Dues Arising From TReDS Transactions Are Operational Debt, Not Financial Debt: NCLT Jaipur

The National Company Law Tribunal (NCLT) at Jaipur has dismissed Bank of Maharashtra's insolvency plea (section 7) against Ashiana Ispat Limited. The tribunal held that dues arising from invoice discounting transactions undertaken through the Trade Receivables Discounting System (TReDS) were operational debt and not financial debt.

The order was passed by Judicial Member Reeta Kohli and Technical Member Kavita Bhatnagar.

The tribunal observed:

“The definition of Operational Creditor includes any person to whom such operational debt has been legally assigned or transferred which in this case has been done through TReDS platform and the financing has been done by the Financial Creditor. Therefore, the debt of by the Corporate Debtor is an operational debt within the meaning of 5(21) of the Code. “

Bank of Maharashtra had approached the Tribunal seeking initiation of CIRP against Ashiana Ispat over an alleged default of approximately ₹5.75 crore.

The bank contended that it had extended a Bill Discounting Facility of ₹6 crore to the corporate debtor through the Trade Receivables Discounting System (TReDS) platform. Under the arrangement, suppliers SKN Steel India LLP and Shri Balaji Polymers Private Limited. uploaded invoices on the TReDS platform, which were accepted by the corporate debtor. Pursuant to this, the bank financed the invoices by disbursing funds directly to the suppliers.

According to the bank, upon discounting of the invoices, the corporate debtor became liable to repay the discounted amounts along with interest and other charges. It argued that despite repeated demands and an acknowledgment of dues, the corporate debtor failed to clear the outstanding amount.

Ashiana Ispat opposed the petition, contending that the transactions were reverse factoring transactions under TReDS mechanism, where funds were paid directly to suppliers and not to the corporate debtor. It argued that the claim arose from trade receivables for supply of goods and therefore amounted to operational debt, not financial debt, making the Section 7 petition not maintainable.

Examining the TReDS framework and the Master Buyer Agreement executed between the parties, the Tribunal observed that under reverse factoring, a financier pays the supplier against approved invoices and subsequently acquires the right to recover the receivable from the corporate debtor.

“If the Buyer fails to make payment on the due date, such failure constitutes a default, which may be reported in accordance with applicable laws, and the Financier becomes entitled to enforce its legal rights directly against the Buyer for recovery of the amount due. “ it observed

The Tribunal held that for a debt to qualify as financial debt under Section 5(8) of the IBC, there must be disbursement against consideration for the time value of money. It noted that no funds were directly disbursed to Ashiana Ispat, and the bank had merely stepped in to finance the suppliers.

Relying on the NCLAT's ruling in Canbank Factors Ltd. v. Brijesh Singh Bhaduria (RP), the bench observed that assignment of receivables through TReDS does not alter the underlying nature of the debt.

Holding that the debt in question was operational and not financial in nature, the Tribunal dismissed the petition.

For Petitioner: Advocates Nitesh Agarwal and Sachin Patil

For Respondent: Advocates Hemant Kothari and Shubham Vijay