Pranav B Prem

The National Company Law Tribunal (NCLT), New Delhi Bench – Court IV, has held that a debt arising out of a structured supply chain finance facility does not fall within the ambit of “financial debt” under Section 5(8) of the Insolvency and Bankruptcy Code, 2016. The decision came in a petition filed by Prudent ARC Limited, seeking initiation of the Corporate Insolvency Resolution Process (CIRP) against the corporate debtor for a claimed default of ₹3.17 crore.

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The bench comprising Shri Manni Sankariah Shanmuga Sundaram (Judicial Member) and Shri Atul Chaturvedi (Technical Member) observed that the essential nature of the transaction was operational, despite being assigned to an asset reconstruction company. The Tribunal dismissed the petition, holding that the transaction did not satisfy the criteria of a financial debt as defined under Section 5(8) of the Code.

The proceedings were initiated by Prudent ARC Limited, an assignee of the original creditor UGRO Capital Limited. The corporate debtor had obtained supply chain financing from UGRO to facilitate the supply of goods to Hema Engineering Industries Limited (HEMA). As per the structure of the transaction, the sale proceeds from HEMA were to be deposited directly into UGRO’s designated account, and eventually, after assignment, into the account of Prudent ARC.

As per the agreement, in the event of default by HEMA, the obligation to repay the dues would fall upon the corporate debtor. Upon HEMA's default, the applicant issued a demand notice to the corporate debtor, which remained unanswered, prompting the filing of the present petition.

The corporate debtor, however, opposed the maintainability of the petition on the ground that the debt in question did not constitute a “financial debt” within the meaning of Section 5(8) of the IBC. It was argued that the transaction was essentially a vendor invoice discounting arrangement, structured to finance the supply of goods, and did not involve any disbursement for time value of money. The debtor further pointed out that its obligation was contingent—arising only if HEMA failed to pay—and not a direct financial arrangement between the applicant and the corporate debtor.

The corporate debtor relied on Section 21(5) of the IBC, which provides that the character of an operational debt does not change even upon assignment to a financial institution. It was submitted that the applicant was attempting to elevate an operational debt to the status of financial debt by relying on assignment, which was not permissible under law.

In assessing the nature of the transaction, the Adjudicating Authority found that the objective of the arrangement was to ensure seamless supply of goods to HEMA. The financing was structured in such a manner that UGRO advanced funds to the suppliers of HEMA, thereby facilitating the procurement process for HEMA. The Tribunal noted that this structure did not embody the essential element of “time value of money” required under Section 5(8) of the IBC for a debt to qualify as financial.

The Tribunal further referred to the ruling of the National Company Law Appellate Tribunal (NCLAT) in Minions Ventures Pvt. Ltd. v. TDT Copper Ltd [Company Appeal (AT) (Ins) No. 572 of 2022]., which reaffirmed that invoice discounting transactions, even if recourse-based or assigned, do not become financial debts unless the disbursement is made for the time value of money.

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It was also highlighted that UGRO Capital’s own claim in the CIRP of HEMA had been admitted as an operational debt and not challenged. This reinforced the conclusion that the nature of the debt remained operational, and its assignment to the applicant did not alter its intrinsic character. On the basis of these findings, the Tribunal concluded that there was no financial debt in existence between the applicant and the corporate debtor, and hence, the application under Section 7 of the IBC was not maintainable. Accordingly, the application was dismissed.

Appearance

For the Applicant: Mr. Sumeet Raj, Mr. Siddharth Shankar, Ms. Akanksha, Mr. Sharique Ajmal, Advs.

For the Respondent: Mr. Rishabh Arora, Adv.

Cause Title: Prudent ARC Limited V. Karan Automibiles

Case No: Restored Company Petition (IBC) /22/ND/2024 (Old Case CP (IB)/60/ND/2023)

Coram: Shri Manni Sankariah Shanmuga Sundaram [Member-Judicial], Shri Atul Chaturvedi [Member-Technical]