Balance Sheet Entries as ‘Other Long-Term Liabilities’ Confirm Financial Debt u/s 5(8): NCLAT [Read Order]

The National Company Law Appellate Tribunal (NCLAT) has held that consistent balance sheet entries under “other long-term liabilities” are credible indicators of financial debt under Section 5(8) of the Insolvency and Bankruptcy Code (IBC).

A Section 7 application was filed by Kaliber Associates Pvt. Ltd. the respondent, against West Star Constructions Pvt. Ltd. under the Insolvency and Bankruptcy Code, 2016. The Appellant Subhash Chander Chauhan is the Suspended Director of Corporate Debtor (CD) (West Star Constructions Pvt. Ltd.) and was admitted into insolvency under Section 7 of the Code.

The corporate debtor, West Star Constructions Pvt. Ltd had received ₹1 crore from the financial creditor, the respondent, in 2010, which it contended was an advance for consultancy services. The appellant argued that a pro forma invoice raised in 2012 was evidence of a consultancy arrangement, rather than a loan, and thus challenged the existence of a financial debt.

The appellant argued that the amount received was an advance for consultancy services, not a loan. It relied on the proforma invoice raised nearly two years after the disbursal, asserting that the funds were linked to service performance.

The appellant highlighted that entries under “other long-term liabilities” were mere accounting treatments and did not reflect a loan. He also cited the IBC’s purpose of resolving genuinely insolvent companies, contending that Section 7 cannot be misused for recovery of dues, relying on judgments such as Invest Asset Securitisation and Reconstruction Pvt. Ltd. v. Girnar Fibres Ltd. and Swiss Ribbons Pvt. Ltd. v. Union of India.

Kaliber submitted that the disbursed sum of ₹1 crore constituted a financial debt under Section 5(8) IBC. The balance sheets of the corporate debtor consistently recorded the amount as “other long-term liabilities” over multiple financial years, evidencing acknowledgement of debt.

Kaliber contended that no contemporaneous documentation for consultancy services existed, and reliance on the belated proforma invoice was legally insufficient. Precedents such as G.S. Buildtech (P) Ltd. v. Ardee Infrastructure Venture (P) Ltd. and Pioneer Urban Land and Infrastructure Ltd. confirmed that accounting entries combined with disbursal satisfy the “time value of money” requirement for financial debt.

The NCLAT examined the balance sheets of the corporate debtor for multiple financial years, noting that the sum was consistently recorded as “other long-term liabilities” against the financial creditor.

Relying on precedents such as G.S. Buildtech (P) Ltd. v. Ardee Infrastructure Venture (P) Ltd. and the Supreme Court decision in Pioneer Urban Land and Infrastructure Ltd., the two membered bench of Mohammad Faiz Alam Khan (Judicial Member) and Arun Baroka (Technical Mmeber) held that such accounting entries serve as reliable indicators of financial debt, satisfying the statutory requirement under Section 5(8) of the IBC.

The disbursal of money, coupled with its classification as a liability, satisfies the “time value of money” criterion.

The tribunal noted that mere assertions regarding alternate treatment in books of accounts or claims of consultancy services cannot negate the established financial debt.. NCLAT observed that a financial debt is not contingent solely on the existence of a written loan agreement; balance sheet entries, disbursement, and acknowledgement in accounts are sufficient to establish debt and default.

The balance sheet entries, combined with disbursal records, established the existence of financial debt, validating the admission of the Section 7 application by the NCLT.

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