Amount disbursed by NBFC on oral agreement not covered by financial debt: NCLT Kolkata

the NCLT Kolkata Bench made up of Shri Rajasekhar VK (Judicial Member) and Shri Balraj Joshi (Technical Member) while deciding a petition under section 7 of the Insolvency and Bankruptcy Code, 2016 (“IBC”), entitled Developers Narendra & Fincon Pvt. Ltd v Vinline Engineering Pvt. Ltd., held that a disbursement made by a non-banking financial institution (“NBFC”) on a verbal agreement cannot be interpreted as the existence of a financial debt, when there is nothing in the file to show that was disbursed as a loan. The motion was dismissed by the Chamber to see an order dated 23.02.2022.

Facts of the case

Developers Narendra & Fincon Pvt. ltd. (“Financial Creditor”) being a Non-Banking Financial Company (NBFC) was approached by Vinline Engineering Pvt. (“Corporate Debtor”) for financial assistance amounting to Rs. 10,00,000/- for business use. An oral agreement was reached between the parties whereby the finance creditor would pay Rs 10,000,000 to the corporate debtor on an interest rate of 16% per annum from the date of disbursement.

On 08.09.2015, the Financial Creditor transferred the principal amount to the Debtor Company. The debtor company had paid Rs. 5,82,136/- to the Financial Creditor for interest due from 08.09.2015 to 31.03.2019. However, the debtor company did not repay the principal despite several verbal requests from the financial creditor.

Subsequently, on 18.03.2020, the financial creditor had filed a petition before NCLT Kolkata Bench (“Adjudication Authority”) under Section 7 of the IBC, requesting the initiation of a resolution process insolvency proceedings (“CIRP”) against the corporate debtor, for default on the amount of the loan.

Arguments on behalf of the financial creditor

The finance creditor’s lawyer argued that the latter had disbursed a short term loan amounting to Rs. 10,00,000/- to the Corporate Debtor on an interest rate of 16% per annum. The said loan was renewed for an amount of Rs. 11,00,000/- at the request of the Debtor Company. After making a payment of Rs. 5,82,136/- on interest due from 08.09.2015 to 31.03.2019, the Debtor Company failed to repay the principal and additional interest to the Finance Creditor. The date of default was 01.04.2019 and the amount in default was Rs. 11,46,850/- including interest.

The lawyer for the financial creditor also pointed out that the debtor company had filed TDS on interest with the income tax department up to March 2019 and this is reflected in Form No. 26AS obtained from TRACES from the income tax department.

Observations made by the contracting authority

The contracting authority observed that a review of bank statements reveals that an amount of Rs. 10,00,000/- was disbursed by the Financial Creditor to the Corporate Debtor on 08.09.2015. However, the disbursement cannot be interpreted as the existence of a financial debt since the written terms and conditions between the parties are not before the contracting authority and there is nothing in the file to show that this disbursement was a loan.

The procuring authority relied on the RBI guidelines on Code of Fair Practices for NBFCs, dated 2013.02.18, in which it was stated that NBFCs shall convey in writing to the Borrower, in the vernacular as understood by the Borrower by means of a sanction letter or otherwise , the amount of the sanctioned loan and the terms and conditions including the annualized interest rate and the method of application thereof and keep the borrower’s acceptance of these terms and conditions on file. It has been observed that RBI circulars have the force of law and are well recognized by law. Therefore, it was mandatory on the part of the financial creditor, being an NBFC, to keep the terms and conditions recorded in writing.

The judicial authority also relied on the judgment of the Supreme Court in Phoenix Arc Pvt. Ltd Vs. Spade Financial Services Ltd. &Ors., Civil Appeal No. 2842 of 2020, in which it was held that for the implementation of a successful insolvency regime and to prevent any person from taking undue advantage, the true nature of transactions must be discovered, in accordance with the IBC.

The Judgment Authority was of the opinion that the Financial Creditor failed to establish the nature of the transaction between the parties. It further observed that the deduction of TDS is not sufficient to conclude that the transaction in question is a Financial Debt.

Decision of the contracting authority

The petition under section 7 of the IBC was dismissed with freedom for the financial creditor to pursue other remedies available under the law.

Case title: Narendra Promoters & Fincon Private Limited v Vinline Engineering Private Limited, CP (IB) No 749/KB/2020

Advice from the financial creditor: Adv. Sankarsan Sarkar and Adv. Tanvi Luhariwala.

Click here to read/download the order

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