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Sham Transactions do not Qualify as Financial Debt under Section 5(8) – By Mohammed Asrar Ahmed

Sham Transactions do not Qualify as Financial Debt under Section 5(8)

Earth Gracia Buildcon Pvt. Ltd. Vs. Earth Infrastructure Ltd
Case Citation: (2021) ibclaw.in 254 NCLAT

– By Mohammed Asrar Ahmed,
Penultimate Year Law Student studying from Symbiosis Law School, Hyderabad



Earth Gracia Buildcon Pvt. Ltd. (Financial Creditor/Appellant) was the wholly owned subsidiary of Earth Infrastructure Ltd. (Corporate Debtor) until 2014, following which due to the changes in the ownership of the shares, the companies had common shareholders, which led to both the companies having mutual shareholders. The Financial Creditor and the Corporate Debtor are undergoing the process of Corporate Insolvency Resolution Process (CIRP). The Financial Creditor had given loan to the corporate debtor i.e., the then parent company from 2012 to 2017. the Financial Creditor claims that they lent a loan of Rs. 16,82,17,052/-. The Resolution Professional (RP) for the Financial Creditor has attached the ledgers and the bank account summary of the financial creditor along with the loan account summary of the Corporate Debtor. The RP of the Corporate Debtor rejected the claim of the Financial Creditor for the want of loan amount. It was rejected on the grounds that there was no loan agreement as cited by the Financial Creditor. The RP of Financial Creditor thus filed an appeal under 60(5) of the Insolvency and Bankruptcy Code 2016 (IBC) before the National Company Law Tribunal (NCLT). The NCLT held that the provided transactions do not fall under the purview of the definition of the Financial Debt under section 5(8) of the IBC and was not eligible to be accepted as a claim and therefore held the transactions to be a sham. The RP of the Financial Creditor filed the present appeal before the National Company Law Appellate Tribunal (NCLAT) against the order of NCLT.

To further enhance their claim the Financial Creditor provided the Tribunal with ledger, bank account statements, balance sheet and memorandum of association of the Financial Creditor and the summary of the loan account of the Corporate Debtor for the period when the loan was being lent. On the contrary, the Corporate Debtor represented by their RP contended that though many documents are being provided by the Financial Creditor but they have failed to provide the loan agreement and thus the claim made in the appeal by the Financial Creditor does not succeed as Financial Debt.


The only issue that was before the NCLAT was whether the claim of the appellant qualifies as financial debt as provided under section 5(8) of the IBC.


Section 5(8) defines financial debt as a debt along with interest, if any, which is disbursed against the consideration for the time value of money. The two vital requisites from this definition are that firstly, there has to be debt that is disbursed and secondly, consideration for time value of money. In the cases of Mack Soft Tech Pvt. Ltd v. Quinn Logistics India Ltd.[1] and Shailesh Sangani v. Joel Cardoso[2], the NCLAT had held that such disbursement of debt should be consideration for the time value of money and that, to pay interest is not the only consideration. In the present case the promoters and the directors of both the companies were common and the NCLAT could easily figure out from the ledger provided by the Financial Creditor that there was nothing mentioned in the ledgers that could establish that the that the money was disbursed to the Corporate Debtor. Thus, the Financial Creditor could neither prove that there was disbursement nor that there was any kind of consideration for the apparent debt. Therefore, the transaction failed to fall under the ambit of the definition of “Financial debt”. The tribunal relied on the landmark SC judgement in the case of Anuj Jain IRP for Jaypee Infratech Ltd. v. Axis Bank Ltd[3], and opined that the it could not be inferred form the ledger entries of the financial creditor that monetary loan has been lent to the Financial Creditor to the Corporate Debtor. Also, the claim of the Financial Creditor was not supported by any board resolution of the company. There were no records that could prove that the Corporate Debtor was in need of the money. The tribunal could not find any loan agreements or any repayment clause. The case of Phoenix Arc Pvt. Ltd. v. Spade Financial Services Ltd. & Ors.[4] was majorly relied upon by the tribunal since the judgement of the said case held that, when the transactions are found to be collusive and sham, it can thus be inferred and concluded that if the transactions in question are sham, they do not qualify as a ‘Financial debt’.


NCLAT found that the Financial Creditor had given a loan and advance of Rs. 18,75,76,212/- to others but there was no mention of the Corporate Debtor. There was lack of documentary evidence to establish the claim of Rs. 16,82,17,052/- along with an interest of 12% P.A. by the Financial Creditor. The judgement by the NCLAT is prominent and important since it established that the disbursement is an additional essential element to qualify as a “financial debt” and is a prominent development. The interpretation of the term “disbursal” has been very well dealt by the NCLAT in their judgement. According to Black’s Law Dictionary, disbursement is defined as “1. The act of paying out money, commonly from a fund or in settlement of a debt or account payable. 2. The money so paid; an amount of money given for a particular purpose.” Furthermore, the term disbursement has been interpreted properly in the case of Pioneer Urban Land and Infrastructure Ltd v. Union of India[5] , which held that the “disbursal” must be money and must be against consideration for the ‘time value of money’. Such money should no longer be with the lender, but with the borrower, who then utilizes the money.


[1] [2018] ibclaw.in 120 NCLAT

[2] (2019) ibclaw.in 283 NCLAT

[3] [2020] ibclaw.in 06 SC

[4]  (2021) ibclaw.in 03 SC

[5] [2019] ibclaw.in 13 SC


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