NCLAT Holds Interest-Free Loan as Financial Debt; Overrules Section 186 of the Companies Act Defence to Uphold CIRP Initiation
- REEDLAW
- Jul 17
- 3 min read
The NCLAT held that an interest-free loan qualifies as a financial debt and overruled the defence based on Section 186 of the Companies Act to uphold the initiation of the Corporate Insolvency Resolution Process (CIRP).
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 petition, held that an interest-free loan disbursed for the purpose of repaying existing financial liabilities and duly reflected in the corporate debtor’s balance sheet qualifies as a “financial debt” under the Insolvency and Bankruptcy Code, 2016. The Tribunal further clarified that a lender’s violation of Section 186 of the Companies Act, 2013, does not negate the borrower’s repayment obligation, nor does it preclude the initiation of the Corporate Insolvency Resolution Process (CIRP) under Section 7 of the Code.
The NCLAT Bench allowed an appeal against the order dated 29.11.2023 passed by the NCLT, Cuttack Bench. The NCLT had dismissed an application filed under Section 7 of the Insolvency and Bankruptcy Code, 2016, by the Appellant, Pancham Studio Pvt. Ltd., seeking initiation of the Corporate Insolvency Resolution Process (CIRP) against Konark Aquatics and Exports Pvt. Ltd. (the Corporate Debtor) in relation to an interest-free loan of ₹4.43 crore.
The Appellant had disbursed the loan through banking channels to enable the Corporate Debtor to discharge its financial liabilities under a One-Time Settlement (OTS) arrangement with secured creditors. Despite repeated demand notices, the Corporate Debtor failed to repay the amount. The loan was reflected as an unsecured loan in the Corporate Debtor’s balance sheets from FY 2016-17 to FY 2020-21 without any caveat or qualification.
The NCLT had dismissed the Section 7 application on the grounds that the amount was not a financial debt, treating it instead as part of a family arrangement arising out of sale proceeds from a joint family property. The NCLT further held the loan to be in violation of Section 186 of the Companies Act, 2013 and declared it void, and also found non-compliance with Section 7(3)(a) of the IBC regarding the record of default from an Information Utility.
The Appellate Tribunal disagreed with these findings. It held that an interest-free loan advanced to discharge the financial liabilities of a corporate debtor constitutes a financial debt under the IBC, if it has the commercial effect of borrowing. The continuous reflection of the amount in the Corporate Debtor’s balance sheets as an unsecured loan was deemed a clear acknowledgement of debt. The NCLAT observed that the existence of a formal written financial contract is not mandatory to establish financial debt, relying on precedent from the Supreme Court and earlier NCLAT rulings, including Orator Marketing Private Limited v. Samtex Desinz Private Limited, REEDLAW 2021 SC 07562 and Agarwal Polysacks Limited v. K. K. Agro Foods and Storage Limited, REEDLAW 2023 NCLAT Del 09515.
On the issue of Section 186 of the Companies Act, the NCLAT held that any violation of this provision could attract penal consequences for the lender, but did not absolve the borrower from its obligation to repay the amount. It ruled that the Corporate Debtor could not take shelter under Section 186 to evade repayment, especially since the borrower had admitted the debt in its own financial records.
The Tribunal also clarified that non-filing of a record of default from an Information Utility, as per Regulation 20(1A) of the IBBI (Information Utilities) Regulations, 2017, was not fatal to a Section 7 application. The Appellate Tribunal emphasised that the IBC allows submission of “other records of default” as contemplated under Section 7(3)(a), the CIRP Regulations, and the Application to Adjudicating Authority Rules, 2016.
Having found that the disbursement of funds, the default in repayment, and the acknowledgement of the debt were all clearly established, the NCLAT held that the requirements for initiation of CIRP under Section 7 were fulfilled. Accordingly, it allowed the appeal, set aside the impugned NCLT order, and directed that CIRP be initiated against the Corporate Debtor.
Mr. Kumarjit Banerjee, Mr. Sanchari Chakraborty, Mr. Aadil Naushad, Mr. Sahil Sharma and Mr. Shashank Agarwal, Advocates, represented the Appellant.
Mr. Rajesh Aggarwal, Dr. B. K. Dash, Ms. Deeksha Aggarwal, Mr. Mayank Dash and Mr. Ninad Dash, Advocates, appeared for the Respondent.
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