Shareholder Advances Marked As ‘Repayable On Demand’ Amount To Financial Debt Under IBC: NCLT Mumbai
Pranav B Prem
The National Company Law Tribunal (NCLT), Mumbai Bench, comprising Sushil Mahadeorao Kochey (Judicial Member) and Prabhat Kumar (Technical Member), has admitted a Section 7 petition under the Insolvency and Bankruptcy Code, 2016 (IBC) filed by Euro Corporate Services Pvt. Ltd. (formerly Distent Barter Pvt. Ltd.) against Royal Fantasy Constructions Pvt. Ltd. (Corporate Debtor). The Tribunal held that the amounts advanced by the petitioner constituted financial debt under Section 5(8) of the IBC, since they were disbursed for time value of money and reflected in the financial statements as “repayable on demand.”
Background
The financial creditor filed the petition seeking initiation of Corporate Insolvency Resolution Process (CIRP) against the corporate debtor for a default of ₹2,02,05,153, inclusive of interest at 9% per annum, with the date of default being August 13, 2024. It was submitted that the financial creditor had advanced several loans aggregating to ₹4.24 crore over multiple financial years, out of which part payments had been made by the corporate debtor. The balance confirmation statement, signed by the authorized signatory of the corporate debtor, showed an outstanding liability of ₹1.94 crore as of March 31, 2024.The petitioner further submitted that the corporate debtor had been regularly crediting interest and deducting TDS on the same, thereby acknowledging the existence of a financial debt.
Corporate Debtor’s Defence
The corporate debtor opposed the petition, asserting that the amounts received were shareholder advances or capital contributions made pursuant to a Share Subscription-cum-Shareholders Agreement (SSA) dated August 9, 2010, and not loans. It argued that the petitioner’s director, Mr. Banwari Lal Maheshwari, and other family members were shareholders of the corporate debtor, and the advances were capital infusions made under the SSA for project development. According to the debtor, repayment obligations were deferred until generation of surplus from the real estate project, as stipulated in Clause 4.6 of the SSA.
The debtor contended that the petitioner could not recall the amounts as debt until such surplus was generated and relied on the NCLAT’s ruling in Proplarity Infratech Pvt. Ltd. to submit that shareholder funding cannot constitute financial debt under the IBC.
Petitioner’s Rejoinder
The petitioner countered that while the SSA governed earlier transactions, the project had stalled after 2010, and subsequent advances were made as independent loans repayable on demand, not as equity participation. It was further argued that the SSA had been superseded by conduct, as the corporate debtor had continued to pay interest even after project suspension, and the ledger entries and financial statements recorded the sums as “loans repayable on demand.”
Tribunal’s Observations
After examining the material on record, the NCLT observed that the ledger accounts of the corporate debtor reflected regular inflow and outflow of funds between 2010 and 2022, along with continued interest accruals. The bench noted that Note 4 of the audited financial statements for FY 2021–22 disclosed loans received from related parties and others as “repayable on demand”, and that neither the petitioner company nor Mr. Banwari Lal Maheshwari was classified as a related party in Note 23 of the same financial statements.
Relying on these facts, the bench held:“These facts lead us to the irresistible conclusion that the amounts received from the Petitioner Company were in the nature of loans. Since the said amounts were disbursed for time value of money, the said loan constitutes a financial debt in terms of Section 5(8) of the Code.”
Findings on Repayment and Default
The NCLT also examined the corporate debtor’s reliance on Clause 4.6 of the SSA, which provided that repayment would arise upon generation of surplus revenue. On scrutiny of the financial statements, the bench found that the corporate debtor had reported operational surpluses of ₹3.62 crore in FY 2022–23 and ₹21.61 lakh in FY 2023–24, indicating that repayment obligations had indeed been triggered. Accordingly, the Tribunal rejected the corporate debtor’s contention that no surplus had arisen.
On the issue of solvency, the bench referred to the Supreme Court’s decision in M. Suresh Kumar Reddy v. Canara Bank & Ors. (2022), observing that the judgment in Vidarbha Industries Power Ltd. could not override the principles laid down in Innoventive Industries Ltd. and E.S. Krishnamurthy v. Bharath Hi-Tech Builders (P) Ltd., reiterating that non-payment of a due debt constitutes default under Section 7 of the IBC.
Holding that the funds advanced by the petitioner were financial debt and that default had occurred, the NCLT admitted the petition under Section 7 of the IBC against Royal Fantasy Constructions Pvt. Ltd. The bench appointed Mr. Raj Kumar Dad (Reg. No. IBBI/IPA-001/IP-P00537/2017-18/10962) as the Interim Resolution Professional (IRP) and imposed a moratorium under Section 14 of the Code. “The amounts received were loans disbursed for time value of money, thereby constituting financial debt under Section 5(8) of the Code,” the bench held while admitting the petition.
Appearance
Counsel for Financial Creditor: Adv. Rohan Agarwal, Adv. Sabeena Mahadik, Adv. Pankaj Uttarodhi
Counsel for Corporate Debtor: Adv. Aman Kacheria, Adv. Rishabh Dhanuka
Cause Title: Euro Corporate Services Pvt. Ltd. (formerly Distent Barter Pvt. Ltd.) v. Royal Fantasy Constructions Pvt. Ltd.
Case No: C.P. (IB)/674(MB)/2024
Coram: Sushil Mahadeorao Kochey (Judicial Member), Prabhat Kumar (Technical Member)
