Amount Disbursed By NBFC Upon Oral Agreement Not Covered In Financial Debt: NCLT Kolkata

The NCLT Kolkata Bench comprising of Shri Rajasekhar V.K. (Judicial Member) and Shri Balraj Joshi (Technical Member) while deciding a petition under Section 7 of the Insolvency and Bankruptcy Code, 2016 ("IBC"), titled Narendra Promoters & Fincon Pvt. Ltd. v Vinline Engineering Pvt. Ltd., has held that a disbursement made by a Non Banking Financial Institution ("NBFC") over an oral agreement cannot be construed as the existence of a financial debt, when there is nothing on record to show that it was disbursed as a loan. The petition was dismissed by the Bench vide an order dated 23.02.2022. Facts Of The Case Narendra Promoters & Fincon Pvt. Ltd. ("Financial Creditor") being a Non Banking Financial Company (NBFC) was approached by Vinline Engineering Pvt. Ltd. ("Corporate Debtor") for a financial assistance amounting to Rs. 10,00,000/- for business use. An oral agreement was entered into between the parties whereby the Financial Creditor would disburse Rs.10,00,000/- to the Corporate Debtor over an interest rate of 16% per annum from the date of disbursal. On 08.09.2015, the Financial Creditor transferred the principal amount to the Corporate Debtor. The Corporate Debtor had paid Rs. 5,82,136/- to the Financial Creditor towards interest due from 08.09.2015 to 31.03.2019. However, the Corporate Debtor failed to repay the principal amount despite several oral demands by the Financial Creditor. Thereafter, on 18.03.2020 the Financial Creditor had moved a petition before NCLT Kolkata Bench ("Adjudicating Authority") under Section 7 of IBC, seeking initiation of Corporate Insolvency Resolution Process ("CIRP") against the Corporate Debtor, for defaulting on the loan amount. Arguments On Behalf Of The Financial Creditor The Counsel for the Financial Creditor 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 a sum of Rs. 11,00,000/- on request of the Corporate Debtor. After making a payment of Rs. 5,82,136/- towards interest due from 08.09.2015 to 31.03.2019, the Corporate Debtor failed to repay the principal amount and further interest to the Financial Creditor. The date of default was 01.04.2019 and the amount in default was Rs. 11,46,850/- including interest. The Counsel for the Financial Creditor also pointed out that the Corporate Debtor had deposited TDS on interest with Income Tax Department upto March, 2019 and the same is reflected in Form No.26AS obtained from TRACES of the Income Tax Department. Observations Made By The Adjudicating Authority The Adjudicating Authority observed that a perusal of bank statements reveal that a sum of Rs. 10,00,000/- was disbursed by the Financial Creditor to the Corporate Debtor on 08.09.2015. However, the disbursal cannot be construed as the existence of financial debt since the written terms and conditions between the parties are not before the Adjudicating Authority and there is nothing on record to show that such disbursement was a loan. The Adjudicating Authority placed reliance on the RBI guidelines on Fair Practices Code for NBFCs, dated 18.02.2013, wherein it has been stated that the NBFCs should convey in writing to the borrower, in the vernacular language as understood by the borrower by means of sanction letter or otherwise, the amount of loan sanctioned along with the terms and conditions including annualized rate of interest and method of application thereof and keep the acceptance of these terms and conditions by the borrower on its record. It was observed that the RBI's circulars have statutory force and are well recognized in law. Hence, it was mandatory on the part of Financial Creditor, being an NBFC, to keep the terms and conditions recorded in writing. The Adjudicating Authority further placed reliance on the Supreme Court judgment in Phoenix Arc Pvt. Ltd. Vs. Spade Financial Services Ltd. &Ors., Civil Appeal No. 2842 of 2020, wherein it has been held that for the implementation of a successful insolvency regime and to impede any person from taking undue benefit, the real nature of the transactions has to be unearthed, as per the IBC. The Adjudicating Authority was of the opinion that the Financial Creditor has failed to establish the nature of transaction between the parties. It further observed that deduction of TDS is not sufficient to conclude that the transaction in question is a Financial Debt. Decision Of The Adjudicating Authority The petition under Section 7 of IBC was dismissed with liberty to the Financial Creditor to pursue other available remedies under law. Case Title: Narendra Promoters & Fincon Private Limited v Vinline Engineering Private Limited, CP (IB) No.749/KB/2020 Counsel for the Financial Creditor: Adv. Sankarsan Sarkar and Adv. Tanvi Luhariwala. Click Here To Read/Download Order

Amount Disbursed By NBFC Upon Oral Agreement Not Covered In Financial Debt: NCLT Kolkata

Pallavi Mishra

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