Merely Extending Financial Assistance Can't Be Considered As Loan In Absence Of A Loan Agreement: NCLT Delhi

The National Company Law Tribunal Bench of Shri Mahendra Khandelwal (Judicial Member) and Shri Atul Chaturvedi (Technical Member) dismissed a Section 7 application filed under the Insolvency & Bankruptcy Code, 2016 (“the code”) holding that merely providing financial assistance can't be construed as a short-term or long-term loan in the absence of a formal loan agreement. Background Facts: In May 2019, the Corporate Debtor approached the Financial Creditor seeking a borrowing of USD 150,000 (approximately ₹1,25,94,562) for the construction of apartments in Malviya Nagar, New Delhi. The Corporate Debtor assured the Financial Creditor that it would generate a profit of USD 70,000–80,000 from the sale of these apartments and agreed to share 50% of the profit with the Financial Creditor. Additionally, the Corporate Debtor promised to repay the borrowed amount within six to eight months. However, despite repeated requests from the Financial Creditor, the Corporate Debtor failed to repay the principal amount or share any profits as promised. On October 9, 2024, the Financial Creditor issued a legal notice demanding repayment of USD 190,000. Findings: The Tribunal noted that while the Financial Creditor claimed to have disbursed a loan of USD 150,000 to the Corporate Debtor, there was no documentary evidence to support this assertion. Specifically, no bank statements of either party were submitted to substantiate that any amount was transferred as a financial debt. Furthermore, the Financial Creditor failed to provide any loan agreement or document evidencing a validly executed loan contract between the parties. The Tribunal held that merely providing financial assistance cannot be construed as a short-term or long-term loan in the absence of a formal loan agreement. In the case of Pawan Kumar v. Utsav Securities Pvt. Ltd., 2020 the NCLAT held that in the absence of a written agreement outlining loan terms and interest, it is difficult to ascertain the repayment period. The Financial Creditor relied on a WhatsApp chat between the directors of both companies as evidence of the financial transaction. However, even assuming that money was indeed transferred, the Applicant did not provide sufficient proof to demonstrate that the funds qualified as a “financial debt” under Section 5(8) of the Code. Moreover, the WhatsApp chat was submitted without the necessary certificate under Section 65B of the Indian Evidence Act, 1872, rendering it inadmissible. In Imdadali M Momin and Ors. v. Pellucid Lifesciences Pvt. Ltd., 2024, the NCLAT held that without documentation specifying the loan tenure, rate of interest, or interest payment schedule, the alleged loan cannot qualify as a financial debt under Section 5(8) of the IBC. The Financial Creditor further contended that the Corporate Debtor had assured a 50% share in the profits expected from selling the apartments, arguing that this implied the element of “time value of money” under Section 5(8) of the Code. However, the Tribunal observed that this profit-sharing was contingent on the future sale and profitability of the apartments, which was inherently uncertain. For a transaction to qualify as a financial debt, the element of “time value of money” must be based on certainty, not speculation. In Realpro Realty Solutions Pvt. Ltd. v. Sanskar Projects and Housing Ltd.,2023, the NCLAT held that where money is disbursed based on anticipated future profit-sharing, it does not meet the criteria of disbursal for consideration involving the time value of money. Accordingly, the Tribunal concluded that a mere promise to share future profits does not constitute a financial debt, as it lacks certainty and does not fulfill the requirement of consideration for the time value of money. In this case, the Applicant failed to submit any document establishing particulars of security, record of default, or a financial contract to substantiate the existence of a financial debt. Thus, the Tribunal dismissed the Section 7 Application filed by the Financial Creditor and held that the Applicant had failed to prove the existence of a financial debt under Section 5(8) of the IBC. Consequently, the question of default by the Corporate Debtor did not arise. The claim was, therefore, dismissed for lack of evidence to establish that the alleged financial assistance qualified as a financial debt under the Code. Case Title: M/S Imperial Banqeuts & Dining Pvt. Ltd. Case Number: Company Petition IB/370/ND/2024 Judgment Date: 09/05/2025 For the Applicant : Mr. Abhishek Taneja, Mr. Sahil Sharma and Mr. Surya Sirohi, Advs. For the RP : Adv. Adil Khan Click Here To Read/Download The Order

Merely Extending Financial Assistance Can't Be Considered As Loan In Absence Of A Loan Agreement: NCLT Delhi

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