The National Company Law Appellate Tribunal (NCLAT), in Sandeep Mittal v M/s ASREC (India) Ltd & Ors (2024), held that balance sale consideration in a sale agreement does not constitute a “financial debt” under section 5(8) of the Insolvency and Bankruptcy Code, 2016.
Tangled history
The Gujarat State Financial Corporation (GSFC), Gujarat Industrial Investment Corporation, Bank of Baroda and Dena Bank sought to recover term loans to Ganpati Pulp and Paper Ltd (GPPL) by selling its immovable assets.
Rama Finance entered a sale agreement with the creditors, agreeing to pay INR5 million (USD59,400) as a downpayment and the balance within five years, and also furnishing a bank guarantee. However, Rama Finance did not meet these terms and entered a one-time settlement with GSFC, which acted on behalf of all the creditors.
In 2011, Bank of Baroda assigned its debts to ASREC. ASREC and Rama Finance entered a one-time settlement of INR55 million. However, it was not complied with.
ASREC then filed an application before the authorities for recovery of INR9.2 million from Rama Finance. The authority admitted the application, leading to the appeal before the NCLAT.
Outcome
The NCLAT allowed the appeals but held that:
? The deed of guarantee by Rama Finance for payment of the purchase price could not be read as a financial debt owed by it.
? The letter, agreement and deed of guarantee clearly indicated the transaction was for the sale and purchase of assets, and was not a financial transaction under which financial debt was undertaken to be paid.
? Disbursal of property was not covered by the definition of “financial debt” under section 5(8) of the code.
The NCLAT relied on: Global Credit Capital Ltd v Sach Marketing Pvt Ltd (2024); Pioneer Urban & Infrastructure Ltd v Union of India (2019); and Yellapu Uma Maheshwari and Anr v Buddha Jagadheeswararao and Ors (2015).
The position that emerged from these judgments was that a financial debt was a debt along with interest, if any, that is disbursed against the consideration for the time value of money. This was 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 could not be considered to be a financial debt.
The NCLAT allowed the appeals, setting aside the admission of application. This judgment safeguards solvent parties from frivolous insolvency proceedings initiated for mere non-payment of transactional dues.
The dispute digest is compiled by Numen Law Offices, a multidisciplinary law firm based in New Delhi & Mumbai. The authors can be contacted at support@numenlaw.com. Readers should not act on the basis of this information without seeking professional legal advice.
