Pranav B Prem

In a significant ruling, the National Company Law Appellate Tribunal (NCLAT), Principal Bench at New Delhi, comprising Justice Rakesh Kumar Jain (Judicial Member), Mr. Naresh Salecha (Technical Member), and Mr. Indevar Pandey (Technical Member), held that a corporate debtor cannot escape its obligation to repay a debt by citing irregularities under Section 186 of the Companies Act, 2013, in the process of disbursal of such loan. The Tribunal clarified that Section 186 is intended to protect shareholders and not to shield a corporate debtor from repaying legitimate dues.

Also Read: NCLAT Rules, Income Tax Refund Received By Bank During CIRP In Corporate Debtor's Account Cannot Be Withheld

The case arose out of an appeal filed by Pancham Studios Pvt. Ltd., assailing the order dated 29.11.2023 passed by the National Company Law Tribunal (NCLT), Cuttack Bench, which had dismissed an application filed under Section 7 of the Insolvency and Bankruptcy Code (IBC) against Konark Aquatics and Exports Pvt. Ltd. (Corporate Debtor), concerning a financial loan amounting to ₹4.43 crores.

Background

According to the appellant, the corporate debtor had sought financial assistance to discharge its liabilities towards secured creditors under a one-time settlement (OTS) scheme. On the debtor’s request, the appellant disbursed an interest-free inter-corporate loan of ₹4,43,50,000 through banking channels. The amount was agreed to be repaid post-OTS. However, despite the conclusion of the OTS and service of five demand notices from 2019 to 2022, the debtor failed to repay the sum. The appellant further submitted that the said amount consistently appeared in the corporate debtor’s financial statements as an "unsecured loan" from 2016–17 through 2020–21. The NCLT, however, rejected the application on three grounds: (1) the amount was not a “financial debt,” (2) the loan was in violation of Section 186 of the Companies Act and thus void, and (3) non-compliance with Section 7(3)(a) of the IBC regarding record of default.

Respondent’s Stand

The respondent, opposing the appeal, argued that the disbursed amount was not a financial debt since it was interest-free and lacked any formal agreement or a fixed date of repayment. They also contended that the transaction violated Section 186(2) of the Companies Act, which restricts companies from lending above a certain threshold without prior shareholder approval. The corporate debtor further claimed that the payment was part of a familial arrangement involving transfer of joint family property and mutual business interests between family-run entities.

NCLAT’s Observations and Findings

The Appellate Tribunal disagreed with the NCLT’s reasoning and held that:

• The corporate debtor had itself recorded the sum of ₹4.43 crores in its balance sheets from 2016–17 to 2020–21 as an unsecured loan without any qualifications. Such consistent entries constituted a clear acknowledgment of debt and demonstrated a commercial effect of borrowing, satisfying the conditions of a "financial debt" under Section 5(8) of the IBC.

• Referring to precedents, including Orator Marketing Pvt. Ltd. v. Samtex Desinz Pvt. Ltd [2021 SCC OnLine SC 513] and BDH Industries Ltd. v. Mars Remedies Pvt. Ltd [CA (AT) (Ins) No. 936 of 2020], the Tribunal held that an interest-free loan could still be treated as a financial debt if it had the commercial effect of borrowing and was used to discharge financial liabilities, which was the case here.

• Regarding the alleged violation of Section 186 of the Companies Act, the NCLAT noted that the provision prescribes penal consequences (such as fine or imprisonment) for non-compliance but does not render the transaction void. Thus, such a violation cannot absolve the corporate debtor from its repayment obligations. The Tribunal emphasized that “in no case the debt advanced by the company to a corporate body can be held to be unrecoverable only because of irregularity in advancement.”

• The respondent’s reliance on M Sai Eswara Swamy v. Siti Vision Digital Media Pvt. Ltd [CA (AT) (Ins) No. 706 of 2021] was deemed misplaced. The Appellate Tribunal clarified that the issue in that case was the absence of board authorization for filing the petition, not the validity of repayment obligations under Section 186.

• Addressing the issue of record of default, the Tribunal held that non-filing of default with an information utility under Regulation 20(1A) of IBBI (Information Utilities) Regulations, 2017, cannot be treated as fatal. The financial creditor can produce other admissible records of default in accordance with the IBC and related rules.

Also Read: NCLAT Rules, Assets Of Corporate Debtor Attached Under PMLA Are Not Part Of Resolution Estate, NCLT Cannot Direct Release Even If Attached During CIRP

Verdict

The NCLAT found that the disbursement of the loan, the non-repayment despite repeated demand notices, and the consistent admission in balance sheets were sufficient to establish the existence of debt and default. Holding that the NCLT erred in its assessment, the Appellate Tribunal allowed the appeal, set aside the impugned order, and admitted the Section 7 application filed by the appellant.

Appearance

For Appellant: Mr. Kumarjit Banerjee, Mr. Sanchari Chakraborty,

For Respondent: Mr. Aadil Naushad, Mr. Sahil Sharma, Mr. Shashank Agarwal, Advocates. Mr. Rajesh Aggarwal, Dr. B.K. Dash, Ms. Deeksha Aggarwal, Mr. Mayank Dash, Mr. Ninad Dash, Advocates.

Cause Title: Pancham Studios Pvt. Ltd. Versus Konark Aquatics & Exports Pvt. Ltd.

Case No: Company Appeal (AT) (Ins.) No. 406 of 2024

Coram: Justice Rakesh Kumar Jain [Judicial Member], Mr. Naresh Salecha [Technical Member], Mr. Indevar Pandey (Technical Member)