The Indore Bench of the National Company Law Tribunal (NCLT) has clarified that promoter-shareholder overlap does not disentitle a financial creditor from invoking Section 7 IBC, and oral loan with interest, TDS deposits, and audited acknowledgements are suffice to establish financial debt and default. The Tribunal also held that an unsecured loan extended by an entity whose promoter holds shares in the corporate debtor qualifies as “financial debt” under Section 5(8)(f) of the IBC if it carries interest and has the commercial effect of a borrowing. The source or motivation of the lender is immaterial once money is disbursed against consideration for the time value of money.
The NCLT also clarified that a corporate debtor cannot defeat an admitted debt by unilaterally claiming that repayment of unsecured dues is contingent on prior clearance of secured lender dues, absent any documented covenant, negative lien, or subordination agreement binding the financial creditor.
The Coram of Brajendra Mani Tripathi (Judicial Member) and Man Mohan Gupta (Technical Member) noted that the Corporate Debtor did not dispute the factum of disbursement of the principal sums or the repayment of Rs. 45 lakhs. The Corporate Debtor’s own e-mail explicitly acknowledged the “unsecured loan from promoters” and merely sought deferment of repayment, an unambiguous admission of debt. The disbursement, made against payment of interest at 2% per annum, evidenced by consistent TDS deposits and reflection in audited financial statements for three consecutive years, squarely falls within Section 5(8)(f) of the IBC, being “any amount raised under any other transaction… having the commercial effect of a borrowing”. The source or motivation of the lender is immaterial once money has been disbursed against consideration for the time value of money.
The Tribunal rejected the Corporate Debtor’s defence that there is “no default” because repayment of the unsecured loan is contingent upon prior repayment of secured dues to the Bank. No document was placed on record, nor even alleged, to show that the Bank imposed any covenant or negative lien prohibiting repayment of unsecured dues to third parties. The plea of an internal understanding subordinating repayment of the Applicant’s dues to the Bank’s dues is a unilateral arrangement asserted by the Corporate Debtor and cannot be read into the loan transaction so as to defeat an admitted debt. The Corporate Debtor’s own admission of liability, coupled with the recall notice and the failure to make payment thereafter, establishes default under Section 3(12) of the IBC.
The Tribunal found the corporate veil-lifting contention unpersuasive. It is an admitted position that the Applicant and its promoters were never members of the Board of Directors of the Respondent, nor involved in its day-to-day management. The doctrine of indoor management operates to protect a third party who has dealt with a company at arm’s length from being saddled with liability for that company’s internal governance. Even if Smt. Shashi Jain holds shares in the Respondent in her individual capacity, that fact alone does not convert the Applicant company into a “promoter” of the Corporate Debtor, nor disentitle it from enforcing an admitted debt.
As regards the pendency of proceedings under Sections 241-242 of the Companies Act, 2013, the Tribunal noted that these proceedings are directed against a different entity (M/s Mittal Soya Proteins Private Limited) and relate to allegations of oppression and mismanagement, a subject matter entirely distinct from the existence of the admitted Financial Debt. A dispute of an entirely different genre, involving different parties and different reliefs, cannot be pressed into service to defeat an otherwise complete application under Section 7. The IBC, being a special statute, takes precedence over the Companies Act, 2013 by virtue of Section 238 of the IBC, as held by the Supreme Court in Innovative Industries Ltd. v. ICICI Bank.
The Tribunal found that the application discloses all particulars and is accompanied by the record of default in the form of bank statements, ledger accounts, Auditors’ Reports, TDS certificate, and the recall notice along with the Corporate Debtor’s reply. Although Shri Rajeev Dak holds 30.02% shareholding in the Respondent and Smt. Shashi Jain also figures in the shareholding pattern, the Applicant and the Respondent are admittedly separate and distinct corporate entities with no commonality of directorship. The transaction has been consistently reflected and acknowledged in the statutory records and financial statements of the Corporate Debtor itself. Mere overlap of shareholding interest, without more, cannot lead to an inference of collusion.
Briefly, Tanay Securities & Services Private Limited (Financial Creditor), a company engaged in legal, accounting, and finance management services, filed a petition under Section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC) against Organic World Private Limited (Corporate Debtor), a company in the farming and horticulture business, seeking initiation of Corporate Insolvency Resolution Process (CIRP) for default in repayment of Rs. 2.24 crores.
The Corporate Debtor had approached the directors of the Financial Creditor for funding, pursuant to which an unsecured loan of Rs. 2 crores were disbursed on Sep 16, 2020 at 2% per annum interest, followed by further disbursements of Rs. 49 lakhs and Rs. 11 lakhs on Jan 15, 2021 and Jan 16, 2021 respectively, taking the total principal to Rs. 2.60 crores. The Corporate Debtor repaid Rs. 45 lakhs on Jan 29, 2021. No written agreement was executed between the parties; the transactions were carried out under an oral understanding and verbal communications.
The unsecured loan was acknowledged by the Corporate Debtor in its Auditor’s Reports for FY 2020-21, 2021-22, and 2022-23. The Corporate Debtor also deposited TDS of Rs. 43,000/- for FY 2022-23 in lieu of interest of Rs. 4.30 lakhs. The Financial Creditor issued a recall notice calling upon the Corporate Debtor to discharge the debt, which went unhonoured, resulting in default occurring on Aug 28, 2024.
The Corporate Debtor raised several contentions: that the Applicant’s promoters (the Dak family) and the Respondent’s promoters (the Mittal family) jointly promoted the Respondent Company; that Shri Rajeev Dak held 30.02% shareholding in the Respondent and Smt. Shashi Jain (said to be sister of one of the Applicant’s directors) held 19.94%; that the corporate veil ought to be lifted to treat both entities as one; that the application by a quasi-promoter for recovery of unsecured loans is not maintainable and amounts to misuse of the IBC; that since secured dues to State Bank of India remain unpaid, there is “no default” in the legal sense as repayment of the unsecured loan is contingent upon repayment of the secured facility; and that two petitions under Sections 241-242 of the Companies Act, 2013 are pending between the parties, demonstrating a pre-existing dispute.
