The New Delhi bench of National Company Law Appellate Tribunal ( NCLAT ) have set aside the admission of application under Section 7 of the Insolvency and Bankruptcy Code, 2016, being not maintainable as the transaction in question constituted an ‘operational debt’ and was not covered under Section 5(8)(e) but was governed by Section 5(20) and Section 21(5) of the Code.
The Tribunal comprising Justice Rakesh Kumar Jain (Judicial Member), Mr. Barun Mitra (Technical Member) and Mr. Indevar Pandey (Technical Member)
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The Financial Creditors‘ case involves the acquisition of products from Manohar Manak Alloys Pvt. Ltd. (Manohar Alloys) by ISINOX Pvt. Ltd. ( Corporate Debtor ). A petition was filed by Somesh A. Naik & others (Financial Creditors) under Section 7 of the Insolvency & Bankruptcy Code. The Corporate Debtor contended that the Rs. 4.37 crores in financial debt alleged by the Financial Creditors was “operational debt,” and as such, the application could not be maintained.
The NCLT Mumbai accepted the section 7 petition on March 17, 2023. The Tribunal determined that the transaction was in the character of receivables sold or discounted as anticipated in Section 5(8)(e) of the Code when reading Section 5(8)(e). As a result, the section 7 application was maintainable. The Corporate Debtor’s suspended director appealed the contested ruling under section 61.
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Counsel for Appellant relied upon the judgment in Minions Ventures Pvt. Ltd. Vs. TDT Copper Ltd. to contend that the dispute between the parties in that case was the same, and the Court held that the financers would step into the shoes of the seller under Sections 5(20) and 21(5), and Sections 5(7) and 5(8)(e) of the Code would not apply. It was thus held that the application having been filed under Section 7 was not maintainable but the financers were relegated to avail their remedy under Section 9 of the Code.
Counsel for Respondent argued that the transaction between the parties is in the nature of a financial debt. Therefore, there was no error in the impugned order. The Tribunal noted that a similar controversy had been decided by the Court earlier in Minions Ventures Pvt. Ltd. in which the Court categorically held that the case would not be covered by Section 5(8)(e); rather it shall be covered by Section 5(20) and 21(5) of the Code which is why the Section 7 application is not maintainable.
The Tribunal allowed the appeal and set aside the impugned order. Respondents were relegated to their remedy to file an application under Section 9 of the Code.
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