Insolvency Code : Balance sheet entries as reliable indicators of financial debt.
NCLAT Upholds Insolvency Initiation Against West Star Constructions Pvt. Ltd. Over Financial Debt Dispute. Appellate Tribunal dismisses appeal, confirming that Rs. 1 crore disbursed by Kaliber Associates is a financial debt under IBC
In a significant ruling, the National Company Law Appellate Tribunal (NCLAT), Principal Bench, New Delhi, has dismissed the appeal filed by Subhash Chander Chauhan, suspended director of West Star Constructions Pvt. Ltd., challenging the initiation of Corporate Insolvency Resolution Process (CIRP) against the company. The judgment, delivered by Justice Mohammad Faiz Alam Khan and Arun Baroka, has upheld the order of the National Company Law Tribunal (NCLT), admitting the Section 7 application filed by M/s Kaliber Associates Pvt. Ltd.
The case revolves around a Rs. 1 crore transaction between Kaliber Associates and West Star Constructions, which the latter contends was an advance for consultancy services. However, the tribunal found that the amount constitutes a financial debt under Section 5(8) of the Insolvency and Bankruptcy Code, 2016 (IBC), and the admission of the insolvency proceedings was justified.
The appellate tribunal examined balance sheet entries, which consistently recorded the amount as "other long-term liabilities." The tribunal held that such entries are reliable indicators of a financial debt and satisfy the requirement of "time value of money," a critical component in determining financial debt under the IBC.
The judgment also clarified that the object of the IBC is to ensure resolution and restructuring in genuine cases of insolvency, not merely as a tool for debt recovery. However, the tribunal noted that even if the application under Section 7 was filed for recovery purposes, it is not barred by law, citing explanations and precedents from the Supreme Court.
The appeal was dismissed, confirming that the disbursal of Rs. 1 crore by Kaliber Associates constitutes a financial debt, and the objections raised by West Star Constructions regarding consultancy services were found lacking in credibility. The tribunal emphasized that the absence of documentary evidence supporting the consultancy claim further weakened the defense, leading to the rejection of the appeal.
This ruling reinforces the principles governing financial debt under the IBC and clarifies the grounds upon which insolvency proceedings can be initiated, providing a precedent for similar cases in the future.
Bottom Line:
Insolvency and Bankruptcy Code, 2016 - Section 7 Application - Determination of "financial debt" under Section 5(8) - Balance sheet entries as reliable indicators of financial debt.
Statutory provision(s): Insolvency and Bankruptcy Code, 2016 - Section 7, Section 5(8), Explanation II to Section 11
Trending News
A civil dispute arising from a commercial transaction does not constitute a criminal offence of cheating
Manipur violence: SC asks why entire leaked clips not sent for forensic test
SC mulls pan-India guidelines to prevent road accidents on expressways, NHs
