The National Company Law Appellate Tribunal (NCLAT) vide its order dated 3 January 2022 in Jayanthi Ravi v Chemizol Additives Pvt Ltd ruled that the advance extended by a director to the company which is recorded as a loan in the minutes of the meeting of the board of directors would be classified as financial debt under the Insolvency and Bankruptcy Code, 2016 (IBC).

In doing so, the NCLAT set aside the order dated 28 January 2020 (Impugned Order) by which National Company Law Tribunal, Bengaluru Bench (Adjudicating Authority) had rejected a petition under Section 7 of IBC on the grounds that there was lack of clarity on whether such advance will be in nature of the financial debt or an operational debt.

Background

Mrs. Jayanthi G. Ravi (Appellant), a former director of M/s Chemizol Additives Private Limited (Respondent) filed a petition against the Respondent before the Adjudicating Authority under Section 7 of IBC on the ground that the Appellant had advanced a loan to the Respondent and the same was duly recorded in the minutes of the meetings of the board of directors.

The Adjudicating Authority, however, vide Impugned Order rejected the petition stating the following:

  • the amounts contributed by the Appellant were for operational expenses of the Respondent;
  • the Appellant and the Respondent did not enter into any agreement and the Respondent did not take prior approval for such borrowing; and
  • there is a lack of clarity as to whether the amount advanced by the Appellant was in nature of financial debt or an operational debt.

Aggrieved, the Appellant challenged the Impugned Order before NCLAT.

Submissions before NCLAT

Submissions of Appellant: The Appellant contended the following:

  • The terms of repayment of the loan advanced by the Appellant were subsequently finalized;
  • In the matter of Shailesh Sangani v. Joel Cardoso and Anr (SCC OnLine NCLAT 52), the NCLAT held that the monies advanced by the directors or shareholders of the company to improve the financial health or boost the economic prospects of a company have the commercial effect of borrowing and as such it is a financial debt;
  • The director of the Respondent had admitted the liability of the Respondent towards the Appellant, in its response to the Appellant's demand notice; and
  • The minutes of the meetings of the board of directors of the Respondent records the grant of such loan and the balance sheet of the Respondent for the period after the resignation of the Appellant also reflects the outstanding liability of the Respondent towards the Appellant.

Submissions of Respondent: The Respondent contended the following:

  • The Appellant being an executive director in the Respondent had unfettered powers in the day-to-day affairs of the Respondent. Resultantly, the Appellant either participated or chaired the meetings of the board of directors including the meeting in which the advance extended by the Appellant was recorded as a ‘loan'; and
  • The financial needs of the company are required to be deliberated upon and approved by the directors of a company in a properly convened ‘Board Meeting'. ‘Post Facto' ratification of the same is not envisaged under the Act. Accordingly, the financial assistance granted by the Appellant is in contravention with the provisions of the Companies Act, 2013.

Findings and Observations (Judgment)

An express agreement to prove disbursement of loan amount is not necessary

The NCLAT relied on the order passed by the NCLT, Mumbai Bench in Anchor Leasing Pvt. Ltd. v. Euro Ceramics Ltd. (CP No. 66/IBC/NCLT/MB/MAH/2018) wherein it was observed and held that IBC “nowhere prescribed the compulsory existence of an express agreement to prove the loan and its disbursement. The statement of accounts produced on record were held enough to prove the disbursement of loan amount.”

It emphasized on inclusive nature of the definition of financial debt and observed that “It must be borne in mind that ‘Financial Debt' under Section 5(8) of the I & B Code, is an inclusive definition and even if a transaction which does not fall under any of those described under the provision can be classified as a ‘Financial Debt'.”

Further, the NCLAT observed that Rule 2(1)(c)(viii) of the Companies (Acceptance of deposit), Rules, 2014 states that any amount received from a director of a company is not a deposit provided that the director has furnished a declaration in writing at the time of giving money, stating that- “the amount is not being given out of funds acquired by him by borrowing or accepting loans or deposits from others and the company shall disclose the details of money so accepted in the Board's report”. In the instant case, the Appellant had issued such a declaration and therefore it may be implied that the amount so extended would not be a deposit.

Hence, it was held that the plea of voidability of the loan transaction cannot be made available to the Respondent as the minutes of the meeting of the board of directors evidently records such transaction and the same is also captured in the balance sheet as the outstanding liability towards the Appellant to the extent of INR 4.10 Crores. Further, one of the directors of the Respondent had confirmed the Respondent's obligations to repay the loan to the Appellant by way of a reply to the demand notices served by the Appellant.

Order and Conclusion

The NCLAT considered the above facts in an integral manner and came to the conclusion that the Appellant has established the existence of financial debt in view of the record of such loan transaction in the minutes of the meeting of the board of directors and the subsequent entries in the balance sheet. The view taken by Adjudicating Authority that the ‘Loan' was not a ‘Financial Debt' was held as legally ‘invalid' and ‘untenable'.

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