Absence of Sanction Letter as per RBI Guideline Does Not Invalidate Financial Debt, NCLAT Sets Aside NCLT Order Against NBFC [Read Order]

In a ruling that clarifies the interplay between RBI guidelines and the Insolvency andBankruptcy Code (IBC), the National Company Law Appellate Tribunal (NCLAT) has set aside the order of the Kolkata Bench of the National Company Law Tribunal (NCLT), which had rejected a Section 7 application filed by a Non‑Banking Financial Company (NBFC).

The dispute arose from the disbursement of ₹1.6 crore by Sinki Commodities, a NBFC, to the corporate debtor in March 2019, carrying interest at 8% per annum.

Step by Step Handbook for Filing GST Appeals, Click Here

The corporate debtor initially paid interest and deducted tax at source (TDS), but repayment cheques were dishonoured. A demand notice was issued in September 2019, followed by a Section 7 application in November 2019.

The NCLT, by order dated 31 March 2022, acknowledged the disbursement but dismissed the application. It reasoned that the “intention of the parties was not clear” and that the NBFC had failed to produce a sanction letter or loan agreement as mandated under RBI’s Fair Practices Code.

Without such documentation, the tribunal held, the transaction could not be treated as “financial debt” under Section 5(8) IBC.

On appeal, the NCLAT examined the record and found that the financial creditor had brought sufficient material to establish the loan transaction.

Bank statements, confirmation of accounts, Form 16A reflecting TDS on interest, and letters from the corporate debtor all corroborated the disbursement and agreed interest. Importantly, the corporate debtor itself admitted in its reply that it had received ₹1.6 crore at 8% interest.

The two-member bench of Ashok Bhushan (Chairperson) and Barun Mitra(Technical Member) highlighted that the essence of financial debt under Section 5(8) is disbursement for “time value of money.” Even in the absence of a formal sanction letter, the transaction was clearly a commercial borrowing with agreed interest. While acknowledging that RBI guidelines are statutory and binding on NBFCs, the NCLAT clarified that breach of such guidelines does not erase the existence of financial debt under the IBC.

The Code, being a special legislation, must be applied to determine whether a debt exists and whether default has occurred.

The tribunal also addressed the corporate debtor’s argument that the arrangement had been novated by the issuance of fresh post‑dated cheques extending up to March 2022.

It held that the cheques themselves constituted an acknowledgement of continuing liability rather than novation. Letters dated 17 September 2019 and 24 September 2019, along with the cheques, demonstrated that the debt remained unpaid and that the debtor recognized its obligation.

In its operative findings, the NCLAT concluded that the financial creditor had successfully proved default. It held that the NCLT erred in rejecting the Section 7 application and set aside the impugned order. However, in the interest of justice, the tribunal granted ABC Floors three months to discharge the debt along with 8% interest, failing which insolvency proceedings would proceed.

Support our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates