Commercial Transactions Cannot Later Be Recharacterised As Financial Debt To Invoke IBC: NCLT Chennai

The Chennai Bench of the National Company Law Tribunal (NCLT) on 5 May held that parties cannot subsequently recharacterise ordinary commercial transactions as financial debt to invoke insolvency proceedings under the Insolvency and Bankruptcy Code, 2016 (IBC).

Judicial Member Jyoti Kumar Tripati and Technical Member Ravichandran Ramasamy dismissed Supreme Plascare India Private Limited's plea seeking initiation of the Corporate Insolvency Resolution Process (CIRP) against Shiroo Polymers Private Limited over an alleged default of Rs.1.13 crore after finding that it failed to establish the existence of a “financial debt” under the IBC. The Bench held:

“We are of the firm view that the nature of a debt is sacrosanct. The legal character of a transaction is determined at the time of its inception and cannot be shifted at the whims of the parties to suit the jurisdiction of this Adjudicating Authority. For a debt to be "Financial," the "time value of money" must be the triggering factor for the disbursement.”

Supreme Plascare India Private Limited filed the insolvency petition against Shiroo Polymers Private Limited and claimed that it had advanced short-term loans amounting to Rs. 1.13 crore to meet the latter's working capital requirements. The applicant relied on a NeSL report, ledger statements and bank statements to establish the debt and default.

Shiroo Polymers disputed the claim and contended that the parties shared a purely commercial relationship involving the supply of raw materials and purchase of finished goods. The company argued that the transfers reflected ordinary business transactions and that the actual amount transferred was only Rs. 99.13 lakh, below the statutory threshold. It further contended that the balance amount comprised interest that Supreme Plascare unilaterally added without any contractual basis.

After examining the material on record, the Tribunal found that the documents reflected an ongoing business-to-business relationship supported by purchase and sale invoices. It observed that a disbursement must involve the element of “time value of money” to qualify as a “financial debt” under the IBC. It held that the applicant bore the burden of proving that the transaction constituted a loan and not merely a payment arising from an ordinary commercial relationship.

The Bench also declined to rely on an unauthenticated NeSL report and the applicant's own ledger entries. It further held that a communication from Shiroo Polymers requesting Supreme Plascare to “consider” certain amounts as a loan could not alter the original character of the transactions.

The Tribunal also noted that the parties had not executed any loan agreement or board resolution and had not included any interest clause to show that the transferred amounts were intended as loans. On the issue of interest calculation, it held:

“Since the Applicant has failed to establish the existence of a financial contract or a provision for interest, the inclusion of such interest to cross the Rs. 1 Crore threshold appears legally untenable.”

Accordingly, the NCLT dismissed the application.

For Applicant: Advocate Rohan Rajasekharan

For Respondent: Advocate Athiban Vijay