The Corporate Debtor denied the existence of a loan agreement ...

Loan Dispute: Appeal Allowed as Funds Transfer Lacked Proof of Loan Agreement Under IBC Section 7 for Family Companies.

September 7, 2024

Case Laws     Insolvency and Bankruptcy     AT

The Corporate Debtor denied the existence of a loan agreement with 12% interest, as claimed by the Financial Creditor in the Section 7 application. To qualify as a Financial Debt u/s 5(8) of the IBC, the transaction must involve disbursal for time value of money. The Supreme Court in Anuj Jain vs. Axis Bank held that transactions u/s 5(8) clauses must contain the essential element of the principal clause or features traceable to it. In this case, the transfer of funds by the Financial Creditor to the Corporate Debtor was between family companies, not a loan or disbursal for time value of money. The Adjudicating Authority erred in admitting the Section 7 application without examining the nature of the transaction and the disputed loan letter. The essential element of disbursal for time value of money was not proved, so the debt cannot be treated as a Financial Debt. However, since the Corporate Debtor admitted owing Rs. 1,22,50,000 and handed over a draft, the Financial Creditor is allowed to retain the amount, despite offering to return it. The appeal is allowed.

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