Violation of Companies Act Deposit Provisions Cannot Defeat Section 7 IBC Proceedings Where Financial Debt Is Established
- REEDLAW
- 2 hours ago
- 3 min read
REEDLAW Legal News Network reports: In a significant ruling on the scope of financial debt under the Insolvency and Bankruptcy Code, 2016, and interface between the Insolvency and Bankruptcy Code, 2016 and the Companies Act, 2013, the National Company Law Appellate Tribunal clarified that interest-bearing amounts advanced through banking channels, supported by statutory deductions, qualify as financial debt, and insolvency proceedings under Section 7 cannot be defeated merely on allegations of non-compliance with deposit-related provisions of company law.
The Appellate Tribunal, speaking through Justice Ashok Bhushan (Chairperson) and Mr. Barun Mitra (Technical Member), held that the decisive test under Section 5(8) of the Code is disbursement against consideration for the time value of money. The Bench observed that while the Companies Act prescribes regulatory consequences for irregular acceptance of deposits, such violations do not extinguish the borrower’s repayment obligation nor bar initiation of corporate insolvency resolution proceedings under the IBC, and accordingly set aside the order rejecting the Section 7 application.
The Appeal was filed against the order of the Adjudicating Authority rejecting an application under Section 7 of the Insolvency and Bankruptcy Code, 2016. The Appellants had advanced short-term business loans to the Corporate Debtor through bank transfers over a period of time, on which interest was paid after deduction of tax at source, as reflected in statutory records. Despite repeated demands, the principal amount was not repaid, leading to the initiation of insolvency proceedings.
The Corporate Debtor admitted receipt of the amounts and payment of interest but sought to characterise the transactions as advance payments for the supply of goods. The Adjudicating Authority rejected the application by holding that acceptance of such funds violated Section 73 of the Companies Act, 2013 and that the transactions were void under Section 23 of the Indian Contract Act, 1872.
The Appellate Tribunal held that the essential ingredients of financial debt—disbursement against consideration for the time value of money—stood conclusively established through bank transfers, interest payments, and TDS deductions. It was observed that the Companies Act regulates the manner of acceptance of deposits and provides penal consequences for violations, but does not extinguish the corporate debtor’s liability to repay amounts received.
Relying on settled jurisprudence, including Innoventive Industries Limited v. ICICI Bank and Another, REEDLAW 2017 SC 08563, Mohanlal Dhakad v. BNG Global India Ltd., Satish Chand Gupta v. Servel India Private Limited, REEDLAW 2021 NCLAT Del 01554 and Pancham Studios Private Limited v. Konark Aquatics and Exports Private Limited, REEDLAW 2025 NCLAT Del 07557, the Tribunal held that Section 73 of the Companies Act does not operate as a statutory bar interdicting repayment or initiation of proceedings under Section 7 of the IBC. The impugned order was therefore found unsustainable in law.
Ms. Sonal Shah and Mr. Kushagra Shah, Advocates, represented the Appellants.
Mr. Saswat K. Acharaya and Mr. Subham Agarwal, Advocates, appeared for the Respondent.
This is premium content available to our subscribers.
To access the full content related to this article — including the complete judgment, detailed legal analysis, ratio decidendi, headnotes, cited case laws, and updates on relevant statutes and notifications — we invite you to subscribe to REEDLAW’s premium research platform.
Â
Click here to Subscribe and unlock exclusive access to structured legal analysis, judicial summaries, and a comprehensive legal research database.
REEDLAW Legal Intelligence & Research is India’s most trusted legal publishing and research platform, empowering professionals with structured judicial insights and authoritative legal intelligence since 1985.
The platform offers comprehensive resources spanning Corporate Insolvency, Bankruptcy, Company Law, SARFAESI, Debt Recovery, Contract, MSMEs, Arbitration, Banking, and Commercial Laws. Through curated journals like IBC Reporter and Bank CLR, and an advanced Online Legal Research Database, REEDLAW simplifies complex legal research for professionals, institutions, and academia across India.