Case Law Details
Sahil Jain Vs KGN General Trading Co. Limited (NCLT Chandigarh)
The application was filed by the financial creditor under Section 7 of the Insolvency and Bankruptcy Code, 2016 (“the Code”) seeking initiation of the Corporate Insolvency Resolution Process (CIRP) against the corporate debtor for a default amount of ₹1.60 crore along with 18% annual interest. The date of default was 01.05.2025.
The financial creditor, a proprietorship firm engaged in manufacturing hosiery goods, had a long-standing business relationship with the corporate debtor, a company in the same line of business. On the basis of mutual confidence, the financial creditor advanced short-term loans totaling ₹1.60 crore during the financial year 2024–25 through multiple transactions between 14.05.2024 and 20.03.2025. Out of this, ₹50 lakh was agreed to be repaid by 31.03.2025, which the corporate debtor failed to do. Consequently, both parties executed a Loan Agreement on 10.04.2025, under which the debtor undertook to repay the entire amount in ten equal monthly instalments of ₹16 lakh each with interest at 18% per annum. The first instalment was due on 25.04.2025, but the debtor defaulted on this payment, triggering a breach under the agreement.
As per Clause 4.1 of the Loan Agreement, upon such default, the financial creditor was entitled to recall the entire outstanding loan. Accordingly, on 06.05.2025, a Loan-cum-Recall Notice was issued demanding immediate repayment of ₹1.60 crore plus interest, followed by a reminder on 20.05.2025. Despite receipt of these communications, the corporate debtor failed to make payment or respond, resulting in continued default.
In response, the corporate debtor admitted to availing the loan but attributed non-payment to financial distress, losses, high input costs, delayed receivables, and a market slowdown. It contended that the default was unintentional and caused by circumstances beyond its control. The debtor further claimed that the financial creditor imposed an excessive interest rate and coerced it into signing the loan agreement despite knowing its financial difficulties. It also pointed to the demise of one of its key managerial persons, Mrs. Samriti Jain, on 10.07.2025, as a factor aggravating its financial instability. The debtor stated that it was engaged in restructuring efforts, exploring asset monetization, and negotiations with lenders to meet its obligations.
After hearing both sides, the Tribunal noted that the existence of a financial transaction was not disputed. The corporate debtor had admitted to receiving ₹1.60 crore, and the disbursement was supported by bank records and the executed Loan Agreement. Therefore, the relationship of debtor and creditor was clearly established. The Tribunal further noted that the debtor failed to pay the first instalment due under the Loan Agreement and that, upon default, the creditor had validly invoked the recall clause. The debtor’s failure to make any payment or offer a repayment plan despite reminders confirmed the default.
The Tribunal held that while financial hardship and market conditions might have contributed to the debtor’s inability to pay, these reasons do not negate the fact of default under the Code. The insolvency process is triggered by occurrence of default, not by evaluating its cause or intention. The primary questions were whether a financial debt existed and whether default had occurred — both of which stood proven.
The Tribunal rejected the corporate debtor’s claim of coercion or excessive interest, noting that no evidence was provided to substantiate such assertions. The agreed rate of 18% per annum was not unusual for commercial loans between business entities. Moreover, having benefited from the funds, the debtor could not disown the contractual terms. The Tribunal also observed that while the death of a managerial person was unfortunate, it did not extinguish the company’s financial obligations. Similarly, ongoing restructuring efforts did not amount to discharge of liability under the Code.
Based on the admitted facts, the documentary record, and absence of any credible defence, the Tribunal concluded that a financial debt existed and that the corporate debtor had defaulted. The defences raised were based on hardship rather than a legal denial of liability. Therefore, the petition was found to be valid and complete.
Accordingly, the Tribunal admitted the application under Section 7 of the Insolvency and Bankruptcy Code, 2016, initiating the Corporate Insolvency Resolution Process against the corporate debtor. A moratorium was declared under Section 14 of the Code, prohibiting the institution or continuation of legal proceedings, transfer or disposal of assets, enforcement of security interests, and recovery of property from the possession of the corporate debtor. The moratorium was to remain in effect until completion of CIRP or approval of a resolution plan, or until an order of liquidation was passed.
Mr. Nikhil Sachdeva, having registration number IBBI/IPA-001/IP-P-02743/2022-2023/14184, was appointed as the Interim Resolution Professional (IRP) to conduct the CIRP. The IRP was directed to make a public announcement and call for submission of claims under Section 15 of the Code. The corporate debtor was instructed to extend full cooperation to the IRP as mandated under Section 19. The IRP was also authorized to seek appropriate directions from the Tribunal in case of non-cooperation by any personnel or promoters.
The IRP was required to protect and preserve the value of the corporate debtor’s property and manage operations as a going concern. The financial creditor was directed to pay an advance of ₹2,00,000 to the IRP within two weeks to facilitate smooth conduct of the CIRP, with liberty to raise further interim fund demands as needed. The Tribunal instructed the registry to communicate copies of the order to the parties, the IRP, and the Registrar of Companies, and to ensure timely publication. The IRP was also directed to notify government departments and employees’ associations that might have claims against the corporate debtor.
With these directions, the Corporate Insolvency Resolution Process was deemed to have commenced from the date of the order. The Tribunal allowed and disposed of the case, admitting the corporate debtor into insolvency proceedings under the Code.
FULL TEXT OF THE NCLT JUDGMENT/ORDER
1. The present Application has been filed by Sahil Jain, Proprietor of M/s White Star Hosiery (hereinafter referred to as “Financial Creditor”) under Section 7 of the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as “Code”) for initiation of Corporate Insolvency Resolution Process (CIRP) against KGN General Trading Co. Limited (hereinafter referred to as “Corporate Debtor”), through its Authorised Signatory for the default amount of Rs. 1,60,00,000/- (Rupees One Crore Sixty Lakhs Only) along with the interest of 18% per annum. The date of default, as mentioned in the Application is 01.05.2025.
2. Brief facts of the case as stated in the Application and argued presented by the Learned Counsel for the Petitioner are summarised as follows:
(i) The Financial Creditor, a proprietorship concern having its registered office at Ludhiana, Punjab, is engaged in the business of manufacturing hosiery goods and readymade garments. The Corporate Debtor is a company incorporated under the Companies Act, 1956, and is also engaged in the business of hosiery goods and textiles. Both parties have known each other for a long time owing to their business relations and mutual confidence developed over time. On account of this relationship, the Financial Creditor advanced short-term loans to the Corporate Debtor from time to time as per its financial requirements.
ii. The Financial Creditor disbursed a total sum of Rs.1,60,00,000/- to the Corporate Debtor during the financial year 2024-25, through multiple transactions between 14.05.2024, and 20.03.2025. Out of this, Rs.50,00,000/- was to be repaid on or before 31.03.2025. However, the Corporate Debtor failed to make the said repayment and continued to delay payments on one pretext or another. Subsequently, the parties entered into a Loan Agreement dated 10.04.2025, stipulating that the Corporate Debtor would repay the total loan amount in ten equal monthly instalments of Rs.16,00,000/- each, along with interest at the rate of 18% per annum. The first instalment was due on 25.04.2025. The Corporate Debtor, however, defaulted on the payment of the first instalment, thereby committing a breach of the Loan Agreement.
iii. In terms of Clause 4.1 of the said Loan Agreement, the Financial Creditor became entitled to recall the entire loan amount, along with accrued interest, upon default. Accordingly, on 06.05.2025, the Financial Creditor issued a Loan-cum-Recall Notice to the Corporate Debtor, demanding immediate repayment of Rs.1,60,00,000/- along with interest at 18% per annum. Despite receipt of the notice, the Corporate Debtor neither responded nor made any payment. A final reminder was issued on 20.05.2025, reiterating the demand for repayment within three days, but the Corporate Debtor again failed to comply, thereby remaining in default of its repayment obligations.
iv. In reply, the Corporate Debtor has submitted that it is engaged in the manufacturing and supply of hosiery goods and textiles but has been suffering from frequent losses, facing severe financial constraints. To mitigate losses and expand its manufacturing operations, it availed credit of Rs.1,60,00,000/- from the Financial Creditor during the financial year 2024-25. The Corporate Debtor contends that due to an acute shortage of working capital, high raw material prices, delayed receivables, and an overall market slowdown, it could not adhere to the repayment schedule. It asserts that the default was neither willful nor deliberate but arose from uncontrollable business circumstances.
v. It is further contended that the loan was availed in good faith and that the Financial Creditor, despite knowing the Corporate Debtor’s precarious financial position, coerced it into executing the Loan Agreement dated 10.04.2025, imposing an excessive interest rate of 18% per annum. The Corporate Debtor also submits that the Financial Creditor prematurely invoked Clause 4.1 and recalled the entire amount without considering its request for additional time and ongoing restructuring efforts. It has also been stated that the affairs of the company suffered further disruption due to the demise of Mrs. Samriti Jain, who was managing the company, on 10.07.2025. The Corporate Debtor denies any intention to default and claims that it is actively pursuing financial restructuring, exploring asset monetization, and engaging with prospective investors and lenders to meet its liabilities.
3. We have heard the submissions made by the Learned Counsel for the Petitioner Financial Creditor as well as the Respondent/Corporate Debtor and have gone through the material available on record carefully, along with the extant provisions Code and the settled position of law on the subject issue.
4. From a careful perusal of the records and submissions made by both parties, it is observed that the existence of a financial transaction between the Financial Creditor and the Corporate Debtor is not in dispute. The Corporate Debtor has, in fact, admitted to having received financial assistance to the tune of Rs.1,60,00,000/- from the Financial Creditor during the financial year 2024-25. The disbursement of funds has been duly supported by documentary evidence, including bank transfer details and the subsequent Loan Agreement dated 10.04.2025, executed between the parties. The Corporate Debtor’s acknowledgment of receipt of the said funds and its reference to the same in the reply clearly establishes the relationship of debtor and creditor.
5. It is also a matter of record that, as per the terms of the Loan Agreement, the Corporate Debtor was required to repay the loan amount in ten equal instalments along with interest at 18% per annum, the first instalment being due on 25.04.2025. It is admitted that the Corporate Debtor failed to make payment of the said instalment. As per Clause 4.1 of the Loan Agreement, in the event of such default, the Financial Creditor was entitled to declare the entire loan amount due and payable. The Financial Creditor, accordingly, issued a Loan-cum-Recall Notice dated 06.05.2025, demanding repayment of the outstanding principal amount along with interest. Despite receipt of the said notice and a subsequent reminder dated 20.05.2025, the Corporate Debtor neither replied nor made any part payment toward liquidation of its liability.
6. The contention of the Corporate Debtor that the default was not deliberate but arose due to financial distress, market recession, and high input costs, though understandable, does not negate the fact of default. The insolvency framework under the Code is triggered by the occurrence of default in repayment of debt, irrespective of the reasons or financial health of the Corporate Debtor. The primary question before this Tribunal is not whether the default was intentional or justified, but whether there exists a financial debt and whether the Corporate Debtor has defaulted in repayment of the same. Both these conditions stand satisfied in the present case.
7. The plea raised by the Corporate Debtor that it was forced to execute the Loan Agreement under financial pressure and that the interest rate was excessive also fails to hold merit. The agreement in question was mutually executed, and no material has been placed on record to substantiate any coercion or duress. The stipulated rate of interest of 18% per annum, though on the higher side, is not uncommon in private financial arrangements of short-term commercial loans between business entities. Moreover, the Corporate Debtor, having availed the benefit of funds under the agreement, cannot now seek to invalidate its terms after defaulting on repayment.
8. Further, while we take note of the unfortunate demise of the person managing the affairs of the Corporate Debtor, such an event, however unfortunate, does not extinguish the liability incurred under a validly executed financial transaction. The ongoing efforts of the Corporate Debtor for financial restructuring and negotiations with investors also do not amount to discharge or suspension of liability under the Code.
9. In view of the admitted facts, the documentary evidence placed on record, and the absence of any credible defence disproving the existence of debt or default, we are of the view that the Financial Creditor has successfully established that there is a financial debt exists and that the Corporate Debtor has defaulted in its repayment obligations. The defence taken by the Corporate Debtor appears to be an expression of its financial hardship rather than a legal rebuttal of the claim. Hence, the default being clearly established, the petition deserves to be considered on merits in accordance with the provisions of the Code.
10. On the basis of the facts, the Application is otherwise defect-free and on order. Accordingly, we admit this application and Order as under:
i. The Corporate Debtor KGN General Trading Co. Limited is admitted in the Corporate Insolvency Resolution Process under Section 7 of the Insolvency and Bankruptcy Code, 2016.
ii. The moratorium under section 14 of the Insolvency and Bankruptcy Code, 2016 is declared for prohibiting all of the following in terms of Section 14(1) of the said Code.
(a the institution of suits or continuation of pending suits or proceedings against the corporate debtor, including execution of any judgment, decree, or order in any Court of Law, Tribunal, Arbitration Panel, or other Authority;
b. transferring, encumbering, alienating, or disposing of by the Corporate Debtor, any of its assets or any legal right or beneficial interest therein;
c. any action to foreclose, recover, or enforce any security interest created by the Corporate Debtor in respect of its property, including any action under the Securitisation and Reconstruction of Financial Assets and the Enforcement of Security Interest Act, 2002;
d. the recovery of any property by an owner or lessor where such property is occupied by or in the possession of the Corporate Debtor.
e. the Order of moratorium shall have effect from the date of this Order till the completion of the Corporate Insolvency Resolution Process or until this Adjudicating Authority approves the Resolution Plan under sub-section (1) of Section 31 or passes an order for the liquidation of the Corporate Debtor Company under Section 33 of the Insolvency 85 Bankruptcy Code, 2016, as the case may be.
(iii) As proposed, Mr. Nikhil Sachdeva having Registration Number: IBBUIPA-001/IP-P-02743/2022-2023/14184 to act as Interim Resolution Professional, having address at H.No. 2822, First Floor, Sector 32-A, Chandigarh Road, Near BCM School, Ludhiana, Punjab and Email – nikhilsachdeva.ca@gmail.com is appointed to act as Interim Resolution Professional (IRP) under Section 13(1)(c) of the Insolvency and Bankruptcy Code, 2016. He shall conduct the Corporate Insolvency Resolution Process as per the provisions of the Insolvency and Bankruptcy Code, 2016, r.w. Regulations made thereunder. The IRP shall make a public announcement of the initiation of the Corporate Insolvency Resolution Process and call for submission of claims under Section 15 as required by Section 13(1) (b) of the Insolvency and Bankruptcy Code, 2016.
iv. the supply of essential goods or services to the Corporate Debtor, if continuing, shall not be terminated or suspended, or interrupted during the moratorium period. The Corporate Debtor is to provide effective assistance to the IRP as and when it takes charge of the assets and management of the Corporate Debtor.
v. The IRP shall perform all its functions as contemplated, inter alia, by sections 17, 18, 20 85 21 of the Insolvency and Bankruptcy Code, 2016. It is further made clear that all personnel connected with Corporate Debtor, its Promoter, or any other person associated with the management of the Corporate Debtor are under legal obligation under Section 19 of the Insolvency and Bankruptcy Code, 2016, to extend every assistance and co-operation to the IRP. Where any personnel of the Corporate Debtor, its Promoter, or any other person, is required to assist or co-operate with the IRP, do not assist or co-operate, the IRP is at liberty to make an appropriate Application to this Adjudicating Authority with a prayer for passing an appropriate Order.
vi. The IRP shall be under a duty to protect and preserve the value of the property of the ‘Corporate Debtor Company’ and manage the operations of the Corporate Debtor Company as a going concern as a part of the obligation imposed by Section 20 of the Insolvency and Bankruptcy Code, 2016.
vii. The Financial Creditor is directed to pay an advance of Rs. 2,00,000/- (Rupees Two lakh only) to the IRP within two weeks from the date of receipt of this Order for smooth conduct of Corporate Insolvency Resolution Process and IRP to file proof of receipt of such amount before the Adjudicating Authority along with First Progress Report. Subsequently, the IRP may raise further demands for Interim funds, which shall be provided as per the Rules.
viii. The Registry is directed to communicate a copy of this Order to the Financial Creditor, Corporate Debtor, and the Interim Resolution Professional and the concerned Registrar of Companies, after completion of the necessary formalities, within seven working days, and upload the same on the website immediately after pronouncement of the Order.
ix. The IRP shall also serve a copy of this Order to the various departments, such as Income Tax, GST, State Trade Tax, and Provident Fund, etc. those who are likely to have their claim against Corporate Debtor as well as to the trade unions/employees associations so that they are timely informed about the initiation of CIRP against the Corporate Debtor.
x. The commencement of the Corporate Insolvency Resolution process shall be effective from the date of this Order.
11. The Registry is directed to communicate a copy of this Order immediately to both the Parties and also to IRP
12. As a result CP (IB) No.176/Chd/Pb/2025 stands allowed and disposed of.
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