24 September 2021
Matter: Pawan Kumar v. Utsav Securities Pvt. Ltd. and Anr.
Order dated: 03 August 2021.
Summary:
In the present case, an application was filed by the financial creditor for initiation of corporate insolvency process against the corporate debtor. It was the case of the financial creditor that it had provided finances to the corporate debtor and the corporate debtor had paid interest and deducted TDS for it. However, the corporate debtor had failed to pay interest thereafter, and also the principal amount. Hence, the financial creditor filed an application before the NCLT seeking initiation of corporate insolvency resolution process (CIRP) against the corporate debtor.The corporate debtor submitted that there was no contractual agreement between the parties specifying the period of the loan nor was any interest rate fixed, and therefore the said amount fell outside the scope of ‘financial debt’ as defined under the Code. However, NCLT, New Delhi Bench admitted the financial creditor’s application for initiation of CIRP against the corporate debtor.
An appeal was filed by the corporate debtor against this order of the NCLT, New Delhi Bench on the ground that there is lack of contractual agreement which can prove the claims of the financial creditor under the Code hence the financial creditor had failed to establish itself as a financial creditor and the transaction as financial debt. The financial creditor submitted that as per the Indian Contracts Act, 1872, oral agreements are valid and enforceable.
The NCLAT allowed the appeal and set aside the order of the NCLT. The NCLAT stated that the NCLT is obliged to investigate the nature of the transaction and should be very cautious in admitting application in order to prevent any person from taking undue benefit of provisions of the Code to detriment the rights of legitimate creditors as well as to protect the corporate debtor from being dragged into CIRP with mala fide intention. The NCLAT held that deduction of TDS cannot be the basis for a transaction to be determined as a financial debt. Further, relying on the RBI guideline and a precedent it was held that there has to be a financial contract as per the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 (Rules) wherein it is a must that the corporate debtor and financial creditor set out the terms of a financial debt including the tenure of the debt, interest payable and the date of repayment. The NCLAT observed that in terms of the Rules there should be a loan agreement in writing between the financial creditor and the corporate debtor.
