'Shylockian System' Of Lending Cannot Be Permitted To Misuse IBC For Debt Recovery: NCLT Kochi

The National Company Law Tribunal (NCLT) at Kochi has refused to admit an insolvency plea against NCS Autocars Private Limited, holding that a "shylockian system" of lending involving advance deduction of interest cannot be permitted to misuse the Insolvency and Bankruptcy Code (IBC).

The tribunal found that the proceedings bore the characteristics of a debt recovery action rather than a bona fide insolvency proceeding.

A coram of Judicial Member Vinay Goel and Technical Member Ravichandran Ramasamy dismissed the plea filed by SC Shah Corporation and seven others.

The tribunal observed, "The system adopted by the Petitioners of making advance deductions from the loan amount towards interest is a typical moneylender's practice. Such a “shylockian system” of lending cannot be permitted to misuse or take advantage of the insolvency resolution process under the Code.”

According to the lenders, NCS Autocars borrowed ₹4 crore in two tranches in September and December 2023. The company executed promissory notes in their favour and agreed to repay the amounts with interest within five months. The lenders claimed the company repaid ₹1.45 crore but defaulted on the remaining dues.

Claiming an outstanding debt of about ₹3.82 crore, including ₹2.55 crore towards principal and about ₹1.27 crore towards interest, the lenders sought initiation of the Corporate Insolvency Resolution Process. They alleged that the company failed to comply with legal notices and repeated demands.

The tribunal noted that although the lenders had obtained several post-dated cheques, they presented only a few for encashment. They also did not initiate proceedings for dishonour of the cheques. While observing that such proceedings are not mandatory before invoking the IBC, the tribunal held that the lenders had not availed themselves of an efficacious remedy available under law.

It further noted that the lenders relied solely on demand promissory notes. They did not produce any written loan agreement. The tribunal also found no material to show that the person who executed the promissory notes on behalf of the company had been authorised by a Board resolution.

“Ordinarily, it can be true but for us it is an important fact as it is not the case of the Petitioner that the petitioners were dealing with the Corporate Debtor for last so many years and there were engaged in mutual day-to-day business but it can be noted that a prudent person while giving huge financial loans to a Corporate Debtor, must ask for authority to sign on behalf of the Company.”, the tribunal observed.

The tribunal found that the lenders deducted interest before disbursing the loan amounts. As a result, the company received only the balance amount. It also observed that the records reflected recurring financial dealings between the parties rather than isolated lending transactions.

The order further records that the lenders had filed multiple insolvency petitions before different NCLT benches based on similar promissory note transactions. In several of those matters, they proposed the same insolvency professional as the Interim Resolution Professional.

The tribunal observed that although the absence of a banking or money-lending licence did not, by itself, make the application non-maintainable, it was a relevant circumstance in examining whether repeated unregulated lending activities were being channelled through the insolvency process as a coercive recovery mechanism rather than for resolution.

It also found no material to indicate that NCS Autocars was commercially insolvent or facing genuine financial distress.

Describing the lending arrangement, the tribunal observed, “It is a system wherein the interest shown or reflected in the documents appears to be less, but the interest effectively and practically charged is so exorbitant that it can be symbolised by the term “squeezing of blood”.”

Holding that the proceedings bore the characteristics of a debt recovery action rather than a bona fide invocation of the insolvency resolution mechanism contemplated under the Code, the tribunal dismissed the petition. It clarified that the lenders were free to pursue any other remedies available to them in accordance with law.

For Petitioners: Advocates Srenik S Jain and Aparna Devi