NCLAT examines sham debt claim

The National Company Law Appellate Tribunal (NCLAT) set aside the admission of a Section 7 insolvency application after holding that where serious allegations are raised that the underlying transaction is sham, collusive or part of a fraudulent round-tripping arrangement, the Adjudicating Authority is required to examine the real nature of the transaction before concluding that a “financial debt” exists. 

The Tribunal emphasized that the mere existence of loan documents or memoranda of understanding cannot be treated as conclusive when substantial material suggests that the transaction may not involve disbursement for the time value of money as required under the Insolvency and Bankruptcy Code (IBC).