NCLT Indore Holds IBC Cannot Be Used To Settle Family Disputes, Rejects ₹4.21 Crore Section 7 Plea

The Indore Bench of National Company Law Tribunal (NCLT) has held that a Section 7 application under the Insolvency and Bankruptcy Code (IBC) cannot be used to recover disputed amounts or settle an ongoing family dispute where the applicant fails to establish the existence of a financial debt and default.

Judicial Member Brajendra Mani Tripathi and Technical Member Man Mohan Gupta dismissed an application filed by Prakash Chuhardas Khatri, Karta of Indore Glass House HUF, seeking initiation of Corporate Insolvency Resolution Process (CIRP) against Indore Glass House Private Limited over an alleged financial debt of about Rs. 4.21 crore. The Tribunal held:

“The real dispute between the parties is a family dispute regarding the business and the properties left behind by their father. Such a dispute is to be decided by the civil court, where evidence can be led. It is by now an established position of law that the Code is not meant merely for the recovery of money, nor can it be used as a tool to settle a family dispute.”

Khatri claimed that he had advanced unsecured loans to Indore Glass House Private Limited between FY 2020-21 and FY 2023-24 through banking channels for working capital requirements.

He claimed that the amounts were repayable on demand with interest and sought about Rs. 2.85 crore towards principal and Rs. 1.36 crore as interest. He relied on the company's audited financial statements and its acknowledgement of an unsecured loan of Rs. 2.85 crore.

The company disputed that the transactions constituted loans, contending that the parties belonged to the same family and that the transfers arose from a family arrangement concerning the family business. It also pointed out that there was no loan agreement, repayment schedule or agreed interest.

The Tribunal observed that although a written loan agreement is not indispensable to establish a financial debt, the applicant must establish the nature of the disputed transactions. It held that the mere receipt of money and its reflection in the company's balance sheet did not establish a financial debt or demonstrate the requisite “time value of money” under Section 5(8) of the IBC, which defines financial debt.

The Bench rejected reliance on the Supreme Court's decision in Orator Marketing Pvt. Ltd. v. Samtex Desinz Pvt. Ltd., observing that while payment of interest is not mandatory to constitute a financial debt in every case, there must be some evidence demonstrating the time value of money.

It further found that there was no agreed date for repayment and that the alleged default arose only after issuance of the demand notice. It therefore held that a default within the meaning of Section 3(12) of the IBC, which defines “default” as non-payment of a debt when it has become due and payable, was not established.

It also considered the pendency of a civil suit concerning partition and family rights relevant to determining the true nature of the transactions, while clarifying that the pendency of such proceedings did not by itself bar a Section 7 application.

Accordingly, the NCLT dismissed the Section 7 application.