Commercial Dues Cannot Be Recharacterized as Financial Debt

The National Company Law Tribunal (NCLT), Chennai Bench, in Supreme Plascare India Private Limited v. Shiroo Polymers Private Limited (CP/IB/76/CHE/2025), held that transactions arising from an ongoing commercial relationship involving purchase and sale transactions could not be recharacterized as financial debt for the purpose of invoking Section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC).

Supreme Plascare India Private Limited (financial creditor) filed an application against Shiroo Polymers Private Limited (Corporate Debtor) seeking initiation of the Corporate Insolvency Resolution Process (CIRP) against the corporate debtor under Section 7 of the IBC. The applicant contended that a sum of ₹1,13,75,929 was due and payable as financial debt, with the date of default stated to be October 26, 2024.

The applicant relied upon a NeSL report, ledger statements maintained by it, and bank statements showing disbursement of funds to establish the existence of a financial debt. The applicant contended that the amounts transferred to the respondent were short-term loans given to meet working capital requirements, including payments towards EMIs, electricity bills, bank interest, salaries and third-party payments.

The respondent opposed the application, contending that the applicant could not be treated as a financial creditor under the Code, as for a debt to qualify as a financial debt under Section 5(8), there must be disbursement of money against the consideration for time value of money. According to the respondent, the amounts reflected in the bank statements represented payments made in the course of business transactions and not loans disbursed against consideration for the time value of money.

It was further submitted that both parties were engaged in the manufacture of plastic articles and had entered a commercial relationship involving the sale of raw materials and the purchase of finished goods.

The respondent further submitted the actual amount transferred by the applicant was only ₹99,13,664 as reflected in the bank statements relied upon by the applicant itself and the balance amount had been unilaterally added as interest without any contractual basis.

The Tribunal observed that the invoices produced by the parties showed a continuous business-to-business relationship and revealed purchase and sales transactions, suggesting an operational rather than a financial arrangement. The bench reiterated that for a debt to qualify as a financial debt under Section 5(8) of the Code, it must be disbursed against consideration for the time value of money, and the burden of proving such a transaction was on the applicant.

The Tribunal further noted that the NeSL report relied upon by the applicant had not been duly authenticated and that the ledger account produced was merely a statement maintained by the applicant itself.

The Bench also noted a message from the respondent stating, “Sir, please consider it a loan; we will adjust within a month later.” It noted that the phrase “please consider as a loan” indicated that the amount was not a loan at its inception and instead reflected an attempt to recharacterize a pre-existing commercial liability. The Tribunal observed that the nature of a debt is determined at the time of its inception and cannot be altered subsequently to invoke the jurisdiction of the Adjudicating Authority.

Further, the Tribunal noted that the applicant had failed to produce any written loan agreement, interest clause or board resolution demonstrating that the transactions constituted a financial arrangement involving the time value of money. It further noted that the respondent had raised a credible challenge regarding the statutory threshold, as the principal amount allegedly transferred was below ₹1 crore and the applicant had failed to establish any contractual basis for the addition of interest.

Accordingly, the Tribunal concluded that the applicant had failed to prove that the alleged default related to a “financial debt” as defined under Section 5(8) of the Insolvency and Bankruptcy Code, 2016. Thus, the Tribunal dismissed the Section 7 application and disposed of the proceedings.