The National Company Law Appellate Tribunal (“NCLAT”) on July 15, 2025, in the case of Pancham Studios Private Limited v. Konark Aquatics and Exports Private Limited, [Company Appeal (AT) (Ins.) No. 406 of 2024] has observed that loan advanced in non-compliance with the provision of Section 186 of the Companies Act, 2013 (“Act”), cannot render the loan unrecoverable under Insolvency and Bankruptcy Code, 2016 (“Code”).

The NCLAT, in the instant case, dealt with the question whether a loan given in violation of Section 186 is void and, in consequence, unenforceable. It was held that mere irregularity in advancement of debt due and payable cannot allow a corporate debtor to avoid its payment obligations and seek shelter under Section 186 of the Act to deny its liability to return the amount due.

Brief Facts

The present appeal before the NCLAT was filed by Pancham Studios Private Limited (“Appellant”/ “Financial Creditor”/ “FC”), challenging the order passed by the National Company Law Tribunal, Cuttack (“NCLT”) on November 29, 2023, whereby NCLT dismissed the application filed by the Appellant under Section 7 of the Code.

The Appellant granted an inter-corporate loan of Rs. 4,43,50,000/- (Rupees four crore forty-three lakh fifty thousand) to Konark Aquatics and Exports Private Limited (“Corporate Debtor”/ “CD”/ “Respondent”) for fulfilment of its liability towards other secured financial creditors. The loan advanced bore no interest and was to be repaid by the CD after settlement of secured financial loans of the CD. However, on failure of the CD to repay the debt, the Appellant filed a petition before NCLT under Section 7 of the Code to initiate Corporate Insolvency Resolution Process against the CD. After consideration of the petition, NCLT dismissed the petition as:

1. The loan given free of interest and without any written loan document was in violation of Section 186 of the Act.

2. Appellant had not filed a record of default in compliance with Section 7(3)(a) of the Code.

Aggrieved by the NCLT’s decision, the Appellant challenged the order before the NCLAT.

Issue

The main issues before the NCLAT were:

1. Whether the Corporate Debtor owed a financial debt of Rs. 4,43,50,000/- to the Appellant?

2. Whether loan given in violation of Section 186 of the Act is void?

3. Whether the Appellant has not complied with the requirements of Section 7(3)(a) of the Code?

Contentions raised by the parties

Contentions raised by the Appellant:

The Appellant contended that:

1. The amount in question was reflected in the financial statements of the CD as unsecured loan from the FC and constituted acknowledgement of debt. Thus, the loan granted was a liability admitted by CD;

2. Interest-free loans advanced to meet financial requirements have commercial effect of borrowing (reliance placed on Orator Marketing Private Limited v. Samtex Desinz Private Limited [2021 SCC OnLine SC 513]);

3. Shareholders/ stakeholders can challenge a violation under Section 186 of the Act. The CD being beneficiary had no locus to assail the transaction on account of violation of Section 186; and

4. Compliance of Regulation 20(1A) of the IBBI (Information Utilities) Regulations, 2017 (filing of information of default with the information utility before filing application under Section 7) is directory and not mandatory in nature (Reliance placed on Vijay Kumar Singhania v. Bank of Baroda [CA (AT) Ins No. 1058 of 2023]).  

Contentions raised by the Respondent/ Corporate Debtor:

The Respondent/ Corporate Debtor contended that disbursement of loan was in violation of Section 186 as loan was granted without approval from shareholders and without interest or at a lower rate of interest. Further violation by the Appellant was exhibited by the loan being advanced without any document/ agreement. The Corporate Debtor also pointed out non-compliance with mandatory requirement under Regulation 20(1A) and submitted that the Appellant had not filed any record of default with the information utility.

Decision of the court

The NCLAT observed that the loan amount was continuously reflected in the Respondent's balance sheet as unsecured debt without any caveat, thereby constituting an acknowledgement of debt by the CD as an unsecured loan with the commercial effect of borrowing.

Mapping out the interpretation of Section 186 of the Act, NCLAT held that mere non-compliance with Section 186 while advancing a loan cannot lead the debt to be irrecoverable. The NCLAT categorically held that a Corporate Debtor cannot take shelter of Section 186 of the Act to deny its liability to return the amount due and payable.

Regarding the Corporate Debtor's argument about the lack of a written financial contract to prove debt, the NCLAT upheld the observation made by NCLAT in Messrs Agarwal Polysacks Private Limited v. Messrs K.K. Agro Foods & Storage Limited [CA (AT) Ins No. 1126 of 2022] whereby it was noted that the existence of a financial contract is not necessary to establish a financial debt.

In view of the above observations, the NCLAT allowed the appeal in the instant case and set aside the order passed by the NCLT on November 29, 2023.

Please find attached a copy of the judgement.

This update has been contributed by R. Sudhinder (Senior Partner) and Anushka Sharma (Associate).

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