Loan Disguised as Sale Found to Be Financial Debt: NCLAT Clarifies Scope of Commercial Borrowing under IBC
- REEDLAW
- May 25
- 3 min read
NCLAT held that a loan transaction disguised as a sale agreement constituted a commercial borrowing and qualified as a financial debt under the IBC.
On 23.05.2025, the National Company Law Appellate Tribunal (NCLAT), New Delhi Bench, comprising Justice Yogesh Khanna (Judicial Member) and Mr. Ajai Das Mehrotra (Technical Member), reviewed an appeal and held that a transaction involving the disbursal of funds with a clear obligation of repayment, stipulated interest, and security in the form of immovable property—though structured as an agreement to sell—constitutes a "financial debt" under Section 5(8) of the Insolvency and Bankruptcy Code (IBC). The Tribunal emphasised that the substance of the transaction, not its form, governs its legal character, and that the real intention of the parties must be examined to determine whether the transaction involves disbursal, time value of money, and the commercial effect of borrowing.
The appellant had filed an application under Section 7 of the Insolvency and Bankruptcy Code, 2016, which was dismissed by the Adjudicating Authority through an order dated 09.02.2023. The dismissal was based on the conclusion that the transaction between the parties was in the nature of a sale/purchase agreement rather than a financial debt. Challenging this conclusion, the appellant argued that it had disbursed significant funds, including an initial amount of Rs. 48,36,540 and an additional Rs. 1 crore, to assist the respondent in settling One Time Settlement (OTS) dues with the State Bank of India. This disbursal was backed by multiple agreements, including an Agreement to Sale dated 09.04.2019, a subsequent agreement dated 01.04.2020, and a Memorandum of Understanding (MoU) dated 09.04.2020, all of which acknowledged the loan and incorporated repayment obligations along with a clause for execution of a sale deed in case of default.
The appellant contended that the real intention behind the transaction was to provide financial assistance, not to effectuate a transfer of property. The MoU provided for interest at 18% per annum or 30% of profits, compounded monthly, reinforcing the commercial nature of the transaction. The appellant further pointed out that the property referred to in the agreements was already mortgaged and was only meant to serve as security for the loan advanced, not as an object of sale. Despite repeated opportunities and extensions granted for repayment, the respondent defaulted, leading to an outstanding claim of over Rs. 2.39 crore. The appellant maintained that the criteria for a financial debt—disbursal, time value of money, and commercial effect of borrowing — were clearly met, and it was a financial creditor under Section 5(7) of the Code.
In response, the respondent maintained that the arrangement was a genuine agreement to sell and expressed readiness to execute the sale deed once the mortgage was cleared. However, the National Company Law Appellate Tribunal (NCLAT), after reviewing the agreements and factual matrix, rejected this contention. The Tribunal emphasised that the disbursed funds were intended for loan repayment to SBI and that repayment terms, interest obligations, and default provisions supported the characterisation of the transaction as a loan rather than a sale.
The Tribunal referred to key statutory definitions under Sections 3 and 5 of the IBC and relied on judicial precedents such as Pioneer Urban Land and Infrastructure Limited and Another v. Union of India and Others, REEDLAW 2019 SC 08502 and Kolla Kotswara Rao to conclude that a transaction can qualify as a financial debt even in the absence of traditional loan structures, provided it carries the commercial effect of a borrowing. It held that the appellant’s financial assistance, backed by enforceable repayment terms and interest stipulations, satisfied the requirements of financial debt under Section 5(8) of the Code.
Accordingly, the NCLAT found that the Adjudicating Authority had erred in dismissing the Section 7 application and failed to recognise the true nature of the transaction. The impugned order was set aside, the application under Section 7 was admitted, and the matter was remanded to the National Company Law Tribunal (NCLT) for further proceedings.
Ms Pinki Anand, Sr Advocate, Mr Balendu Shekhar, Mr Rajkumar Maurya, Ms Saudamini Sharma, Ms Tanisha S. and Ms. Nayoleeka Purty, Advocates, represented the Appellant.
Mr Avinash R Khanolkar, Ms Surekha Yadav and Ms Khushbu B, Advocates, appeared for the Respondent.
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