As a part of the Insolvency Law Practice of the firm, we’re pleased to share our research update, dealing with a recent judgement given by the National Company Law Tribunal (New Delhi bench) in the case of Ravinder Pal Singh v. Satkar Air Cargo Services.    

In the aforesaid case, the Hon’ble NCLT had to deal with a very interesting case where in the Petitioner who was a promoter director of the Respondent private limited company advanced a loan of Rs. 80 lakhs on various dates to the Respondent company.

The audited financial statements of the Respondent Company also revealed the said loan of Rs. 80 lakhs received as unsecured loans and advances from the said promoter director. The relevant ledger account of the Respondent company also showed the said amount as outstanding loan from the applicant. 

However, despite demand by the applicant, the corporate debtor did not repay the loan.

The Respondent company argued that the said amount was not a loan / financial debt because (i) the amount given by the applicant was adjusted against the value of the shares allotted to him and the benefits enjoyed by the applicant’s family in the form of high salary, perks, luxury etc, and (ii) the business of the group companies had gone down on account of faults of the applicant and his son.

 Judgment of the Hon’ble NCLT (New Delhi)

The Hon’ble NCLT held that the amount advanced could not be regarded as a ‘financial debt’ because mere granting of loan and admission of taking loan will ipso facto not treat the applicant as ‘financial creditor’ under the Insolvency Code. Financial debt is a debt along with interest, if any, which is disbursed against consideration for time value for money. Therefore, any loan having been taken without interest, or time value of money cannot be considered to be a ‘financial debt’.

The NCLT noted that the applicant had neither produced any loan agreement, not there were details and particulars of any applicable interest agreed between the parties. It also noted that, – in the balance sheets of the Respondent corporate debtor, there was no accumulation of interest on the loan amount; and there was nothing on record to show that the Respondent company agreed to pay interest at any point of time.

Our Analysis and Comments in brief

Persons who provide loans to companies, particularly promoters/directors of private limited companies, have to be cautious enough to ensure that there is proper documentation evidencing (that) the amount is being given by way of a ‘loan’.  

Generally, if a company obtains loan, the Board of Directors or any Committee thereof pass a resolution to the said effect. Therefore, even if there is no loan agreement, such a resolution should suffice as a documentary evidence to prove that the said amount was indeed a ‘financial debt’ given as consideration for time value of money.

Under the provisions of Companies Act, 2013, any amount received by a private limited company from a director is not considered to be a ‘deposit’ if a declaration is given to the effect that the Director has not borrowed money to give a loan to the company. In the absence of such declaration, such loan given by the Director to the company is considered to be a ‘deposit’, warranting stringent compliances to be made by the company in relation to ‘acceptance of deposits’.  

Non-repayment of deposit or refusal to repay deposit, attract repayment with penal interest at the rate of 18% per annum as per Companies (Acceptance of Deposit) Rules, 2014. Further default in repayment attract heavy penalty including imprisonment in case of wilful refusal / fraud under section 447 of Companies Act, 2013. In the aforesaid case, it seems that the point relating to acceptance of deposits was not put forth before the NCLT.

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