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”).
Facts
Mangaldas Finance, a sole proprietorship of one Asit Surendrabhai Shah registered under the Gujarat Money Lenders Act, 2011, filed a petition under Section 7 of the IBC against Milano Papers Private Limited, claiming a default of ₹9.56 crore arising out of four term loans sanctioned in October 2024. The loans carried interest at 15% per annum. Crucially, the amounts were not disbursed to Milano Papers at all — they were transferred directly from the applicant’s loan account to Yes Bank, to clear Milano Papers’ outstanding dues with that bank. Milano Papers serviced the arrangement until October 2025, after which it defaulted. A demand notice followed, to which the corporate debtor responded citing financial difficulty and seeking time. Mangaldas Finance thereafter invoked Section 7.
Milano Papers resisted the petition on two grounds: first, that the application misstated the date of default; and second, that the acceptance of several repayments without objection, prior to the demand notice, amounted to a novation of the repayment terms, extinguishing any subsisting default. The Bench, comprising Judicial Member Chitra Hankare and Technical Member Dr. V.G. Venkata Chalapathy, did not need to dwell on novation — it disposed of the petition on a more fundamental footing: that no financial debt existed in the first place.
Findings Of The Tribunal
The Bench anchored its reasoning in the manner of disbursal. Since the loan proceeds moved from the applicant’s account directly to Yes Bank and never touched Milano Papers’ account, the Tribunal held that “this cannot be construed as a loan disbursement to the respondent CD.” It went further, characterising the transaction in functional rather than formal terms: “A repayment arranged in order to enable the CD repay the loan cannot be the activity of a money lender and the loan so granted by applicant does not qualify as financial creditor or financial debt under Sec 5 (7) & (8) of IBC 2016.” The Bench also invoked Section 39 of the Gujarat Money Lenders Act, 2011, which regulates recovery by registered money lenders, to hold that the applicant was ineligible to invoke Section 7 of the IBC on the facts before it. The petition was dismissed with costs of ₹1 lakh payable to the Prime Minister’s National Relief Fund.
The Doctrinal Backdrop: Disbursal As The Sine Qua Non Of Financial Debt
Section 5(8) of the IBC defines ‘financial debt’ as a debt disbursed against the consideration for the time value of money. The Supreme Court in Pioneer Urban Land and Infrastructure Ltd. v. Union of India and, subsequently, in Anuj Jain, Interim Resolution Professional for Jaypee Infratech Ltd. v. Axis Bank Ltd., has repeatedly emphasised that the twin ingredients of disbursal and time value of money are not merely descriptive but definitional — a transaction that fails either limb cannot be dressed up as financial debt however it is labelled in the loan documentation. NCLT and NCLAT benches have applied this disbursal requirement to deny financial-creditor status where funds were routed to secure or discharge a third party’s liability rather than reaching the corporate debtor’s own account — a line of reasoning visible in rulings holding that mortgages created to secure group-company debt, or amounts advanced towards joint-venture capital, do not constitute financial debt qua the corporate debtor. Milano Papers extends this logic to a fact pattern that is commercially common but had not been squarely tested: take-over or bridge financing structured so that the new lender pays off the old one directly.
The functional consequence of the Tribunal’s reasoning is significant. It draws a distinction between (a) a loan disbursed to a corporate debtor which the debtor then chooses to apply towards repaying an existing lender, and (b) a loan where the new lender itself remits funds to the existing lender without the money ever passing through the corporate debtor’s hands. The Bench treated only the former as capable of satisfying Section 5(8); the latter, in its view, is not “the activity of a money lender” qua the corporate debtor at all, since the corporate debtor never received or controlled the funds. Read literally, this reasoning risks conflating the mode of disbursal with the existence of a debt obligation — a corporate debtor that authorises and benefits from a direct payment to its existing lender does receive value, in the sense that its own liability stands discharged, even if the money never physically transits its own bank account. Whether the IBC’s disbursal requirement is concerned with the physical route of the funds or with whether the corporate debtor received economic benefit and undertook a corresponding repayment obligation is a distinction the Tribunal’s order does not fully unpack, and one that appellate scrutiny may need to clarify.
Practical Implications For Structuring Take-Over Finance
For NBFCs, money lenders, and even banks that structure take-over or balance-transfer financing, Milano Papers is a cautionary signal at the drafting stage rather than merely a limitation on the IBC forum. Lenders extending take-over finance would be well advised to route disbursal through the corporate debtor’s own account, with a contemporaneous instruction or mandate from the debtor directing onward payment to the existing lender, so that the disbursal-to-debtor limb of Section 5(8) is unambiguously satisfied on the documentary record. Loan and security documents should also expressly record the debtor’s acknowledgment of receipt and application of funds, rather than leaving the transaction to be reconstructed from bank transfer records after a dispute has arisen. Absent such structuring, a lender that finds itself in Mangaldas Finance’s position is not without remedy — recovery under the Gujarat Money Lenders Act, 2011 (or the equivalent State legislation), a civil suit for recovery, or, where security has been created, enforcement under the SARFAESI Act, remain available — but the expedited, time-bound machinery of the IBC will not be one of them.
Conclusion
Mangaldas Finance v. Milano Papers is best read as part of a consistent judicial trend confining Section 7 of the IBC to genuine financial creditors who have disbursed funds to, and hold a debt obligation against, the corporate debtor itself — rather than to every lender who can point to a loan agreement and a default. The ruling also carries a subtler message for money lenders regulated under State legislation such as the Gujarat Money Lenders Act: the Tribunal’s reference to Section 39 of that Act signals a willingness to read sector-specific recovery restrictions into the eligibility analysis under Section 7, not merely the substantive definition of financial debt under Section 5(8). Until an appellate forum tests the correctness of treating the physical route of disbursal as dispositive — as opposed to treating it as evidence of whether the corporate debtor incurred a genuine repayment obligation — lenders structuring take-over or refinancing transactions would do well to ensure that disbursal to the corporate debtor is documented beyond doubt.
Case Title: Mangaldas Finance v. Milano Papers Private Limited | Case Number: C.P.(IB)/38(AHM)2026 | Citation: 2026 LLBiz NCLT (AHM) 770
For Applicant: Advocate Jaimin R. Dave | For Respondent: Advocate Tirth Nayak
The author is an Advocate and Company Secretary based in Mumbai, practising in SEBI/SAT enforcement, NCLT/IBC insolvency matters, and Bombay High Court litigation. Views are personal.
FULL TEXT OF THE NCLT JUDGMENT/ORDER
This case is fixed for pronouncement of order
The order is pronounced in open court vide separate sheet.
1. This Application has been filed under Section 7 of Insolvency and Bankruptcy Code, 2016 by Mangaldas Finance, Sole Proprietorship of Asit Surendrabhai Shah (In Short “Financial Creditor”) seeking initiation of Corporate Insolvency Resolution Process against Milano Papers Private Limited (In Short “Corporate Debtor”) for having committed a default of an amount of Rs. 9,56,94,059/- out of which out of which Rs. 9,33,01,452/- is towards the Principle Amount and Rs. 23,92,607/- is towards interest. The date of default is stated as 07.11.2025.
2. The Applicant states that the Corporate Debtor was in need of funds and thus had approached the Financial Creditor in the month of October 2024 for grant of financial assistance, inter-alia for taking over the outstanding loan owed to Yes Bank Limited. For, obtaining such financial assistance the Corporate Debtor had passed a board resolution to this effect. Accordingly, the Financial Creditor vide sanction letter dated 03.10.2024 had sanctioned 4 term loans aggregating to Rs. 16,70,00,000/- (Rupees Sixteen Crores and Seventy Lakhs Only) at an interest rate of 15 % per annum and a tenure of 24 months on certain terms and conditions. The Applicant disbursed the following amounts to Yes Bank Limited on behalf of the Corporate Debtor (i) Rs. 8,00,00,000/- on 03.10.2024 (ii) Rs. 4,00,00,000/-, Rs. 3,65,00,000/- and Rs.1,05,00,000/- on 04.10.2024. It is further stated that aforementioned credit facilities were secured by way of security over immovable properties mortgaged in favour of the Financial Creditor pursuant to a mortgage deed dated 19.12.2024.
3. The Applicant states that the Corporate Debtor had paid the instalments from 03.10.2024 till 08.10.2025. However, from 07.11.2025, the Corporate Debtor had not made any repayment in relation to the abovementioned credit facilities. Later, the Applicant had issued the demand notice dated 28.11.2025 seeking repayment of the entire outstanding dues of Rs. 9,56,94,059/- along with further running interest within 15 days from the date of receipt of the notice. It is further stated that the Corporate Debtor in its reply dated 01.12.2025 had admitted of receiving the demand notice dated 28.11.2025 on 01.12.2025 and has shown its inability to repay the debt owed to the Financial Creditor on account of financial crunch. The Corporate Debtor had sought time of 30 days to repay the outstanding dues but no amount was repaid.
4. The Applicant had relied upon following documents to substantiate its claim :-
a) License of the Financial Creditor under Gujarat Money Lenders Act, 2011.
b) PAN Card of Mr. Asit.S.Shah.
c) Sanction letter dated 03.10.2024.
d) Bank Statement of the Financial Creditor.
e) Mortgage Deed dated 19.12.2024.
f) Ledger Statements of the Corporate Debtor maintained in the books of the Financial Creditor.
g) Working Computation of the Outstanding Amount in tabular form.
h) Demand Notice dated 28.11.2025 .
i) Reply dated 01.12.2025 and NeSL form -C .
5. The Applicant has proposed the name of Mr. Malhar Rashmikant Mehta having registration no. IBBI/IPA-001/IP-P01032/2017 2018/11686 to act as the Interim Resolution Professional, who has also filed his written consent in Foiiii 2.
6. The Respondent in its reply states that present petition is incomplete and non-compliant of Rule 4 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 and Regulation 2A of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016. The Respondent further states that the petition does not disclose the correct date of default. The Financial Creditor is not entitled to as per the its license of extend loans beyond the area in reference to which the license issued under the Gujarat Money Lender Act, 2011 has been granted.
7. The Respondent states that he had made various payments which are admittedly not as per the repayment teiins originally envisaged. The aforesaid payments have been accepted without any objection prior to the issuance of the demand notices and hence in such circumstances the teiins of repayment of loan facility stands novated by conduct and hence there exists no incumbency upon the Corporate Debtor to abide by the original terms in light of the subsequent acts.
8. The Respondent states that on account of the occurrence of novation, ‘debt’ as defined under the provisions of the Code does not exist and by extension there is no ‘default’ as defined under the Code. It is further stated that substantial quantum of amount have been repaid against loan facility and in such circumstances the present petition is a malicious attempt by the Applicant to effect recovery, despite the repayment teruis having been novated by conduct as per the provisions of the Contract Act, 1872. The Respondent further states that Applicant had issued demand notice on 28.11.2025, however the date of default is not in consonance with the same.
9. The right to file rejoinder of the Applicant was closed vide order dated 16.06.2026. Both, the parties were allowed to file written submissions.
10. The Applicant had filed the additional affidavit pursuant to the order dated 06.02.2026 passed by this Tribunal. The Tribunal had d’rected the applicant to file by way of affidavit with all the record and proof as to how the applicant can file application under Section 7 of the Code with allthe relevant pennission, license on maintainability of the Petition. The Applicant in its additional affidavit states that he is a money lender duly registered under the provisions of Gujarat Money-Lenders Act, 2011 and has been granted certificate of registration for a period of 5 years from 20.02.2024 to 19.02.2029. It is further stated that since the aforementioned certificate is issued by the Registrar of Money-Lenders, Government of Gujarat, by virtue of which the he can be said to hold a valid license to engage in the business of money lending. There is no bar on a registered money lender to file an Insolvency Petition under Section 7 of the Insolvency and Bankruptcy Code, 2016 and more so when there are documents on record to demonstrate that the applicant qualifies as a secured financial creditor for the team loan advanced to Corporate Debtor.
11. The Applicant had relied on following Judgments –
a) Innoventive Industries Ltd. Vs ICICI Bank Ltd. [2017] 140 CLA 39 (SC).
b) ES Krishnamurthy Vs Bharath Hi Tech Builders (P.) Ltd. [20211133 com159 (SC).
c) Catalyst Trusteeship Ltd. Vs Ecstasy Realty Pvt. Ltd. 2026 SCC OnLine SC 300.
d) Rohan Vijay Nahar and Others Vs. State of Maharashtra and Others. (2026) 2 Supreme Court Cases 182.
12. The Applicant had filed a declaration and states that earlier a Section 9 petition involving the Corporate Debtor being CP(IB) No. 544 of 2019 was admitted by this Tribunal vide an order dated 31.12.2020 and later withdrawn vide an order dated 03.02.2021 passed in I.A. No. 67 of 2021 in C.P.(IB) No. 544 of 2019.
13. We have heard the learned Counsels for both the parties and perused the documents on record along with written submissions of the Applicant.
14. Observations:-
a) The petitioner is a Money Lender registered under the Gujarat Money Lenders Act, 2011 which is an Act within itself regulated by the State Authority. The Licence/Registration in Form 3 submitted is for the period from 20.02.2024 to 19.02.2029. The party has not submitted any Income Tax Filing, but has submitted the Pan No. of an individual named Asit Surendrabhai Shah. The stated loan is sanctioned to repay the loan of the CD in to their Yes Bank loan account. A repayment arranged in order to enable the CD repay the loan cannot be the activity of a money lender and the loan so granted by applicant does not qualify as fmancial creditor or financial debt under Sec 5 (7) & (8) of IBC 2026.
b) The applicant cannot be assigned the loan which will be done by a creditor in terms of provisions of IBC 2016, even if he has arranged the facility. The stated amount is transferred from the Social Cooperative Bank (Loan Account of applicant) to Yes Bank account. This cannot be construed as a loan disbursement to the respondent CD.
c) Section 39 of the said Money Lenders Act regulates the money lender’s activity and there are certain prohibitions set in Section 39 of the Act as regards mode of recovery and in the Government of Gujarat Notification in this regard. The applicant is ineligible to file an application under Sec 7 of IBC 2016. The provision of IBC is for CIRP which is defined in Ch II, Section 6 and Section 7 of IBC, 2016. The Applicant does not comply to recovery of amount.
d) This petition is neither eligible to be filed, status, the credit to the loan account of Yes Bank cannot be the date of sanction of loan, the date of default is not arrived as per any teams, the applicant cannot lend under the Money Lenders Act provisions and claim status of financial creditor, it seems apparently collusive petition.
e) In view of the above this application is liable to be dismissed with cost.
15. Hence, we pass the following order:-
I. C. P. (IB) No. 38 of 2026 is rejected and disposed of.
II. The Applicant is directed to pay a sum of Rs. 1,00,000/- towards cost in Prime Minister’s National Relief Fund.
