A personal loan to a promoter or director of a company cannot start the Corporate Insolvency Resolution Process (CIRP), according to the Supreme Court's ruling in the case of M/S Radha Exports (India) Private Limited v. K.P. Jayaram & Another [Civil Appeal No. 7474 of 2019] dated August 28, 2020 (the "Judgment").
In the instant case titled M/S Radha Exports (India) Private Limited v. K.P. Jayaram & Another the issue raised for clarification before the Apex Court was:
Maintainability of the CIRP brought against the Appellant Company under Section 7 of the IBC?
With regard to this issue, The SC noted that the NCLAT was not inclined to accept the appellant company's claim that the full amount had been paid for two allegedly valid reasons. The Correlation Statement indicated payments totaling INR 53,05,000/- in favour of Chennai Customs and INR 1,75,000/- in favour of a Mr. Kulasekaran, which was the primary factor. As financial creditors, the Respondents contested that these contributions went toward the creditors' outstanding debts. The second reason was that if the entire sum had been paid, the Appellant Company would have had no justification to assert that the amount was non-payable because it was time-barred. The SC responded to the second justification by pointing out that it is well established in law that alternative defences are acceptable to refute an allegation. Thus, the Appellant Company had the option of disputing the Respondents' claim by raising the defence of limitation and arguing that there was nothing owed or payable by the Appellant Company to the Respondents. Innoventive Industries Limited v. ICICI Bank and Another [(2018) 1 SCC 407] and B.K. Educational Services Private Limited v. Parag Gupta and Associates [(2019) 11 SCC 633] were cited by the court to support its conclusion that even in the absence of those cases, the applicant invoking CIRP was required to prima facie establish the existence of a legally recoverable debt in his favour before filing the CIRP. The SC continued by noting that the Respondent No. 2 resigned from the board of the Appellant Company based on the letter signed by the Respondents, and at that point, the Respondent No. 2 requested the Appellant Company to treat the share application money of INR 90,00,000/- as share application money of Mr. M. Krishnan and to issue shares for the aforementioned value to Mr. Krishnan. The money was to be considered a personal loan from Respondent No. 2 to Mr. M. Krishnan, effectively a personal loan to a promoter or director of a business. The CIRP under the IBC cannot therefore be triggered by the same.
The SC made a significant observation regarding the limited range of procedures and issues that the NCLT may consider under Section 7 of the IBC. According to the SC, disagreements over whether the Respondents' signatures are fake or if records have been made up can be decided using evidence, including forensic evidence, in a routine lawsuit. The SC further noted that the payment for shares received cannot be a debt, much less a financial debt, as is clear from official records that the shares were properly distributed to a third party at the payee's request. In light of the foregoing, the SC determined that a personal loan to a company's promoter or director cannot result in CIRP under the IBC.
The Court categorically stated that,
“t appears that the appellate authority was not inclined to accept the submission of the appellant Company, that the entire amount had been paid, for two purported reasons. The first reason was that the correlation statement showed payments of certain amounts amounting to Rs 53,05,000 in favour of Customs, Chennai and payments amounting to Rs 1,75,000 in favour of one Mr Kulasekaran. The respondents, as financial creditors had disputed that these payments were towards the dues of the financial creditors. The second reason was that, if the total amount had been paid, there was no reason for the appellant Company to take the plea that the amount was not payable, the same being barred by limitation.”