In the matter of Mr. Dhruv Harjai – Appellant vs M/s PPG Asian Paints Private Limited- Respondent at National Company Law Appellate Tribunal (NCLAT) order dated 15 July 2025
Facts of the Case:
- M/s Sidhi Vinayak Vehicles Private Limited – Corporate Debtor (CD) – represented by ex-director – Mr. Dhruv Harjai, entered into a Bodyshop Agreement on 21 March, 2018 with M/s. PPG Asian Paints Private Limited – the Financial Creditor (FC).
- Under this agreement, the FC provided an upfront payment of Rs. 35 lakhs to the CD. The stated purpose was to enable the CD to purchase specialized paint equipment and conduct promotional activities, thereby upgrading its facilities. This payment was intended to facilitate the CD’s ability to fulfil its future obligations under the agreement.
- In direct consideration of Rs. 35 lakh payment, the CD committed to a reciprocal obligation: it had to procure refinish products worth Rs. 1 crore from the FC over the subsequent four years.
- The CD executed a promissory note for the exact amount of the upfront payment as a collateral security. This note was not merely a promise to pay but included a specific clause – in the event of a default, the CD would be liable to repay the principal amount along with an interest rate of 12% per annum.
- Following the CD’s default, the FC issued a legal notice demanding the repayment of the Rs. 35 lakhs plus the accrued interest. When the CD failed to comply, the FC filed an application u/s 7 of the Insolvency and Bankruptcy Code, 2016 (IBC). On 8 December, 2022, the NCLT passed an order admitting the Section 7 application, initiating the CIRP against the CD.
- Aggrieved by the NCLT’s order, Mr. Dhruv Harjai, the ex-director of the CD, filed an appeal with the National Company Law Appellate Tribunal.
Arguments of the Appellant:
- The core of the appellant’s argument was that the transaction was fundamentally an operational debt. Payment of Rs. 35 lakh was part of a commercial agreement related to the procurement and supply of goods (paint products). Therefore, the debt arose from a business transaction involving goods and services, which is the definition of an operational debt under Section 5(21) of the IBC.
- The appellant contended that the payment was an advance to facilitate a commercial relationship, not a loan. It did not have the commercial effect of a borrowing as required to be classified as a financial debt under Section 5(8)(f) of the IBC. The money was a means to an end—to help the CD meet its contractual obligations—and was not intended as a pure financial transaction.
- The promissory note, according to the appellant, was merely a secondary or collateral document. Its existence did not change the primary nature of the underlying transaction, which was commercial. The note was a security measure, not the primary instrument creating a financial debt.
Arguments the Respondent:
- The respondent argued that its application under Section 7 of the IBC was valid because the debt was a financial debt. It was further argued that the transaction, particularly the upfront payment of Rs. 35 lakhs had the commercial effect of a borrowing. FC had provided a lump sum of money to the CD, and in return, the CD undertook an obligation to either perform its part of the contract or repay the money with interest.
- The promissory note was a critical piece of evidence. The respondent emphasized that the note explicitly stipulated the repayment of the principal amount along with 12% interest per annum in case of default. This clause demonstrated the time value of money, defining characteristic of a financial debt. The money was not just an advance but a financial accommodation for which a return (interest) was promised in case of non-performance.
- The respondent differentiated the transaction from an operational debt by stating that the payment was not for goods or services supplied by the CD to the FC. Instead, the payment was made to the CD to enable it to expand its business and procure products from the FC. This flow of money—from the FC to the CD, with a repayment obligation and interest—is a classic characteristic of a financial debt.
Held:
- The interest clause in the promissory note was irrefutable evidence of the time value of money. This is a hallmark of a financial debt, where a sum is advanced to a party with the expectation of a return or compensation for its use over a period. In this case, the Rs. 35 lakhs was not just a payment for goods but was an upfront financial accommodation. The interest clause demonstrated that the transaction was designed to compensate the creditor for the time their money was unavailable
- The transaction falls u/s 5(8)(f) of the IBC, which defines a financial debt as any transaction having the commercial effect of a borrowing. The NCLAT reasoned that even though the transaction was part of a broader commercial agreement, its underlying financial structure—an upfront payment secured by a repayment obligation with interest—had the clear commercial effect of a borrowing.
- The appellant’s argument that the debt was an operational debt was rejected. It was highlighted that an operational debt arises from the supply of goods or services. In this case, the Rs. 35 lakhs were not payment for goods or services supplied by the CD to the FC. Instead, it was a financial advance given to the CD to enable it to expand its business and meet its future commitments to the FC. The flow of money was the opposite of what would define an operational debt, where the creditor would have supplied goods or services and the debtor would owe them money for that
- NCLT had correctly identified the debt as a financial debt. The presence of the promissory note with the interest clause was the most compelling evidence. The NCLT’s decision underscored the principle that the substance of a transaction, not just its form, dictates its classification under the IBC. As a result – the appeal was dismissed and the NCLT’s order admitting the CIRP was upheld.
Ms Arti Ahuja Jewani – Partner – artiahuja@mmjc.in
Ms Esha Tandon- Deputy Manager –eshatandon@mmjc.in