RBI Circular Cannot Override IBC; Written Agreement Not Mandatory To Prove Financial Debt: NCLAT

The National Company Law Appellate Tribunal (NCLAT) at Delhi has held that RBI circulars requiring written loan agreements cannot override the Insolvency and Bankruptcy Code.

The tribunal observed that it is “a clear derivative” of its earlier judgments that the RBI circular does not prevail over IBC proceedings and that a written agreement is not mandatory to establish financial debt under the Code.

The bench of Chairperson Justice Ashok Bhushan and Technical Member Barun Mitra, while referring to its earlier judgment in Desana Impex Ltd. v. Brick and Mortar Realty Pvt. Ltd., observed that,

“When we look at the above judgment, it is clear that the IBC does not stipulate or prescribe the need to have a written agreement between the parties to prove any disbursement of loan to be treated as a financial debt.”

The tribunal further observed,

“It is also a clear derivative of this judgment that the RBI Circular does not prevail over IBC proceedings and therefore not mandatory for any NBFC to furnish any written financial contract or a written agreement between the parties to substantiate a financial debt in terms of the scheme of IBC.”

The appeal was filed by Subham Capital Pvt. Ltd., a non-banking financial company (NBFC), against Vedic Realty Pvt. Ltd., challenging an order passed by the Kolkata Bench of the National Company Law Tribunal (NCLT) on September 23, 2024, which had dismissed a petition seeking initiation of Corporate Insolvency Resolution Process (CIRP) against Vedic Realty.

Subham Capital had disbursed loans aggregating Rs 22.75 Crore between 2011 and 2016 on the basis of an oral understanding with Vedic Realty. The transactions carried interest and were reflected in the books of both parties. The borrower issued demand promissory notes, confirmation letters, loan renewal acknowledgements, and post-dated cheques acknowledging the liability.

TDS was also deducted on interest payments. The last repayment was made in April 2021, after which default occurred. A recall notice was issued in March 2022, followed by the filing of a Section 7 petition.

That petition was later withdrawn after the parties entered into a settlement agreement dated November 18, 2022. The arrangement, however, did not hold. When the corporate debtor failed to adhere to the agreed repayment terms, Subham Capital moved the NCLT again in 2023 with a fresh application under Section 7.

The tribunal rejected the second petition. It held that, in the absence of a written loan agreement, the transaction could not be recognised as a financial debt. The NCLT also found the fresh application to be not maintainable, noting that the earlier petition had been withdrawn without liberty to revive the proceedings.

Before the appellate tribunal, Subham Capital argued that the liability was not in dispute and stood reflected in the corporate debtor's bank statements. According to the appellant, the debt had been repeatedly acknowledged through demand promissory notes, confirmation letters, loan renewal acknowledgements, post-dated cheques and deduction of TDS on interest payments, all of which, it said, clearly established both debt and default.

It was further contended that the withdrawal of the earlier Section 7 petition following the settlement dated November 18, 2022 could not prevent the creditor from approaching the tribunal again. The default, counsel submitted, continued even after the settlement, and the breach of its terms constituted a fresh cause of action.

The respondent, on the other hand, maintained that the appellant, being an NBFC, was bound by the RBI Fair Practices Code and the relevant Master Circular, which required loan transactions to be supported by a written agreement. In the absence of such a document, it was argued, the alleged advance could not be treated as financial debt.

The respondent also asserted that the claim was essentially based on breach of the settlement agreement and that such a dispute could not be pursued through insolvency proceedings. Since the earlier Section 7 petition had been withdrawn unconditionally, the second petition, according to the respondent, was barred by the principles of res judicata.

The NCLAT referred to its earlier rulings in Agarwal Polysacks Ltd. v. K.K. Agro Foods & Storage, and Satish Balan, which held that the IBC does not mandate a written financial contract to prove financial debt and that debt can be established through other material on record.

The tribunal noted that in the present case the respondent had issued loan receipts, demand promissory notes and confirmation letters acknowledging receipt of loan, besides letters acknowledging renewal of loans for the period 2013–2017 reflecting accrual of interest. Signed confirmations of accounts for the financial years 2013–14 to 2017–18 were also on record.

It further observed that,

“Besides unequivocal admission and acknowledgement of financial debt by the Respondent, the TDS deduction made on interest components as well as issue of post-dated dishonoured cheques are also a clear proof of disbursement of loan with interest.”

On the question of maintainability, the tribunal held that the NCLT erred in applying principles of res judicata and in holding that a fresh petition could not be filed after withdrawal of the earlier one, observing that breach of settlement terms gives rise to a fresh cause of action and that insolvency proceedings cannot be rejected on technical grounds where debt and default are otherwise established.

Holding that the material on record clearly showed the existence of financial debt and default above the statutory threshold, the NCLAT set aside the impugned order.

Accordingly, the appeal was allowed, and the tribunal directed the Adjudicating Authority to admit the Section 7 application and proceed in accordance with law.