Law

The Legal Affair

Let's talk Law

NCLAT: Loan must have a direct transaction between parties to qualify as financial debt under IBC

NCLAT: Loan must have a direct transaction between parties to qualify as financial debt under IBC

Factual Background 

In the matter of Actioncor Consultants Ltd. v. Viprah Technologies Ltd, The parties to the current case agreed that the appellant would lend Rs. 1,40,00,000 to the directors of the corporate debtor via an Investment Agreement with the goal of using the funds for the directors’ individual use in reviving the respondent firm. The appellant chose to submit an application under Section 7 of the IBC seeking to begin the Corporate Insolvency Resolution Process against the respondent firm after delivering legal notice but still receiving no attempt from the respondent company to return the debt. The Adjudicating Authority rejected the Section 7 application in a decision dated July 18, 2019, on the grounds that the appellant was not a party to the “Investment Agreement” and that the Corporate Debtor had not made any promises to pay back the appellant’s money. The appellant filed an appeal under Section 61 of the IBC, contesting the impugned ruling that the Adjudicating Authority had issued.

Issue 

Whether the sum that the appellant gave to the directors of the corporate debtor in their individual capacities through an Investment Agreement qualifies as financial debt under Sec. 5(8) of the IBC

Analysis of Tribunal order 

According to a division bench of the NCLAT made up of Justice M. Venugopal and Shreesha Merla Technical Member, the amount owed must be paid directly between the Financial Creditor and the Corporate Debtor in order for Section 5(8) of the Insolvency and Bankruptcy Code, 2016 (IBC) to recognise it as a “Financial Debt.”

The Managing Director and Director did borrow that amount, which is undisputed, according to the NCLAT, but such transactions were never made directly with the Corporate Debtor Company. The Court stated that “amounts taken by their Directors in their individual capacities, even though used for the corporate business purposes, will not fall within the ambit of the definition of “Financial Debt” as defined under Section 5(8) of the Code.”

The NCLAT denied the appeal and ruled that the sum cannot be considered “financial debt” since there is no evidence on file to show that the Financial Creditor actually lent the money to the Corporate Debtor. The NCLAT additionally determined that the appellant is free to recoup any outstanding debt from the sale of the assets used as collateral.