NCLAT Delhi: Payment By Third Party For Corporate Debtor For Raw Material Or Working Capital Is “Financial Debt”

Background Facts:

Unicast Autotech Pvt. Ltd. (Corporate Debtor) carries out the business of manufacturing aluminum die casts, whereas Uno Minda Limited (Respondent 1) is in the business of supplying automotive solutions to original equipment manufacturers ('OEM').

A Business Support Agreement ('BSA') was entered into between the Corporate Debtor and its Promoters including Mr. Rajeev Kumar Jain (Appellant) and Respondent 1 for a sale 100% stake in the Corporate Debtor and to supply raw material funding and critical capital working requirements. It was decided that all the money lent to be treated as unsecured debts to the Corporate Debtor only payable by the Promoters.

The Appellant contended that all transactions happened between Respondent 1 and the Promoters with no involvement of the Corporate Debtor since no financial assistance was availed by the Corporate Debtor from Respondent No.1.

The Appellant who is the Ex-Director and one of the Shareholders of the Corporate Debtor has filed the present appeal against NCLT New Delhi's Order allowing the Corporate Insolvency Resolution Process ('CIRP') application filed by Respondent 1 against the Corporate Debtor.

NCLAT Verdict:

The NCLAT Delhi dismissed the appeal and held that the payment of raw material made by a third party at the instructions of a Corporate Debtor or financial assistance towards working capital constitutes 'Financial Debt' under IBC.

The Appellate Tribunal observed that the meaning of 'Financial Debt' is a debt along with interest, if any, which is disbursed. Thus, interest is not sine-qua non, therefore, interest may or may not be payable by the Corporate Debtor. It pointed out that what is relevant and significant is the understanding between the parties to ascertain the existence of the time value of money which can be in several forms, other than pure payment of interest.

NCLAT held that presently, the various clauses under the BSA, Sale and Purchase Agreement, and deed of guarantees show clearly that these documents were made jointly by the Promoters, the Corporate Debtor, and the Respondent No. 1 i.e the Corporate Debtor consented to be part of the agreement.

Thus, a clear intention to provide the working capital to the Corporate Debtor existed between the Promoters Group including the Appellant, the Corporate Debtor, and Respondent 1. Such working capital was to be provided in various forms including for making payments of raw material on behalf of the Corporate Debtor.

It held that raw material is to be treated as forming part of working capital. Further, any financial assistance towards working capital is to be treated as “financial debt” only and not as “operational debt”.

In conclusion, NCLAT held that NCLT New Delhi's Order is valid and the Appellant's contention that the Corporate Debtor was not a party to the agreement cannot be accepted.

Case Title: Mr. Rajeev Kumar Jain vs. Uno Minda Ltd. and Anr.

Case No.: Company Appeal (AT) (Insolvency) No. 947 of 2022 & I.A. No. 2682, 2683 of 2022 & 1652 of 2023

Counsel for Appellant: Mr. Swetab Kumar, Mr. Shashank Agarwal, Advocates.

Counsel for Respondents: Mr. Mahip Singh, Mr. Karan Kohli, Mr. Krishan Kumar, Mr. Varun, Advocates.

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