Investigation of Real Nature of the Transaction under Insolvency and Bankruptcy Code, 2016 (IBC, 2016)
Time and again it has been held that the Adjudicating Authority before admitting a petition for a Corporate Insolvency Resolution Process has to examine the real nature of the transaction that took place between the parties therein. The Adjudicating Authority will admit the petition only when the documents produced before it are prima facie evident that the Corporate Debtor has committed a default.
The Financial Creditor in respect to the loan agreement has to produce written contractual agreement to enable the Adjudicating Authority to investigate into the term loan, interest liable to be paid, etc. That in the absence of a written contractual agreement the Adjudicating Authority may reject such petition despite the fact there has been disbursement against the time value of money as the absence of written contractual agreement will not allow the Adjudicating Authority to examine the real nature of the transaction. The examination into the real nature of the transaction by the Adjudicating Authority is essential to ensure that the provision of Insolvency and Bankruptcy Code are not being misused. The critical analysis of the judgment passed by the Hon’ble National Company Law Appellate Tribunal in Pawan Kumar vs Utsav Securities Pvt. Ltd. & Ors in CA (AT) (Ins) No. 2020 will enable us to understand the importance of a written contractual agreement.
The Utsav Securities Pvt. Ltd. (Financial Creditor) filed Section 7 Petition under Insolvency and Bankruptcy Code, 2016 against Vogue Clothiers Pvt. Ltd. (Corporate Debtor). The Financial Creditor had lent sum of Rs. 6.10 Crore to the Corporate Debtor from 16-2-2017 to 22-2-2017. The Corporate Debtor paid interest of Rs. 6,05,718 on 14-2-2018 after TDS deduction and thereafter the Corporate Debtor failed to pay the interest to the Financial Creditor. The Financial Creditor sent a notice recalling the loan sum to the Corporate Debtor. Thereafter the Financial Creditor filed petition for initiation of corporate insolvency resolution process against the corporate debtor under Section 7 of Insolvency and Bankruptcy Code, 2016 (IBC).
The Corporate Debtor in its defense before the Hon’ble National Company Law Tribunal submitted that there was no contractual agreement entered between the parties defining the term of loan or payment of interest therefore the said transaction does not fall within the definition of a Financial Debt.
The Hon’ble National Company Law Tribunal (NCLT) after hearing both the parties didn’t find any substance in the arguments of the Corporate Debtor. The Hon’ble NCLT further held that the absence of contractual agreement does not vitiate the transaction that took place between the parties and therefore the debt is a financial debt and allowed the petition.
The Hon’ble National Company Law Appellate Tribunal held that the essential ingredients required to be satisfied by the Financial Creditor for a matter to get admitted are as follows:-
i. The Financial Creditor must disburse the loan amount to Corporate Debtor,
ii. The disbursement must have been made against the consideration for time value of money and
iii. When the debt has become due and payable either in installments, parts or in whole and the Corporate Debtor is unable to pay off its debt then the said debt becomes a default on the part of the Corporate Debtor.
In addition to the above, the Hon’ble National Company Law Appellate Tribunal also held that production of a written contractual agreement where terms and tenure of the financial transaction, rate of interest to be paid, time or repayment has been set out is also essential to satisfy the debt has become due and payable as per the definition of the ‘financial contract’ under Section 3 (1) (d) of IBC. That if the Financial Creditor fails to produce any written financial contract then that would be deemed as failure on the part of the Financial Creditor to satisfy as when the debt became due and payable and the same is essential for initiating Corporate Insolvency Resolution Process against the Corporate Debtor.
The production of financial contract is required for the purpose of investigating the real nature of the transaction entered between the financial creditor and corporate debtor and the said investigation is a duty of the Adjudicating Authority when a petition under Section 7 of IBC is filed before it as per the judgment passed by the Hon’ble Supreme Court at Para 48 in Phoenix Arc Pvt. Ltd. vs Spade Financial Services Ltd & Ors.[i] The Hon’ble Supreme Court in this case held that the investigation into the real nature of transaction is vital to prevent any person from misusing or trying to take undue benefit of the provisions of the IBC.
That the Hon’ble National Company Law Appellate Tribunal also held that it is the duty of the Adjudicating Authority to protect the Corporate Debtor from being dragged into malafide Corporate Insolvency Resolution Process.
The Hon’ble National Company Law Appellate Tribunal set aside the order passed by the Adjudicating Authority and rejected the petition filed for initiating corporate insolvency resolution process against the Corporate Debtor as the Financial Creditor failed to disclose/produce a written Financial Contract.
[i] Civil Appeal No. 2842 of 2020
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