The National Company Law Tribunal, Ahmedabad Bench, has held vide Ruling dated 05/01/2026 that repayment of unsecured loans to related parties ahead of financial creditors constitutes a preferential transaction under the Insolvency and Bankruptcy Code, 2016. The ruling underscores that directors and related parties cannot be placed in a better position than other creditors in the period preceding insolvency.
The order was passed by Shammi Khan, Judicial Member, and Sanjeev Sharma, Technical Member, on an application filed by the Liquidator under Sections 43, 44, 45, 50, 66, and 67 of the Code.
Background and Initiation of Proceedings
Corporate Insolvency Resolution Process was initiated against the corporate debtor, and an Interim Resolution Professional was appointed, who was later confirmed as Resolution Professional. During the CIRP, the Committee of Creditors directed the Resolution Professional to conduct a transaction audit and forensic audit of the corporate debtor’s affairs.
Based on the findings of these audits, the Resolution Professional filed an application alleging preferential, undervalued, and fraudulent transactions, along with wrongful trading and misconduct by the suspended management during the pre-insolvency period.
Objection on Limitation and Regulation 35A
One of the primary objections raised by the respondents was that the application was barred by limitation due to delay in filing beyond the timeline prescribed under Regulation 35A of the CIRP Regulations.
The NCLT rejected this objection. Relying on settled judicial position, the Tribunal held that the timelines under Regulation 35A are directory and not mandatory. Since the delay arose due to completion of the transaction and forensic audits, the Tribunal held the delay to be justified and condonable. The application was therefore held to be maintainable.
Preferential Repayment to Related Parties
The forensic audit revealed that the suspended management had repaid unsecured loans amounting to approximately Rs. 48.88 lakhs to related parties, including directors and their relatives, during the relevant period. These repayments were made before clearing the dues of financial creditors.
The Tribunal observed that such repayments had the effect of placing related parties in a more advantageous position than they would have occupied in the event of liquidation. Accordingly, the repayments satisfied the ingredients of a preferential transaction under Section 43 of the Code.
The respondents failed to establish that these transactions were carried out in the ordinary course of business or were otherwise exempt under Section 43(3).
Book Entry Adjustments Without Actual Fund Flow
The Tribunal also examined several book entry adjustments where unsecured loans in favour of related parties were credited without any corresponding inflow of funds. The NCLT held that mere accounting entries, unsupported by actual consideration, cannot justify crediting amounts to related parties.
Such adjustments were found to artificially improve the position of related parties and were therefore held to constitute preferential transactions under Section 43.
Bogus Capitalisation and Fraudulent Trading
A significant finding related to capitalisation of alleged research and development expenses aggregating to approximately Rs. 7.06 crores. These expenses were subsequently written off in full, without supporting documents, technical justification, or evidence of actual expenditure.
The Tribunal held that the unexplained capitalisation followed by complete write-off amounted to manipulation of accounts and reflected carrying on business with fraudulent intent. This conduct was held to fall squarely within the scope of fraudulent trading under Section 66 of the Code.
Burden of Proof Under Sections 43 and 66
The respondents contended that related parties had infused funds and that the transactions were commercially justified. The NCLT reiterated that the burden of proving exemption under Section 43(3) rests on the respondents.
In the absence of documentary evidence to establish ordinary course of business, provision of new value, or statutory protection, the respondents were held to have failed to discharge this burden.
Directions Issued by the NCLT
The NCLT held the respondents jointly and severally liable for the preferential and fraudulent transactions. The Tribunal directed that the benefits received through such transactions be reversed and restored to the corporate debtor.
The ruling reinforces that directors and related parties cannot rely on internal arrangements, book entries, or unsupported explanations to justify preferential treatment when insolvency is imminent.
Key Takeaway
This decision reaffirms the strict approach adopted by NCLT in scrutinising related party transactions during the twilight period. Repayment of related party loans, artificial accounting entries, and unsupported capitalisation can expose promoters and directors to restitutionary liability under the Insolvency and Bankruptcy Code.
For insolvency professionals, the ruling highlights the importance of transaction and forensic audits in identifying avoidable transactions and protecting the interests of creditors.
NCLT Ahmedabad Ruling dated 05/01/2026: Repayment of Related Party Loans Held Preferential