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Financial Assistance Can Qualify as Financial Debt Under IBC: NCLAT - 2025-02-20

Subject : Corporate Law - Insolvency and Bankruptcy

Financial Assistance Can Qualify as Financial Debt Under IBC: NCLAT

Supreme Today News Desk

NCLAT Ruling: Financial Assistance Recognized as Financial Debt Under IBC

Overview of the Case

In a significant ruling, the National Company Law Appellate Tribunal (NCLAT) has determined that financial assistance provided by Adhunik Corporation Limited to Shivam India Limited qualifies as financial debt under the Insolvency and Bankruptcy Code (IBC). This decision arose from an appeal against an order by the National Company Law Tribunal (NCLT), Kolkata Bench, which had dismissed Adhunik 's application for initiating Corporate Insolvency Resolution Proceedings (CIRP) against Shivam.

Background of the Dispute

The case stems from an agreement dated May 18, 2015, where Adhunik Corporation provided financial assistance to Shivam India to operationalize its factory, which had been shut down due to financial constraints. A subsequent Memorandum of Agreement (MoA) was executed on June 23, 2020, detailing the terms of the financial assistance, which amounted to ₹27.85 crore. Adhunik claimed that this amount was not repaid, leading to the filing of a Section 7 application under the IBC.

Arguments Presented

Appellant's Position

Adhunik Corporation argued that the funds disbursed were indeed a financial debt as defined under Section 5(8) of the IBC, emphasizing that the MoA included provisions for the return of the funds and the collection of sales commissions, which constituted a time value of money. They contended that the NCLT had erred in classifying the agreement as merely a business arrangement rather than recognizing it as a financial transaction.

Respondent's Defense

Conversely, Shivam India contended that the MoA was not a loan agreement but a business arrangement where Adhunik was responsible for supplying raw materials and managing operations. They argued that since there was no interest charged on the funds, it could not be classified as financial debt. Furthermore, they claimed that the Appellant had already profited from the sales of finished products, thus negating any claim of default.

Legal Precedents and Principles

The NCLAT referenced several landmark judgments, including Pioneer Urban Land & Infrastructure Ltd. v. Union of India and Orator Marketing Pvt. Ltd. v. Samtex Desinz Pvt. Ltd. , which clarified that financial debt does not necessarily require the presence of interest to qualify. The court emphasized that the essence of financial debt lies in the disbursal of funds against consideration for the time value of money.

Court's Findings

The NCLAT found that the infusion of funds by Adhunik Corporation indeed had the commercial effect of borrowing, as it was aimed at operationalizing Shivam's business. The tribunal noted that the NCLT had incorrectly dismissed the application based on a misinterpretation of the nature of the agreement. The NCLAT stated:

> "The infusion of funds was being done with the intent of earning profits and the investments were therefore for consideration for the time value of money."

Conclusion and Implications

The NCLAT set aside the NCLT's order and remanded the matter for further consideration regarding the default status of the financial debt. This ruling underscores the broader interpretation of financial debt under the IBC, affirming that arrangements without explicit interest clauses can still qualify as financial transactions. The decision is poised to impact future cases involving similar financial arrangements, reinforcing the need for careful consideration of the underlying agreements in insolvency proceedings.

Bench Details

The ruling was delivered by a bench comprising Justice Ashok Bhushan and Member (Technical) Barun Mitra on February 19, 2025.

This judgment serves as a crucial precedent in the interpretation of financial debt under the IBC, potentially influencing how financial transactions are structured and litigated in the future.

#Insolvency #FinancialDebt #NCLAT #NationalCompanyLawAppellateTribunal

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