Shareholder Advances Recorded As 'Repayable On Demand' Qualify As Financial Debt: NCLT Mumbai

The National Company Law Tribunal (NCLT) Mumbai bench of Sushil Mahadeorao Kochey (Judicial Member) and Prabhat Kumar (Technical Member) admitted a petition under section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC) filed by Euro Corporate Services Pvt. Ltd. (formerly Distent Barter Pvt. Ltd.) against Royal Fantasy Constructions Pvt. Ltd (Corporate Debtor) holding that the loan advanced to the corporate debtor constituted a financial debt under section 5(8) of the IBC. It held that “Further Note 4 of the audited financial statement for the year ended 31st March, 2022 discloses the loans received from related parties and others as “Repayable on demand”. Neither the Banwari Lal Maheshwari nor the Petitioner Company is declared as related party in Note no. 23 of said financial statements. These facts lead us to the irresistible conclusion that the amounts received from Petitioner Company were in nature of loan. Since the said amounts were disbursed for time value of money, the said loan constitutes a financial debt in terms of Section 5(8) of the Code.” Background: The Financial Creditor sought initiation of Corporate Insolvency Resolution Process (CIRP) for a default of ₹2,02,05,153, inclusive of interest at 9% per annum. The date of default was stated to be 13th August 2024. According to the petition, the financial creditor had advanced several loans to the corporate debtor amounting to Rs. 4.24 crore against which partial payments were made. The balance confirmation signed by the authorised representative of the corporate debtor showed an outstanding amount of Rs. 1.94 crore as on 31st March 2024. The Corporate Debtor submitted that the very first payment made to the Respondent was towards share subscription, demonstrating that the Petitioner was acting in furtherance of the Shareholders Agreement at the behest of the said shareholder. It was further submitted that the advances made by the petitioner were capital contributions following SSA, not loans. It was further stated that the repayment was contractually deferred until generation of surplus from real estate projects under clause 4.6 of the SSA. It was further submitted that the directors and shareholders of the petitioner were signatories to the SSA and therefore the transaction was in the nature of equity participation, not lending. Relying on Proplarity Infratech Pvt. Ltd., it was submitted that shareholders funding cannot constitute a financial debt under the IBC. Per contra, the Petitioner submitted that the terms of the SSA were not acted upon after 2010, as the project stalled, all subsequent disbursements were decided to be treated as independent loans repayable on demand. It was further submitted that the SSA had been superseded by conduct as the debtor continued to pay interest even after project suspension. Lastly, it was submitted that even assuming the existence of the SSA, fresh disbursements after 2010 could not relate back to a 2010 agreement. Findings: The Tribunal observed that the ledger account of the corporate debtor showed regular receipt and repayment of money from 2010-22, with a fresh disbursement of Rs. 1.31 crore against the interest continued to accrue. It further observed that the financial statements of the corporate debtor showed these amounts as repayable on demand, not as shareholder capital. “Neither the petitioner company nor Mr. Banwari Lal Maheshwari has been declared a related party in the Corporate Debtor's balance sheet. These facts lead to the irresistible conclusion that the amounts received were loans disbursed for time value of money, thereby constituting financial debt under Section 5(8) of the Code,” the Bench held. The Tribunal further observed that financial statements revealed a net operational surplus of ₹3.62 crore in FY 2022–23 and ₹21.61 lakh in FY 2023–24 which contradicted the corporate debtor's claim that repayment was not due. It held that the existence of surplus triggered repayment under clause 4.6 of the SSA. On plea of solvency,The Tribunal referred to M. Suresh Kumar Reddy where it was held that “the decision in the case of Vidarbha Industries cannot be read and understood as taking a view which is contrary to the view take in the case of Innoventive Industries and E.S.Krishnamurthy. It finally held that the non-payment of a part of the debt when it becomes due and payable will amount to default on the part of the corporate debtor and an order under Section 7 Insolvency Bankruptcy Code (" IBC ") must follow.." Accordingly, the Tribunal admitted the petition holding that the transaction constituted a financial debt under section 5(8) of the IBC. Case Title: Euro Corporate Services Pvt. Ltd. (formerly Distent Barter Pvt. Ltd.) v. Royal Fantasy Constructions Pvt. Ltd. Case No.: C.P. (IB)/674(MB)/2024 Date of Order: 30/10/2025 Counsel for Financial Creditor: Adv. Rohan ...

Shareholder Advances Recorded As 'Repayable On Demand' Qualify As Financial Debt: NCLT Mumbai

Mohd Malik Chauhan

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Shareholder Advances Recorded As 'Repayable On Demand' Qualify As Financial Debt: NCLT Mumbai

Mohd Malik Chauhan

This is a premium content Available exclusively to Our subscribers

INR 1099+GST

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This is a premium content
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