Accounting Entry Alone Cannot Make Share Purchase Payment A Financial Debt Under IBC: NCLAT

The National Company Law Appellate Tribunal (NCLAT) at Delhi has recently ruled that ₹1.39 crore paid towards a share purchase cannot be treated as a financial debt merely because the company later recorded it as an unsecured loan. It upheld the dismissal of an insolvency plea against the company.

“That an acknowledgment shows only, that some money is owed. But that itself does not show that the money is a "financial debt" as defined in Section 5(8). The Respondent is right in saying that merely showing an amount as an unsecured loan does not by itself create the relationship of Financial Creditor and Corporate Debtor,” the bench of Judicial Member Justice Sharad Kumar Sharma and Technical Members Indevar Pandey and Arun Baroka observed.

Catalyst Refinery Services Private Limited had sought insolvency proceedings against Ganpati Global Private Limited over the unpaid amount.

The dispute arose from a 2014 agreement under which Ganpati Global's shareholders agreed to sell their shares to Catalyst for ₹7.70 crore. Catalyst paid ₹1.39 crore to the company through six cheques in August 2014.

Catalyst claimed that the transaction later stalled and the parties orally agreed to treat the payment as an unsecured loan carrying 11% annual interest, repayable on demand. It relied on the company's balance sheets, balance confirmations and tax deduction entries to establish that the amount was a financial debt.

Ganpati Global maintained that the payment formed part of the share purchase transaction and was intended to help clear its liabilities. It denied agreeing to convert the amount into a loan.

The NCLAT found that the MOU did not provide for repayment of the ₹1.39 crore to Catalyst or for any return on the money. It held that the payment was made as part of the share purchase, not against consideration for the time value of money, a requirement under Section 5(8) of the Insolvency and Bankruptcy Code (IBC).

The bench also found that Catalyst had not proved the alleged oral agreement to convert the payment into a loan.

“We hold that on the record the Appellant has not shown that such an agreement was made and what its terms were. A Section 7 application is decided on documents and admitted facts in a summary manner. A disputed oral agreement, whose existence and terms depend on the word of one side against the other, cannot be tried in such a proceeding,” the bench observed.

It further held that the company's balance sheets, balance confirmations and tax deduction entries could acknowledge that money was owed but could not, by themselves, establish a financial debt. The company had credited interest and deducted tax at source but had never actually paid interest to Catalyst.

The NCLAT left Catalyst free to pursue recovery through an appropriate legal forum. It expressed no view on the merits of such a claim or on limitation.

The bench also directed its registry to forward the judgment to the jurisdictional Principal Commissioner of Income Tax for any action considered appropriate. It made no finding on whether the company's accounting treatment violated tax law.