NCLT cannot get into “disputed question of fact”: Mumbai Bench

While admitting an insolvency application against a corporate debtor, the NCLT followed the principles laid down by the NCLAT in Nikhil Mehta and Sons v. AMR Infrastructure Ltd. for determining what constitutes a ‘financial debt’. The NCLT has reiterated its stance that, it is only legal forum to deal ‘summarily’ with the insolvency proceedings..Vijay Rochlani (Petitioner) extended ‘financial assistance’ of Rs. 55 lakh to the Shanti Exim Ltd (Corporate Debtor). The sum was paid during December 2016 with a promise of repayment by March 2017. The Corporate Debtor repaid Rs. 5 lakh of the total amount by March 2017 and promised to pay the balance by December 2017. The Corporate Debtor further offered an interest of 12% p.a. for the remaining amount of Rs. 50 lakh till final repayment. After paying interest for three quarters, the Corporate Debtor stopped making any payments thereafter. For the remaining amount, after several reminders, the Petitioner filed an application as a financial creditor..The Corporate Debtor’s defence to an insolvency application filed by Petitioner was that the sum in dispute was not in the nature of a loan but was an ‘internal family arrangement’. Petitioners’s wife, is the sister of the two directors of the Corporate Debtor. Due to divorce proceedings (between the Petitioner and his wife) pending before the Family Court, the directors of the Corporate Debtor (brothers of the Petitioner’s wife) argued that the balance money was being retained in an escrow account until determination of divorce proceedings for purposes of ‘alimony’..The NCLT, while admitting the petition, noted three elements to conclude that the nature of this transaction was a `financial debt’-.1) Transfer of money has the element of payment of interest;.2) Corporate Debtor has recorded this debt as `Short Terms Borrowings’, indicating it is a financial liability and;.3) TDS was deducted as and when interest was paid..The NCLT also observed that the Corporate Debtor undisputedly recorded in its books of accounts this transaction under the head ‘liability’. The corporate debtor’s argument was that the recording in the books of accounts do not change the very nature of the transaction, which was received from the Petitioner with an understanding that the amount was having the character of maintenance of his wife against matrimonial responsibility..In response, the NCLT noted,.“In my opinion, an entry recorded in the books of accounts is to be narrated in the light of the surrounding circumstances and the action taken either by the depositor or by the receiver. In this case, an important fact cannot be ignored that on receiving the amount in question the Debtor Company had treated the impugned amount as a loan and thereupon undisputedly deducted Tax at Source on payment/ accrual of Interest.”.The NCLT further held that it cannot go into the complex question of dispute over a debt or a claim and is a legal forum to deal summarily the insolvency proceedings. The NCLT held,.“the Tribunal cannot enter into the disputed question of fact which could be resolved only through formal proceedings of a Civil Court. As against that, the distinguishable feature is that the family dispute among husband and wife has nothing to do with the impugned transaction of a transfer of money from the Petitioner in the accounts of the Debtor company.”.The ’cause of action’ for insolvency petition is the occurrence of default,.“In the present case, the cause of action had arisen when the Debtor company had refused to return the loan. However, in the Civil proceedings the cause of action is in operation when the litigating parties file a suit of divorce. Both the legal proceedings are independent having no nexus with each other, therefore, can be independently adjudicated by two different judicial forum.“.Advocate Madhavi Nalluri and Deep Shridharani appeared for the Petitioner, whereas Zubin Behramkamdin and Vyom Shah appeared for the Corporate Debtor..(Read the order)