Debt Arising From Structured Supply Chain Finance Facility Does Not Constitute 'Financial Debt' U/S 5(8) Of IBC: NCLT New Delhi

The application was filed by Prudent Arc Limited to initiate CIRP of the corporate debtor for default of Rs. 3.17 Cr. The financial debt was assigned to the applicant by UGRO Capital Ltd.

Brief Background

The corporate debtor was involved in the business of supplying goods to Hema Engineering Industries Ltd. (HEMA), for which UGRO Capital Limited provided supply chain financing to the corporate debtor. The corporate debtor instructed HEMA to deposit the sale consideration directly into the account of the applicant. As per the agreement between the applicant and the corporate debtor, if any default occurs on the part of HEMA, the liability will devolve upon the corporate debtor.

The applicant served a demand notice to the corporate debtor, seeking payment of Rs. 3.17 Cr., but the corporate debtor didn't respond to it, and the amount remained unpaid. Therefore, the present cause of action arose.

Submission of the Corporate Debtor

It submitted that the primary obligation to pay was on HEMA. It argued that the service agreement between the UGRO and HEMA delineates the flow of obligation under the transaction. It also highlighted that, as per the terms of the agreement, in the event of default, HEMA will have the liability to pay. And its liability would only arise upon HEMA's failure to pay the respected amount.

It argued that as per section 21(5) of the IBC, the operational debt retains its character even if it has been assigned to a financial creditor. Further, it submitted that the petition is based upon a vendor invoice discounting arrangement; hence, it doesn't qualify as financial debt u/s 5(8) of the IBC.

Observations of the Adjudicating Authority

The bench found that the purpose of the arrangement was to enable HEMA to secure an uninterrupted supply of the goods and equipment from its supplier, which was achieved by providing financial assistance to the suppliers from UGRO Capitals.

The bench observed that the transaction's substantive character was operational, as the funds were advanced to facilitate the supply of goods & services and not for the time value of money.

Reference was made to the NCLAT ruling in Minions Ventures Pvt. Ltd. v. TDT Copper Ltd., reaffirming that invoice discounting transactions, even if assigned or structured with recourse, are not financial debts unless disbursed for the time value of money.

The tribunal found that the primary obligation to pay remained with the buyer (HEMA Engineering), and the fallback liability on the corporate debtor did not transform the arrangement into a financial loan.

The Tribunal also took note that UGRO's own claim in the CIRP of HEMA had been admitted as an operational debt and never challenged, further evidencing the nature of the transaction.

The adjudicating authority dismissed the application.

Case Name: Prudent ARC Limited v. Karan Automibiles

Case No.: Restored Company Petition (IBC) /22/ND/2024 (Old Case CP (IB)/60/ND/2023)

Bench: Shri Manni Sankariah Shanmuga Sundaram (Member-Judicial) and Shri Atul Chaturvedi (Member-Technical)

For the Applicant: Mr. Sumeet Raj, Mr. Siddharth Shankar, Ms. Akanksha, Mr. Sharique Ajmal, Advs.

For the Respondent: Mr. Rishabh Arora, Adv.

Order Date: 15.07.2025