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The Adjudicating Authority is not a Civil Court to decide the breach of the contract between the parties

In Saregama India Limited Vs. Home Movie Makers Private Limited, Company Appeal (AT) (Insolvency) No. 359 of 2019, the Appellant had filed application before the Adjudicating Authority under Section 7 of IB Code, 2016  against the Corporate Debtor – M/s Home Movie Makers Private Limited  for initiation of Corporate Insolvency Resolution Process. The Adjudicating Authority, after hearing the parties, dismissed the Application holding that the claim made by the Appellant (Financial Creditor) is not a ‘financial debt’ against which the appeal was filed before the NCLAT.

The Appellant in support of their grounds argued that the transaction between the parties clearly establishes it is a financial debt. Per contra, the Respondent (Corporate Debtor) denied the stand of the Appellant and states that it is not a financial debt in terms of Section 5(8) of the IBC and there was no Time Value of Money as consideration therefore the application of the Appellant was rightly rejected by the Adjudicating Authority.

The NCLAT observed that from perusal of the document and notice issued by the Appellant in Form -3 dated 15.11.2018, the Appellant relied upon the Marketing Agreement dated 09.12.2016 and corresponding letters as mentioned therein. However, in Form-1, i.e., Application under section 7 of IBC, the Appellant relied upon the Marketing Agreement dated 28.09.2013 and 09.12.2016 and claimed an amount of Rs. 57,55,799/- which was shown as default. 

The NCLAT decided that to determine the issue whether the claim of the Appellant falls under the category of ‘financial debt’ and whether the debt is due which has been disbursed against the consideration for Time Value of Money. From an in depth perusal of the agreement dated 28.09.2013 entered between the Appellant and the Respondent, the NCLAT decided that there is no clause with respect to payment of interest in case of default. From the aforesaid agreement it is clear that the Appellant had not disbursed the money against the consideration for the time value of money and the Respondent has not received the money as a financial debt. Under the IBC, the Adjudicating Authority or this Appellate Tribunal will not go into the aspects of the veracity of the agreement, its breach, void, voidable etc. The Adjudicating Authority is not a Civil Court to decide the breach of the contract between the parties. The IBC is a code by itself and will have to go strictly by the provisions of the Code, whether a claim is made under Section 9 by the Operation Creditor and under Section 7 by Financial Creditor and under Section 10 by a Corporate Applicant. 

The Appellant, who claims to be a Financial Creditor, however, claims made by it, is not a Financial Debt. It is reiterated that in the marketing agreements and subsequent correspondence exchanged between the Appellant and the Respondent, no way it is mentioned that the amount paid by the Appellant to be repayable along with interest over a period of time in a single or series of payments in future. However, the Appellant has not disbursed money against the consideration for the time value. Accordingly, it is held that the claim of the Appellant is not a Financial Debt within the meaning of Section 5(8) of IBC. 


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