Tribunal holds that restructuring unpaid invoices via MOUs with interest on default does not convert operational debt into financial debt under IBC Section 7; petition by Button Industries Pvt. Ltd. dismissed.
In a significant ruling dated September 24, 2026, the National Company Law Tribunal (NCLT), Ahmedabad Bench, dismissed the insolvency petition filed by Button Industries Private Limited against Viaz Tyres Limited. The petition sought initiation of the Corporate Insolvency Resolution Process (CIRP) under Section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC), claiming that the amount owed by Viaz Tyres constituted a financial debt.
The dispute originated from five invoices dated March 22, 2020, amounting to Rs. 1.16 crore, advanced by Button Industries for the supply of Basmati rice. Subsequent to payment delays, the parties executed a series of Memoranda of Understanding (MOUs) in 2022 and 2024, converting the outstanding operational dues into a loan-like repayment schedule with an interest clause of 18% per annum applicable upon default.
Button Industries contended that this restructuring transformed the nature of the debt into a financial debt under Section 5(8) of the IBC, thereby entitling it to initiate insolvency proceedings. It claimed that the interest clause evidenced the consideration for the time value of money, a key criterion for financial debt classification.
However, Viaz Tyres vehemently contested the claim, alleging forgery of the invoices and MOUs, disputing the genuineness of signatures and company seals, and challenging the very existence of any financial debt. The corporate debtor also highlighted procedural lapses, including nondisclosure of critical documents upon their request.
After a thorough examination of the evidence and submissions, the Tribunal held that the original debt arose from unpaid invoices, which are operational debts. The subsequent MOUs merely postponed the payment schedule and prescribed installments without fundamentally altering the character of the debt. The interest clause triggered only upon default does not transform an operational debt into financial debt, as the essence of financial debt under Section 5(8) is the disbursal of funds with consideration for the time value of money at inception, not merely upon default.
The Tribunal underscored that the underlying transaction retained its operational nature, and the mere existence of an interest provision upon default is insufficient to classify the debt as financial debt. Consequently, the petitioner did not qualify as a financial creditor under the IBC, and the Section 7 petition was liable to be rejected.
Accordingly, the NCLT rejected and disposed of the petition, reinforcing the principle that the character of a debt does not change solely because of restructuring or an interest clause triggered upon default. This judgment provides clarity on the distinction between operational and financial debts and sets a precedent limiting the misuse of insolvency provisions for recovery of operational dues.
Bottom Line:
Insolvency and Bankruptcy Code, 2016 Section 7 Amount originally arising from unpaid invoices/receivables and later restructured through MOUs for deferred repayment does not become "financial debt" merely because interest is stipulated on default - In absence of disbursal against time value of money, applicant cannot be treated as financial creditor, Section 7 petition liable to be rejected.
Statutory provision(s):
Insolvency and Bankruptcy Code, 2016 Section 7, Section 5(8)
