The National Company Law Appellate Tribunal has delivered a landmark ruling clarifying that a transaction cannot be classified as a financial debt under the Insolvency and Bankruptcy Code if it is a sham arrangement designed for fund layering without any genuine time value of money. The Tribunal set aside the admission of a Section 7 application against Ligare Aviation Ltd., holding that the underlying transactions were part of a systematic pattern of round-tripping among group companies, rendering them non-financial in nature.
Background & Facts
The Dispute
The dispute centers on whether a series of inter-group financial transactions between Religare Enterprises Ltd. (Financial Creditor) and Ligare Aviation Ltd. (Corporate Debtor) constituted valid financial debt under Section 5(8) of the Insolvency and Bankruptcy Code, 2016. Religare Enterprises filed a Section 7 application seeking initiation of Corporate Insolvency Resolution Process (CIRP) for non-repayment of Rs. 5.87 crore, allegedly advanced under eight one-page Memoranda of Understanding (MoUs) executed between 2009 and 2016. The Corporate Debtor contested the validity of the debt, asserting that the transactions were not genuine loans but part of a fraudulent scheme to siphon funds through group entities.
Key Facts
- On 30.03.2009, Religare Arts Investment Management Ltd. (RAIML), a predecessor of Religare Enterprises, executed a one-page MoU with Ligare Aviation Ltd. for an unsecured loan of up to Rs. 5 crore at 13% interest.
- On 31.03.2009, RAIML transferred Rs. 3.60 crore to Ligare Aviation Ltd.’s bank account.
- On the same day, 31.03.2009, Ligare Aviation Ltd. transferred the entire Rs. 3.60 crore to Religare Finvest Ltd., a wholly owned NBFC subsidiary of Religare Enterprises.
- Between 30.03.2009 and 31.03.2009, at least six other mirror transactions occurred between group entities, each involving identical amounts being received and immediately transferred out within hours.
- The Corporate Debtor’s bank statements (Annexure R-6) documented these transactions, showing no retention of funds for operational or business purposes.
- The Corporate Debtor’s financial statements as of 31.03.2017 contained a categorical denial of the claimed debt in response to a balance confirmation letter from RAIML.
- On 27.03.2019, Religare Finvest Ltd. filed FIR No. 50/2019 with the Economic Offences Wing, Delhi, alleging that the MoUs were sham documents created to disguise siphoning of funds through non-arm’s length transactions.
- The charge-sheet filed in FIR No. 50/2019 detailed a systematic pattern of circular fund movement since 2008, with loans never repaid and replaced by new loans to other group entities.
- The Corporate Debtor’s management changed in 2016, and the new management consistently denied liability for pre-2016 transactions.
Procedural History
- 31.03.2009: Rs. 3.60 crore transferred from RAIML to Ligare Aviation Ltd. and immediately to Religare Finvest Ltd.
- 29.04.2016: Arbitral award of Rs. 3,500 crore in favor of Daiichi Sankyo Company Ltd. against the Singh Brothers and group companies.
- 26.02.2018: Delhi High Court issued garnishee order against Ligare Aviation Ltd. for Rs. 184.04 crore as garnishee debtor to RHC Holdings Ltd.
- 27.03.2019: Religare Finvest Ltd. filed FIR No. 50/2019 alleging fraudulent MoUs and fund siphoning.
- 18.01.2021: Religare Enterprises Ltd. filed Section 7 application before NCLT (C.P. (IB) No. 2(PB)/2022) for Rs. 5.87 crore.
- 18.07.2023: NCLT admitted Section 7 application, rejecting Corporate Debtor’s defense as a "moonshine defence".
- 28.07.2023: NCLAT stayed CIRP proceedings and issued notice in Company Appeal (AT) (Ins.) No. 992/2023.
- 24.11.2023: NCLAT upheld locus of Daiichi Sankyo Company Ltd. to file appeal (Company Appeal (AT) (Ins.) No. 1238/2023).
- 27.05.2026: NCLAT delivered judgment allowing both appeals.
The Parties' Positions
- Appellants (Chandra Shekhar Jha & RHC Finance Pvt. Ltd.): Shareholders of Corporate Debtor; argued that transactions were sham, lacked time value of money, and were part of a fraudulent layering scheme. Cited Phoenix ARC Pvt. Ltd. v. Spade Financial Services Ltd. to assert that real nature of transaction must be examined.
- Appellant (Daiichi Sankyo Company Ltd.): Decree holder with garnishee order of Rs. 184.04 crore against Corporate Debtor; argued that CIRP initiated on fraudulent basis would prejudice its recovery proceedings.
- Respondent (Religare Enterprises Ltd.): Contended that MoUs evidenced valid financial debt, and subsequent transfer of funds was irrelevant. Relied on Innoventive Industries and Swiss Ribbons to argue that NCLT’s role is limited to verifying debt and default.
- Respondent (IRP): Reported ongoing non-cooperation by suspended management and receipt of Rs. 20.45 crore from Customs Department, now frozen by Delhi High Court order.
Relief Sought
Appellants sought: (1) Setting aside of NCLT’s order dated 18.07.2023; (2) Dismissal of Section 7 application; (3) Declaration that no financial debt existed; (4) Costs of litigation.
The Legal Issue
The central question was whether a transaction involving immediate transfer of funds from a corporate debtor to a related entity on the same day, with no retention or utilisation of funds for business purposes, constitutes a "financial debt" under Section 5(8) of the IBC, or whether such a transaction is a sham designed to create an illusion of debt for fraudulent purposes.
Arguments Presented
For the Appellant/Petitioner
The appellants relied on Phoenix ARC Private Limited v. Spade Financial Services Ltd. (2021) 3 SCC 475, arguing that a financial debt requires disbursal against the consideration for the time value of money. They contended that the Rs. 3.60 crore never remained in the Corporate Debtor’s account for even 24 hours and was immediately routed to Religare Finvest Ltd., indicating no genuine lending intent. The MoUs were one-page documents lacking terms of repayment, purpose, or security, and were part of a documented pattern of round-tripping. The FIR and charge-sheet filed by Religare Finvest Ltd. itself corroborated the fraudulent nature of the transactions. The appellants emphasized that the Corporate Debtor’s 2017 denial of liability in the balance confirmation letter negated any acknowledgment of debt.
For the Respondent/State
The respondents argued that the existence of MoUs and bank transfers established debt and default, and the NCLT’s role under Section 7 is limited to verifying these formalities. They cited Innoventive Industries and Power Trust to assert that the NCLT cannot delve into the nature of transactions or consider criminal proceedings. They contended that the subsequent use of funds by the Corporate Debtor is irrelevant to the existence of a financial debt. The FIR filed by Religare Finvest Ltd. was argued to be an internal matter unrelated to the MoU between RAIML and Ligare Aviation Ltd., and could not invalidate a debt evidenced by documentary proof.
The Court's Analysis
The NCLAT undertook a rigorous doctrinal analysis grounded in the definition of financial debt under Section 5(8) of the IBC, which requires disbursal "against the consideration for the time value of money." The Tribunal emphasized that the Supreme Court in Phoenix ARC Pvt. Ltd. had unequivocally held that sham or collusive transactions create only an illusion of debt, and the real agreement between parties must be examined.
"A transaction which is sham or collusive would only create an illusion that money has been disbursed to a borrower with the object of receiving consideration in the form of time value of money, when in fact the parties have entered into the transaction with a different or an ulterior motive."
The NCLAT found that the Adjudicating Authority erred by focusing solely on the terms of the MoUs and ignoring the bank statements, which demonstrated that the Rs. 3.60 crore was transferred out on the same day. The Tribunal noted that the Corporate Debtor had submitted detailed pleadings and documentary evidence - including the 2017 denial of liability and the FIR filed by Religare Finvest Ltd. - to prove the transaction’s fraudulent character. The Adjudicating Authority’s dismissal of these pleadings as a "moonshine defence" without addressing the evidence was held to be a failure to perform its duty under the IBC.
The Tribunal further held that the mere existence of a MoU and bank transfer does not automatically validate a financial debt. The pattern of transactions - multiple mirror transfers between group entities within hours - indicated a systematic practice of fund layering, not genuine lending. The fact that the subsidiary of the Financial Creditor itself had filed an FIR alleging the same transactions as fraudulent was deemed highly significant, even if not substantive evidence, as it corroborated the Corporate Debtor’s allegations.
The NCLAT also rejected the argument that the Corporate Debtor’s financial statements constituted an acknowledgment of debt, noting that the 2017 denial letter was part of the record and that Asset Reconstruction Company v. Bishal Jaiswal (2021) 6 SCC 366 requires financial statements to be read in context, including caveats and contemporaneous denials.
The Court concluded that the transaction failed the Phoenix ARC test: there was no time value of money, no genuine intent to lend, and no benefit to the Corporate Debtor. The initiation of CIRP on such a basis was held to be an abuse of the IBC’s process.
The Verdict
The appeals were allowed. The NCLAT set aside the order dated 18.07.2023 admitting the Section 7 application. The Section 7 application (C.P. (IB) No. 2(PB)/2022) was dismissed. All pending interim applications were disposed of. Parties were directed to bear their own costs. The Tribunal held that no financial debt existed under Section 5(8) of the IBC, and the CIRP could not be initiated on a transaction that was a sham and collusive.
What This Means For Similar Cases
Genuine Disbursal for Time Value Is Non-Negotiable
- Practitioners must now demonstrate that funds were actually made available to the corporate debtor for its use, not merely routed through its account.
- A MoU and bank transfer alone are insufficient if the funds are transferred out within hours without any business purpose.
- Evidence of immediate onward transfer must be scrutinized as a red flag for sham transactions.
Criminal Proceedings Are Not Dispositive, But Corroborative
- FIRs or charge-sheets cannot independently invalidate a financial debt, but when filed by a related party (e.g., a subsidiary of the financial creditor), they become critical corroborative evidence.
- Courts must consider whether the allegations in such proceedings align with the transactional pattern before the NCLT.
Balance Sheet Entries Are Not Absolute Acknowledgments
- A balance sheet entry may be rebutted by contemporaneous written denials, as held in Asset Reconstruction Company.
- Practitioners must ensure that balance confirmation responses are preserved and submitted as part of the record to challenge alleged acknowledgments.
Locus of Non-Parties Is Broadly Interpreted
- Decree holders and garnishee creditors with a direct financial interest in the corporate debtor’s assets have locus to challenge CIRP if initiated on fraudulent grounds.
- The NCLAT reaffirmed the Supreme Court’s expansive interpretation of "person aggrieved" under Section 61 of the IBC, especially in cases involving fraud.
Fraudulent Initiation Must Be Probed at Admission Stage
- The NCLT cannot ignore pleadings of fraud or sham transactions at the admission stage under Section 7.
- The Tribunal must examine the real nature of the transaction, not merely its form, to prevent abuse of the insolvency process.
