NCLT Ahmedabad Rejects Money Lender's CIRP Plea, Says Loan To Repay Existing Bank Debt Is Not Financial Debt

The Ahmedabad bench of the National Company Law Tribunal (NCLT) has held that a money lender who advances funds only to help a corporate debtor clear an existing bank loan cannot, in the facts of the case, claim the status of a financial creditor under the Insolvency and Bankruptcy Code (IBC).

It rejected a Section 7 insolvency plea filed by Gujarat-based Mangaldas Finance seeking initiation of the corporate insolvency resolution process against Milano Papers Pvt. Ltd.

The bench of Judicial Member Chitra Hankare and Technical Member Dr. V.G. Venkata Chalapathy observed that the loan had been sanctioned solely to repay the corporate debtor's Yes Bank liability.

"A repayment arranged in order to enable the CD repay the loan cannot be the activity of a money lender and the loan so granted by applicant does not qualify as financial creditor or financial debt under Sec 5 (7) & (8) of IBC 2016," the bench held.

Mangaldas Finance, a sole proprietorship of Asit Surendrabhai Shah registered under the Gujarat Money Lenders Act, 2011, approached the tribunal under Section 7 of the IBC seeking initiation of the corporate insolvency resolution process against Milano Papers. It claimed a default of ₹9.56 crore arising from four term loans sanctioned in October 2024.

According to the applicant, the loans carried interest at 15% per annum and were disbursed directly to Yes Bank to clear Milano Papers' outstanding dues. The company continued making repayments until October 2025 but allegedly defaulted the following month. The money lender then issued a demand notice. It said Milano Papers acknowledged the notice and cited financial difficulties while seeking additional time to clear the outstanding amount.

The applicant argued that there was no bar on a registered money lender filing an insolvency petition under the IBC. It also contended that the documents on record established that it was a secured financial creditor in respect of the term loan advanced to the company.

Milano Papers opposed the plea, arguing that the application did not disclose the correct date of default. It also submitted that several repayments had been accepted without objection before the demand notice was issued. According to the company, this amounted to a novation of the repayment terms. As a result, there was no subsisting debt or default under the IBC.

Examining the transaction, the bench noted that the loan amount had been transferred directly from the applicant's loan account to Yes Bank instead of being disbursed to Milano Papers.

"This cannot be construed as a loan disbursement to the respondent CD," it observed.

The bench also referred to Section 39 of the Gujarat Money Lenders Act, which regulates the activities of money lenders and prescribes restrictions on recovery. Holding that the applicant was ineligible to invoke Section 7 of the IBC in the facts of the case, it observed, "The applicant is ineligible to file an application under Sec 7 of IBC 2016."

The tribunal rejected the insolvency petition and directed the applicant to pay costs of ₹1 lakh to the Prime Minister's National Relief Fund.