Inter Corporate Loan With interest Provision Will Be A Financial Debt

In Narendra Kumar Agarwal & Anr Vs Monotrone Leasing Pvt. Ltd. & Anr., Company Appeal (AT) (Insolvency) No. 549 of 2020,NCLT held that an Inter Corporate Loan was issued for a certain period, with the intention of paying back the loan amount along with interest, then such transaction will also fall under the ambit of ‘Financial Debt

FACTS

In the present case, the Monotrone Leasing Pvt. Ltd. (“The Respondent”) had filed an application under Section 7 of the Insolvency and Bankruptcy Code, 2016 (“I&B Code”) praying initiation of Corporate Insolvency Resolution Process (“CIRP”) against Narendra Kumar Agarwal & Anr. (“Appellant”) before the National Company Law Tribunal (Adjudicating Authority).

The Respondent claimed to be the ‘Financial Creditor’ of the Appellant i.e. Corporate Debtor, who had availed Inter Corporate Loan of Rs. 25,00,000/- (Rupees Twenty Five Lakh only) @15% interest per annum. The Appellant repaid the aggregate sum of Rs. 2,69,705/- (Rupees Two Lakh Sixty Nine Thousand Seven Hundred and Five Only) and thereafter stopped paying and as a result the Respondent demanded payment.

The Appellant issued two cheques bearing No. 806211 and 806210 dated 11.06.2018 for payment of Rs. 25,00,000/- (Rupees Twenty Five Lakh only). However, both cheques got dishonoured and as a result the Respondent had filed an Application before the Adjudicating Authority. The Adjudicating Authority admitted the Application. However, being aggrieved by the order of the Adjudicating Authority has filed the present appeal before National Company Law Appellate Tribunal (Appellate Tribunal)

ISSUE BEFORE THE APPELLATE TRIBUNAL

Whether Inter Corporate Loan shall fall within the ambit of the Financial Debt under Section 5(8) of the I&B Code?

ARGUMENT BY THE APPELLANT

The Appellant challenged the present appeal by stating:

The Respondent failed to show that it had necessary Board approval before issuing the alleged loan.
The Respondent failed to prove existence of any financial contract between the parties. Further, the oral agreement and payment of TDS cannot be taken as proof of financial debt.
The alleged oral contract between the Respondent and Appellant does not establish debt. Further, The transaction may be treated as the ‘Inter-Corporate Deposit’, but it can not be treated as the Financial Debt, as it is distinct from a loan and would not fall within the definition of financial debt.
The Respondent had failed to establish proof of default and in the absence of default, Application under Section 7 of I&B Code cannot be admitted.
The date of default is crucial to determine the date on which the cause of action accrued and on a bare reading of Form-I it can be understood that no date of default has been mentioned and an incomplete Application, such as in the instant case, could not have been admitted by the Adjudicating Authority.

Therefore, the decision of the Adjudicating Authority is erroneous and hence this Appeal.

RESPONSE BY THE RESPONDENT

The Respondent countered the Appellant argument by stating:

The alleged transaction was Inter-Corporate Loan issued to the Appellant for a short term of 90 days which was payable @ 15% interest per annum. Further, the transaction’s is proved by the copy of Money Receipt, filed before the Appellate Tribunal.
In case the Inter Corporate Deposit is made for a certain period, which is required to be paid back along with interest, then such transaction will also fall under the ambit of ‘Financial Debt’ as the interest received on such deposit is the product of instant transaction, which can be considered as the time value of money. Therefore, such transaction of the Inter Corporate Deposit will fall under the definition of Financial debt under Section 5(8) of the I&B Code.
The written contract can not be treated as an essential element to prove the Financial Debt if the transaction’s nature is proved otherwise.
The Appellant had admitted its liability in the reply submitted against demand notice issued under Section 138 of Negotiable Instrument Act.

Therefore, in view of the above it is clear as day light that since the transaction falls under the definition of Financial Debt under I&B Code and the Appellant had defaulted in repaying the debt and debt is more than 1,00,000/- (Rupees One Lakh only) and hence the Application filed before Adjudicating Authority is complete and qualified to be admitted.

JUDGEMENT

The Appellate Tribunal agreed with the contention of Respondent and held that whether the issuing of Inter Corporate Loan will fall under the ambit of “Financial Debt” or not can be analyzed from the nature of contract, and the definition of Financial Creditor and Financial Debt defined under Section 5 (7) and Section 5 (8) of I&B Code respectively.

“Section 5(7)

“Financial Creditor” means any person to whom a financial debt is owed and includes a person to whom such debt has been legally assigned are transferred to.

Section 5(8)

“Financial Debt” means a debt along with interest, if any, which is disbursed against the consideration for the time value of money and includes –

Money borrowed against the payment of interest.”

Now, in case the Inter Corporate Loan was issued for a certain period, with the intention of paying back the loan amount along with interest, then such transaction will also fall under the ambit of ‘Financial Debt’ under Section 5 (8) of I&B Code, as the interest received on such deposit is the product of instant transaction, which can be considered as the time value of money.

Therefore, the alleged transaction undertaken between the Appellant and Respondent will fall under the ambit of Financial Debt since it fulfils the above criteria.

Hence, the Appellate Tribunal relying on the judgment of Innoventive Industries Ltd. v. ICICI Bank, MANU/SC/1063/2017 held that the Application filed by Respondent for initiation of CIRP is completely valid, as there is existence of Financial Debt, the Appellant has acknowledged and defaulted in repayment of such debt and debt is more than 1,00,000/- (Rupees One Lakh only) which fulfils the checklist to file Application under Section 7 of I&B Code.

AMLEGALS Remarks

The present decision of the Appellate Authority, would act as an additional development under the I&B Code. This insolvency statute upgraded the position of law and revolutionized the legal regime surrounding corporate credits by shifting the control and power from the hands of Debtor in default to the Creditor whose money is to be repaid.

The present case has prevented a major aberration of justice by recognizing the Inter Corporate Loan as Financial Debt under Section 5 (8) of the I&B Code and by preventing the Corporate Debtor from bypassing the legal repercussion on technicalities concerning nature of the Corporate Debt.

The Appellate Tribunal furthered the efficacy of the IBC and ensured protection of the Creditors.

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