Introduction
In the case of ICICI Prudential Real Estate AIF I v. Nandi Vardhan Infrastructure Limited[i], the National Company Law Tribunal (‘NCLT’) held that amounts payable by the successful resolution applicant under the approved resolution plan (‘Plan’) do not constitute financial debt. Failure to pay such amounts does not constitute a default for the purpose of s. 7 proceedings under the Insolvency and Bankruptcy Code, 2016 (‘IBC’).
Facts
ICICI Prudential Real Estate AIF I (‘Applicant’) had subscribed to non-convertible debentures of Sunshine Housing and Infrastructure Private Limited (‘SHIPL’).
SHIPL defaulted in repaying these amounts. The Applicant, accordingly, initiated insolvency proceedings against SHIPL by filing an application under s. 7 of the IBC.
Nandi Vardhan Infrastructure Limited, the corporate debtor (‘CD’), submitted its Plan, which received approval from the creditors of SHIPL. The Plan stipulated that the financial debt be partially discharged within a six-month period. It provided that the CD would pay Rs. 5 crores to the Applicant.
However, despite a demand notice issued by the Applicant, the CD failed to pay Rs. 5 crores within the stipulated time limit. On continued failure to pay these amounts, the Applicant initiated insolvency proceedings against the CD under s. 7 of the IBC.
Contention of the Parties
The Applicant contended that the financial debt has arisen on account of the Plan submitted by the CD in respect of insolvency proceedings against SHIPL.
The Applicant further argued that even in the absence of a disbursement for the time value of money, the amount of Rs. 5 crores can be regarded as the definition of financial debt under the IBC is very wide. In this regard, the Applicant relied on decisions in the case of Pioneer Urban Land and Infrastructure Limited and another v. Union of India and others[ii] and Orator Marketing Private Limited v. Samtex Desinz Private Limited[iii].
The Applicant also argued that the Plan took over SHIPL's liabilities. Therefore, the amounts payable by the CD are to be regarded as a financial debt for the purpose of application under s. 7 of the IBC.
The Applicant also argued that the promise to pay the amounts under the Plan amount to a guarantee. Therefore, such guarantees are covered under the definition of 'financial debt’ as defined under IBC.
On the other hand, the CD contended that since the Applicant did not disburse Rs. 5 crores, there cannot be a default in repayment of the said amount, and hence, the said amount cannot be treated as a financial debt. Further, the CD also argued that the amounts do not qualify as financial debt as they were not disbursed against the time value of money.
The CD also argued that the non-implementation of the resolution plan was beyond its control. Non-payment cannot be said to be a default with respect to any financial debt due to the Applicant.
Observations made by NCLT
The NCLT held that the undertaking or promise made in the Plan to pay a specified amount to creditors or stakeholders does not constitute ‘financial debt’ as defined under the IBC. The NCLT highlighted that financial debt pertains to loans or credit facilities that are disbursed for the time value of money and have a defined repayment schedule.
The NCLT held that if there is a failure to pay the amounts mentioned in the resolution, there are certain consequences under IBC that follow. However, the same cannot be equated with the expression financial debt.
The case laws cited by the Counsel do not support the classification of the debt invoked in this petition as financial debt under s. 5(8) of the IBC.
The NCLT also held that the promise to pay amounts under a successful Plan cannot be equated with a corporate guarantee. The NCLT held that the case laws relied upon by the Applicant do not support the view that the amounts payable under the approved Plan amount to a financial debt under IBC.
Conclusion
The NCLT’s observation that the amounts payable under the approved Plans are not ‘financial debt’ under IBC is based on a strict interpretation of the provisions of IBC. The NCLT is correct in observing that equating the amounts payable under a successful Plan with financial debt is far-fetched. The provisions of IBC contain sufficient safeguards in case the approved resolution plan is not implemented. Therefore, sufficient rights and remedies are available to financial creditors under IBC, which may be pursued.
End Notes
[i] C.P. (IB) – 276(MB)2023.
[ii] 2019 SCC Online SC 1005.
[iii] 2021 SCC Online SC 513.
Authored by Adhijeet Neogy Metalegal Advocates. The views expressed are personal and do not constitute legal opinions.