NCLT Rules Inter-Corporate Deposit In Balance Sheets Not Sufficient To Establish Financial Debt Without Documentation

NCLT Rules Inter-Corporate Deposit In Balance Sheets Not Sufficient To Establish Financial Debt Without Documentation

The National Company Law Tribunal (NCLT) Principal Bench in New Delhi, led by Chief Justice (Retd.) Ramalingam Sudhakar (President) and Avinash K. Srivastava (Technical Member), has ruled that simply recording a transaction as an "Inter-Corporate Deposit" in balance sheets is not adequate to prove it as financial debt without supporting documentation.

The bench emphasized that for a Financial Creditor (FC) to initiate a Corporate Insolvency Resolution Process (CIRP) against a Corporate Debtor (CD) under Section 7 of the Insolvency and Bankruptcy Code (IBC), there must be clear evidence of 'debt' and 'default.' The application under Section 7 must be filed in Form-1 with the necessary documents as prescribed by the CIRP Regulations, 2016.

The bench highlighted that Regulation 8 of the CIRP Regulations 2016 allows proof of debt through various documents such as records with information utilities, financial contracts, court orders, or financial statements. However, the existence of debt must be demonstrated with relevant documentation, not just balance sheet entries.

The ruling referenced previous decisions, including Agarwal Polysacks Ltd. v. K.K. Agro Foods & Storage Ltd. and PV Potluri Ventures (P) Ltd. v. Benita Industries Ltd. In these cases, it was established that financial debt can be evidenced through various documents, not exclusively through written contracts.

The case at hand Involved Proplarity Infratech Private Limited (FC) claiming a short-term loan of Rs. 2,00,00,000 from Sky High Technobuild Private Limited (CD). The FC alleged non-repayment of the loan and interest, leading to an outstanding amount of Rs. 4,70,00,000. The FC argued that the transaction was acknowledged in the CD's financial statements and auditor's reports.

The CD contended that there was no formal loan agreement, and the amount was recorded as an "Inter-Corporate Deposit" rather than a financial debt. The CD argued that the FC did not meet the requirements of Sections 5(7) and 5(8) of the IBC, and no default occurred as per Section 3(12) of the Code.

The NCLT noted that the mere listing of the amount as an "Inter-Corporate Deposit" without detailed documentation or a formal loan agreement was insufficient to establish financial debt. The absence of a loan agreement and supporting documentation weakened the FC’s claim.

Consequently, the NCLT dismissed the petition, reaffirming that proper documentation is essential to substantiate claims of financial debt under the IBC.