Personal mortgage funding without direct company borrowing does not create financial debt for a Section 7 insolvency claim.

An amount paid by a director through a personal mortgage loan, later repaid from sale of her property, was not treated as financial debt of the corporate debtor because the loan was obtained in the director's own name and there was no direct disbursement by the director to the company. The board resolution only noted that the company would avail mortgage finance on the director's property, which did not satisfy the requirement under Section 5(8) of the Insolvency and Bankruptcy Code that the debt be disbursed against consideration for the time value of money. As no borrowing transaction with commercial effect was shown, the Section 7 application was held not maintainable.

---

---

Issues: Whether the amount paid by the director from a personal mortgage loan, subsequently repaid by sale of her property, constituted a financial debt owed by the corporate debtor so as to sustain an application under Section 7 of the Insolvency and Bankruptcy Code, 2016.

Analysis: The director had obtained the loan in her own name by mortgaging her personal property, and the board resolution only recorded that the company would avail mortgage finance on the director's property. The essential requirement under Section 5(8) of the Insolvency and Bankruptcy Code, 2016 is that the debt must be disbursed against consideration for the time value of money. On the facts, there was no direct disbursement by the director to the corporate debtor and no transaction showing that the corporate debtor had borrowed the amount from the director with any commercial effect of borrowing. The relied upon authority on stakeholder funding did not apply because the present case did not involve funds infused by the director into the company as a borrowing transaction.

Conclusion: The amount claimed did not constitute a financial debt and the Section 7 application was not maintainable. The appeal failed.

---