Insolvency and BankruptcyNCLATRulingsTribunal & Appellate

NCLAT mandates the debt should be disbursed against the consideration for the time value of money u/s 5(8) IBC

Saregama India Limited vs. Home Movie Makers Private Limited

NCLAT dismisses the appeal of Saregama India; rejects claim of Appellant that the claim was a financial debt on account of it not satisfying the conditions of a “Financial Debt” under section 5(8) of the IBC.

The Appellant M/s Saregama India Limited filed the present appeal against the order passed by the Adjudicating Authority (National Company Law Tribunal, Division Bench, Chennai) dismissing the application filed by the Appellant under Section 7 of Insolvency and Bankruptcy Code, 2016 ( ‘IBC’) against the Corporate Debtor – M/s Home Movie Makers Private Limited (Respondent) for initiation of Corporate Insolvency Resolution Process. The Adjudicating Authority dismissed the Application holding that the claim made by the Appellant (Financial Creditor) is not a ‘financial debt’. Appellant argues that the transaction between the parties clearly establishes it is a financial debt while the Respondent (Corporate Debtor) denied the stand of the Appellant stating that it is not a financial debt in terms of Section 5(8) of the IBC and there was no Time Value of Money as consideration therefore the application of the Appellant was rightly rejected by the Adjudicating Authority.

NCLAT notes that the only point for consideration is whether the claim of the Appellant falls under the category of financial debt or not. NCLAT examines the marketing agreement entered into between the parties and other relevant documents and finds that a clause with respect to payment of interest in case of default is absent therein and that the Appellant had not disbursed the money against the consideration for the time value of money and the Respondent has not received the money as a financial debt. NCLAT observes that on the other hand, it is a contract between the Appellant and the Respondent for utilisation of FCT which was available to the Respondent (Producer) while telecasting their serials however, it is the case of the Respondent that the Appellant has to pay the consideration for utilisation of FCT. NCLAT further observes that the Appellant has not given any debt to the Respondent and further that the payments as made under the terms of Agreements cannot be termed as Financial Debt as in order to define it as a Financial Debt, the criteria as required under law need to be fulfilled.

NCLAT considers the Judgment of NCLAT  in the matter of “Nikhil Mehta and Sons (HUF) Vs. AMR Infrastructure Ltd. – Company Appeal (AT) (Insolvency) No. 07 of 2017” which was referred to in Company Appeal (AT)(Insolvency) No. 142 of 2017 in the matter Sh. Neeraj Bhatia Vs. Davinder Ahluwalia and refers the judgment “Dr. B.V.S. Lakshmi vs. Geometrix Laser Solutions Private Limited” – Company Appeal (AT) (Insolvency) No. 38 of 2017 where Section 5(8) has been interpreted as below, 

For coming within the definition of ‘Financial Debt’ as defined under sub-section (8) of Section 5, the Claimant is required to show that (i) there is a debt alongwith interest, if any, which has been disbursed and (ii) such disbursement has been made against the ‘consideration for the time value of money’. Thereby, if the Claimant claims to be ‘Financial Creditor’ he will have to show that debt is due which he has disbursed against the ‘consideration for the time value of money’ and that the borrower has raised the amount directly or through other modes like credit facility or its de-materialised equivalent, note purchase facility or the issue of bonds, notes, debentures, loan stock or any other similar instrument. The amount of any liability in respect of any lease or hire purchase contract which is deemed as a finance or capital lease under the Indian Accounting Standards or such other accounting standards can also be referred to by the Creditor to claim that there is a ‘financial debt’ due to him which has been disbursed against the ‘consideration for the time value of money. 

To show that there is a debt due which was disbursed against the ‘consideration for the time value of money’, it is not necessary to show that an amount has been disbursed to the ‘Corporate Debtor’. A person can show that the disbursement has been made against the ‘consideration for the time value of money’ through any instrument. For example, for any derivative transaction entered into in connection with protection against or benefit from fluctuation in any rate or price and for calculating the value of any derivative transaction for which only the market value of such transaction shall be taken into account, it is not necessary to show that amount has been disbursed. The disbursement against the ‘consideration for the time value of money’ is the main factor.” 

In the present case, NCLAT replies on the above orders and states that the Appellant, who claims to be a Financial Creditor, however, claims made by it, is not a Financial Debt. Thereafter NCLAT reiterates that, “ in the marketing agreements and subsequent correspondence exchanged between the Appellant and the Respondent, no way it is mentioned that the amount paid by the Appellant to be repayable along with interest over a period of time in a single or series of payments in future. NCLAT opines that the Appellant has not disbursed money against the consideration for the time value and holds that the claim of the Appellant is not a Financial Debt within the meaning of Section 5(8) of IBC. NCLAT dismisses the appeal.

Hence, NCLAT dismisses the appeal without interfering with the impugned order passed by the Adjudicating Authority. 

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