Upfront Payment Payable By Corporate Debtor With Interest On Breach Of Agreement Terms Amounts To Financial Debt U/S 5(8) Of IBC: NCLAT

The National Company Law Appellate Tribunal (NCLAT) New Delhi bench of Justice Rakesh Kumar Jain (Judicial Member), Mr. Naresh Salecha (Technical Member) and Mr. Indevar Pandey (Technical Member) has held that disbursement of upfront payment to the corporate debtor to enable it to purchase refinish products along with a condition that the amount would be paid with interest at the rate of 12% per annum if the corporate debtor failed to purchase the products worth Rs. 1 crore over four years, amounts to financial debt under section 5(8) of the IBC. The present appeal has been filed under section 61 of the Insolvency and Bankruptcy Code, 2016 (IBC) against an order passed by the National Company Law Tribunal (NCLT) by which an application under section 7 of the IBC was admitted. The Appellant submitted that the application under Section 7 was not maintainable because the debt in question was in respect of the provision of goods or services which clearly falls within the definition of operational debt. Per contra, the Respondent submitted that Corporate Debtor (CD) had issued a promissory note dated 21.03.2018 by which it had agreed to pay Rs. 35 lakh alongwith interest @ 12% p.a. in case of default which is sufficient to establish that the amount of Rs. 35 Lakh was a financial debt and not an operational debt. The Tribunal noted that an agreement was entered into between the parties in which the Corporate Debtor took financial assistance from PPG Asian Paints Pvt. Ltd.(PPGAP) for sales and promotion of specialised painting equipment to upgrade its automotive painting facilities. In response, the PPGAP made an upfront payment of Rs. 35 lakhs which was secured by a demand promissory note. It further held that the note contained a clause that if the corporate debtor failed to procure the materials worth Rs.1 crore over four years, the amount would be repaid with interest of 12% per annum. Given the commercial arrangement and the financial liability involved, the transaction in question clearly falls within the definition of the financial debt under section 5(8) of the IBC. It further observed that it is not the case of the Appellant that the amount was given to purchase goods or services. The Appellant's argument that the subject matter of debt has some connection with the goods in the transaction would attract section 5(21) of the IBC cannot be accepted. The Supreme Court in Global Credit Capital Ltd held that to determine whether the transaction amounts to financial or operational debt, the real nature of the transaction must be assessed. Accordingly, the present appeal was dismissed. Case Title: Dhruv Harjai Versus PPG Asian Paints Pvt. Ltd. & Ors. Case Number: Company Appeal (AT) (Ins.) No. 60 of 2023 & I.A. No. 224, 225, 476, 3871 of 2023 & 5221 of 2024 Judgment Date: 15/07/2025 For Appellant : Mr. Adhitya Srinivisan, Mr. Rishabh Kanojiya, Mr. Srajan Tyagi, Mr. Ankur Das, Advocates. For Respondents : Mr. Yashvardhan, Mr. Piyush Singh, Mr. Shubham Raj, Mr. Ayush Kumar, Advocates for R-1. Mr. Shailendra Singh, Mr. Abhyuday Dhasmana, Advocates for HDFC Bank. Click Here To Read/Download The Order

Upfront Payment Payable By Corporate Debtor With Interest On Breach Of Agreement Terms Amounts To Financial Debt U/S 5(8) Of IBC: NCLAT

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Upfront Payment Payable By Corporate Debtor With Interest On Breach Of Agreement Terms Amounts To Financial Debt U/S 5(8) Of IBC: NCLAT

Mohd Malik Chauhan

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