NCLAT New Delhi: Written Financial Contract Not Required To Establish Debt Under Section 5(8) Of IBC

NCLAT New Delhi: Written Financial Contract Not Required to Establish Debt Under Section 5(8) of IBC

The NCLAT New Delhi Bench, comprising Justice Ashok Bhushan (Chairperson) and Barun Mitra (Technical Member), recently affirmed that a written financial contract is not a prerequisite for establishing the existence of debt. The ruling clarifies that, under the Application to Adjudicating Authority Rules, 2016, and the CIRP Regulations, financial debt can be demonstrated through other relevant documents, making a written contract non- essential for this purpose.

The appeal was filed under Section 61 of the Insolvency and Bankruptcy Code, 2016 (IBC), arising from the Order dated June 27, 2022 (referred to as the 'Impugned Order'), issued by the Adjudicating Authority (National Company Law Tribunal). The impugned order admitted a Section 7 application filed by Gajendra Investment Ltd. (the financial creditor) against Rushabh Civil Contractors Pvt. Ltd. (the corporate debtor) due to non-payment of a debt that had become due. The ex-director of the corporate debtor appealed the order.

The financial creditor had lent Rs 3.77 crores to the corporate debtor on September 14, 2016. Following the corporate debtor's failure to repay the outstanding sum, a demand notice was issued. The Financial Creditor claimed that a default had occurred on June 19, 2019, amounting to Rs 1.51 crores in their Section 7 application, which was admitted by the Adjudicating Authority on June 27, 2022.

The appellant contended that the financial creditor failed to establish the existence of a financial contract between the parties, arguing that in the absence of any agreement, the creditor could not prove the debt or default. Additionally, discrepancies were pointed out regarding the amounts claimed in the Demand Notice and the Section 7 application compared to the corporate debtor's ledger. The appellant further argued that interest had not been claimed in the creditor's books after April 31, 2017, yet the application claimed 18% interest, allegedly inflating the debt to Rs 1.51 crores. The appellant maintained that the transactions were mere advances, not qualifying as financial debt.

Conversely, the financial creditor submitted that they had sent a letter dated June 14, 2019, requesting payment of the outstanding debt, to which the corporate debtor did not respond. The financial creditor asserted that the corporate debtor had acknowledged the debt in their balance sheet filed with the registrar of companies.

The tribunal examined the relevant provisions related to insolvency petitions filed by financial creditors. It stated that under Section 7 of the IBC, a petition must be admitted if the debt and default are established. The tribunal referred to the Supreme Court's judgment in Innoventive Industries Ltd. v. ICICI Bank (2018), which stated that once a default is verified, the application must be admitted unless it is incomplete.

Addressing the argument that a written contract is essential for proving debt, the tribunal rejected this notion, stating that it is not a sine qua non for insolvency petitions. Evidence can be derived from other documents.

The tribunal also referenced its previous ruling in Agarwal Polysacks Ltd. v. K. K. Agro Foods & Storage (2022), confirming that a written financial contract is not a mandatory requirement for proving the existence of debt. The tribunal further examined documents such as balance sheets and demand notices, concluding that the financial creditor had provided undeniable evidence of the corporate debtor's debt liability.

Regarding whether the disbursal constituted a financial debt, the tribunal cited the Supreme Court ruling in Pioneer Urban Land and Infrastructure Ltd. v. Union of India (2019), stating that any debt must be treated as financial debt only if it involves a disbursal of money against consideration for time value. The tribunal noted that the disbursal of funds included interest, qualifying it as financial debt under Section 5(8) of the IBC.

The tribunal found no reason to disagree with the adjudicating authority's conclusion regarding the existence of debt based on documents such as the balance confirmation statement. The tribunal dismissed the appellant's adjustment argument regarding a Memorandum of Understanding (MoU), stating it did not inspire confidence.

In conclusion, the tribunal affirmed that all prerequisites for filing a Section 7 application had been met, and the adjudicating authority acted correctly in admitting the corporate debtor into CIRP for defaulting on a financial debt exceeding the threshold limit. Accordingly, the present appeal was dismissed.