NCLAT Rules, Unadjusted Trade Advance Payable With Interest Rate Qualifies As Financial Debt U/S 5(8) Of IBC
Pranav B Prem
The National Company Law Appellate Tribunal (NCLAT), Principal Bench, New Delhi, comprising Justice Rakesh Kumar Jain (Judicial Member), Mr. Naresh Salecha (Technical Member), and Mr. Indevar Pandey (Technical Member), has held that an unadjusted trade advance which carries an interest obligation qualifies as a "financial debt" under Section 5(8) of the Insolvency and Bankruptcy Code, 2016 (IBC), since it involves consideration for time value of money. The Tribunal further held that a Section 7 application filed on such grounds is maintainable if it falls within the limitation period, taking into account exclusions granted by the Supreme Court during the COVID-19 pandemic.
Background
The appeal was filed by Akzo Nobel India Ltd. under Section 61 of the IBC against the order dated 04.07.2023 passed by the National Company Law Tribunal, New Delhi Bench-II. The NCLT had dismissed the Section 7 application filed by Akzo Nobel on the ground that it was barred by limitation, although it had accepted that the appellant was a financial creditor of the corporate debtor, Stan Cars Pvt. Ltd.
The dispute arose out of an agreement dated 21.11.2017, through which the appellant extended a trade advance of ₹2.4 crore to the respondent. This amount was to be adjusted over a five-year period against purchase orders worth ₹6.5 crore. The agreement also included a provision that any unadjusted amount would be treated as a loan carrying interest at 12% per annum.
Despite the agreement, the respondent was only able to conduct business worth approximately ₹40 lakhs. Consequently, Akzo Nobel filed a Section 7 petition on 28.10.2022 seeking initiation of Corporate Insolvency Resolution Process (CIRP). The NCLT dismissed the application on the ground that it was filed beyond the three-year limitation period.
Contentions
The appellant contended that a trade advance carrying interest satisfies the condition of time value of money and therefore falls within the ambit of financial debt under Section 5(8) of the IBC. It also argued that an email sent by the respondent on 27.12.2019 constituted an acknowledgment under Section 18 of the Limitation Act, thereby extending the limitation period.
Alternatively, the appellant submitted that the limitation period must be calculated after excluding the COVID-19 period in line with the directions of the Supreme Court in its suo motu Writ Petition (C) No. 3 of 2020. Based on this exclusion, the date of filing the application (28.10.2022) was within the extended limitation period.
The respondent, however, argued that the agreement was essentially a trade contract and the advance was operational in nature. It was contended that the trade advance was supposed to be adjusted as a trade discount and not treated as a loan. The respondent also challenged the authenticity of the agreement and claimed that a civil suit seeking declaration of the agreement as invalid was already pending. Further, it was argued that the email dated 27.12.2019 did not amount to an acknowledgment of debt.
Observations and Findings
The Tribunal first addressed the nature of the advance and upheld the NCLT’s finding that the appellant was a financial creditor. Referring to Clause 7 of the agreement, the Tribunal highlighted that any unadjusted trade advance was deemed to be a loan and carried interest at 12% per annum from the date of disbursal until full repayment. This clause, in the view of the Tribunal, clearly established the element of time value of money, which is a key requirement for classifying an obligation as financial debt under Section 5(8) of the Code.
The Tribunal noted that the objective of the trade advance was to facilitate the installation of capital equipment for business operations, and the agreement provided for interest in the event of failure to meet annual purchase targets. Accordingly, the debt was financial in nature.
On the issue of limitation, the Tribunal rejected the appellant’s contention that the email dated 27.12.2019 amounted to an acknowledgment under Section 18 of the Limitation Act, stating that the communication was vague and did not clearly acknowledge a subsisting debt.
However, the Tribunal accepted the appellant’s alternative argument regarding the exclusion of the COVID-19 period. Referring to the Supreme Court’s order in the suo motu Writ Petition (C) No. 3 of 2020, the Tribunal observed that the limitation period from 15.03.2020 to 28.02.2022 stood excluded. Accordingly, the revised end date of limitation was computed as 06.11.2023. Since the Section 7 petition was filed on 28.10.2022, it was held to be within the limitation period.
The Tribunal also dismissed the respondent’s argument that the proceeding was an attempt to enforce a contract or recover damages. It reiterated that once a financial debt and default are established and the corporate debtor is unable to repay, CIRP can be validly initiated.
Verdict
The NCLAT held that the unadjusted trade advance extended by Akzo Nobel India Ltd. constituted a financial debt under Section 5(8) of the IBC. It further held that the Section 7 application was filed within limitation after accounting for the COVID-19 period excluded by the Supreme Court’s directions. Accordingly, the appeal was allowed, the impugned order set aside, and the matter was remanded to the NCLT for admission of the insolvency petition.
Appearance
For Appellant: Mr. A.S Likhari, Advocate.
For Respondents: Mr. Ashraf Belal, Advocate.
Cause Title: Akzo Nobel India Ltd. V. Stan Cars Pvt. Ltd.
Case No: Company Appeal (AT) (Ins.) No. 1294 of 2023
Coram: Justice Rakesh Kumar Jain [Judicial Member], Mr. Naresh Salecha [Technical Member], Mr. Indevar Pandey (Technical Member)
