NCLAT Sets Aside Admission Of S.7 Application Upon Finding Transaction Was In Nature Of 'Operational Debt'

The NCLAT New Delhi bench of Justice Rakesh Kumar Jain (Judicial Member), Mr. Barun Mitra (Technical Member) and Mr. Indevar Pandey (Technical Member) has held that the application under Section 7 of the Insolvency and Bankruptcy Code, 2016, was not maintainable as the transaction in question constituted an 'operational debt' and was not covered under Section 5(8)(e) but was governed by Section 5(20) and Section 21(5) of the Code. The Tribunal allowed the appeal against the admission of petition under section 7 and relegated the Respondents to pursue their remedy under Section 9 of the Code. Brief Facts: The case of the Financial Creditors is that ISINOX Pvt. Ltd. (Corporate Debtor) used to purchase goods from Manohar Manak Alloys Pvt. Ltd. (Manohar Alloys). A petition under Section 7 of the Insolvency & Bankruptcy Code was filed by Somesh A Naik & others (Financial Creditors). The Financial Creditors claimed Rs. 4.37 crores in financial debt, while the Corporate Debtor argued it was 'operational debt' and thus, the application was not maintainable. On 17.03.2023, the NCLT Mumbai admitted the section 7 petition. While interpreting Section 5(8)(e) of the Code, the Tribunal held that the transaction is in the nature of receivables sold or discounted as contemplated in Section 5(8)(e) of the Code and as such the section 7 application was maintainable. The suspended director of Corporate Debtor filed the appeal under section 61 against the impugned order. Issue: Whether the financial creditors can maintain the application under Section 7 of the Code or it is a transaction of an operational debt for which an application under Section 9 is maintainable? Contentions: Counsel for Appellant relied upon the judgment in Minions Ventures Pvt. Ltd. Vs. TDT Copper Ltd. to contend that the dispute between the parties in that case was the same, and the Court held that the financers would step into the shoes of the seller under Sections 5(20) and 21(5), and Sections 5(7) and 5(8)(e) of the Code would not apply. It was thus held that the application having been filed under Section 7 was not maintainable but the financers were relegated to avail their remedy under Section 9 of the Code. Counsel for Respondent argued that the transaction between the parties is in the nature of a financial debt. Therefore, there was no error in the impugned order. Observations: The Tribunal noted that a similar controversy had been decided by the Court earlier in Minions Ventures Pvt. Ltd. in which the Court categorically held that the case would not be covered by Section 5(8)(e); rather it shall be covered by Section 5(20) and 21(5) of the Code which is why the Section 7 application is not maintainable. The Tribunal allowed the appeal and set aside the impugned order. Respondents were relegated to their remedy to file an application under Section 9 of the Code. Case Title: Varun Gupta vs. ISINOX Pvt. Ltd. Through the IRP Mr. Manishkumar R. Patel & Ors. Case Number: Comp. App. (AT) (Ins) No. 430 of 2023 & I.A. No. 1429, 1430, 1431 of 2023 & 2005 of 2024 Date of Judgment: 16.12.2024Click Here To Read/Download The Order

NCLAT Sets Aside Admission Of S.7 Application Upon Finding Transaction Was In Nature Of 'Operational Debt'

Tazeen Ahmed

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