Pranav B Prem

The National Company Law Tribunal (NCLT), Mumbai Bench, comprising Mr. Sushil Mahadeorao Kochey (Judicial Member) and Mr. Prabhat Kumar (Technical Member), has held that advances made by a shareholder after the expiration of a Shareholders Agreement constitute ‘financial debt’ within the meaning of Section 5(8) of the Insolvency and Bankruptcy Code, 2016 (IBC). The Bench made this observation while admitting a Section 7 application filed by Euro Corporate Services Pvt. Ltd. against Royal Fantasy Constructions Pvt. Ltd., for default in repayment of financial debt exceeding ₹2 crore.

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Background of the Case

The petitioner, Euro Corporate Services Pvt. Ltd., was a shareholder and lender to Royal Fantasy Constructions Pvt. Ltd. The petitioner advanced funds to the corporate debtor even after the expiry of the Share Subscription-cum-Shareholders Agreement (SSSHA) executed between the parties in 2010. According to the petitioner, these advances were in the nature of loans and carried an obligation of repayment along with interest. The corporate debtor, however, contended that the sums advanced were not loans but were to be repaid only from the surplus revenue generated from the commercial complex, as stipulated under Clause 4.6 of the SSSHA, and hence, no default had occurred.

The petitioner argued that the ledger accounts of the corporate debtor clearly recorded the payments as loans and showed entries of interest payment and tax deduction at source (TDS), establishing that the disbursements were made for consideration of time value of money, a defining element of financial debt under Section 5(8) of the IBC.

Findings of the Tribunal

After examining the records, the NCLT observed that the amounts received by the corporate debtor in 2021–22 could not be linked to the 2010 Shareholders Agreement, which had long expired and specifically provided that the loans were to be repaid before December 2010. The Bench noted that the books of account maintained by the corporate debtor reflected the payments as loan transactions, with interest credited and TDS deducted. The Tribunal also referred to the ledger entries and the balance sheet to conclude that the transactions had all the characteristics of a financial debt, as the disbursements were made with the expectation of repayment along with interest.

It held:“The amount received in the financial year 2021–22 cannot be traced back to the Share Subscription-cum-Shareholders Agreement of 2010. The subsequent advances, being disbursed for time value of money, constitute ‘financial debt’ under Section 5(8) of the Code.” The Bench rejected the corporate debtor’s argument that the repayment was contingent upon revenue surplus, clarifying that the existence of a conditional clause in an earlier agreement cannot alter the nature of a subsequent disbursement, especially when the transaction is recorded as a loan in the debtor’s books of account.

Order of the Tribunal

Holding that the debt and default stood clearly established, the NCLT admitted the Section 7 application filed by Euro Corporate Services Pvt. Ltd. The Bench declared that non-payment of even a part of the financial debt when it becomes due and payable constitutes default under the IBC. It thus initiated the Corporate Insolvency Resolution Process (CIRP) against Royal Fantasy Constructions Pvt. Ltd., appointed an Interim Resolution Professional (IRP), and imposed a moratorium under Section 14 of the Code.

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The ruling reiterates that advances made by shareholders after the expiry of a shareholders agreement, when recorded as loans and carrying interest, are financial debts for the purposes of the IBC. The Tribunal emphasized that the nature and treatment of the transaction in the books of account—and not merely the existence of an earlier agreement—determines whether an advance qualifies as financial debt.

Appearance

For Financial Creditor: Adv. Rohan Agarwal a/w, Adv. Sabeena Mahadik, and Adv. Pankaj Uttarodhi

For Corporate Debtor: Adv. Aman Kacheria a/w Adv. Rishabh Dhanuka

Cause Title: Euro Corporate Services Private Limited v. Royal Fantasy Constructions Pvt. Ltd.

Case No: CP (IB)/674 (MB)/2024

Coram: Judicial Member Sushil Mahadeorao Kochey, Member Technical Prabhat Singh