Pranav B Prem

The National Company Law Appellate Tribunal (NCLAT), New Delhi, has held that a written financial contract is not a precondition to prove the existence of a legally enforceable debt under the Insolvency and Bankruptcy Code, 2016. The Tribunal observed that any of the documents mentioned under Regulation 8(2) of the CIRP Regulations may suffice to establish a debt, and the absence of a formal written agreement cannot negate the existence of a financial liability. A three-member bench comprising Justice Rakesh Kumar Jain (Judicial Member), Justice Mohd. Faiz Alam Khan (Judicial Member), and Mr. Naresh Salecha (Technical Member) made the observation while dismissing an appeal filed under Section 61 of the IBC against an order of the NCLT Kolkata Bench, which had admitted an application under Section 7 of the Code.

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Background of the Case

The appeal was filed by Bijendra Prasad Mishra, Director of M/s H.S. Mercantile Pvt. Ltd. (Corporate Debtor), challenging the NCLT’s order admitting a Section 7 application filed by M/s Drolia Agencies Pvt. Ltd., which had amalgamated with the erstwhile creditor M/s Subh Chintak Commotrade Pvt. Ltd. According to the respondent, Subh Chintak Commotrade Pvt. Ltd. had disbursed an inter-corporate loan of ₹50,00,000 to the appellant company on 7 November 2009 through RTGS. The loan carried an interest rate of 9% per annum, and tax was deducted at source (TDS) on the interest from 2010–11 to 2015–16. The Corporate Debtor reflected the loan in its financial statements, but failed to repay the amount. Consequently, a loan recall notice dated 04.04.2016 and another demand notice dated 05.02.2019 were issued.

The appellant, however, claimed that the ₹50 lakh was not a loan but an advance payment for the supply of fabric, which was allegedly settled through the delivery of goods worth ₹72,39,520 on 1 April 2016. It contended that no written contract of loan existed and that the application was time-barred.

Contentions of the Parties

The Appellant argued that the NCLT had exceeded the scope of remand, as it was only directed to examine the issue of limitation. It further contended that there was no financial contract or other relevant evidence proving the advancement of a loan. The appellant also submitted that the amount was a commercial advance for fabric supply and that the debt was discharged by delivery of goods. Reliance was placed on previous NCLAT decisions to argue that the absence of a written contract disqualifies a claim as financial debt.

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The Respondent countered that the disbursement of ₹50 lakh was clearly recorded in bank statements and financial accounts, and the deduction of TDS on interest showed that it was a financial transaction for time value of money. The respondent maintained that the debt was duly acknowledged in the Corporate Debtor’s balance sheets from 2009–10 to 2016–17, and that the figures matched precisely with the amount claimed. It argued that Regulation 8(2) of the CIRP Regulations allows proof of debt through various forms of documentary evidence, not merely written contracts.

Tribunal’s Findings and Observations

After reviewing the documentary evidence, the NCLAT noted that the appellant had received ₹50,00,000 from the creditor and had itself provided for 9% interest on the amount while deducting TDS until FY 2015–16. The Tribunal questioned why interest would be paid if the amount was merely an advance for fabric supply, observing that this fact “fortifies the submission of the financial creditor that the money advanced was a financial debt.”  The Bench also found that the claim of fabric supply was unsupported, as all invoices were dated the same day (1 April 2016), no proof of dispatch existed, and the total value shown exceeded the closing inventory available with the debtor. The alleged supply of goods, it held, was not substantiated and could not discharge the loan liability.

The NCLAT affirmed the NCLT’s finding that the amount of ₹50,00,000 was a financial debt within the meaning of Section 5(8) of the IBC and that the acknowledgment of debt in the balance sheet dated 31.03.2017 extended the limitation period under Section 18 of the Limitation Act. Consequently, the application filed on 1 October 2019 was within the extended limitation period.

On the issue of the necessity of a written financial contract, the Appellate Tribunal conducted an extensive review of precedents, including Agarwal Polysacks Ltd. v. K.K. Agro Foods and Storage Ltd. (2023), Satish Balan v. Neeta Navin Nagda (2023), Desana Impex Ltd. v. Brick and Mortar Realty Pvt. Ltd. (2024), and Rahul H. Mehta v. Gajendra Investment Ltd. (2024). Drawing from these authorities, it reiterated that a written contract is not a mandatory requirement to establish financial debt. Quoting from Agarwal Polysacks Ltd., the NCLAT observed: “A financial contract supported by financial statements as evidence of the debt is one of the documents contemplated in Regulation 8(2), but that is not the exclusive requirement for proving the existence of debt. The Regulation indicates that it is not mandatory that existence of financial debt has to be proved by a financial contract.”  The Bench emphasized that the use of the word “or” in Regulation 8(2) clearly shows that any one of the documents listed—such as financial statements, acknowledgments, bank records, or tribunal orders—can prove the existence of a financial debt. Thus, “the existence of such debt may very well be proved by other documents referred therein.”

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Concluding that the NCLT’s findings were consistent with the evidence and the legal framework, the NCLAT held that the financial debt, default, and acknowledgment were all clearly established through documentary records. It also confirmed that the application was filed within limitation and that the transaction was rightly treated as a financial debt for time value of money. Accordingly, the appeal was dismissed, and the NCLT’s order admitting the Section 7 application and initiating CIRP against M/s H.S. Mercantile Pvt. Ltd. was upheld. No order as to costs was made.

Appearance

For Appellant: Mr. Krishnendu Datta, Sr. Advocate along with Mr. Ritesh Agrawal & Ms. Priyanshi Sharma.

For Respondent: Mr. Sunil Choraria, for R-1/RP. Ms. Pooja Agrawal, for R-2.

Cause Titile: Bijendra Prasad Mishra V. M/s HS Mercantile Pvt. Ltd. and Ors.

Case No: Company Appeal (AT) (Insolvency) No. 2364 of 2024

Coram: Justice Rakesh Kumar Jain (Judicial Member), Justice Mohd. Faiz Alam Khan (Judicial Member), Mr. Naresh Salecha (Technical Member)