Operational Debt Can't Be Converted Into Financial Debt By Execution Of Subsequent Agreement Between Parties: NCLT New Delhi

The National Company Law Tribunal (NCLT) New Delhi bench of Shri Manni Sankariah Shanmuga Sundaram (Judicial Member) and Shri Atul Chaturvedi (Technical Member) has held that an Operational Debt cannot be converted into a Financial by the execution of subsequent agreement between the parties. If this is permitted, it would open the floodgates for potential misuse of the provisions of the IBC. The present application has been filed under section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC) seeking to initiate Corporate Insolvency Resolution Process (CIRP) against the Corporate Debtor. The Applicant submitted that despite giving several opportunities, the corporate debtor failed to repay the debt amount. A notice of default was also issued along with reminder notices. In response, the corporate debtor also acknowledged the liability and financial stress to repay the amount. Per contra, the Respondent submitted that the application is nothing but a bundle of lies which was filed by the financial creditor with ulterior motives and malafide intention by raising false, frivolous, bogus and baseless claim against the corporate debtor. The key question before the Tribunal was to determine the nature of debt at the time of disbursement. It is proved from the record that the Corporate Debtor had disbursed the amount as an advance during the financial year 2011-12 for the supply of materials. The Tribunal after referring to various definitions and provisions of the IBC held that the claim of the Applicant cannot be classified as a financial debt within the meaning of section 5(7) and 5(8) of the IBC therefore the Applicant cannot be treated as a financial creditor under section 5(8) of the IBC. The Tribunal rejected the contention of the Applicant and held that an operation debt cannot be converted into a financial debt through execution of subsequent agreement as this would defeat the IBC's objectives and open the floodgates for potential misuse. It further held that given the circumstances and the conduct of the parties surrounding the alleged conversion of the debt, the credibility of the Loan Agreement is highly doubtful. It also held that possible collusion cannot be ruled out. In light of the above judgment in Minions Adventures Pvt. Ltd. and the facts of the case, the present petition was found to be not maintainable. Case Title: M/s IPK Exports Private Ltd Vs. M/s HSB Home Solutions Ltd Case Number:COMPANY PETITION (I.B.) NO. 771 OF 2024 Judgment Date: 08/07/2025 Click Here To Download Order/Judgement

Operational Debt Can't Be Converted Into Financial Debt By Execution Of Subsequent Agreement Between Parties: NCLT New Delhi

Mohd Malik Chauhan

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