Contribution Secured by Promissory Note Qualifies as Financial Debt under IBC; NCLAT Upholds CIRP Admission
- REEDLAW
- Jul 18
- 3 min read
The National Company Law Appellate Tribunal held that a contribution secured by a promissory note qualifies as a financial debt under the Insolvency and Bankruptcy Code, and accordingly upheld the admission of the Corporate Insolvency Resolution Process.
On 15 July 2025, the National Company Law Appellate Tribunal (NCLAT), New Delhi Bench comprising Justice Rakesh Kumar Jain (Judicial Member) and Technical Members Mr. Naresh Salecha and Mr. Indevar Pandey, while adjudicating a company appeal along with multiple interlocutory applications, held that a payment made under a commercial agreement, secured by a promissory note and carrying an obligation to repay with interest upon default, constitutes a financial debt under Section 5(8)(f) of the Insolvency and Bankruptcy Code, 2016, as it bears the commercial effect of borrowing, even if the transaction is linked to the supply of goods.
The National Company Law Appellate Tribunal (NCLAT) dismissed an appeal filed by the Suspended Director of Sidhi Vinayak Vehicles Pvt. Ltd. challenging the admission of a Section 7 application under the Insolvency and Bankruptcy Code, 2016. The application was filed by PPG Asian Paints Pvt. Ltd., which claimed a financial debt of ₹42.35 lakh. The NCLT had admitted the application and appointed an Interim Resolution Professional (IRP) by order dated 08.12.2022. The appellant contended that the amount in question did not qualify as a financial debt but arose from a commercial arrangement related to goods or services and therefore fell under the ambit of operational debt.
The Corporate Debtor had entered into a Bodyshop Agreement dated 21.03.2018 with the Financial Creditor, under which the latter made an upfront contribution of ₹35 lakh for the purchase of paint equipment and promotional activities. The Corporate Debtor was obligated to procure goods worth ₹1 crore over a period of four years. The agreement also included a promissory note executed by the Corporate Debtor, acknowledging the amount of ₹35 lakh with an interest commitment of 12% per annum in case of default. The Financial Creditor claimed that the Corporate Debtor had failed to fulfil its contractual obligation to procure goods worth ₹20 lakh by 31.03.2019, thereby breaching the agreement.
Although the Tribunal issued notice to the Corporate Debtor, no appearance or reply was filed, and the matter proceeded ex parte. The Tribunal, after evaluating the evidence, held that the debt and default stood established and admitted the application. The appellant argued that the transaction pertained to the provision of goods or services and therefore should be treated as an operational debt, relying on the Supreme Court’s judgment in Consolidated Construction Consortium Limited v. Hitro Energy Solutions Private Limited, REEDLAW 2022 SC 02517.
The Respondent, however, maintained that the ₹35 lakh was not paid for the purchase of goods from the Corporate Debtor but as financial support to enable the debtor to meet its procurement commitments. The existence of a promissory note and an interest clause was cited to demonstrate that the transaction bore the commercial effect of borrowing, which qualified it as a financial debt under Section 5(8)(f) of the Code. The Respondent also referred to the Supreme Court’s ruling in Global Credit Capital Limited v. Sach Marketting Private Limited and Another, REEDLAW 2024 SC 04604, where the Court emphasised examining the real nature of the transaction rather than its form.
The NCLAT concluded that the transaction was not in exchange for goods or services from the Corporate Debtor, but rather a funding arrangement backed by contractual repayment obligations and a promissory note. It held that the arrangement had the commercial effect of borrowing and therefore fell within the definition of financial debt. The Tribunal found no merit in the appeal and accordingly upheld the admission of the Section 7 application, affirming the initiation of CIRP against the Corporate Debtor. All pending applications were also disposed of.
Mr. Adhitya Srinivisan, Mr. Rishabh Kanojiya, Mr. Srajan Tyagi, and Mr. Ankur Das, Advocates, represented the Appellant.
Mr. Yashvardhan, Mr. Piyush Singh, Mr. Shubham Raj, and Mr. Ayush Kumar, Advocates, appeared for the Respondent No. 1.
Mr. Shailendra Singh and Mr. Abhyuday Dhasmana, Advocates, appeared for the HDFC Bank.
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