NCLAT Sets Aside NCLT Order, Grants ABC Floors Pvt. Ltd. Three Months to Settle Financial Debt

Tribunal Affirms NBFC's Financial Debt Claim Despite Absence of Written Agreement

In a significant ruling, the National Company Law Appellate Tribunal (NCLAT) has overturned an order from the National Company Law Tribunal (NCLT), Kolkata Bench, granting ABC Floors Pvt. Ltd. a three-month period to settle its financial obligations with Sinki Commodities Pvt. Ltd. This decision came in light of an appeal filed by the financial creditor, challenging the NCLT's initial rejection of a Section 7 application under the Insolvency and Bankruptcy Code (IBC), 2016.

The appeal, presided over by Justice Ashok Bhushan and Barun Mitra, addressed the financial relationship between Sinki Commodities, an NBFC, and ABC Floors. The NBFC had disbursed a sum of Rs.1,60,00,000 to ABC Floors without a formal written financial agreement, relying instead on various documents such as bank statements and confirmations of account.

Initially, the NCLT had dismissed the application, questioning the clarity of the parties' intentions and citing the absence of required statutory documentation as per RBI guidelines. However, the NCLAT found that despite the lack of a formal contract, the transaction qualified as a financial debt. This conclusion was supported by documentary evidence and admissions by ABC Floors, including post-dated cheques and acknowledgment of interest payments.

Justice Bhushan emphasized that the real nature of the transaction, established through corroborative evidence, suffices to classify it as a financial debt under Section 5(8) of the IBC. The tribunal stated that RBI guidelines, while statutory, do not override the IBC's definition of financial debt. It was noted that the absence of a written agreement does not preclude the establishment of a financial debt if the transaction's essence is clear and evidenced.

The tribunal has set aside the NCLT's order and provided ABC Floors with a three-month window to discharge its debt, including agreed interest. Should the corporate debtor fail to meet this obligation, the NCLT is directed to admit the Section 7 application, potentially initiating insolvency proceedings.

This ruling underscores the NCLAT's stance on the flexibility of evidence requirements in insolvency proceedings, particularly concerning financial transactions lacking formal contracts but substantiated through other means. The decision also highlights the tribunal's commitment to ensuring fair resolution processes under the IBC framework.

Bottom Line:

Non-Banking Financial Company (NBFC) is not precluded from proving a financial debt without a written agreement between parties if sufficient documentary evidence establishes the nature of the transaction as financial debt under section 5(8) of the Insolvency and Bankruptcy Code, 2016.

Statutory provision(s): Insolvency and Bankruptcy Code, 2016 - Sections 5(8), 7

Sinki Commodities Pvt. Ltd. v. ABC Floors Pvt. Ltd., (NCLAT)(Principal Bench New Delhi) : Law Finder Doc Id # 2796018