IBC Laws - While a written contract is not an absolute prerequisite for establishing the existence of a Financial Debt, Adjudicating Authority must ascertain that the initiation of CIRP is not done in mala fide and is genuinely aimed at resolving insolvency | Mere admission of receipt of money by Corporate Debtor does not qualify as a Financial Debt under Sec. 5(8) of IBC | It is the duty of Financial Creditor to plead and produce evidence as to the existence of any debt, that is due and payable and not paid to constitute the requirements to file an application under Sec. 7 of the IBC - Meghna Devang Juthani Vs. Ambe Secruities Pvt. Ltd.

(2023) ibclaw.in 1065 NCLT

IN THE NATIONAL COMPANY LAW TRIBUNAL
Mumbai Bench

Meghna Devang Juthani
v.
Ambe Securities Pvt. Ltd.

C.P. (IB) No. 974/MB/C-VI/2020
Decided on 18-Dec-23

Coram: Shri K. R. Saji Kumar (Judicial Member) and Shri Sanjiv Dutt (Technical Member)

Add. Info:

Corporate Debtor: Ambe Secruities Pvt. Ltd.

For Appellant(s): Adv Mayuri Thakkar

For Respondent(s): PCS Lakshminnarayan Krishnamoorthy

Brief about the decision:

Facts of the case

This is an Application filed by the Financial Creditor (FC), on 06.04.2020 under section 7 of Insolvency and Bankruptcy Code, 2016 (IBC) for initiating CIRP in respect of Ambe Secruities Pvt. Ltd., the Corporate Debtor (CD). In this matter, the debt arises from a loan extended to the CD by the FC.
It is alleged that a total amount of Rs. 1,70,51,918/- fell due to the FC from the CD, inclusive of the principal amount of Rs. 1,15,00,000/- with interest amounting to Rs. 53,51,918/- as on 31.05.2020 and expenses towards recovery amounting to Rs. 2,00,000/-.
The FC is attempting to make a claim to recover certain amount due to her Late husband from the CD on the grounds of being his legal heir. However, the CD contends that there was no contractual relationship between the FC and the CD and she is not in a position to assert a claim for the said amount. Furthermore, determination of question related to title or inheritance is beyond the purview of the Adjudicating Authority.

Decision of the Adjudicating Authority

No written contract regarding loan sanctioned by the FC or any jural relationship between the Late husband of the FC and the CD. Written contract may not be necessary to prove a financial debt; however, the nature of the transaction is relevant to constitute financial debt within the meaning of section 5(8) of the IBC. The CD has stated that the amount of Rs. 2,00,00,000/- received by it was not by way of a loan. The CD used to provide
financial advice as to investment options to the Late husband of the FC. Out of the said Rs. 2,00,00,000/-, the CD submits that, an amount of Rs. 85,00,000/- was returned to him. The amount received by the CD for arranging investment in Futures Contracts or Stocks cannot be regarded as a debt disbursed against the consideration for time value of money, that too when investment is done as a speculator through third party brokers.(p4.1)
In order to constitute a “debt”, there must be a liability or obligation on the part of a person in respect of a claim which is due from any person. Otherwise, it cannot be regarded as a debt within the meaning of Section 3(11) of the IBC. Liability or obligation emanates from a written or oral agreement between the parties. In the instant case, there is nothing to indicate that there was any liability or obligation of the CD to return any money received by it from the Late husband of the FC. In the absence of any proof as to the nature of the transaction, mere admission of receipt of money by the CD does not qualify as a financial debt within the meaning of Section 5(8) of the IBC.(p4.1)
The FC has failed to provide any documentary evidence such as a loan agreement, promissory note, contract, or any other document to support the existence of a financial debt and default. We observe that the CD’s annual reports, balance sheet and other relevant documents provided by the FC do not specifically indicate any outstanding debt to the FC.(p4.3)
Consequently, the question of the CD paying interest on the amount received from the Late husband of the FC and the matter of TDS do not arise. Therefore, the applicant does not qualify as a “financial creditor” within the meaning of Section 5(7) of the IBC and hence, is ineligible to file an application under Section 7 of the IBC.(p4.4)
The FC has relied on its bank statements and the CD’s confirmation of accounts to support the existence of transactions between them. Nevertheless, in the absence of written documentation specifying the nature of these transactions, their classification as a loan, as asserted by the FC, cannot be assumed. The FC has submitted a certificate dated 14.02.2023 from the Information Utility, NeSL, showing CD’s debt amounting to Rs. 1,70,51,918.00/- but in terms of regulation 21(4) of IBBI (Information Utility) Regulations 2017, the Record of Default will be issued by NSEL in form D. However, the record of default in form D has not been submitted by the FC.(p4.5)
In view of these facts, it is important to emphasize that while a written contract is not an absolute prerequisite for establishing the existence of a financial debt, the Adjudicating Authority must ascertain that the initiation of CIRP is not done in mala fide and is genuinely aimed at resolving insolvency. In the current case, there is insufficient evidence to support the acceptance or admission of the current application.(p4.6)
Financial debt, as per the definition, encompasses debt, along with any applicable interest, provided in exchange for the time value of money. Going by the observations of the Principal Bench, NCLT in Carnoustie Management India Pvt. Ltd. Vs. CBS International Projects Pvt. Ltd. (2019) ibclaw.in 704 NCLT, the FC herein has failed to explain as to how and under what circumstances and since when the loan document was executed. As laid down in Swiss Ribbons Pvt. Ltd. & Anr vs. Union of India & Ors. (2019) ibclaw.in 03 SC, the definition of financial creditor and financial debt makes it clear that a financial debt is a debt together with interest, if any, which is disbursed against the consideration for time value of money. There is nothing in this matter to show that any disbursement of amount took place. As observed in case of Sanjay Kewalramani vs Sunil Parmanand Kewalramani & Ors. [2018] ibclaw.in 20 NCLAT, there is no evidence indicating that a loan was extended in favour of CD.(p4.7)
Moreover, in Pawan Kumar vs. Utsav Securities Pvt Ltd. (2021) ibclaw.in 368 NCLAT, it was emphasized that the presence of a loan agreement along with pertinent documents is imperative to substantiate the existence of a financial debt. In present case, there was no acknowledgement of debt on record. There is neither any loan agreement nor proper explanation regarding the same is on record.(p4.8)
It is the duty of the FC/Applicant to plead and produce evidence as to the existence of any debt, that is due and payable and not paid to constitute the requirements to file an application under Section 7 of the IBC.(p4.8)
The funds if at all extended by the FC to the CD were exclusively intended for investment purposes, which does not warrant initiation of CIRP in respect of the CD. The FC cannot use the Adjudicating Authority as a recovery forum.(p4.8)
The FC is unable to prove the existence of the debt and default. In view of the above, the present Application filed under Section 7 of the IBC to initiate CIRP in the matter of the CD deserves to be Rejected.(p4.9)