NCLT Mumbai Reiterates: Interest Free Term Loans are Financial Debt under IBC

NCLT Mumbai Reiterates: Interest Free Term Loans are Financial Debt under IBC

The National Company Law Tribunal (NCLT), Mumbai by its division member bench comprising of Shri Kishore Vemulapalli (Judicial Member) and Shri Prabhat Kumar (Technical Member), while adjudicating an application under Section 7 of Insolvency and Bankruptcy Code, 2016 (“IBC, 2016”) in Praful Satra vs. MD Development Private Limited has reiterated that interest free term loans qualify as financial debt under the provisions of Insolvency and Bankruptcy Code, 2016.

The brief background of the case is that Praful Satra (“Financial Creditor”) extended an interest-free loan for a sum of Rs. 9,37,52,350 to MD Development Private Limited (“Corporate Debtor”) for a period of 2nd May, 2018 to 5th March, 2019 with the condition that the loan was repayable on demand. The Corporate Debtor repaid Rs. 7,52,94,500, with the balance of 1,84,57,850 remaining outstanding.

The Financial Creditor made several calls to demand the repayment of money but the balance amount remained unpaid and ultimately Financial Creditor was constrained to issue a Demand Notice dated 26 August, 2021.

Per contra, the Corporate Debtor argued that the petition was false and vexatious. It was submitted that The Financial Creditor had not referred any correspondence between the parties and no proof was provided in the petition against the claim made by the Financial Creditor.

The NCLT noted that the Financial Creditor had filed confirmation of accounts for the years 2018-19, 2019-20 and 2020-21 duly signed by the Corporate Debtor which show outstanding balances owed to the Financial Creditor by the Corporate Debtor. Hence, the Tribunal found that there was an amount payable to the Financial Creditor.

In addition to this, the NCLT found that since the loan was repayable on demand, the debt became due and payable on receipt of the Demand Notice dated 26th August, 2021.

As regards interest-free loan, the NCLT placed reliance on the Supreme Court decision passed in the case of M/s. Orator Marketing Pvt. Ltd. Vs. M/s. Samtex Desinz Pvt. Ltd. (2021) and held that interest-free loans are financial debts; a sum of Rs. 1,84,57,850/- was due to the Financial Creditor as financial debt and the said amount was not paid by the Corporate Debtor when called upon to pay vide notice dated 26 August, 2021.

Accordingly, the said debt was in default also. Since the amount claimed in default exceeds Rs. 1.00 core i.e., minimum threshold limit under section 4 of the IBC, the Tribunal felt that the case deserved to be admitted.

In view of the above observations, the NCLT admitted the petition.