Interest-Bearing Inter-Corporate Loan Can Qualify As Financial Debt Under IBC: NCLT Kolkata
The National Company Law Tribunal (NCLT), Kolkata Bench, has held that an inter-corporate loan carrying interest qualifies as a "financial debt" under Section 5(8) of the Insolvency and Bankruptcy Code, 2016, provided it satisfies the twin requirements of time value of money and commercial effect of borrowing.
The bench of Judicial Member Bidisha Banerjee and Technical Member Cmde Siddharth Mishra observed that Section 5(8) of the IBC neither expressly nor impliedly excludes inter-corporate loans from the definition of financial debt.
"Section 5(8) of the IBC, 2016 which defines financial debt, does not impliedly or expressly exclude inter-corporate loans from its ambit. As long as the transaction satisfies the test of time value of money and has the commercial effect of borrowing, such loans, if unpaid when it is due, would qualify as a financial debt", the tribunal ruled.
The present section 7 application was filed by Scorpion Nirman Private Limited (Financial creditor) against Swal Limited (Corporate debtor). The financial creditor submitted that the parties executed a Loan Term Sheet dated under which it extended an unsecured inter-corporate loan of Rs. 7 Cr. in three tranches. However, the corporate debtor failed to pay the monthly interest despite several reminders, leading the financial creditor to issue the demand notice and filing the present petition.
Per contra, the corporate debtor argued that the transaction violated the provisions of inter-corporate loans under the Companies Act, 2013 and therefore could not be treated as the “financial debt” under the IBC.
The NCLT considered section 186 of the Companies Act, it observed that the provision provides maximum limit for granting loan by a Company is either sixty six percent of its paid-up share capital or a hundred percent of its free reserve
Considering the provision of the Companies Act, the bench observed,
“Under Section 186 of the Companies Act, 2013, the maximum limit for granting loan by a Company is either sixty six percent of its paid-up share capital or a hundred percent of its free reserves. In order to legitimately grant a loan exceeding the aforementioned limit, the Company has to pass a special resolution.”
The tribunal observed that through board resolution, the board of directors duly authorised the financial creditor to grant the loan to the corporate debtor, which complies with the statutory mandate of granting intercorporate loans.
Further, the NCLT relied upon the ruling of Narendra Kumar Agarwal v. Montrone Leasing Private Limited, Company Appeal (AT) (Insolvency) where the NCLAT upheld the decision of the NCLT ruling that an inter-corporate loan is included within the definition of financial debt.
The bench also relied upon the Corporate Debtor's letter, wherein it acknowledged the outstanding dues and attributed its inability to pay to financial difficulties and cash-flow mismatches.
Accordingly, observing that the default was continuing and that the Section 7 application filed well within limitation, the NCLT admitted the petition.
For Applicant: Advocates Rahul Auddy and Aditya Gooptu
For Respondent: Advocates Tanvi Luhariwala and Ms. Simran More