Whether An Asset Purchase Agreement Can Be Classified As A Financial Debt Under The Insolvency And Bankruptcy Code (IBC), 2016, Despite Its Structure As A Sale Transaction

Summary:

[1]In the present case, the National Company Law Appellate Tribunal (NCLAT), Principal Bench, New Delhi, addressed appeals filed by Sandeep Mittal and Ravi Mittal, suspended directors of Shree Industries Ltd. (“SIL”), against an order from the National Company Law Tribunal (“NCLT”) admitting a Section 7 application by ASREC (India) Ltd. The crux of the matter involved a financial dispute stemming from a sale agreement dated November 27, 1990, between SIL and several financial institutions, including Gujarat State Financial Corporation (GSFC). The Appellants contended that the transaction was a sale of assets rather than a loan agreement, asserting that no financial debt was owed to ASREC as SIL had merely purchased assets from the creditors. Despite this argument, the NCLT found that the agreement constituted a financial debt and ruled that SIL was in default, leading to the admission of ASREC’s application. The appellants challenged this finding, claiming that the financial institutions were vendors and not lenders. However, the NCLAT upheld the NCLT’s decision, emphasizing that the nature of the agreement allowed for claims under insolvency proceedings due to the established financial debt.

Facts:

Shree Industries Ltd. (SIL), formerly known as Rama Finance Limited, had its dealings with various financial institutions following a default by Ganpati Pulp and Paper Ltd. (GPPL). GPPL had secured loans from multiple lenders, including Gujarat State Financial Corporation (GSFC) and Bank of Baroda, totalling approximately ₹1.23 crores. Due to GPPL’s default on these loans, GSFC took possession of GPPL’s assets and issued a public sale notice.

SIL submitted a bid to purchase these assets for ₹3.88 crores, which was accepted by the lenders. An agreement was executed on November 27, 1990, stipulating that SIL would pay ₹50 lakhs as a down payment and the remaining amount in instalments over five years. The agreement also included provisions for bank guarantees and stipulated that failure to pay any two instalments would allow GSFC to revoke the sale.

Over the years, SIL made payments exceeding ₹3 crores towards this consideration but faced challenges regarding its financial obligations. In 2016, SIL proposed a one-time settlement with ASREC (India) Ltd., which had acquired debts from Bank of Baroda, but this proposal was not fulfilled. In March 2021, ASREC issued a notice of default to SIL for outstanding payments totalling ₹92.35 crores as of June 30, 2022. Subsequently, ASREC filed a Section 7 application with the NCLT to initiate insolvency proceedings against SIL, asserting that SIL had incurred financial debt due to the earlier agreements.

SIL contested this claim, arguing that it was merely a purchaser of assets and not indebted to ASREC since the financial institutions were vendors in the transaction. The NCLT ultimately admitted ASREC’s application, leading to the appeals filed by Sandeep Mittal and Ravi Mittal, suspended directors of SIL, challenging the tribunal’s findings regarding the nature of the financial obligations stemming from the sale agreement.

Issue:

Whether the agreement dated November 27, 1990, between Shree Industries Ltd. (SIL) and various financial institutions constituted a financial debt or a sale of assets?

Judgment:

The NCLAT while affirming the NCLT’s judgment, held that GPPL had defaulted on loans from several financial institutions, leading to GSFC taking possession of its assets and subsequently selling them to SIL for ₹3.88 crores under an agreement dated November 27, 1990. The agreement stipulated a down payment of ₹50 lakhs and the remainder to be paid in instalments over five years. SIL made payments totalling over ₹3 crores but later faced claims from ASREC regarding outstanding debts amounting to ₹92.35 crores as of June 30, 2022. The tribunal noted that the nature of the transaction allowed for claims under insolvency proceedings due to established financial obligations. It emphasized that the agreement was indeed a financial arrangement involving the time value of money, thereby confirming ASREC’s right to initiate insolvency proceedings against SIL. The appeals were dismissed, reinforcing the tribunal’s findings regarding the classification of financial transactions in insolvency contexts.

Analysis:

The judgment highlights the complexities surrounding corporate debt and asset sales, particularly in cases where companies are declared sick under relevant legislation. SIL’s history of default and its attempts to negotiate one-time settlements further complicate its position, raising questions about the effectiveness of such settlements in resolving underlying financial issues. The NCLAT’s affirmation of the NCLT’s decision also reflects a tendency to favour creditor rights in insolvency proceedings, aligning with the objectives of the Insolvency and Bankruptcy Code (IBC) to maximize asset recovery for creditors.

[1] BEFORE THE HON’BLE NATIONAL COMPANY LAW APPELLATE TRIBUNAL

Sandeep Mittal v. M/s ASREC India Ltd. and Ors.

Company Appeal (AT) (Insolvency) No.37 of 2024 

Judgment dated 9th September, 2024