ONE PAGE 32 – UKG Steel Pvt Ltd V Erotic Buildcon Pvt Ltd – U/s 7

ONE PAGE 32 – UKG Steel Pvt Ltd V Erotic Buildcon Pvt Ltd – U/s 7.
Loan given against the Company law is ultra vires & legally an unenforceable debt under IBC
#Courts:  NCLT PB Bench IB# 1050/2020 Dt.31.05.2021

1. Background:

a. Loan agreement executed between both parties on 16.03.2019. Applicant advanced loan of Rs.3.76 Cr at an interest of 6.5% pa. Respondent agreed to repay in 8 quarterly instalments from 30.06.2019.

b. The amount was disbursed on different dates in 4 consecutive instalments. Bank statement filed by the Applicant is smudged and the transaction date are not visible.

c. Respondent expressed his inability to make dues payment in response to the notice sent by the Applicant.

d. Then, on 02.01.2020, Applicant recalled the entire amount with interest ie Rs.3.92Cr stating it will take legal action in case payment is not done.

e. In reply to the final notice, Respondent on 3.12.2020 in its reply stated about the financial crisis, bonafide intention to timely pay the loan instalments and requested for some more time.

2. NCLT Evaluation & Judgment:

a. From perusal of the bank statement there is no evidence which reflect that the money was transferred from Applicants Bank to Respondent. Smudged Bank statement gives negligent impression about the Applicant and the balance sheet now where show the disbursal of principal amount.

b. Though CD has not denied the disbursement of debt, question remains whether the Applicant who is neither a bank/NBFC or a body corporate recognized by RBI for carrying out financial business, was authorised to give such loan.

c. NCLT referred to Section 186 of Companies Act, 2013 which deals with inter-corporates loans and sets out a limit on a company for disbursing loan to other entities. NCLT even calculated whether the Applicant had given loan as per Sec 186.

1) Paid up Share Capital:                        Rs. 97,75,020/-

2) Reserves & Surplus:                            Rs. 66,58,072/-

3) 60% of (1) & (2)                                     Rs. 98,59,855/-

4) Security Premium Account not separately provided in Balance sheet

d. The loan amount disbursed by the Applicant is more than 3 crores which is much more than 60% of aggregate paid up share capital and reserved & surplus.

e. Applicant neither made the disclosure of such inter corporate loan in its balance sheet not it had produced special resolution passed in the EGM of shareholders for the purpose of compliance u/s186(3) of Companies Act. Loan agreement also does not speak about the resolution passed by shareholders.

f. Borrowing given by Applicant is contrary to limited prescribed under Companies Act which amounts to ultra vires act committed by Applicant. Hence loan advanced by Applicant is not legally enforceable debt.

g. NCLT found no merit in the Application and dismissed as misconceived.

MS Mano Ranjani

Disclaimer: The Opinions expressed in this article are that of the author(s). The facts and opinions expressed here do not reflect the views of IBC Laws ( The entire contents of this document have been prepared on the basis of the information existing at the time of the preparation. The author(s) and IBC Laws ( do not take responsibility of the same. Postings on this blog are for informational purposes only. Nothing herein shall be deemed or construed to constitute legal or investment advice. Discussions on, or arising out of this, blog between contributors and other persons shall not create any attorney-client relationship.