Tribunal Emphasizes Three-Test Framework to Establish "Financial Debt" Under IBC; Disbursement Must Be Directly to Corporate Debtor and for Business Use
In a significant ruling dated August 7, 2026, the National Company Law Tribunal (NCLT), Chennai Bench, delivered a judgment in the matter of Rajesh Kumar Saraf HUF v. Veremax Technologie Services Ltd., dismissing a petition filed under Section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC). The petition sought initiation of Corporate Insolvency Resolution Process (CIRP) against the respondent company, Veremax Technologie Services Ltd., on grounds of default in repayment of a financial debt.
The petitioner, Rajesh Kumar Saraf HUF, claimed to have disbursed a short-term loan amounting to Rs. 5 crores at 36% per annum interest to the corporate debtor for working capital requirements. However, the tribunal found that the entire loan amount was transferred via RTGS not to the corporate debtor's bank account but directly into the personal bank account of Mr. TRM Venkatesh, a director of the corporate debtor. Furthermore, repayment communications and schedules were also in the name of Mr. Venkatesh individually.
The NCLT applied a rigorous three-pronged test to determine whether the loan constituted a "financial debt" under Section 5(8) of the IBC, which requires:
(i) Credit of Debt Test - the amount must be credited to the corporate debtor's account;
(ii) Principal Purpose Test - the loan must be for the corporate debtor's business needs such as working capital or investment; and
(iii) Application of Debt - the amount must have been actually used for the corporate debtor's business purposes.
The tribunal observed that none of these conditions were met. The absence of any document showing that the loan was disbursed to or used by the corporate debtor rendered the petition unsustainable. Reliance was also placed on the principle of separate legal personality of a company distinct from its directors, meaning a disbursement to an individual director's account cannot be treated as a financial debt of the company unless proven otherwise by supporting corporate resolutions or business utilization.
The NCLT further noted that the petitioner failed to produce any correspondence or evidence demonstrating the loan was for corporate business purposes or utilized by the company. The National E-Governance Services Limited (NeSL) financial information record also identified Mr. Venkatesh, and not the company, as the debtor.
Consequently, the tribunal dismissed the petition, underscoring the strict interpretation of "financial debt" under the IBC and the necessity of direct disbursement and utilization by the corporate debtor for a successful CIRP petition. No costs were awarded.
This judgment serves as a cautionary note for financial creditors to meticulously verify the identity of the debtor and the flow of funds before initiating insolvency proceedings, reaffirming the legal principle that the corporate veil cannot be pierced lightly without documentary evidence.
Bottom Line:
For a "financial debt" under Section 7 of the Insolvency and Bankruptcy Code, 2016, the disbursement must be made directly to the Corporate Debtor and utilized for its business purposes. A disbursement to an individual's personal account does not qualify as a "financial debt" owed by the Corporate Debtor.
Statutory provision(s):
Insolvency and Bankruptcy Code, 2016 Section 7, Section 5(8)
