The NCLT Kolkata Bench on April 13, 2022 in the matter of Narendra Promoters & Fincon Pvt. Ltd. v. Vinline Engineering Pvt. Ltd. while deciding a petition under Section 7 of the Insolvency and Bankruptcy Code, 2016 (“IBC“), held that a disbursement made by a Non-Banking Financial Institution (“NBFC“) over an oral agreement cannot be construed as the existence of a financial debt, when there is nothing on record to show that it was disbursed as a loan

In the instant matter, Narendra Promoters & Fincon Pvt. Ltd. (“Financial Creditor“) being a NBFC was approached by Vinline Engineering Pvt. Ltd. (“Corporate Debtor“) for a financial assistance amounting to Rs. 10,00,000/- for business use. An oral agreement was entered into between the parties whereby the Financial Creditor would disburse the amount to the Corporate Debtor over an interest rate of 16% per annum from the date of disbursal. The Corporate Debtor failed to repay the principal amount despite several oral demands by the Financial Creditor. Thereafter, the Financial Creditor had moved a petition before NCLT Kolkata Bench (“Adjudicating Authority“) under Section 7 of IBC, seeking initiation of Corporate Insolvency Resolution Process (“CIRP“) against the Corporate Debtor, for defaulting on the loan amount.

The Adjudicating Authority placed reliance on the Supreme Court judgment in Phoenix Arc Pvt. Ltd. Vs. Spade Financial Services Ltd. &Ors, Civil Appeal No. 2842 of 2020; wherein it has been held that for the implementation of a successful insolvency regime and to impede any person from taking undue benefit, the real nature of the transactions has to be unearthed, as per the IBC.

The Adjudicating Authority was of the opinion that the Financial Creditor has failed to establish the nature of transaction between the parties. It further observed that deduction of TDS is not sufficient to conclude that the transaction in question is a Financial Debt.

Hence, the Bench dismissed the petition under Section 7 of IBC with liberty to the Financial Creditor to pursue other available remedies under law.