NCLAT Remands Section 7 IBC Petition After Finding NCLT Did Not Issue Notice to Corporate Debtor Before Rejecting It

NCLAT sets aside NCLT's rejection of a director's Section 7 petition over Rs. 6.86 crore interest-free loan, citing procedural failure and unexamined factual questions about the debt's true character.

The National Company Law Appellate Tribunal's Principal Bench at New Delhi has remanded a Section 7 insolvency petition back to the NCLT New Delhi Bench, after finding that the Adjudicating Authority rejected the petition without issuing notice to the corporate debtor and without examining the full factual record. The appeal was filed by Mr. Rajender Prasad Mittal, an erstwhile director of M/s Jaikrishan Estates Private Limited, who claimed to be a financial creditor in respect of an interest-free loan of Rs. 6,86,44,042 advanced to the company in the financial year 2014–15. The NCLAT found that while the books of the corporate debtor acknowledged the amount as a long-term borrowing, the real nature of the transaction remained genuinely disputed and required a hearing on merits before the Adjudicating Authority.

The Dispute Before the Tribunal

Mittal filed a petition under Section 7 of the Insolvency and Bankruptcy Code, 2016 before the NCLT New Delhi Bench in CP(IB) No. 850/ND/2024, seeking initiation of the Corporate Insolvency Resolution Process against Jaikrishan Estates. He stated that he had disbursed Rs. 6,86,44,042 from his personal Axis Bank account to the company in FY 2014–15. The corporate debtor repaid Rs. 3 crore, leaving the principal outstanding. Mittal claimed the amount appeared in the corporate debtor's balance sheets for FY 2016–17, 2018–19, 2020–21, and 2022–23 under the head “long term borrowing.”

The NCLT rejected the petition by order dated 16 January 2025. According to the appellant, the Adjudicating Authority reached that conclusion without issuing notice to the respondent and after asking the appellant to file an affidavit on maintainability — a request the appellant's counsel declined, preferring instead to argue the maintainability question. The NCLT found that the appellant had not placed on record any board resolution authorising the infusion of funds as a loan, and held that the conditions under Section 5(8) of the Code had not been satisfied.

Appellant's Case: Interest-Free Director Loans as Financial Debt

Before the NCLAT, Mittal argued that the absence of a formal loan agreement does not defeat a Section 7 petition if disbursement is established through bank account statements. He relied on a line of NCLAT and Supreme Court decisions to contend that an interest-free loan advanced by a director or promoter to meet a company's working capital requirements qualifies as a financial debt under Section 5(8) of the Code, particularly under clause (f), which covers any amount raised under a transaction having the commercial effect of a borrowing.

He placed reliance on the Supreme Court's decision in Orator Marketing Pvt. Ltd. v. Samtex Desinz Pvt. Ltd. (Civil Appeal No. 2231 of 2021), which held that the definition of financial debt in Section 5(8) does not expressly exclude interest-free loans advanced to finance business operations. He also cited the NCLAT's decisions in Sailesh Sangani v. Joel Cardoso (Company Appeal (AT) (Ins.) No. 616 of 2018) and M/s Agarwal Polysacks Limited v. M/s K.K. Agro Foods and Storage Limited (Company Appeal (AT) (Ins.) No. 1126 of 2022), among others, for the proposition that a written financial contract is not a pre-condition for proving financial debt.

Respondent's Case: Capital Contribution, Not a Loan

Jaikrishan Estates, represented by Senior Advocate Mr. Vivek Kohli, contested the characterisation of the funds as a loan. The respondent's case was that when the Mittal Group and Singla Group were inducted as shareholders in 2000, each holding 20% of the total share capital of Rs. 15 crore, it was agreed that all promoter groups — Wadia, Singla, and Mittal — would augment the company's working capital in proportion to their respective shareholdings. The funds advanced by Mittal were, on this account, proportionate capital infusions and not standalone loan transactions.

The respondent pointed to the absence of any board resolution, loan agreement, promissory note, or repayment schedule. It argued that Mittal had been a director from 16 January 2000 to 21 October 2022 and had resigned abruptly citing “some other engagement.” The respondent also drew attention to a demand notice dated 20 December 2021 in which Mittal sought assignment of the advance to his wife pursuant to a gift deed dated 19 July 2019, arguing this raised questions about the commercial character of the transaction.

The respondent relied on the Supreme Court's decisions in Anuj Jain, IRP for Jaypee Infratech Ltd. v. Axis Bank Ltd., (2020) 8 SCC 401, and Phoenix ARC Pvt. Ltd. v. Spade Financial Services, (2021) 3 SCC 475, for the requirement that a financial debt must reflect the time value of money. It also argued that the NCLAT's own decision in Neelkanth Township & Construction Pvt. Ltd. v. Urban Infrastructure Trustees Ltd. (Company Appeal (AT) (Ins.) No. 44 of 2017) held that shareholders advancing funds for business purposes do not automatically become financial creditors.

The Legal Question: Whether the Transaction Had the Commercial Effect of Borrowing

The central question was whether the funds transferred by Mittal from his personal bank account to Jaikrishan Estates in FY 2014–15 constituted a “financial debt” within the meaning of Section 5(8) of the Code — specifically, whether the disbursement was against consideration for the time value of money or had the commercial effect of a borrowing under Section 5(8)(f).

The respondent's position was that the transaction lacked every marker of a financial debt: no interest, no repayment schedule, no board resolution, no contemporaneous documentation treating the transfer as a loan, and a demand notice that sought to assign the amount to a third party under a gift deed rather than recover it as a straightforward creditor claim. The appellant's position was that balance sheet acknowledgment and bank disbursement records were sufficient, and that the absence of interest did not disqualify the debt under the Orator Marketing line of authority.

How the NCLAT Reasoned

The NCLAT, in a judgment authored by Member (Technical) Arun Baroka, identified two significant features of the record that it found the NCLT had not properly examined.

First, the corporate debtor's own books of accounts acknowledged the amount under the head of long-term borrowings against the appellant's name. The Tribunal held this was sufficient to determine acknowledgment of the debt at the threshold stage.

Second, the NCLAT examined the demand notice dated 22 October 2021 sent by Mittal. Paragraph 7 of that notice referred to a Share Purchase Agreement dated 26 April 2019 and an irrevocable gift deed dated 19 July 2019 by which Mittal had purportedly gifted the recoverable amount to his wife, Mrs. Saroj Rani, and sought the corporate debtor to remit the amount to enable him to discharge obligations under that gift deed. The Tribunal found this raised questions about the real nature of the debt.

At the same time, the NCLAT noted that the respondent's own reply to the demand notice accepted that the funds were infused to meet the working capital requirements of the company and that all promoter groups had agreed to augment working capital in proportion to their shareholding. The Tribunal observed that this amounted, in a sense, to an acceptance that the corporate debtor had taken funds from the appellant for its working capital requirements.

Weighing these competing considerations, the NCLAT concluded that the factual matrix — including the share purchase agreement (not on record), the gift deed, and the nature of the promoter arrangement — required detailed examination. The Adjudicating Authority had not called for the respondent's reply before rejecting the petition, which the NCLAT found was a procedural shortcoming that warranted remand rather than a final determination at the appellate stage.

Order

The NCLAT disposed of Company Appeal (AT) (Insolvency) No. 368 of 2025 by remanding the matter to the NCLT New Delhi Bench for a decision on merits. The Tribunal directed that the Adjudicating Authority should decide the case without being influenced by the observations made in the NCLAT's order. All related interlocutory applications were also disposed of. No order as to costs was made.