Director’s personal loan lacks time value of money to constitute financial debt under Section 5(8).

The Appellant was a Director of the Corporate Debtor (Respondent). Following a Board Resolution dated 14.11.2014, the Appellant obtained a mortgage loan of Rs. 88,00,000 in her own name from ICICI Bank, using her personal property as security.

Although the loan proceeds were disbursed directly to the Corporate Debtor, the Appellant remained the primary borrower.

When the Corporate Debtor failed to clear the outstanding dues, the Appellant sold her flat in 2018 to discharge the entire loan amount to the bank.

The Appellant then filed a Section 7 application under the Insolvency and Bankruptcy Code (IBC) to initiate the Corporate Insolvency Resolution Process (CIRP) against the Respondent, claiming the amount repaid to the bank as a "financial debt".

The Adjudicating Authority (NCLT, Chennai) rejected the application on 17.12.2021, holding that no financial debt was proved.

Whether a loan obtained by a Director in their individual capacity and subsequently repaid by them after the Corporate Debtor's default constitutes a "financial debt" under Section 5(8) of the IBC.

Section 5(8) of the Insolvency and Bankruptcy Code, 2016, which defines "financial debt" as a debt along with interest, if any, which is disbursed against the consideration for the time value of money.

Clauses (a) to (i) of Section 5(8), particularly the requirement for "disbursement".

Shailesh Sangani v. Joel Cardoso and Anr. (2019 SCC Online NCLAT 52), which details when funds infused by a director to boost a company’s prospects may be treated as a commercial borrowing.

Amrit Lal Goverdhan Lalan v. State Bank of Travancore & Ors. (1968 SCR (3) 724) regarding a surety's remedies against a principal debtor.

The Tribunal noted that the essential prerequisite for a "financial debt" is that the disbursement must be against the consideration for the time value of money.

Upon perusing the Board Resolution, the Tribunal found that the loan was taken by the Appellant in her own name from ICICI Bank; consequently, the transaction was between the Appellant and the bank, not between the Appellant and the Corporate Debtor.

The Tribunal reasoned that there was no "disbursement" by the Appellant to the Corporate Debtor that satisfied the criteria of Section 5(8).

The Tribunal distinguished Shailesh Sangani, observing that in the present case, the Appellant was simply fulfilling her personal obligation to the bank by selling her flat to repay a loan she had personally secured.

Since the Corporate Debtor was not a party to the primary loan transaction and no direct financial contract existed between the Appellant and Respondent for the repayment of these specific funds, the transaction did not qualify as a financial debt.

The Tribunal concluded that the pre-condition of disbursement for the time value of money was absent.

The Tribunal clarified that this dismissal would not preclude the Appellant from pursuing other legal remedies available under different laws.