Loan Paid To Director's Account Not Company Debt Without Proof Of Corporate Borrowing: NCLT Chennai

The National Company Law Tribunal (NCLT) at Chennai has held that a loan directly disbursed into the personal bank account of a company's director cannot be treated as a financial debt of the company without supporting evidence.

The creditor must establish that the borrowing was undertaken by the company and that the funds were received or utilised by it for its business.

A coram of Judicial Member Jyoti Kumar Tripathi and Technical Member Ravichandran Ramasamy observed,

“A financial disbursement made directly to an individual director's bank account cannot, by stretch of imagination, be treated as a financial debt extended to the corporate entity, in the absence of direct corporate borrowing resolutions and direct receipt of funds by the company, further the applicant has not brought on record any further documents to substantiate that the said disbursement was done in furtherance of the corporate debtor.”

Rajesh Kumar Saraf HUF, the Financial Creditor, filed a Section 7 petition seeking initiation of Corporate Insolvency Resolution Process against Veremax Technologie Services Limited.

The Financial Creditor contended that the Corporate Debtor, through its directors/major shareholders, sought a short-term loan of ₹5 crore for working capital. The loan was to be repaid within one month at 36% annual interest.

The amount was transferred through RTGS to the bank account of director TRM Venkatesh. The Financial Creditor said the Corporate Debtor issued a demand promissory note in its favour.

The Financial Creditor further contended that the Corporate Debtor sought additional time to repay the loan. It said the Corporate Debtor committed to pay ₹1 crore per month from September 2023.

The Financial Creditor said no such payments were made. It claimed a total amount of ₹5,01,84,250, including interest.

The Corporate Debtor disputed the liability. It pointed out that the amount was disbursed to Venkatesh personally.

It also relied on the Record of Financial Information issued through the National E-Governance Services Limited (NeSL) portal. The record identified Venkatesh as the “Debtor”, while Veremax was shown as the “Guarantor”.

Examining the materials on record, the bench observed that the principal loan amount was disbursed through RTGS directly into Venkatesh's personal bank account. It was not credited to the bank account of the Corporate Debtor.

The Tribunal further noted that the Loan Repayment Schedule dated February 3, 2024, and email communications were issued by and addressed to Venkatesh in his individual capacity. The repayments were also tendered by Venkatesh personally.

"….a corporate entity registered under the Companies Act possesses a separate and distinct legal personality from its directors or shareholders,” the Tribunal emphasised.

It held that a financial disbursement made directly to an individual director cannot be treated as a financial debt extended to the company in the absence of direct corporate borrowing resolutions and direct receipt of the funds by the company. The Applicant had also failed to produce material showing that the disbursement was made in furtherance of the Corporate Debtor.

The tribunal said that disbursement for the purposes of the Insolvency and Bankruptcy Code must necessarily be to the Corporate Debtor. It must also be for utilisation by the Corporate Debtor in furtherance of its business.

The tribunal then set out a three-fold test to determine whether the alleged disbursement could constitute a financial debt of the Corporate Debtor.

Credit of debt Test – whether the debt amount was credited to the account of the Corporate Debtor.

Principle Purpose Test – whether the amount was disbursed to meet the working capital, investment, repayment of an earlier debt or other business requirements of the Corporate Debtor.

Application of debt – whether the amount was actually appropriated for and used by the Corporate Debtor.

Applying the three-fold test, the tribunal found that all three limbs remained unsatisfied.

On the first limb, the amount was not credited to any account held by or in the name of Veremax. Instead, it was disbursed into the personal bank account of an individual.

On the second limb, the Applicant failed to place on record material establishing that the amount was disbursed towards any specific requirement, need, or business purpose of the Corporate Debtor. The Bench, therefore, found the second limb of the test unsatisfied.

On the third limb, the Applicant failed to produce material showing that the amount was actually utilised for the business or affairs of Veremax. The third limb of the test was therefore also unsatisfied.

The Tribunal therefore held that the Petitioner failed to establish the primary requirement of a “financial debt” disbursed to Veremax Technologie Services Limited. It accordingly dismissed the insolvency petition.

For Applicant: Advocates Rahul Balaji and Madhan Babu

For Respondent: Advocate Pawan Jhabakh