Vipul Ganda is an Independent Litigation Counsel with over 14 years of experience and a proven track record in Litigation and Dispute Resolution.

Earth Gracia Buildcon Private Limited Versus Earth Infrastructure Limited


Court / Forum : National Company Law Appellate Tribunal
Citation : Company Appeal (AT) (INS) No. 351 of 2020
Coram : Hon’ble Justice Mr. Jarat Kumar Jain, Member (Judicial) and Mr. Kanti Narahari, Member (Technical)
Subject : Section 5(8) of the Insolvency and Bankruptcy Code, 2016
Date of Decision : 2021-06-08

Brief Facts

  • M/s Earth Gracia Buildcon Private Limited (“Appellant”) and M/s Earth Infrastructure Limited (“Respondent”) are both undergoing corporate insolvency resolution process and are represented by their respective Resolution Professionals.
  • Appellant claims to have advanced a sum of Rs. 16,82,17,052 to the Respondent and had filed Form C dated April 8, 2019 amounting to Rs. 20,78,13,695 along with ledger, bank account statement and summary of loan account with the Resolution Professional of the Respondent. The said claim form was rejected by Resolution Professional of the Respondent due to non-availability of loan agreement.
  • The Appellant was aggrieved by the rejection of claim and had filed an application bearing number CA/565/C-III/ND/2019 along with ledger, bank account statement, balance sheet, memorandum of association of the Appellant and loan account summary before the Ld. National Company Law Tribunal, New Delhi (“Adjudicating Authority”). The Ld. Adjudicating Authority, vide order dated January 8, 2020 (“Impugned Order”), had rejected the said application on the grounds that transaction does not fall within the purview of financial debt, there is no consideration for time value of money and the transaction is sham.
  • Aggrieved by the Impugned Order, Appellant has preferred Appeal before the Hon’ble National Company Law Appellate Tribunal, New Delhi (“NCLAT”).

Issues

  1. Whether the claim made by the Appellant is financial debt as defined under Section 5(8) of the Insolvency and Bankruptcy Code, 2016 (“Code”)?

Decision

  • The essential requirements of financial debt under Section 5(8) of the Code are disbursement and consideration for time value of money. The Hon’ble NCLAT referred to the judgments of Hon’ble Supreme Court in Phoenix Arc Private Limited vs. Spade Financial Services Limited and Others [(2021) 3 SCC 475] and Anuj Jain, IRP of Jaypee Infratech Limited vs. Axis Bank and Others [(2020) 8 SCC 401]. The promoters and directors of both the companies are common. Therefore, from the ledger entries of the Appellant, it cannot be inferred that money was disbursed from Appellant to Respondent. The ledger only shows inflow and outflow of funds between the Appellant and the Respondent which are in the nature of running account. The said ledger shows debit and credit balance which lack any commercial effect of borrowing (i.e.) one of the essential elements of financial debt.
  • A disbursement of debt should be against consideration for time value of money and the payment of interest is not the only consideration. When a company is in need of funds, promoter/director or shareholder can protect the company by infusing funds without claiming any interest. The Appellant has not been able to point out any consideration for the alleged debt and accordingly, has failed to prove that the transaction comes within the definition of financial debt.
  • The Hon’ble NCLAT concurred with the reasons provided by Ld. Adjudicating Authority for declaring the transaction between the Appellant and Respondent as sham transaction. If the transaction is not backed by any board resolution; no record of Respondent requiring any funds; no agreement for loan and interest; no document for period of repayment; Appellant and Respondent are group companies with common directors and promoters; even though in the balance sheet of Appellant, an amount of Rs. 18,75,76,212 is appearing as loan and advance but name of Respondent is not mentioned; essential conditions of financial debt are missing; and claim before the Resolution Professional has not been substantiated with any documentary evidence. Therefore, the transaction in the present case is a sham transaction and do not qualify as a financial debt.
  • Accordingly, the Appeal was dismissed.

Vipul Ganda is a Delhi based Advocate practicing largely at the Delhi High Court. His practice focus is Dispute Resolution and Litigation and his practice areas include Arbitration, Commercial, Civil, Constitutional, Corporate and Criminal Litigation.