Whether the parties under an agreement can convert an “Operational Debt” into a “Financial Debt” and file Section 7 application on the basis of such agreement? – Mr. Santosh Mate (Prop. of Mahalaxmi Traders) Vs. Satyam Transformers Pvt. Ltd. – NCLT Mumbai Bench
In this case, filed CIRP application u/s 7 of IBC, the applicant has supplied goods and services to the Corporate Debtor and accordingly the Corporate Debtor was indebted to an amount of Rs.1,69,00,000/-. Since, the Corporate Debtor was not in a position to clear the outstanding due and payable to the applicant, both the parties have entered into a Debt Conversion Cum Agreement dated 01.04.2019 whereunder both parties agreed to convert the “Operational Debt” of the applicant into “Financial Debt”.
NCLT Mumbai Bench held that it is very clear from the definitions of the ‘Financial Creditor’ and ‘Financial Debt’ as defined under Section 5(7) and (8) that the above claim of the applicant does not fall under any of the categories of the “Financial Debt” and the Petitioner does not fall under definition of “Financial Creditor” within the meaning of the Code. The Counsel appearing for the applicant could not cite any authoritative pronouncement of Hon’ble Supreme Court or Hon’ble NCLAT to show that such a debt conversion is legally permissible under an agreement between the parties. In the absence of any such authoritative pronouncement of higher forum, this tribunal is unable to accept that the parties under an agreement can convert “Operational Debt” into a “Financial Debt”. If Courts and Tribunals recognise such agreement as valid and permissible it would defeat the very object of the Code and would lead to rewriting the Code.
