Interest-Free Debt Must Involve Time Value Of Money To Qualify As Financial Debt: NCLT Delhi

The National Company Law Tribunal Bench of Shri Mahendra Khandelwal (Judicial Member) and Shri Atul Chaturvedi (Technical Member) dismissed a petition filed under Section 7 of the Insolvency and Bankruptcy Code, 2016 (“the code”) stating that when the loan is granted without any interest it should have a consideration of time value of Money. Background Facts: Mr. Sunil Chopra, Financial Creditor extended an interest-free, unsecured loan of ₹6,73,00,000/- to the Corporate Debtor, CAPL Hotels and Spa Pvt. Ltd. in 2009 and the loan was stated to be repayable on demand. The financial statements of the Corporate Debtor consistently recorded the amount as an "Unsecured Loan." Also, the financial statement for the year ending 31.03.2021, signed by the Board of Directors, contains such acknowledgment. When in July 2022 the Financial Creditor issued a loan recall notice, demanding immediate repayment the Corporate Debtor requested time to settle the matter, stating that the promoters of company were not in India. As, no repayment was made after that as well the Financial Creditor served a second legal notice in 2023. Contentions: The Corporate Debtor Contended that the financial transaction took place between 2005 and 2009, the Application was barred by limitation. However, the first demand for repayment was made after an inordinate delay of nearly 17 years in July 2022. He further submitted that there was no loan agreement between the parties as there was no loan documentation, no agreement, repayment terms, interest clause, or board resolution authorizing the loan. The entries in the financial statements were alleged to have been inserted by the Financial Creditor himself, who was a promoter, Director, and Key Managerial Personnel of the company during the relevant period. So, the funds are a partner's contribution in a closely-held business venture, and not financial debt and the classification as “unsecured loan” was not valid. In 2019, the Financial Creditor had exited from the company and had transferred his shares. However, he did not provide any share transfer documents or loan-related records, thereby disabling the Corporate Debtor from adjusting or writing off alleged payables in its accounts., as a result, certain entries continued to appear in the financials of the Corporate Debtor, which the Applicant now seeks to claim as “debt”. In response, the Financial Creditor contended that the disbursed amount of ₹6.73 crore was a clear loan repayable on demand, and thus amounts to “financial debt”. He stated that the recording of the amount disbursed as an “unsecured loan” in the audited financial statements of Corporate Debtor, which was duly signed by the Board of Directors is valid acknowledgement of debt under Section 18 of the Limitation Act, thereby extending the period of limitation. Along with this, the response to loan recall notice by the Corporate Debtor seeking time to repay the amount and not denying the liability, is an admission of debt and default. The Financial Creditor further submitted that the absence of a formal loan agreement or board resolution does not defeat his claim and the financial debt is enforceable based on financial statements. He also argued that interest-free loans qualify as financial debt if disbursed for business purposes. In response to the allegation that the infusion was quasi-equity, the Financial Creditor stated there was no resolution or agreement treating it as such, and that the classification of the amount in the company's own records as “unsecured loan” had remained consistent even after his exit. He also denied allegations of having withheld any documents, and stated that Corporate Debtor had continued to acknowledge the debt in its audited financial statements even after the change in ownership of the Company. Findings: The Tribunal noted that the Financial Creditor claimed the loan to be repayable on demand as it qualified as a financial debt under Section 5(8) of the Code. He further argued that despite the absence of interest, the disbursal amounted to a loan extended against the time value of money. In Orator Marketing (P) Ltd. v. Samtex Desinz (P) Ltd. (2023), the Supreme Court held that The definition of “financial debt” in Section 5(8) IBC does not expressly exclude an interest free loan. “Financial debt” would have to be construed to include interest free loans advanced to finance the business operations of a corporate body.” However, the Tribunal emphasized that the critical element in such cases is demonstrating that the disbursal was made against consideration for time value of money. In Arunkumar Jayantilal Muchhala v. Awaita Properties Pvt. Ltd., As long as the lender visualizes an element of profit and enhancement of economic prospect in return for the money advanced for certain time period, the loan in question...

Interest-Free Debt Must Involve Time Value Of Money To Qualify As Financial Debt: NCLT Delhi

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