13 October 2017

Demerged resultant entity eligible to position itself as a ‘financial creditor’

Brief Overview

Financial Creditor (Reliance Commercial Finance Limited) made an application to the National Company Law Tribunal, Ahmedabad to initiate insolvency resolution process against Corporate Debtor (Anil Nutrients Limited) under Section 7 of the Insolvency and Bankruptcy Code. The Corporate Debtor had availed a term loan from the Financial Creditor vide a Working Capital Agreement. The Corporate Debtor had also executed Deed of Hypothecation, Demand Promissory Note etc. Another company had extended collateral in the form of corporate guarantee on behalf of the Corporate Debtor. The Financial Creditor was formed as a result of demerger of the business of Reliance Capital Limited wherein all debts of Reliance Capital Limited were transferred to the Financial Creditor.
The Corporate Debtor had failed to repay the loan amount in terms of the Working Capital Agreement despite repeated requests from the Financial Creditor. The Corporate Debtor also failed to respond to the legal notice issued by the Financial Creditor demanding repayment of loan. Per the legal notice, the Corporate Debtor had to settle an amount as on October 12, 2016. Thereafter, the Financial Creditor issued a statutory notice on December 31, 2016 demanding immediate repayment of outstanding loan amount within a period of 21 days. The Corporate Debtor failed in making due repayment of loan amount within the notified period of 21 days.



The NCLT ordered that in accordance with IBC, the Adjudicating Authority was required to ascertain the existence of a ‘financial debt’. The essence of a ‘financial debt’ had to be satisfied to initiate an insolvency resolution process against the Corporate Debtor. Upon perusal of the documents furnished by the Financial Creditor it was ascertained that the loan would fall under the category of ‘financial debt’, in accordance with Section 5(8) of IBC. It was further ascertained that both, the Corporate Debtor and the guarantor had failed to repay the loan amount and committed a ‘default’.
In case of a financial creditor filing an application to initiate an insolvency resolution process, it is also mandatory for the Adjudicating Authority to ensure that the application is complete in all respects and that the notice has been duly served on the Corporate Debtor. NCLT ascertained the completeness of application and admitted the application and named an Insolvency Resolution Professional to carry out the insolvency resolution process.

Browse articles