Important Judgments on IBC by the NCLTs (23-27 August 2021)

  August 29, 2021

Abbreviations Used

  • Code – Insolvency and Bankruptcy Code, 2016
  • CrPC –The Criminal Procedure Code, 1973
  • CIRP – Corporate Insolvency Resolution Process
  • AA – Adjudicating Authority (NCLT)
  • CD – Corporate Debtor
  • FC – Financial Creditor
  • OC – Operational Creditor
  • CoC – Committee of Creditors
  • IRP – Interim Resolution Professional
  • RP – Resolution Professional
  • RA – Resolution Applicant

Guwahati Bench

Recognising a Debt Trap Agreement to Initiate Future Safeguard: Damayanti Tea Industries v. M/s. Bochapathar Tea Estate Pvt. Ltd. (23.08.2021)

It was a Section 7 application filed by Damayanti Tea Industries against the CD, M/s. Bochapathar Tea Estate, for a default in making repayment of the advance availed (3,34,30,000/-)  from the FC in the form of green tea leaves divided over regular instalments, as allegedly mentioned in an agreement signed. The CD submitted that the FC could not be considered a person under the Code, and that it was omitting material facts with malicious intent.

 

The bench was of the view that the application had to be rejected on multiple grounds, since its basis was an advance payment agreement towards purchase of green tea leaves, and the agreed amount was to be adjusted towards the supply of tea leaves. The parties were bound for special performance on their part without fail, which established that the amount given was an advance only for procurement of tea leaves from the CD.

 

Referring to the NCLAT’s previous order on a similar issue, the bench emphasised on the fact that providing an advance against business dealings did not come under the purview of ‘financial debt’ under the Code and therefore, Section 7 could not be invoked for these kinds of transactions. The advance given to the CD for only procurement of tea leaves could not be considered as a financial debt and therefore, the application was deemed unmaintainable. Further, upon analysis of documents submitted, the bench observed that no document produced by the FC could display the quantum of tea leaves received, the amount that was payable or receivable from the CD, or any other relevant details of the transaction. Since the existence of debt or the fact that it became due and payable could not be established, the primary conditions required for admission of a Section 7 application remained unfulfilled.

 

Additionally, the bench found the agreement at hand to be a debt trap in nature, as it had purposely led to a default, forced a closure and hostile takeover, eventually leading to the sale and liquidation of the company which was at the receiving end of the advance for supply of tea leaves. Appropriate authorities were requested to take cognizance of the same, so that needy companies were safeguarded against several versions of debt trap or exploitation-based agreements.

~ By Sandali Sharma

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