Corporate Debtor Can't Avoid Repayment Obligations On Ground Of Irregularities U/S 186 Of Companies Act In Disbursing Loan: NCLAT

The National Company Law Appellate Tribunal (NCLAT) New Delhi bench of Justice Rakesh Kumar Jain (Judicial Member), Mr. Naresh Salecha (Technical Member) and Mr. Indevar Pandey (Technical Member) has held that the Corporate Debtor cannot avoid its obligation to repay the debt on the ground that section 186 of the Companies Act was not followed while disbursing the loan. The aim of this provision is to protect the shareholders, not to shield the corporate debtor from its repayment obligations. The present appeal has been filed against an order passed by the National Company Law Tribunal (NCLT) by which it dismissed an application under section 7 of the IBC. The Appellant submitted that since the said amount was disbursed to enable the CD to liquidate its financial liabilities towards secured financial creditors under an OTS arrangement and the amount was repayable after OTS was over but the Respondent did not repay the amount despite five demand notices which were served between 02.08.2019 to 30.05.2022. It was further submitted that the Adjudicating Authority erred in holding that the loan was unenforceable due to violation of section 186 of the Companies Act. The objective of this provision was to protect the shareholders and stakeholders from excessive lending by its management, not to enable corporate debtor to evade repayment obligations on grounds of such violation. Per contra, the Respondent submitted that disbursement of interest free loan in absence of an agreement or fixed repayment date does not qualify as a financial debt under section 5(8) of the IBC. It was further argued that this violates section 186 of the Companies Act which prohibits disbursement of interest free loan without prior approval and restricts company from providing loans exceeding 60% of the paid up share capital. The Tribunal noted that section 186(2) provides that no company can provide loans exceeding 60% of its paid up share capital, free reserves and securities premium account. Section 186(13) further states that fine and imprisonment are provided for the company and its officers if this provision is violated. It further held that nowhere this section renders such transactions void and unrecoverable. Therefore, any violation of section 186 of the Companies Act cannot absolve the corporate debtor from its liability to repay. The provision aims to protect the shareholders, not to shield the debtor. The Corporate Debtor cannot be permitted to invoke section 186 to avoid repayment of a legally due debt. It held that the Appellant has established that the disbursed amount was consistently reflected in the balance sheet of the corporate debtor as an unsecured loan which was never repaid despite multiple demand notices. This is a clear case of default under the IBC. The Adjudicating Authority committed an error in dismissing the Application under section 7 of the IBC. Accordingly, the present appeal was allowed. Case Title: Pancham Studios Pvt. Ltd. Versus Konark Aquatics & Exports Pvt. Ltd. Case Number: Company Appeal (AT) (Ins.) No. 406 of 2024 Judgment Date: 15/07/2025 For Appellant : Mr. Kumarjit Banerjee, Mr. Sanchari Chakraborty, For Respondent : Mr. Aadil Naushad, Mr. Sahil Sharma, Mr. Shashank Agarwal, Advocates. Mr. Rajesh Aggarwal, Dr. B.K. Dash, Ms. Deeksha Aggarwal, Mr. Mayank Dash, Mr. Ninad Dash, Advocates. Click Here To Read/Download The Order

Corporate Debtor Can't Avoid Repayment Obligations On Ground Of Irregularities U/S 186 Of Companies Act In Disbursing Loan: NCLAT

Mohd Malik Chauhan

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