NCLT New Delhi: Operational Debt Arising from Advance Payment Cannot Be Treated as Financial Debt via Subsequent Loan Agreement
Pranav B Prem
The National Company Law Tribunal (NCLT), New Delhi Bench (Court-IV), comprising Shri Manni Sankariah Shanmuga Sundaram (Judicial Member) and Shri Atul Chaturvedi (Technical Member), has held that an operational debt cannot be converted into a financial debt merely by the execution of a subsequent agreement between the parties. The Tribunal emphasized that permitting such conversions would defeat the core objectives of the Insolvency and Bankruptcy Code, 2016 (IBC), and open the floodgates to potential misuse.
The order was passed in Company Petition (IB) No. 771 of 2024, filed under Section 7 of the IBC by M/s IPK Exports Private Ltd, seeking to initiate Corporate Insolvency Resolution Process (CIRP) against M/s HSB Home Solutions Ltd for a claimed default of ₹3,06,09,874/-, including principal and interest. The Applicant contended that the amount was originally advanced during the financial year 2011–2012 for the supply of materials. Upon the Respondent’s continued failure to deliver the goods or refund the money, the parties entered into a Loan Agreement dated 15.04.2022, reclassifying the outstanding amount as a financial loan repayable with 24% interest.
The Financial Creditor claimed that the Loan Agreement converted the advance into a financial debt within the meaning of Section 5(8) of the IBC, thereby making the applicant a financial creditor under Section 5(7). It submitted that despite notices and reminders, the Corporate Debtor failed to make the repayment, and even acknowledged its liability in several correspondences, including its inability to refund the amount due to financial distress.
The Respondent, on the other hand, opposed the application stating that it was malafide, frivolous, and based on false claims. It denied the authenticity of the Loan Agreement and argued that the petition was not maintainable.
The key issue before the Tribunal was the classification of the debt: whether it could be treated as a financial debt due to the execution of the Loan Agreement, even though the original disbursement was clearly an operational advance for supply of materials.
Upon a thorough review of the facts and the nature of the initial transaction, the Tribunal observed that the payment made by the Applicant was an advance for goods and services, and therefore, qualified as an operational debt under Section 5(21) of the IBC. The Tribunal stressed that such operational debt cannot be retrospectively recharacterized as a financial debt by simply executing a later agreement, as doing so would blur the legislative distinction between financial and operational creditors, which is central to the IBC framework.
Quoting from the Supreme Court’s observations in Swiss Ribbons Pvt. Ltd. v. Union of India [Writ Petition (Civil) No. 99 of 2018], the Tribunal highlighted that safeguards exist to prevent companies from being dragged into insolvency proceedings without legitimate cause, and misuse of the Code must be prevented.
The NCLT further noted that the manner in which the alleged conversion was carried out, along with the terms of the Loan Agreement, raised serious doubts about its genuineness and suggested the possibility of collusion. It concluded that recognizing such debt conversions would undermine the statutory intent of the IBC and compromise its purpose. Accordingly, the Tribunal dismissed the petition as not maintainable, holding that the applicant did not qualify as a financial creditor under the Code.
Appearance
For the Applicant: Mr. Akshay Joshi, Advocate
For the Respondent: Mr. Praveen Singh, Advocate
Cause Title: M/s IPK Exports Private Ltd V. M/s HSB Home Solutions Ltd
Case No: Comapny Petition (I.B.) No. 771 OF 2024
Coram: Shri Manni Sankariah Shanmuga Sundaram [Judicial Member], Shri Atul Chaturvedi [Technical Member]
