NCLAT Sets Aside Section 7 IBC Admission: Financial Debt and Default Must Be Conclusively Proved

Case Overview

Case Name: Pawan Kumar Vs Utsav Securities Pvt. Ltd.
Court: National Company Law Appellate Tribunal (NCLAT), New Delhi
**Appeal No.😗* Company Appeal (AT) (Ins) No. 251 of 2020
Date of Order: 03/08/2021

Background of the Dispute

Pawan Kumar, a former director of the corporate debtor Vogue Clothiers Pvt. Ltd., approached the NCLAT challenging an order dated 30.01.2020 passed by the Adjudicating Authority (National Company Law Tribunal, New Delhi Bench) in CP (IB) No. 1593/(ND)/2019. The NCLT had admitted an application filed under Section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC), thereby initiating Corporate Insolvency Resolution Process (CIRP) against Vogue Clothiers Pvt. Ltd. and appointing Ms. Karuna Sharma as the Insolvency Resolution Professional (IRP).

The financial creditor, Utsav Securities Pvt. Ltd., is a Non-Banking Finance Company (NBFC) registered with the Reserve Bank of India. Between 16.02.2017 and 22.02.2017, it transferred a sum of Rs. 6.10 crore through RTGS into the corporate debtor's bank account. A single payment of Rs. 6,05,718 was received by the financial creditor on 14.02.2018, reportedly after deduction of TDS. Following this, the corporate debtor allegedly ceased making further payments, prompting the financial creditor to issue a recall notice dated 27.04.2019 and subsequently file the Section 7 application before the NCLT.

Contentions Raised Before the NCLAT

Arguments Advanced by the Appellant

Counsel for the appellant, Pawan Kumar, raised several substantive objections:

  • The financial creditor failed to produce any loan agreement or financial contract along with its Section 7 application.
  • There were no pleadings specifying fundamental terms such as the applicable interest rate, date of repayment, or the precise date on which default occurred.
  • Without a written agreement and its attendant terms, the financial creditor could not establish its status as a "financial creditor" or demonstrate that the amount constituted a "financial debt" within the meaning of Section 5(7) and Section 5(8) of the IBC.
  • Clause 5, Part (v) of Form I under the IBC framework requires the financial creditor to attach a complete, up-to-date copy of the financial contract. "Financial contract" is specifically defined under Rule 3(1)(d) of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016, and no such document was furnished.
  • Reliance was placed on Prayag Polytech Pvt. Ltd. Vs. Gem Batteries Pvt. Ltd., CP (IB) No. 178/ND/2019, Utsav Securities Pvt. Ltd. Vs. Timeline Buildcon Pvt. Ltd., CP (IB) No. 1559 (PB)/2019, Caliber Associates Pvt. Ltd. Vs. M/s Tripat Kaur, CA (AT) (Ins) No. 52 of 2017, and M/s Utility Powertech Ltd. Vs. Amit Traders, 2018 SCC Online DL 9096.
  • In Sanjay Kewalramani Vs. Sunil Parman and Kewalramani & Ors., 2018 SCC OnLine NCLAT 310, this Appellate Tribunal had already held that mere payment of interest and deduction of TDS by a company is, by itself, insufficient to fasten liability on the corporate debtor.
  • The transaction bore the characteristics of a routine commercial transaction rather than a loan advanced in consideration for the time value of money.

Arguments Advanced by the Financial Creditor

The financial creditor's counsel countered with the following submissions: