Loan Or Promoter Funding? NCLAT Remands Insolvency Plea Against Jaikrishan Estates

The National Company Law Appellate Tribunal (NCLAT) at Delhi has remanded an insolvency plea filed by a former director of Jaikrishan Estates for fresh consideration, holding that the true nature of the alleged debt required fuller examination rather than summary rejection.

“...we find the real nature of the debt to be questionable due to the existence of share purchase agreement, which is not on record and also the so called assignment by unrecoverable and unconditional gift deed dated 19.07.2019 in favour of this wife by the Appellant,” the tribunal observed.

A bench of Judicial Member Justice N Seshasayee and Technical Member Arun Baroka held that the company law tribunal had failed to adequately examine the dispute before rejecting the plea.

“This should have been examined in detail by the Adjudicating Authority by at least calling for the reply of the Respondent, which in this case, has not happened,” the bench observed.

The case arose from a plea filed by Rajender Prasad Mittal, a former director of Jaikrishan Estates, who claimed he had advanced about Rs 6.86 crore from his personal bank account to the company in 2014-15 as an interest-free loan for its financial requirements. He relied on entries in the company's balance sheets over multiple years showing the amount under “long-term borrowings.”

He argued that this established acknowledgment of the liability.

Mittal argued that even without a formal loan agreement, the disbursement could qualify as financial debt. He also contended that his plea was rejected without the company even being called upon to respond. Jaikrishan Estates disputed this, arguing that the amounts were not loans but promoter contributions infused towards working capital in proportion to shareholding.

The company contended that there was no board resolution, repayment schedule, interest component or other commercial terms ordinarily associated with borrowing. It also pointed to Mittal's own legal notice referring to a share purchase agreement and an unconditional gift deed in favour of his wife to question the nature of the claim.

The appellate tribunal noted that the company's books recorded the amount against Mittal's name under long-term borrowings. It held that this was sufficient to establish acknowledgment of debt. At the same time, it found that the surrounding circumstances raised questions about the true nature of the transaction.

Referring to the company's own stand that the funds were meant for working capital requirements, the bench observed:

“In a way, this is an acceptance by the Respondent that it had taken loan from the Appellant for its working capital requirements. But on the other hand, we find the real nature of the debt to be questionable due to the existence of share purchase agreement, which is not on record and also the so called assignment by unrecoverable and unconditional gift deed dated 19.07.2019 in favour of this wife by the Appellant.”

Sending the matter back for fresh consideration, the tribunal held,

“It will be in the fitness of things that we remand this case back to the Adjudicating Authority to decide the case on merits without being biased by our observations in this impugned order.”