NCLAT Chennai rules that a director’s loan reflected in balance sheets qualifies as financial debt under IBC Section 5(8).
Director’s Loan Recorded in Balance Sheet Qualifies as Financial Debt
The Chennai Bench of the National Company Law Appellate Tribunal (NCLAT) has held that loans provided by directors and consistently reflected in audited balance sheets constitute financial debt under Section 5(8) of the Insolvency and Bankruptcy Code (IBC), 2016. The determination impacts the categorization of creditors in corporate insolvency proceedings.
The tribunal observed that mere intercorporate or shareholder advances do not automatically qualify as financial debt. However, when such loans are recorded under 'secured or unsecured loans' in financial statements, and earn interest, they satisfy the criteria of borrowing for operational purposes. Reference was made to the definition in Section 5(8)(f), which includes 'amounts owed' under loan agreements.
This clarifies a critical issue in CIRP admissions. Financial creditors must ensure proper documentation and disclosure. Practitioners are advised to scrutinize balance sheets and loan agreements carefully when classifying debts in IBC proceedings.