Default in completing payment for property purchase not financial debt under IBC: NCLAT

The National Company Law Appellate Tribunal (NCLAT) has ruled that a default in completing the payment of sale consideration for the purchase of immovable property would not constitute a financial debt under the Insolvency and Bankruptcy Code (IBC) [Sandeep Mittal v.ASREC and Ors]..The disbursal of property does not constitute a financial debt and there should be a disbursal of money to constitute such a debt under the IBC, the NCLAT's principal Bench in Delhi explained. A Bench of Chairman Justice Ashok Bhushan and technical members Barun Mitra and Arun Baroka passed the ruling while reversing an order by the National Company Law Tribunal (NCLT), Ahmedabad Bench.The appellate tribunal referred to a Supreme Court ruling to clarify the scope of "disbursement" under Section 5(8) of the IBC, which defines a "financial debt."The top court in the case of Pioneer Urban and Infrastructure Ltd. emphasized that disbursement, as outlined in this Section, specifically pertains to the release of money, which is made in exchange for consideration based on the time value of money. In particular, paragraphs 70 and 71 of the Supreme Court judgment affirmed that the term “disbursed” is defined as money paid against consideration for the time value of money (loans). In view of this judgment, the NCLAT said that, "The above pronouncement of the Hon’ble Supreme Court is clear and disbursal of property as suggested by learned Counsel for Respondent No.1, cannot be accepted to be covered by definition of ‘financial debt’ under Section 5, sub-section (8).”.The matter before the NCLAT concerned transactions entered into by Shree Industries Ltd (SIL), which had purchased certain secured assets (land) that used to belong to Ganpati Pulp and Paper Ltd (GPPL).These assets had been taken over by the Gujarat State Financial Corporation (GSFC) upon the default of certain loans by GPPL. GSFC took possession of these secured assets on October 22, 1986. GSFC then issued a sale notice on August 27, 1990, to auction the assets.Rama Finance Ltd. (now Shree Industries Limited) emerged as the highest bidder, offering ₹3.88 crores. An agreement dated November 27, 1990, detailed that SIL would pay ₹50 lakhs upfront and the remaining ₹3.38 crores in 20 quarterly installments over five years.This agreement was between SIL (purchaser) on one side and GFSC acting on behalf of itself and as an agent for other creditors of GPPL, namely GIIC, Bank of Baroda and Dena BankHowever, SIL was unable to comply with these terms and was declared a sick industrial company in 1997.A one-time settlement was later reached between GSFC and SIL in respect of the remaining payments. However, disputes over these payments persisted.Meanwhile, ASREC (India) Ltd., acquired a portion of Bank of Baroda's share in the property sale transaction. In March 2021, ASREC issued a default notice claiming an outstanding amount of ₹92.35 crores as of June 2022.Subsequently, ASREC filed a Section 7 application before the NCLT on November 23, 2022, asserting that SIL had defaulted on its financial obligations..The central issue was whether the transaction between GSFC and SIL should be classified as financial debt under Section 5(8) of the IBC.The NCLT, Ahmedabad Bench, had initially admitted the Section 7 application, interpreting the 1990 sale agreement as involving a financial debt since it involved structured payments in installments.However, the NCLAT overruled this decision. The appellate tribunal emphasized that the definition of "financial debt" under Section 5(8) of the IBC requires the disbursal of money rather than property."From the perusal of letter dated 07.11.1990, Agreement dated 27.11.1990, Guarantee Deed dated 12.12.1990, it is amply clear that transaction between parties was transaction of sale and purchase of the assets of GPPL and the proceedings initiated by Financial Creditor – Respondent No.1 (ASREC) were for recovery of balance purchase price, which do not involve any financial debt," the NCLAT added..Senior Advocates Krishnendu Datta and Ratan Singh, with Advocates Rahul Gupta, Pallavi Anand appeared for the appellant, a suspended director of SIL, Sandeep Mittal,Senior Advocate Vibha Datta Makhija with Advocates Usha Singh, Shahrukh Inam, Karan, Goeta, Nidhi Mehrotra, Rajesh, Karan Mamgain, Advocates represented ASREC (India) Ltd.Advocates Ravi Raghunath, Vishal Ganda, and Srijan Jain appeared for the Interim Resolution Professional appointed by the NCLT, Gaurav Singhal, who also appeared in person. Senior Advocate Gaurav Mitra, with Advocates Pervinder, Shikher Upadhyay, Lavanya appeared for GIIC..[Read Judgment]