Once ‘Debt’ is converted into ‘Capital’ it cannot be termed as ‘Financial Debt’ and the Appellant cannot be described as ‘Financial Creditor’: NCLAT
The National Company Law Appellate Tribunal (NCLAT) has ruled that once ‘Debt’ is converted into ‘Capital’ it cannot be termed as ‘Financial Debt’ and the Appellant cannot be described as ‘Financial Creditor’.In this case, the Appellant had given a loan of Rs. 40 lakhs to the Respondent which was to be repaid in four instalments. The Respondent did not repay the Principal...
The National Company Law Appellate Tribunal (NCLAT) has ruled that once ‘Debt’ is converted into ‘Capital’ it cannot be termed as ‘Financial Debt’ and the Appellant cannot be described as ‘Financial Creditor’.
In this case, the Appellant had given a loan of Rs. 40 lakhs to the Respondent which was to be repaid in four instalments. The Respondent did not repay the Principal amount or the interest. She also alleged that the loan has been converted into equity, which is against the terms and conditions of ‘Loan Agreement’. She further averred her late husband had also invested Rs.1 Crore and that he had not been repaid either principal amount or interest amount. She also asserted that she is a ‘Financial Creditor’.
She had initially approached the National Company Law Tribunal (NCLT) which did not entertain her claim in terms of Section 7 (5) of the Insolvency and Bankruptcy Code, 2016 (IBC) and rejected her petition on the ground that the Appellant is not a ‘Financial Creditor’.
The appellant therefore raised an appeal before the NCLAT. Her appeal has been filed under Section 61 read with Section 7 of the IBC.
The Respondent submitted the Auditor certificate certifying the investment as capital contribution that included the name of the Appellant also. The Respondent thus submitted that the Appellant is not a Financial Creditor rather a related party and hence in no way she can be treated as a ‘Financial Creditor’ etc.
Section 5(7) of the IBC defines “Financial creditor” as any person to whom a financial debt is owed and includes a person to whom such debt has been legally assigned or transferred to.
The appellate authority held that the provisions of Section 7 of the IBC 2016 provides for initiation of the Corporate Insolvency Resolution Process (CIRP) by a ‘Financial Creditor only and that too, if there is a ‘Debt’ and ‘Default’. The NCLAT therefore observed that, “From the above provisions of law, it is latently & patently clear that once the ‘Debt’ is converted into ‘Capital’ it cannot be termed as ‘Financial Debt’ and the Appellant cannot be described as ‘Financial Creditor’.”
The NCLAT dismissed the case observing that the grievance of the Appellant does not fall under the provision of ‘Insolvency and Bankruptcy Code, 2016’.
Justice Venugopal M. – Member (Judicial) and Dr. Ashok Kumar Mishra – Member (Technical) presided over the case.