Repayment Obligations Stand Despite Irregularities in Loan Disbursal: NCLAT

Repayment Obligations Stand Despite Irregularities in Loan Disbursal: NCLAT

Introduction

The National Company Law Appellate Tribunal (NCLAT), New Delhi Bench, has held that a corporate debtor cannot avoid its obligation to repay a debt on the ground that Section 186(2) of the Companies Act, 2013, was not followed while disbursing the loan.

Factual Background

Pancham Studios Pvt. Ltd. disbursed an amount to Konark Aquatics & Exports Pvt. Ltd. to enable the latter to liquidate its financial liabilities towards secured financial creditors under an OTS arrangement. Despite five demand notices, Konark Aquatics failed to repay the amount.

Procedural Background

The Appellant filed an application under Section 7 of the Insolvency and Bankruptcy Code (IBC), which was dismissed by the National Company Law Tribunal (NCLT). The NCLT held that the loan was unenforceable due to violation of Section 186(2) of the Companies Act.

Issues

The primary issue was whether the corporate debtor could avoid its repayment obligation due to the alleged violation of Section 186 of the Companies Act.

Contentions of the Parties

Appellant’s Contentions:

• The Appellant submitted that the objective of Section 186 of the Companies Act was to protect shareholders and stakeholders from excessive lending by the company’s management, and not to allow the corporate debtor to evade repayment of an otherwise legitimate debt.
• The Appellant argued that the debtor could not invoke Section 186(2) to avoid repayment of a legally due debt.

Respondent’s Contentions:

• The Respondent contended that disbursement of an interest-free loan without an agreement or fixed repayment schedule did not qualify as ‘financial debt’ under Section 5(8) of the IBC.
• It was argued that the loan violated Section 186(2) of the Companies Act, which restricts disbursement of loans without prior approval beyond prescribed limits.

Reasoning & Analysis

The NCLAT observed that Section 186(2) provides that no company shall provide loans exceeding 60% of its paid-up share capital, free reserves, and securities premium account, without prior approval. However, the Tribunal held that there is no provision in Section 186 that renders such loans void or unrecoverable.

The bench held that violation of Section 186(2) does not absolve the debtor from its repayment obligation. The provision exists to protect stakeholders and does not grant an escape route to the debtor. Thus, the debtor cannot use it as a defence to avoid paying back the debt.

Implications

This ruling clarifies that the objectives of Section 186(2) of the Companies Act must be seen distinctly from repayment obligations under the IBC. The judgment reinforces that a corporate debtor cannot avoid repaying a due debt by citing irregularities in loan disbursal under the Companies Act.

Outcome

The bench of Justice Rakesh Kumar Jain (Judicial Member), Mr. Naresh Salecha (Technical Member) and Mr. Indevar Pandey (Technical Member) allowed the appeal, holding that the Appellant had established that the disbursed amount was consistently reflected in the debtor’s balance sheet as an unsecured loan that was never repaid despite repeated demands. The Tribunal directed the Adjudicating Authority to admit the Section 7 application under the IBC.

In this case, the Appellant was represented by Mr. Kumarjit Banerjee and Mr. Sanchari Chakraborty, Advocates. The Respondent was represented by Mr. Aadil Naushad, Mr. Sahil Sharma, Mr. Shashank Agarwal, Mr. Rajesh Aggarwal, Dr. B.K. Dash, Ms. Deeksha Aggarwal, Mr. Mayank Dash and Mr. Ninad Dash, Advocates.