On September 9, 2024, the National Company Law Appellate Tribunal, Principal Bench, New Delhi (“NCLAT”) in the case of, Sandeep Mittal v. M/s ASREC (India) Limited, Company Appeal (AT) (Insolvency) Nos. 37 & 573 of 2024, has held that sale consideration payable towards purchase of assets does not qualify as a ‘financial debt’ within the meaning of Section 5(8) of the Insolvency and Bankruptcy Code, 2016 (“Code”).

Brief Facts

In the instant case, Gujarat State Financial Corporation (“GSFC”), Gujarat Industrial Investment Corporation (“GIIC”), Bank of Baroda and Dena Bank (collectively, “GPPL Lenders”) had extended certain term loans to Ganpati Pulp and Paper Limited (“GPPL”), which were secured by a charge created by GPPL over certain immovable assets. On default by GPPL, GSFC took possession of the secured assets and issued a sale notice pursuant to Section 29 of the State Financial Corporations Act, 1951. In response to the sale notice, an offer was submitted by Shree Industries Limited (earlier known as Rama Finance Limited) (“SIL” or “Corporate Debtor”) to acquire the assets of GPPL, secured in favour of the GPPL Lenders, for an amount of Rs. 3,88,00,000 (Rupees three crore eighty-eight lac). The GPPL Lenders accepted the offer submitted by SIL and an agreement for sale dated November 27, 1990 was executed between SIL and GSFC, acting on behalf of itself and the other GPPL Lenders, wherein SIL agreed to make a down payment of Rs. 50,00,000 (Rupees fifty lac) and pay the balance Rs. 3,38,00,000 (Rupees three crore thirty-eight lac) (“Balance Amount”) within a period of 5 (five) years in 20 (twenty) quarterly instalments. SIL also executed a corporate guarantee dated December 12, 1990 in favour of the GPPL Lenders, for the payment of the Balance Amount along with interest.

 Subsequently, one of the GPPL Lenders i.e., Bank of Baroda assigned its portion of the debt in GPPL to ASREC (India) Limited (“Financial Creditor”) vide an assignment agreement dated March 29, 2011. Thereafter, SIL submitted a one-time settlement proposal to the Financial Creditor. Upon non-compliance with the aforesaid settlement proposal, the Financial Creditor issued a notice of default to SIL, for the outstanding dues. Subsequently, on November 23, 2022, the Financial Creditor filed an application under Section 7 of the Code before the NCLT, New Delhi, for initiating corporate insolvency resolution process against the Corporate Debtor. The NCLT, New Delhi admitted the Section 7 application for initiation of corporate insolvency resolution process of the Corporate Debtor, which came to be challenged by the suspended directors/ promoters of the Corporate Debtor (“Appellants”), before the NCLAT.

Issues

The two key issues which were framed by the NCLAT were:

1. whether the transaction, pursuant to the agreement for sale entered into between SIL and GSFC, qualifies as a ‘loan transaction’ or a ‘simple sale and purchase transaction’; and
2. whether the guarantee provided by SIL for payment of the Balance Amount can be construed as a ‘financial debt’ owed by SIL.

Contentions of the Appellants

The Appellants contended that the agreement for sale entered into between SIL and GSFC was a sale agreement for sale and purchase of assets of GPPL, and not a loan agreement. The Appellants argued that the unpaid sale consideration arising from the aforesaid agreement could not be classified as a financial debt under the Code, and as such, the matter did not justify the initiation of insolvency proceedings.

Contentions of the Financial Creditor

The Financial Creditor argued that the Balance Amount payable by the Corporate Debtor in instalments under the agreement for sale entered into between SIL and GSFC, effectively transformed the aforesaid sale agreement into a loan transaction. The Financial Creditor also contended that the Balance Amount, along with the accrued interest, constituted a financial debt within the meaning of the Code, since Section 5(8) of the Code does not contemplate disbursement of money only, but should be interpreted broadly to cover disbursement of property as per Section 5(8)(f) of the Code.

Decision

The NCLAT, by relying on the Supreme Court’s decision in Global Credit Capital Limited v. Sach Marketing Private Limited, [(2024) SCC OnLine SC 649], held that to determine whether a transaction is a ‘financial debt’, the true nature of the transaction has to be looked into. The NCLAT observed that the true nature of the transaction has to be determined from the documents executed in relation to the transaction in question, which in the instant case clearly indicated that the transaction in question was a sale and purchase transaction and not a ‘financial debt’.

The NCLAT further observed that Section 5(8) of the Code defines ‘financial debt’ as a debt disbursed in consideration for the time value of money, encompassing various forms of financial transactions such as loans, bonds, receivables sold, and other similar instruments. In this context, the NCLAT referred to the Supreme Court's ruling in Pioneer Urban and Infrastructure Limited v. Union of India, [(2019) 8 SCC 416], wherein it was held that ‘disbursed’ refers to money which has been paid against the consideration for ‘time value of money’.

With respect to the deed of guarantee dated December 12, 1990, the NCLAT held that the transaction involved was for the sale and purchase of assets of GPPL, and the guarantee provided was for payment of the Balance Amount by SIL, and that the same cannot in any manner be read to mean ‘financial debt’, owed by SIL.

Accordingly, the NCLAT allowed both the appeals filed by the Appellants. 

Please find a copy of the order here.

This update has been contributed by Aastha (Partner) and Ghanshyam Patel (Associate).

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