The Chennai Bench of the National Company Law Tribunal (NCLT) has laid down a three-fold ‘disbursement’ test, i.e., “Credit of Debt, Principle Purpose, and Application of Debt”, and held that all three limbs must be satisfied before a corporate entity can be pushed into Corporate Insolvency Resolution Process (CIRP). The NCLT ruled that a company registered under the Companies Act is a distinct juristic person from its directors and shareholders, hence, a loan disbursed directly into a director’s personal bank account cannot, by any stretch, be treated as a financial debt of the corporate entity.
The Bench placed significant weight on the Record of Financial Information from the NeSL portal, which the Petitioner itself had submitted, identifying the ‘Debtor’ as the individual director and not the company, turning the Petitioner’s own evidence against it. The Bench said that Petitioner must place contemporaneous documentary evidence, board resolutions, correspondence, and utilisation proof, on record to demonstrate that the funds were received and applied for the corporate debtor’s business; mere assertion is insufficient.
Essentially, the clarified that where the NeSL record identifies the company only as a ‘Guarantor’ to the individual borrower, the Petitioner cannot maintain a Section 7 petition against the company as a Corporate Debtor without invoking the proceedings in the capacity of a Guarantor.
The Division Bench comprising Jyoti Kumar Tripathi (Judicial Member) and Ravichandran Ramasamy (Technical Member) reiterated that under Section 7 of the IBC, a Financial Creditor can initiate CIRP strictly against a Corporate Debtor upon proving that a financial debt was disbursed to the Corporate Debtor against the consideration for the time value of money, and that the Corporate Debtor committed a default in repayment thereof.
On examining the documents on record, the Bench found that the Petitioner’s own statement of accounts and loan agreements categorically established that the principal loan amount was disbursed via RTGS directly into the personal bank account of Mr. TRM Venkatesh (an individual) and not into the bank account of the Corporate Debtor. The Loan Repayment Schedule and email communications were issued by and addressed to Mr. TRM Venkatesh in his individual capacity, and repayments were likewise tendered by him personally. The NeSL Record of Financial Information explicitly recorded the ‘Debtor’ as Mr. TRM Venkatesh.
The Tribunal laid down the well-settled proposition of law that a corporate entity registered under the Companies Act possesses a separate and distinct legal personality from its directors or shareholders. A financial disbursement made directly to an individual director’s bank account cannot, by any stretch of imagination, be treated as a financial debt extended to the corporate entity, in the absence of direct corporate borrowing resolutions and direct receipt of funds by the company. The Petitioner had not brought on record any further documents to substantiate that the disbursement was done in furtherance of the Corporate Debtor.
Briefly, Rajesh Kumar Saraf HUF (the Petitioner/Financial Creditor) sought initiation of the Corporate Insolvency Resolution Process (CIRP) against Veremax Technologie Services Ltd. (the Respondent/Corporate Debtor), a company incorporated on May 17, 2013, with its registered office at Doshi Towers, Poonamallee High Road, Kilpauk, Chennai. The case of the Petitioner was that the Corporate Debtor, acting through its directors and major shareholders Mr. TRM Venkatesh and Mrs. V. Annam, approached the Applicant for a short-term loan of Rs. 5 crores for a period of one month at an interest rate of 36% per annum for meeting working capital requirements.
The Petitioner claimed that the loan of Rs. 5 Crores was disbursed on June 09, 2023, by way of RTGS from the bank account of the Applicant directly into the personal bank account of Mr. TRM Venkatesh, and on the same day the Corporate Debtor issued a Demand Promissory Note in favour of the Applicant promising to repay Rs. 5 Crores on demand at 36% per annum interest. The Petitioner stated that the date of default was July 10, 2023, and that the Corporate Debtor sought further time for repayment, with certain adjustments being made towards interest. The total amount claimed in Part IV of Form 1 was INR 5.01 crores, comprising a principal of INR 4.50 crores and interest of INR 51.34 lakhs calculated at 36% p.a. from the date of disbursement till Aug 26, 2024.
The Petitioner further stated that despite repeated reminders and a commitment by the Corporate Debtor to pay Rs. 1 crore per month from September 2023 onwards, no payments were made. A legal notice was issued on July 20, 2024, demanding Rs. 4.85 crores, which was delivered on Aug 22, 2024.
