Conversion Of Partner's Dues Into Loan Does Not Qualify As Financial Debt , Rules NCLAT
Pranav B Prem
The National Company Law Appellate Tribunal (NCLAT), Principal Bench, New Delhi, comprising Justice Ashok Bhushan (Judicial Member), Mr. Arun Baroka and Mr. Barun Mitra (Technical Members), has held that the conversion of a partner’s dues into a loan to a partnership firm, and its subsequent assignment to a third party, does not amount to a “financial debt” under Section 5(8) of the Insolvency and Bankruptcy Code, 2016. The Tribunal clarified that such dues, even if later converted and assigned, cannot retrospectively acquire the status of financial debt if they were not originally so at the time the liability arose.
Background
The appeal was filed by Gogia Leasing Ltd., challenging the order dated 20.12.2024 passed by the Adjudicating Authority (NCLT), which had dismissed an application filed under Section 7 of the IBC. The Appellant had approached the NCLT claiming to be an assignee of a debt originally owed to two individuals—Mr. Abhishek Goel and Mrs. Angori Devi—who were erstwhile partners in a partnership firm.
According to the Appellant, the dues owed to these former partners were later converted into an interest-bearing loan. After the conversion, the firm was restructured as a Limited Liability Partnership (LLP), and the debt was assigned to Gogia Leasing Ltd., who then sought initiation of Corporate Insolvency Resolution Process (CIRP) under Section 7 of the Code.
Observations by the Adjudicating Authority
The NCLT, in its detailed order, raised strong doubts about the legitimacy of the claim. It noted that the transition from a partnership firm to an LLP occurred in April 2023, after the exit of the original partners in October 2022. The Adjudicating Authority emphasized that the Appellant had not provided any credible documentation to trace the origin of the alleged loan or substantiate the claimed dues of ₹2,98,19,253/-.
The NCLT further observed that: “The Assignors purportedly converted their outstanding dues into an interest-bearing loan without any clear basis or documentation… The circumstances strongly indicate that this petition is collusive in nature.” It also noted the lack of transparency in the timing of the conversion and the structural changes to the entity. The petition was found to be lacking in clarity and appeared to be an attempt to misuse the insolvency process.
Arguments in Appeal
Before the NCLAT, the Appellant contended that it was merely an assignee of the debt, and at the time of assignment, the LLP structure was already in place. It was argued that since the debt was now in the form of a loan, and the entity was an LLP, there was no legal bar to initiating proceedings under Section 7 of the Code.
Findings of the NCLAT
The Appellate Tribunal did not accept the Appellant’s arguments. It examined the core issue—whether the dues converted into a loan amounted to a financial debt under Section 5(8) of the IBC. It held that the nature of the debt must be considered at the time it arose. Since the debt initially arose as dues owed to partners of a firm, and was only later “converted” into a loan, it did not have the characteristics of a financial debt at inception.
The Tribunal specifically observed: “The present case is a case where partners of the firm have certain dues against the partnership firm which they converted as a loan… At the time when the debt arose… that was not a financial debt within meaning of Section 5(8) of the IBC.”
The NCLAT concluded that the mere fact that the LLP was already constituted at the time of assignment does not elevate the nature of the original debt into a financial debt. It upheld the decision of the NCLT and dismissed the appeal, affirming that no financial debt existed to trigger Section 7 of the Code.
On Allegations of Collusion
The Appellant had also objected to the NCLT’s observations about collusion, stating that such a finding was unwarranted. The NCLAT agreed that since it had already concluded that the debt did not fall within the meaning of Section 5(8), there was no need to examine other aspects such as allegations of collusion. It clarified: “The finding that there was no debt was sufficient and it was not necessary for the Adjudicating Authority to make any observation regarding collusion at that stage.”
The NCLAT held that the debt claimed by the Appellant did not qualify as a financial debt under Section 5(8) of the IBC. Accordingly, the dismissal of the Section 7 application by the NCLT was upheld, and the appeal was dismissed.
Appearance
For Appellant: Mr. Prithu Garg, Mr. Ashutosh Arvind Kumar and Mr. Shivam Singh, Advocates
For Respondent: -
Cause Title: Gogia Leasing Ltd. V. Sunanda Polymers LLP
Case No: Company Appeal (AT) (Insolvency) No. 405 of 2025
Coram: Justice Ashok Bhushan [Chairperson] , Mr. Arun Baroka [Member (Technical)], Mr. Barun Mitra [Member (Technical)]
[Read/Download order]
