2026 (1) TMI 1091 - AT - IBC

Financial debt classification and genuineness of loan transactions in insolvency: claim rejected for diversion and sham transaction

Financial debt characterization and genuineness of loan transactions in insolvency were examined: where an advance was treated as liability in the balance ... Financial debt - authenticity and genuineness of contractual documents - fraudulent transaction - summary jurisdiction of the Adjudicating Authority - Extinguishment of claims on approval of resolution plan - Bonafide of claim - verification of claims by the IRP/RP under Regulations 10, 12 and 13 of IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 - Appeal to the Appellate Tribunal - Section 66 of the Insolvency and Bankruptcy Code, 2016 - HELD THAT:- The sum was provided as an advance and was treated as a liability and not a borrowing in the balance sheet and therefore does not partake the character of financial debt. We therefore find that the Adjudicating Authority did not commit any infirmity in holding that the advance purportedly given by the Appellant not having been classified as a borrowing in the balance sheet, hence, this amount did not acquire the colour of financial debt. On the allegation of the loan transaction having been labelled as a sham and bogus transaction simply because the Corporate Debtor had purchased an Audi-6 Car, it is the case of the Appellant that this was a misplaced contention as there is nothing on record to show that no funds were available with the Corporate Debtor at the time of purchase of Audi Car barring the loan amount given by the Appellant. It is the contention of the Appellant that when the bank statement of the Corporate Debtor placed at page 192 of the APB clearly shows that Rs 48,50,000/- had been received in the account of the Corporate Debtor from the Appellant, this clearly and effectively demonstrated that there was infusion of funds by the Appellant into the account of the Corporate Debtor. Hence, the Adjudicating Authority had erroneously questioned the genuineness of the loan transaction on account of purchase of a car. As the loan was used for purchase of an Audi A6 Car for personal use of the Appellant, the Adjudicating Authority has correctly held that the Appellant has filed a claim to recover the sum purportedly advanced by him to the Corporate Debtor which not having been utilised for the purpose for which the sum was advanced tantamount to defrauding the creditors of the Corporate Debtor. From a plain reading of Clause 2, it is amply clear that the loan was to be used for development of land and Clause 2.2 made it adequately clear that diversion of the loan for any other business purpose was not permissible. However, when we look at the bank statement of the Corporate Debtor as placed at page 314 of the APB it is clear that the same day i.e. 19.04.2007 when the alleged secured loan was disbursed, the same day there has been a pay-out of the same amount from the account of the Corporate Debtor for the purpose of purchasing an Audi A6 Car which use clearly did not conform to the stipulations of Clause 2.2 of the Loan Agreement. The Appellant being a Director of the Corporate Debtor at that point of time cannot disclaim responsibility that the purported loan advanced to the Corporate Debtor had not been utilised for the beneficial interest of the Corporate Debtor as contemplated in the Loan Agreement. Given this backdrop, we find that there is sufficient basis in the findings returned by the Adjudicating Authority that the loan transaction not being genuine, the claim filed by the Appellant was not found to be genuine and therefore rejected. Further, the transaction carried out under the Loan Agreement having found to have defrauded by the creditors of the Corporate Debtor, the Adjudicating Authority has not committed any infirmity rejected in declaring the impugned transaction to be null and void. Appeal lacks substance and accordingly is dismissed. Issues: (i) Whether the claim filed by the appellant based on the 02.04.2007 Loan Agreement qualified as a financial debt and was admissible in the CIRP; (ii) Whether the transactions alleged to have been undertaken by the appellant under the Loan Agreement constituted fraudulent transactions within the meaning of Section 66 of the Insolvency and Bankruptcy Code, 2016.Issue (i): Whether the appellant's claim qualifies as a financial debt and was admissible in the corporate insolvency resolution process.Analysis: The claim was evaluated against the Loan Agreement, supporting bank statements, and the audited balance sheet of the corporate debtor. The balance sheet classified the amount of Rs. 48,50,000 under 'Other Advances' in the head 'Other Long Term Liabilities' and not as a borrowing. Deficiencies in the Loan Agreement (absence of licensed vendor stamp details, serial number, date of purchase of stamp paper, and absence of board resolution authorising execution) and the failure to create any charge or mortgage in favour of the appellant were noted. The appellant's prolonged delay in seeking repayment and lack of contemporaneous steps to enforce the purported debt added to doubts on bonafides. Regulations 10, 12 and 13 of the IBBI Regulations empower verification of claims by the IRP/RP, justifying scrutiny of genuineness.Conclusion: The claim does not qualify as a financial debt and the rejection of the appellant's claim is upheld; conclusion is against the appellant.Issue (ii): Whether the transactions under the Loan Agreement amount to fraudulent transactions under Section 66 of the IBC.Analysis: Clause 2 of the Loan Agreement limited application of the funds to land development; contemporaneous bank records show the funds were diverted on the same day to purchase an Audi A6, inconsistent with the stipulated purpose. The Loan Agreement lacked requisite authorisation and indicia of genuineness, and the transactions were found to have adversely impacted the corporate debtor's financial position. The Adjudicating Authority's findings that the documents were inconsistent, lacking authenticity, and indicative of sham transactions were supported by the record.Conclusion: The transactions are fraudulent within the meaning of Section 66 of the Insolvency and Bankruptcy Code, 2016; conclusion is against the appellant and in favour of the respondent.Final Conclusion: The appellate challenge to the Adjudicating Authority's dismissal of the claim and its holding under Section 66 is without merit; the impugned findings on the genuineness of the Loan Agreement, classification of the amount as an advance, and fraudulent diversion of funds sustain rejection of the claim and the Section 66 finding.Ratio Decidendi: Where the record shows substantive deficiencies in the authenticity and authorisation of a purported loan document, classification of the amount in the debtor's books as an advance rather than a borrowing, and contemporaneous diversion of funds contrary to the contractually stipulated purpose, the Adjudicating Authority (guided by IBBI Regulations empowering verification of claims) may reject the claim as not constituting a financial debt and may hold the transactions to be fraudulent under Section 66 of the Insolvency and Bankruptcy Code, 2016.