Invoice Discounting Transaction Not Financial Debt Unless Disbursed for Time Value of Money: NCLT New Delhi
Invoice Discounting Transaction Not Financial Debt Unless Disbursed for Time Value of Money: NCLT New Delhi
Introduction
The National Company Law Tribunal (NCLT), New Delhi Bench-IV, has held that debt arising from a structured supply chain finance facility does not constitute 'financial debt' under Section 5(8) of the Insolvency and Bankruptcy Code (IBC), 2016.
Factual Background
The corporate debtor was involved in supplying goods to Hema Engineering Industries Ltd. (HEMA), for which UGRO Capital Limited provided supply chain financing. As per the agreement, HEMA was instructed to deposit the sale consideration directly into the account of the applicant, Prudent ARC Limited.
The agreement further stated that in case of any default by HEMA, the liability would devolve on the corporate debtor.
Procedural History
The applicant, Prudent ARC Limited, filed a petition to initiate Corporate Insolvency Resolution Process (CIRP) against the corporate debtor for a default of ₹3.17 crore.
The financial debt was assigned to the applicant by UGRO Capital Ltd.
Contentions of the Parties
Applicant’s Contentions: The applicant contended that the debt arising from the structured supply chain finance facility constitutes financial debt under Section 5(8) of the IBC.
Respondent’s Contentions: The corporate debtor argued that the primary obligation to pay was on HEMA, and its own liability would arise only upon HEMA's failure to make the payment.
It emphasized that the petition was based on a vendor invoice discounting arrangement, which does not qualify as financial debt.
The respondent also submitted that Section 21(5) of the IBC clarifies that operational debt retains its nature even when assigned to a financial creditor.
Observations of the Adjudicating Authority
The NCLT Bench, comprising Shri Manni Sankariah Shanmuga Sundaram (Member-Judicial) and Shri Atul Chaturvedi (Member-Technical), held that the substantive character of the transaction was operational, as the funds were advanced to facilitate supply of goods and services, not for the time value of money.
The Tribunal relied on the NCLAT ruling in Minions Ventures Pvt. Ltd. v. TDT Copper Ltd., reaffirming that invoice discounting transactions, even if assigned or structured with recourse, are not financial debts unless disbursed specifically for the time value of money.
Reasoning & Analysis
The Tribunal noted that HEMA Engineering was the buyer and had the primary payment obligation, while the corporate debtor’s fallback liability did not transform the arrangement into a financial loan.
Importantly, the Tribunal highlighted that UGRO Capital's claim in HEMA’s own CIRP was admitted as operational debt and never challenged—supporting the view that the same debt, when assigned, does not become a financial debt.
Implications
The decision sets a precedent in distinguishing operational vs. financial debt under structured financing. It clarifies that supply chain finance, especially in the form of invoice discounting, will not automatically qualify as financial debt unless the criteria under Section 5(8) are strictly met.
Outcome
The Tribunal dismissed the application, holding that the debt did not qualify as financial debt under Section 5(8) of the IBC.
