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Synopsis

The National Company Law Tribunal recently imposed a cost of Rs. 1 lakh on a financial creditor for using the Insolvency and Bankruptcy Code (IBC) proceeding as a recovery mechanism

“..the Financial Creditor has conveniently supressed the above MoU in order to use the present IBC proceeding as recovery mechanism and therefore the present CP has to be dismissed by imposing costs…Therefore, for the aforesaid reasons, this bench is of the considered opinion that there is no merit in the above CP and the same is liable to be rejected by imposing cost of Rs. 1 Lakh payable by the Financial Creditor to ROC, Guwahati NER by way of Bharat Kosh within 2 weeks from the date of uploading the order on e-portal,” the order reads.

The Guwahati bench of NCLT, comprising Judicial Member HV Subha Rao and Technical Member Satya Ranjan Prasad, was hearing a Section 7 petition filed by a financial creditor to initiate Corporate Insolvency Resolution Process (CIRP) against the corporate debtor.

The corporate debtor, a private company, had entered into a Memorandum of Understanding (MOU) with the financial creditor to jointly participate in an e-auction for a project's development.

The total sale consideration amounted to 6.11 crores, out of which the financial creditor paid 3 crores.

The corporate debtor returned its share of 50 lakhs, leaving a balance pending along with 8% interest. After the creditor issued a notice, the debtor filed a Section 7 petition.

The creditor argued that the MoU was never effective, and the land was solely in the debtor's name. Hence, the amount given to the debtor should be considered a loan, not an investment.

The debtor countered, claiming a joint venture with a 50:50 holding ratio. He maintained that there was no evidence to suggest the transaction was a loan.

The NCLT in its order said that it was difficult to believe that the above Financial Creditor being a Company doing business in financing and investments would disburse amounts to the general public without taking any security document.

“It is also very difficult to believe that the above Financial Creditor being a Company doing business in financing and investments would disburse amounts to general public without taking any security documents, loan documents etc. In addition to above, the nature of the business of the Financial Creditor is not only financing but also doing investments and therefore the defence of the Corporate Debtor coupled with the above MoU strengthens the pleas of the Corporate Debtor,” the order states.

The NCLT relied on the NCLAT decision of M/s Jagbasera Infratech Private Ltd. v. Rawal Variety Construction Ltd. and said that the amounts invested in partnership business or joint venture do not fall within the definition of financial debt.

Case title: Chiragsala Sales Pvt. Ltd vs Vaishno Devi Traders Private Limited