Tribunal holds related-party interest-free loan as "financial debt" under IBC, 2016; rejects corporate debtor's plea on absence of formal loan agreement and limitation
In a significant ruling dated September 4, 2026, the National Company Law Tribunal (NCLT), Mumbai Bench, admitted a Corporate Insolvency Resolution Process (CIRP) petition filed under Section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC) against M/s Wardha Mega Food Park Private Limited (Corporate Debtor or CD). The petition was filed by Mr. Jagdish Kumar Parulkar, the Liquidator of M/s B.Y. Agro and Infra Limited, the Financial Creditor (Applicant), seeking initiation of insolvency proceedings for recovery of Rs. 1.48 crore alleged to be due and payable by the CD.
The dispute arose from an unsecured, interest-free loan advanced by the Applicant company to the CD during financial years 2015-16 and subsequently reduced, primarily to meet working capital requirements. The loan was reflected continuously in the financial statements of both parties over several years, including the CD's own audited balance sheets under the head "Long-Term Borrowings". Despite the absence of a formal loan agreement, repayment schedule, or interest clauses, the Tribunal held that the nature of the transactions and repeated acknowledgements by the CD established the existence of a "financial debt" within the meaning of Section 5(8) of the IBC.
The CD contested the maintainability of the petition on grounds that there was no disbursement against consideration for time value of money, no formal documentation, and argued the petition was barred by limitation as it was filed beyond three years from the alleged date of default. The CD also contended that accounting entries alone cannot establish financial debt and that the proceedings were essentially disguised recovery actions between related parties.
In its detailed analysis, the NCLT noted that while a formal loan agreement is not an indispensable prerequisite for establishing financial debt, the substance of the transaction must be examined. The Tribunal relied heavily on the undisputed fact that the CD itself consistently acknowledged the liability over successive financial years in its audited accounts and ledger records. It emphasized that entries in the balance sheet and ledger, when supported by a continuous course of conduct and acknowledgment by the debtor, constitute sufficient evidence of financial debt and acknowledgment under Section 18 of the Limitation Act, 1963. The Tribunal also referenced the Supreme Court's ruling in Orator Marketing Pvt. Ltd. v. Samtex Desinz Pvt. Ltd., which categorically stated that interest-free loans are included within the ambit of financial debt under the IBC.
Regarding limitation, the Tribunal observed that the acknowledgments in the CD's balance sheets for the financial years 2021-22 and 2024-25 restarted the limitation period, allowing the petition to be filed within the prescribed time. The Tribunal further clarified that statutory permission granted under Section 33(5) of the IBC to initiate proceedings during liquidation does not itself extend limitation, but the balance sheet acknowledgments were decisive in this case.
The Tribunal dismissed the CD's objections that the petition was a disguised recovery suit or that the absence of formal documentation invalidated the claim. It held that the related-party nature of the transaction did not, by itself, render the debt fictitious, especially in the absence of any evidence that the loan was not disbursed or was fabricated.
Consequently, the NCLT admitted the Section 7 petition, declared a moratorium under Section 14 of the IBC, and appointed Mr. Sanjay Shrivastava as the Interim Resolution Professional to manage the CIRP process. The Tribunal directed all concerned parties to cooperate with the IRP and observed that coercive actions against the CD's officers for non-compliance would be dealt with under the IBC provisions.
This judgment reinforces the principle that the absence of a formal loan agreement or interest does not preclude recognition of financial debt under the IBC if there is clear documentary and conduct-based acknowledgment. It also highlights the importance of balance sheet entries and continuous recognition of liabilities in the books of the corporate debtor as sufficient evidence for initiation of insolvency proceedings, even among related entities.
Bottom Line:
Insolvency and Bankruptcy Code, 2016 - Application under Section 7 for initiating Corporate Insolvency Resolution Process (CIRP) - Existence of financial debt and default sufficiently established based on evidence, including balance sheets and records of default.
Statutory provision(s):
Insolvency and Bankruptcy Code, 2016 Sections 5(8), 5(24), 7, 14, 18 of Limitation Act, 1963, 33(5), 238A
