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While hearing a case under Section 7 of the Insolvency and Bankruptcy Code 2016, the NCLT Bench held that amount disbursed by a Non-Banking Financial Company over an oral agreement cannot be construed as the existence of financial debt, on non-existence of anything on record to prove that it was disbursed as loan. The bench comprising of Shri Rajasekhar V.K. and Shri Balraj Joshi dismissed the petition. Let’s discuss the facts of the case.
Narendra Promoters & Fincon Pvt. Ltd being an NBFC was approached for a financial assistance of 10 lakh rupees by Vinline Engineering Pvt. Ltd. (“Corporate Debtor”). This amount was proposed to be used for business use. The parties entered into an oral agreement whereby the financial creditors- Narendra Promoters & Fincon Pvt. Ltd would disburse an amount of 10 lakh rupees to the corporate debtor- Vinline Engineering Pvt. Ltd. over an interest rate of 16% per annum from the disbursal date.
The Financial creditor transferred the said amount to the corporate debtor on 8th September 2015. The corporate debtor paid a sum of 5.82 lakh rupees to the financial creditor towards interest due from 8th September 2015 to 31st March 2019 however, the corporate debtor failed to repay the principal amount even after repeated oral demands from the financial creditor.
In view of this, the financial creditor moved an application before the National Company Law Tribunal Kolkata Bench in 2020 under Section 7 of the IBC, seeking initiation of the Corporate Insolvency Resolution Proceedings against the corporate debtor for defaulting on the loan amount.
Arguments made by the Financial Creditor
The counsel for the financial creditor- Narendra Promoters & Fincon Pvt. Ltd, argued that the financial creditor had disbursed a short term loan of 10 lakh rupees to the corporate debtor at an interest rate of 16% per annum. The loan amount of 10 lakh rupees was renewed to a sum of 11 lakh rupees on the request of the corporate debtor. The corporate debtor paid a sum of 5.82 lakh rupees to the financial creditor towards interest due from 8th September 2015 to 31st March 2019 however, the corporate debtor failed to repay the principal amount and also the further interest to the financial creditor. The amount of default was 11.46 lakh rupees (including interest).
Further, the financial creditor also notified the adjudicating authority that the corporate debtor had deposited TDS on interest with income tax department up to March 2019 and it is reflected in the Form 26AS obtained from the TRACES (TDS Reconciliation Analysis and Correction Enabling System) of the Income Tax Department.
Observations made by the adjudicating authority
The NCLT bench hearing the matter observed that on perusal of bank statements it can be found that a sum of 10 lakh rupees was disbursed by the financial creditor to the corporate debtor on 8th September 2015 however, such disbursal cannot be construed as the existence of a financial debt because the court doesn’t have the written terms and conditions between the parties and there is nothing on record to prove that the disbursement here was a loan.
The adjudicating authority relied on the RBI guidelines on fair practices code for NBFCs that was released on 18.02.2013 where it has been categorically mentioned that NBFCs are required to convey in writing to the borrower, in vernacular language that can be understood by the borrower through sanction letter or otherwise, the loan amount sanctioned along with the terms and conditions including the annualised interest rate and method of application and keep the borrowers’ acceptance of these terms and conditions on its record. It was observed that the said RBI circular have statutory force and that it’s well recognised under law. Hence the court noted that it was crucial on the part of the financial creditor to keep the terms and conditions in written form.
The adjudicating authority also relied on the judgement of the apex court in the case of Phoenix Arc Pvt. Ltd. Vs. Spade Financial Services Ltd. &Ors., Civil Appeal No. 2842 of 2020, where it was held that in order to implement insolvency regime successfully and to deter a person from taking any unlawful benefit, the real nature of the transactions must be unearthed according to the IBC.
The adjudicating authority stated that the financial creditor could not establish the nature of the transaction between the parties. It also observed that TDS deduction is not enough to conclude that the transaction in question is a financial debt.
Final order of the Tribunal
The said petition under Section 7 of the IBC was dismissed by the NCLT bench with liberty to the financial creditor to pursue other remedies available under law.
Read Our Article: What is new under National Company Law Tribunal, NCLT Amendment 2020
Ashish M. Shaji has done his graduation in law (BA. LLB) from CCS University. He has keen interests in doing extensive research and writing on legal subjects especially on corporate law. He is a creative thinker and has a great interest in exploring legal subjects.
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