Loan Paid To Director’s Personal Account Is Not Company’s Financial Debt: NCLT Chennai [Read Order]

Chennai: The National Company Law Tribunal, Chennai Bench, has dismissed a petition filed under Section 7 of the Insolvency and Bankruptcy Code, 2016, holding that a loan disbursed directly into the personal bank account of a company's director, and not into the account of the company itself, does not constitute a "financial debt" owed by the corporate debtor, in the absence of evidence that the funds were credited to, meant for, or applied towards the company's business.

A Bench comprising Shri Jyoti Kumar Tripathi, Member (Judicial), and Shri Ravichandran Ramasamy, Member (Technical), was considering a petition filed by Rajesh Kumar Saraf HUF against Veremax Technologie Services Ltd. seeking initiation of Corporate Insolvency Resolution Process over an alleged default of about Rs. 5.02 crore.

As per the petitioner's case, the corporate debtor, acting through its directors/major shareholders Mr. TRM Venkatesh and Mrs. V. Annam, had approached the petitioner seeking a short-term working capital loan of Rs. 5 crore for one month at 36% per annum interest. The amount was disbursed by RTGS on 09.06.2023 into Mr. TRM Venkatesh's bank account, against which the corporate debtor issued a Demand Promissory Note undertaking to repay on demand. It was the petitioner's case that despite partial adjustments towards interest and repeated reminders, the outstanding amount was not cleared, a legal notice dated 20.07.2024 demanding Rs. 4,85,17,400 went unanswered, and the corporate debtor thereby committed default from 10.07.2023, with the total claim in the petition computed at Rs. 5,01,84,250.

The respondent opposed the petition, submitting that the monies were disbursed to, and repayments were tendered by, Mr. TRM Venkatesh in his individual capacity, and not by or to the company. It was pointed out that the Loan Repayment Schedule dated 03.02.2024 was issued by Mr. Venkatesh personally, and that the Record of Financial Information on the NeSL portal, relied upon by the petitioner itself, recorded the "Debtor" as Mr. TRM Venkatesh and the respondent-company only as a Guarantor, a capacity in which the petitioner had admittedly not invoked the present proceedings. The respondent further contended that, after accounting for payments already made, no amount remained due, and that the petitioner had separately issued a notice dated 04.06.2026 for the very same debt under the Negotiable Instruments Act, 1881.

In its reply memo, the petitioner disputed the discharge claimed by the respondent, submitting that after giving credit for all sums received, including Rs. 94,84,250 remitted on 08.07.2026, a balance of Rs. 4,94,42,000, of which Rs. 4,26,17,500 was principal, remained outstanding.

The Tribunal held that the central question was whether the petitioner had established a "financial debt" disbursed to, and defaulted upon by, the corporate debtor, as required under Section 7 of the IBC. On examining the record, it found that the loan was disbursed via RTGS directly into Mr. TRM Venkatesh's personal account and not the corporate debtor's account, that the repayment schedule and correspondence were addressed to and issued by him individually, and that repayments were likewise made by him personally, with the petitioner's own NeSL filing recording him as the "Debtor".

Reiterating that a company has a legal personality distinct from its directors or shareholders, the Bench held that a disbursement to an individual director's account cannot, without more, be treated as a financial debt of the company, absent a corporate borrowing resolution or direct receipt of funds by the company. Drawing on the definition of "disbursement" in Black's Law Dictionary, the Tribunal held that for the purposes of the Code, disbursement must be to, and for utilisation by, the corporate debtor in furtherance of its business, and laid down a three-fold test to determine disbursement to a corporate debtor: (i) the Credit of Debt Test, whether the amount stood credited to the corporate debtor's account; (ii) the Principal Purpose Test, whether it was disbursed to meet the corporate debtor's working capital, investment, repayment or other business needs; and (iii) the Application of Debt Test, whether it was in fact appropriated and used by the corporate debtor.

Applying this test, the Bench found that none of the three limbs was satisfied: the amount was credited to an individual's account and not the corporate debtor's; no material was placed on record to show the disbursement was for any specific need or business purpose of the corporate debtor; and no evidence was furnished to show the funds were in fact utilised for or towards the corporate debtor's business or affairs.

Holding that the petitioner had therefore failed to establish the primary requirement of a financial debt disbursed to the corporate debtor, the Tribunal dismissed the petition, with no order as to costs.

Appearances:

For the Petitioner: Mr. Rahul Balaji and Mr. Madhan Babu, Advocates.

For the Respondent: Mr. Pawan Jhabakh, Advocate.

Case Title: Rajesh Kumar Saraf HUF vs. Veremax Technologie Services Ltd., CP(IB)/202/CHE/2024

[Read Order]