Financial Debt Established from Balance Sheet Entries Even Without a Loan Agreement: NCLAT Upholds Section 7 CIRP
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REEDLAW Legal News Network reports: In a pivotal ruling, the National Company Law Appellate Tribunal clarified that a Section 7 application under the Insolvency and Bankruptcy Code, 2016 cannot be rejected solely on the ground that no formal loan agreement exists, where disbursement of funds and the existence of financial debt are demonstrable from contemporaneous records such as balance sheet entries and acknowledgments reflecting the time value of money.
The National Company Law Appellate Tribunal, New Delhi Bench, comprising Justice Mohammad Faiz Alam Khan (Judicial Member) and Mr. Arun Baroka (Technical Member), while adjudicating a Company Appeal, held that the absence of a formal loan agreement was not fatal to a Section 7 application when financial disbursement and the subsistence of financial debt were established through documentary evidence including balance sheet entries and acknowledgments. The Appellate Tribunal observed that such contemporaneous records sufficiently demonstrated the time value of money and justified admission of the corporate insolvency resolution process.
The appeal had been preferred by the Appellant, being the suspended director of the Corporate Debtor, challenging the order of the Adjudicating Authority admitting an application under Section 7 of the Insolvency and Bankruptcy Code, 2016, and thereby initiating the corporate insolvency resolution process against the Corporate Debtor. The insolvency proceedings had initially been admitted ex parte, which order was earlier set aside by the Appellate Tribunal with a remand directing the Adjudicating Authority to examine the real nature of the underlying transaction and to determine whether the alleged claim constituted a “financial debt” within the meaning of Section 5(8) of the Code. Upon remand, the Adjudicating Authority reconsidered the matter and once again admitted the Section 7 application, leading to the present appeal.
The Appellant had contended that the amount of ₹1 crore received from the Respondent did not arise from any loan transaction but was an advance paid towards consultancy services in the real estate sector, for which a proforma invoice dated 15.12.2012 had been issued, stipulating a total consideration of ₹1.20 crore. It was argued that the balance amount of ₹20 lakh had remained unpaid and that the accounting entries in the books of the Corporate Debtor, reflecting the sum as “other long-term liabilities”, could not be treated as proof of a financial debt. Reliance was placed on the principle that insolvency proceedings could not be invoked as a substitute for recovery of dues, as reiterated by the Supreme Court in Invent Asset Securitisation and Reconstruction Private Limited v. Girnar Fibres Limited, REEDLAW 2022 SC 04538, and that the Adjudicating Authority retained discretion not to admit an application where the Corporate Debtor was solvent and a going concern, as discussed in Vidarbha Industries Power Limited v. Axis Bank Limited, REEDLAW 2022 SC 07529.
The Respondent, on the other hand, asserted that the sum of ₹1 crore had been disbursed much prior to the alleged consultancy invoice and had been consistently reflected in the balance sheets of both parties as a loan or liability, thereby evidencing a financial debt. It was contended that no contemporaneous documents, agreements, or proof of consultancy services rendered had been produced by the Corporate Debtor, and that the proforma invoice relied upon was raised nearly two years after the disbursal. The Respondent relied upon decisions including Pioneer Urban Land and Infrastructure Limited and Another v. Union of India and Others, REEDLAW 2019 SC 08502; G.S. Buildtech Private Limited v. Ardee Infrastructure Venture Private Limited, REEDLAW 2021 NCLAT Del 12597; and Agarwal Polysacks Limited v. K. K. Agro Foods and Storage Limited, REEDLAW 2023 NCLAT Del 09515, to submit that balance sheet entries were relevant evidence of financial debt and that absence of a formal loan agreement was not fatal where disbursal and default were otherwise established.
Upon consideration, the Appellate Tribunal held that the material on record clearly established the disbursal of ₹1 crore to the Corporate Debtor and that the Corporate Debtor had failed to produce any cogent evidence to substantiate its plea that the amount was an advance for consultancy services. The consistent reflection of the amount as a liability in the balance sheets of the Corporate Debtor for successive financial years was treated as a reliable indicator of the existence of a financial debt, in line with the ratio laid down in G.S. Buildtech Private Limited v. Ardee Infrastructure Venture Private Limited, REEDLAW 2021 NCLAT Del 12597. The Tribunal further held that the requirements of “disbursal” and “time value of money, as explained by the Supreme Court in Pioneer Urban Land and Infrastructure Limited and Another v. Union of India and Others, REEDLAW 2019 SC 08502, stood satisfied.
The Tribunal also rejected the contention that the insolvency process was being misused for recovery, observing that Explanation II to Section 11 of the Code and the decision in Manish Kumar v. Union of India clarified that initiation of proceedings under Section 7 was not barred merely because recovery of dues was one of the objectives. It was further held that the reliance on Vidarbha Industries Power Limited v. Axis Bank Limited, REEDLAW 2022 SC 07529 was misplaced, as debt and default having been established, no exceptional circumstances existed warranting refusal of admission. The plea of consultancy advance was found to be an afterthought, particularly in view of the belated and unchallenged rejection of the Corporate Debtor’s claim before the Liquidator.
In conclusion, the Appellate Tribunal held that the amount disbursed constituted a financial debt, that default stood proved, and that the Adjudicating Authority had rightly admitted the Section 7 application. Finding no infirmity in the impugned order, the appeal was dismissed without costs.
Mr. Saurabh Jain and Mr. Prayag Jain, Advocates, represented the Appellant.
Mr. Abhishek Naik, Ms. Gulafsha Kureshi and Ms. Katyayani, Advocates, appeared for the Respondent No.2/RP.
Mr. Anirban Bhattacharya, Ms. Priyanka Bhatt and Mr. Rajeev Choudhary, Advocates, appeared for the Respondent No. 1.
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