Pranav B Prem

The National Company Law Appellate Tribunal (NCLAT), Principal Bench, New Delhi, has held that a Non-Banking Financial Company’s (NBFC) failure to comply with Reserve Bank of India (RBI) guidelines cannot deprive a transaction of its status as a financial debt under Section 5(8) of the Insolvency and Bankruptcy Code (IBC), or prevent the filing of an application under Section 7 of the Code. A Bench comprising Justice Ashok Bhushan (Chairperson) and Barun Mitra (Technical Member) observed that the real nature of the transaction and the time value of money must determine whether a financial debt exists, irrespective of procedural breaches of RBI circulars.

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Background

The appeal was filed by Sinki Commodities Pvt. Ltd., an NBFC, challenging the order dated March 31, 2022, passed by the NCLT Kolkata Bench, which had dismissed its Section 7 application against ABC Floors Pvt. Ltd. The Adjudicating Authority had rejected the petition on the ground that the NBFC had not complied with the RBI Fair Practices Code, which required issuance of a written sanction letter specifying the sanctioned amount, interest rate, and terms of repayment. The NCLT, while acknowledging that the disbursement of ₹1.6 crore was made to the corporate debtor with an agreed interest of 8% per annum, held that the lack of documentation and non-compliance with RBI guidelines meant the nature of the transaction could not be classified as a financial debt.

Appellant’s Contentions

On appeal, Sinki Commodities contended that a written contract is not a pre-condition to establish a financial debt under Section 5(8) of the IBC. It pointed out that the corporate debtor had admitted the receipt of the amount and the agreed rate of interest in its own pleadings. The appellant relied on Agarwal Polysacks Ltd. v. K. K. Agro Foods & Storage Ltd. [Company Appeal (AT) (Insolvency) No. 1126 of 2022], where the Tribunal had held that the absence of a formal written agreement does not negate the existence of financial debt.

Respondent’s Contentions

The respondent argued that the appellant, being an NBFC, was statutorily bound by RBI circulars to issue a written sanction letter and communicate loan terms to the borrower. Relying on the Supreme Court’s decision in Nedumpilli Finance Company Ltd. v. State of Kerala (2022) 7 SCC 394, it was submitted that RBI directions are statutory and mandatory, and that non-compliance renders the transaction irregular. The respondent also contended that the loan arrangement had been novated, as new post-dated cheques were issued for a later repayment schedule.

Findings of the Tribunal

After examining the documents, the NCLAT noted that the disbursement of ₹1.6 crore and the payment of interest at 8% per annum were both admitted facts. It referred to the borrower’s own letters confirming receipt of funds, the TDS Form 16A showing deduction of interest, and the confirmation of accounts reflecting loan interest entries. The Bench reiterated that for a debt to qualify as a financial debt, it must involve commercial borrowing and the time value of money. The absence of a formal written agreement could not outweigh the evidence proving such a transaction.

Significantly, the Tribunal clarified that while RBI guidelines are statutory and binding, a breach of such directions cannot alter the legal character of a debt that otherwise satisfies the definition of financial debt under Section 5(8) of the IBC. It emphasized that the Insolvency Code is a special legislation, and the existence of financial debt must be determined independently of RBI’s procedural framework. Citing the Supreme Court’s ruling in Global Credit Capital Ltd. v. Sach Marketing (P) Ltd. (2024) 9 SCC 482, the NCLAT underscored that the substance of the transaction, and not merely the presence of formal documents, determines whether a debt is financial in nature.

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Holding that Sinki Commodities had successfully established the existence of a financial debt and default by the corporate debtor, the Bench set aside the NCLT’s order and allowed the appeal. The Tribunal directed ABC Floors Pvt. Ltd. to repay ₹1.6 crore along with 8% interest per annum within three months, and to submit proof of payment before the Adjudicating Authority. It further directed that, if the amount is not repaid within the stipulated period, the NCLT shall admit the Section 7 application in accordance with law.

Appearance

For Appellant: Ms. Sadapurna Mukherjee, Advocate.

For Respondents: Mr. Abhishek Anand, Mr. Ashish Choudhury, Mr. Akash Agarwal, Mr. Abhishek Arora, Mr. Anand Kamal and Ms. Prachi Grover, Advocates.

Cause Title: Sinki Commodities Pvt. Ltd v. ABC Floors Pvt. Ltd.

Case No: Company Appeal (AT) (Insolvency) No. 783 of 2022

Coram: Justice Ashok Bhushan (Chairperson), Barun Mitra (Technical Member)