Debt Arising from Non-Recourse Bill Discounting is Operational, Not Financial; Sec 7 Application Dismissed: NCLT Mumbai

NCLT Mumbai Dismisses UK Export Finance’s Insolvency Plea, Rules Debt from Non-Recourse Bill Discounting is Operational

Mumbai – The National Company Law Tribunal (NCLT), Mumbai Bench, has rejected an insolvency petition filed by the UK government's export credit agency, UK Export Finance (UKEF), against Mumbai-based Aaquaries Global Industries Limited (AGIL). The bench, comprising Hon’ble Shri Nilesh Sharma (Judicial Member) and Hon’ble Shri Sameer Kakar (Technical Member), held that the debt in question, though acknowledged, was operational in nature and did not qualify as a "financial debt" under the Insolvency and Bankruptcy Code, 2016 (IBC).

The Tribunal ruled that a debt originating from the supply of goods does not transform into a financial debt simply because it is assigned or subrogated, especially when the underlying instrument was discounted on a "non-recourse" basis.

Background of the Case

The case revolved around a multi-party international trade transaction. AGIL arranged for the sale of medical equipment from a UK-based supplier, The Medical Warehouse Limited, to a buyer in Singapore. To facilitate payment, Medical Warehouse drew a Bill of Exchange (BOE) for approximately USD 5.58 million on AGIL, which the latter accepted.

This BOE was subsequently endorsed "without recourse" to Bank ABC. Crucially, Bank ABC had a guarantee agreement with UKEF, which covered payments for such instruments involving UK suppliers. When AGIL defaulted on the BOE payment on November 4, 2022, Bank ABC invoked the guarantee. UKEF settled the claim with Bank ABC and, through the principle of subrogation, acquired the right to recover the amount from AGIL. UKEF then filed an application under Section 7 of the IBC, claiming the status of a "Financial Creditor."

Key Arguments

UK Export Finance (Financial Creditor) argued that the transaction was essentially a financing arrangement. They contended that their credit enhancement facility enabled the transaction and that AGIL had repeatedly acknowledged the debt in communications, implicitly accepting its financial nature. They claimed the right to initiate insolvency proceedings to recover the outstanding amount of over USD 7.4 million (including interest).

Aaquaries Global Industries (Corporate Debtor) countered that UKEF was not a financial creditor. Their primary defense was that the original debt arose from the supply of goods, making it an "operational debt." They argued that a fundamental requirement for a financial debt—a "disbursal for the time value of money" directly to the corporate debtor—was absent. Citing the Supreme Court's judgment in Anuj Jain Vs. Axis Bank Ltd. , AGIL contended that there was no privity of financial contract between it and either Bank ABC or UKEF.

Furthermore, AGIL highlighted that the sale of receivables (the BOE) to Bank ABC was on a "non-recourse" basis, a category explicitly excluded from the definition of "financial debt" under Section 5(8)(e) of the IBC.

Tribunal's Analysis and Ruling

The NCLT meticulously analyzed the chain of transactions and the nature of the debt. The bench found that the original liability of AGIL arose from its role in a trade transaction for goods, making the debt operational at its inception.

The Tribunal's key findings were:

• No Direct Disbursal: There was no evidence of any funds being disbursed by Bank ABC or UKEF to the Corporate Debtor, AGIL. The financing was extended to the supplier, Medical Warehouse, by discounting the BOE.
• Nature of Debt Unchanged by Transfer: The acquisition of an operational debt by a third party through subrogation or assignment does not alter its fundamental character. The NCLT observed, "In our view, as the original transaction from which the debt has arisen is of operational nature... the acquisition of the said debt by Bank ABC does not convert the said debt into a ‘financial debt’."
• Exclusion of Non-Recourse Receivables: The judgment emphasized the significance of Section 5(8)(e) of the IBC, which includes "receivables sold or discounted" as financial debt but explicitly excludes those "sold on non-recourse basis." The endorsement of the BOE to Bank ABC was without recourse, placing the transaction outside the scope of a financial debt.
• Acknowledgement of Debt vs. Nature of Debt: While AGIL had acknowledged its liability to pay, the Tribunal clarified that such an acknowledgement does not change an operational debt into a financial one. The character of the debt is determined by the nature of the original transaction.

Quoting a relevant NCLAT precedent, Cooperative Rabobank U. A. Singapore Branch Vs. Mr. Shailendra Ajmera , the Tribunal noted that where a BOE relates to the supply of goods and finance is provided to the supplier, the creditor's claim against the buyer (Corporate Debtor) is that of an "Operational Creditor."

Final Decision and Implications

Based on its findings, the NCLT concluded that UKEF could not be classified as a "Financial Creditor" of AGIL. Consequently, the application to initiate Corporate Insolvency Resolution Process (CIRP) under Section 7 was dismissed as not maintainable.

The Tribunal stated, "In the instant case we find that the CD does not owe any financial debt to the Applicant as there is no document to show any disbursal by the Applicant or by Bank ABC Ltd. to the CD."

The judgment serves as a critical clarification on the distinction between financial and operational debt in complex, multi-layered trade finance structures. It reinforces that the core nature of a debt is paramount and that insolvency proceedings under Section 7 cannot be initiated by a creditor whose claim, despite being acquired through guarantee or assignment, originates from a non-recourse operational transaction. UKEF was granted the liberty to pursue other legal remedies for recovery.