Principal Bench holds ₹1.39 crore paid under tripartite MOU as share purchase consideration, not financial debt; oral loan conversion unproved, remedy lies in civil courts
In a significant ruling on October 16, 2026, the National Company Law Appellate Tribunal (NCLAT), Principal Bench, New Delhi, dismissed the Section 7 Insolvency and Bankruptcy Code (IBC), 2016 application filed by Catalyst Refinery Services Private Limited against Ganpati Global Private Limited. The case revolved around a payment of ₹1.39 crore made under a tripartite Memorandum of Understanding (MOU) dated August 27, 2014, relating to the acquisition of shares in the respondent company.
The appellant had contended that the amount paid was a financial debt and that after the share purchase deal failed, an oral agreement was reached to treat this amount as an unsecured loan bearing 11% interest, repayable on demand. The appellant relied on the respondent's balance sheets showing the amount as an unsecured loan, issuance of balance confirmations, interest crediting, and deduction of Tax Deducted at Source (TDS) under Section 194A of the Income Tax Act, 1961, to prove the existence of financial debt and default, entitling it to initiate the Corporate Insolvency Resolution Process (CIRP).
However, the NCLAT bench, comprising Mr. Justice Sharad Kumar Sharma (Judicial Member), Mr. Arun Baroka, and Mr. Indevar Pandey (Technical Members), rejected these claims. The Tribunal observed that the original payment was part of the share purchase consideration and was not disbursed against the consideration for the time value of money, a crucial requirement under Section 5(8) of the IBC for constituting a financial debt. The MOU explicitly showed that the payment was towards the purchase price and discharge of the respondent's liabilities, with no clause mandating repayment or interest.
Further, the alleged oral agreement converting the transaction into a loan was unproved: there was no written agreement, no specified date, no identification of parties to the alleged oral contract, nor any contemporaneous evidence setting out its terms. The Tribunal noted that disputed oral agreements are not suitable for adjudication in summary proceedings under Section 7. Mere book entries, showing the amount as an unsecured loan and deduction of TDS, were held insufficient to establish that the payment was originally a loan for consideration of time value of money.
The Tribunal emphasized the burden of proof on the financial creditor to establish the existence of financial debt before a default can be considered under Section 7. Since the appellant failed to prove this foundational element, the insolvency application was rightly dismissed by the National Company Law Tribunal (NCLT), Jaipur Bench.
The NCLAT also noted clerical errors in the NCLT's order regarding misidentification of counsel and misdescription of written submissions, but held these did not prejudice the appellant and did not warrant setting aside the order.
Interestingly, the judgment pointed out the respondent's conduct of retaining the amount for years, crediting interest in its books, and deducting TDS without actually paying interest to the appellant. The Tribunal directed the Registry to forward a copy of the judgment to the jurisdictional Principal Commissioner of Income Tax for appropriate action under tax laws.
The appellant remains free to pursue civil remedies for recovery of the amount and any interest, but such claims cannot be adjudicated under the insolvency framework when no financial debt exists.
This ruling reaffirms that payments made as part of share purchase consideration cannot be treated as financial debt merely on later accounting entries or tax deductions. It also underscores that oral agreements converting such transactions into loans require clear proof before insolvency proceedings can be initiated.
Bottom Line:
Insolvency and Bankruptcy Code, 2016 - Amount paid under tripartite MOU as part of share purchase consideration does not become "financial debt" merely because it was later shown in books as unsecured loan, balance confirmations were issued and TDS on alleged interest was deducted - Unproved oral agreement of conversion into loan insufficient in Section 7 proceedings - Remedy, if any, lies before appropriate civil forum.
Statutory provision(s):
Section 5(7), Section 5(8), Section 7 of the Insolvency and Bankruptcy Code, 2016; Section 194A of the Income Tax Act, 1961; Section 18 of the Limitation Act, 1963; Section 186(9) of the Companies Act, 2013; Rule 3(1)(d) of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016; Rule 11 of the National Company Law Appellate Tribunal Rules, 2016
