Amount paid to corporate debtor as advance for marketing requirements cannot be considered a financial debt

Case details: Arrow Engineering Ltd. v. Golden Tobacco Ltd. - [2021] 128 taxmann.com 70 (NCLT - Ahd.)

Judiciary and Counsel Details

• • MS. Manorama Kumari, Judicial Member, and Chockalingam Thirunavukkarasu,  Technical Member
  • Robin Jaisinghani and Ms. Natasha Dhruman Shah, Advs. for the Appellant.
  • Dhaval Deshpande Adv. for the Respondent.

Facts of the Case

The Applicant entered into Letter of Intent (LOI) for disbursing advance for marketing/financial requirements of a development project to be undertaken by the respondent corporate debtor. An MoU was entered between parties in terms of which the corporate debtor would transfer 50 percent of constructed area to applicant post-development of property in full and final settlement of amount advanced by an applicant to the corporate debtor. The Applicant disbursed a partial amount as per terms of MoU.

NCLT Held

Relying on that MoU applicant filed an application under section 7 of the Code as MoU did not contain vital information like date of execution of the document, address of both parties between whom MoU had been entered into and number/date of cheque claiming to have been given by the applicant to the respondent.

Consequently, MoU became a piece of simple paper in the eye of the law, having no evidentiary value, and the advance amount paid could not be considered as ‘financial debt’ or ‘operational debt’ as an arrangement between applicant and respondent was in nature of business sharing. The NCLT stated that there was no financial debt, an application under section 7 was not maintainable.

Cases Referred To

• Motilal Padampat Sugar Mills Co. Ltd. v. State of Uttar Pradesh 1979 taxmann.com 210 (SC) (para 14).