Take-Over Financing of Bank Loan Is Not Financial Debt: NCLT Ahmedabad

Mangaldas Finance Vs Milano Papers Private Limited (NCLT Ahmedabad)

Take-Over Financing Of A Bank Loan Is Not ‘Financial Debt’: NCLT Ahmedabad’s Ruling In Mangaldas Finance v. Milano Papers And The Narrowing Disbursal Test Under Section 5(8) IBC

A recurring fact pattern before the National Company Law Tribunal (“NCLT”) involves a lender — often a registered money lender or an NBFC — that sanctions a fresh loan to a corporate borrower, but disburses the amount not to the borrower but directly to an existing secured lender to clear a prior liability. The question that then arises at the admission stage of a Section 7 petition is deceptively simple: does such take-over or refinancing arrangement create a ‘financial debt’ owed by the corporate debtor to the new lender, entitling the latter to trigger the Corporate Insolvency Resolution Process (“CIRP”)? The Ahmedabad Bench of the NCLT has answered this in the negative in Mangaldas Finance v. Milano Papers Private Limited, dismissing a Section 7 petition and imposing costs of ₹1 lakh on the applicant money lender. The ruling merits attention because it tightens, rather than merely restates, the disbursal requirement embedded in Section 5(8) of the Insolvency and Bankruptcy Code, 2016 (“IBC”).

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