The National Company Law Appellate Tribunal (“NCLAT”) in a recent judgement in Sandeep Mittal vs. M/s ASREC (India) Ltd. & Ors. [CA (AT) (Ins.) No. 37 & 573 of 2024] has held that balance sale consideration in the sale agreement does not constitute a ‘financial debt’ under Section 5(8) of the Insolvency and Bankruptcy Code, 2016 (“Code”).

The Gujarat State Financial Corporation (“GSFC”), Gujarat Industrial Investment Corporation (“GIIC”), Bank of Baroda, and Dena Bank (collectively, “Creditors”) sought to recover term loans extended to M/s Ganpati Pulp and Paper Ltd. (“GPPL”) by selling the latter's immovable assets. M/s Rama Finance Limited (renamed as Shri Industries Ltd.; hereinafter, "Corporate Debtor") entered into a Sale Agreement with the Creditors, agreeing to pay Rs. 50 lakhs as a down payment and the balance within five years. The Corporate Debtor was also supposed to furnish a Bank Guarantee. The Corporate Debtor did not abide by the terms of payment as mentioned in the Sale Agreement. Therefore, a one-time settlement was entered into by GSFC (on behalf of all the Creditors) and the Corporate Debtor.

In 2011, Bank of Baroda assigned its debts to M/s ASREC. ASREC and Corporate Debtor entered into a one-time settlement of Rs. 5.50 Cr, however, it was not complied with. ASREC filed an application under Section 7 of the Code in 2022 for recovery of Rs. 92 Lakhs from the Corporate Debtor. The Adjudicating Authority admitted the application, leading to the present appeal before the NCLAT.

The NCLAT while allowing the appeals held that:

1. The Deed of Guarantee furnished by the Corporate Debtor for payment of purchase price, cannot be read as a financial debt owed by it.
2. The letter, Agreement and Deed of Guarantee, clearly indicate that transaction in question was for sale and purchase of assets and in no manner can be said to be a financial transaction under which financial debt was undertaken to be paid.
3. Disbursal of property cannot be accepted to be covered by definition of ‘financial debt’ under Section 5(8) of the Code.

The NCLAT took note of the judgements in Global Credit Capital Ltd. v. Sach Marketing Pvt. Ltd.¹, Pioneer Urban & Infrastructure Ltd. v. Union of India² and Yellapu Uma Maheshwari and Anr. vs. Buddha Jagadheeswararao and Ors³. The position that emerged from the above judgements was that a financial debt is a debt along with interest, if any, which is disbursed against the consideration for the time value of money and is clearly discernible from the documents executed between the parties at the relevant time. The NCLAT analysed the sale agreement and guarantee, concluding that the transaction was a sale of GPPL's assets and therefore, the same cannot be considered to be a financial debt. The NCLAT reiterated that Section 5(8) of the Code defines financial debt as the disbursement of money as consideration for time value of money. Accordingly, the NCLAT allowed the appeals, setting aside the Adjudicating Authority's order admitting the Section 7 application. This judgment safeguards solvent parties from frivolous insolvency proceedings initiated for mere non-payment of transactional dues.

By - C. George Thomas and Ansh Mittal