2026 Supreme(Online)(NCLAT) 558

NATIONAL COMPANY LAW APPELLATE TRIBUNAL
N Sesha Sayee (Member(Judicial)) , Mr. Arun Baroka (Member (Technical)) ,
MR. RAJENDER PRASAD MITTAL – Appellant
Versus
M/S JAIKRISHAN ESTATES PRIVATE LIMITED – Respondent
368/ND/2025 COMPANY APPEAL(AT)(INS)

An interest-free loan from a director can be a 'financial debt' under the IBC, but the Adjudicating Authority must properly examine the transaction's true nature before admitting or rejecting a Section 7 petition.

Headnote:(A) Insolvency and Bankruptcy Code, 2016 - Section 5(8), Section 7, Section 61 - Whether an interest-free loan advanced by a director/promoter to a corporate debtor for working capital, recorded in the company's books as long-term borrowing, constitutes a 'financial debt' - The definition of 'financial debt' under Section 5(8) does not expressly exclude an interest-free loan and includes amounts raised under a transaction having the commercial effect of borrowing - However, the existence of a share purchase agreement and a gift deed by the appellant raises questions about the real nature of the debt, requiring further examination by the Adjudicating Authority.

(B) Insolvency and Bankruptcy Code, 2016 - Section 7 - Acknowledgment of debt - An entry in the books of accounts of the corporate debtor relating to 'long term borrowings' against the appellant's name is sufficient to determine acknowledgment of the debt. (Para 48)

(C) Insolvency and Bankruptcy Code, 2016 - Section 7 - The Adjudicating Authority, when considering a Section 7 application, is required to examine the real nature of the transaction and call for a reply from the respondent before dismissing the petition on preliminary grounds. (Para 52)

Facts of the case:
The appellant, a former director of the respondent corporate debtor, filed a petition under Section 7 of the IBC to initiate Corporate Insolvency Resolution Process (CIRP), claiming an outstanding financial debt of Rs. 6,86,44,042/-. This amount was allegedly advanced as an interest-free loan in the financial year 2014-15 and was recorded in the respondent's balance sheets under 'long term borrowing'. The respondent contended that the amount was a proportionate capital infusion by promoters for working capital, not a loan. The Adjudicating Authority rejected the Section 7 petition, and the appellant appealed under Section 61 of the Code.

Findings of Court:
The Appellate Tribunal noted an acknowledgment of the debt in the corporate debtor's books of accounts. However, it found the real nature of the debt questionable due to the existence of a share purchase agreement and an 'irrevocable and unconditional gift deed' dated 19.07.2019, which the appellant executed in favor of his wife assigning the right to recover the amount. The Tribunal concluded that the Adjudicating Authority should have examined these documents and called for a reply from the respondent instead of dismissing the petition. The case was remanded back for a decision on merits.

Issues: The main issue was whether an interest-free loan advanced by a director for the working capital needs of a company, acknowledged in financial statements, qualifies as a 'financial debt' under Section 5(8) of the IBC, and whether the Adjudicating Authority is required to conduct a deeper factual inquiry into the nature of the transaction before rejecting a Section 7 application.

Ratio Decidendi: While the court acknowledged that an interest-free loan can constitute a 'financial debt' under the expansive definition of Section 5(8) of the IBC, it held that the Adjudicating Authority failed to conduct a proper inquiry into the facts. The presence of a share purchase agreement and a gift deed assigning the debt created ambiguity about the true character of the transaction. Therefore, the matter was remanded for a fresh hearing on merits, where the Adjudicating Authority must examine all relevant documents and hear the respondent's side.

Result: The appeal was disposed of by remanding the case back to the Adjudicating Authority to decide the case on the merits without being biased by the observations in the impugned order. All related IAs were also disposed of. No order as to costs. (Para 52)