NCLT - Mere admission of receipt of money does not qualify as a financial debt

Cause Title : Meghna Devang Juthani Vs Ambe Securities Private Limited, National Company Law Tribunal, Mumbai, CP (IB) No. 974/MB-VI/2020

Date of Judgment/Order : 18.12.2023

Corum : Hon’ble Shri K. R. Saji Kumar, Member (Judicial) Hon’ble Shri Sanjiv Dutt, Member (Technical)

Citied: 

1. Carnoustie Management India Pvt. Ltd. Vs. CBS International Projects Private Limited, NCLT
2. Swiss Ribbons Pvt. Ltd. & Anr vs. Union of India & Ors. (2019)
3. Sanjay Kewalramani vs Sunil Parmanand Kewalramani & Ors. (2018)
4. Pawan Kumar vs. Utsav Securities Pvt Ltd 2021

Background

Application was filed under section 7 of the Insolvency and Bankruptcy Code, 2016 alleging loan of Rs, 1.70 cr is due. The Applicate identified herself as the widow and heir of the lender but could not produce any documents proving financial contract between her Late husband and the CD but claimed that the CD has accepted that money was received from her husband. The applicant subsequently filed rejoinder claiming the debt to an 'operational debt' and not a financial one.

The CD said that it was franchiser of registered brokers in dealing in commodity, derivatives and contracts. The money given by the late husband was for investment in Futures and Options of stocks and commodities through the CD and not a loan. The said money was deployed on behalf of the late husband through the registered broker and therefore was neither a financial nor an operational debt.

Judgment

The NCLT observed that though 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 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. 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.

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.

The NCLT further observed that  presence of a loan agreement along with pertinent documents is imperative to substantiate the existence of a financial debt.