Agreement to Sell Can Constitute Financial Debt When Intended as Loan Security: NCLAT

Court and outcome clarified

The headline is sometimes reported as an NCLT Mumbai ruling. The final ruling discussed here was delivered by the National Company Law Appellate Tribunal, Principal Bench, New Delhi, on 23 May 2025.

The Mumbai NCLT had dismissed the Section 7 application on 9 February 2023 after treating the transaction as a sale and purchase arrangement. On appeal, the NCLAT examined the complete documentation, reversed that conclusion and admitted the insolvency petition.

This distinction matters for accurate reporting. The legal finding that the arrangement constituted financial debt came from the NCLAT.

Background of the transaction

Akshay Techforge had defaulted on a State Bank of India loan and required funds for a one-time settlement. Advantagesai Projects had already disbursed ₹48,36,540 up to 12 November 2018.

The parties executed an agreement to sell on 9 April 2019. It acknowledged the earlier disbursement and recorded a further advance of ₹1 crore. That amount was paid directly into Akshay Techforge's SBI one-time-settlement account on 12 April 2019.

The arrangement required repayment by 31 March 2020. If repayment was made, the agreement to sell would stand cancelled. If repayment failed, the identified plots could be transferred under a sale deed after adjustment of the agreed amount.

Extension and interest arrangement

When the amount was not repaid, the parties executed another agreement on 1 April 2020, extending repayment up to 31 March 2021.

A memorandum of understanding dated 9 April 2020 recorded interest at 18% per annum on a monthly compounding basis or 30% of profit, whichever was higher. Interest was to be calculated from 1 September 2018 until payment of the outstanding amount.

Advantagesai Projects claimed that ₹2,39,17,469.66 had become receivable under the agreed terms and filed an application under Section 7 of the IBC.

Why the Mumbai NCLT dismissed the petition

The Mumbai NCLT viewed the documents as recording a sale and purchase transaction rather than a financial loan. On that basis, it concluded that the amount did not qualify as financial debt and dismissed the Section 7 application.

The financial creditor challenged that approach, arguing that the tribunal had relied on the form of the agreement while overlooking the purpose of the disbursement, repayment terms, interest obligation and accounting treatment.

NCLAT examined the real intention of the parties

The NCLAT held that the true character of a transaction must be determined from the documents read as a whole and the parties' conduct. Calling a document an agreement to sell does not conclusively make every payment a property-sale advance.

The funds were intended to clear the corporate debtor's SBI liability. The agreements permitted the property to be mortgaged to another financial institution so that the appellant's loan could be repaid. The property arrangement therefore operated as protection for repayment.

The agreement would also stand cancelled if the money was repaid by the stipulated date. These clauses were inconsistent with the conclusion that an immediate and unconditional property purchase was the parties' sole intention.

Ledger accounts supported the loan character

The NCLAT also examined the accounting treatment adopted by both sides. The appellant's ledger described the respondent's account as a loan account. The respondent's ledgers for the relevant periods similarly treated the appellant's account as a loan account.

This consistent treatment was important because it supported the written repayment and interest clauses. The corporate debtor had acknowledged the loans and advances across the agreements and financial records.

Financial debt under Section 5(8) of the IBC

Section 5(8) defines financial debt as a debt, along with interest if any, disbursed against consideration for the time value of money. The definition also covers transactions having the commercial effect of borrowing.

The NCLAT found all the essential features in this case. There was an actual disbursement, a fixed repayment date, a substantial interest obligation and a commercial borrowing used to settle the corporate debtor's bank dues.

The transaction therefore satisfied the tests of disbursement, time value of money and commercial effect of borrowing.

Agreement to sell was security for repayment

The decision does not establish that every amount paid under an agreement to sell is financial debt. The conclusion followed from the special terms and evidence in this transaction.

Here, the documents provided that repayment would cancel the agreement. They allowed further mortgage of the property to raise funds for repayment, contained interest provisions and recorded the amount as a loan in both parties' ledgers.

Viewed together, these facts showed that transfer of the plots was a consequence contemplated upon default. The real commercial object was financing, while the property supported recovery of that financing.

NCLAT's final decision

The NCLAT held that the financial assistance fell within Section 5(8) of the IBC. It set aside the Mumbai NCLT order dated 9 February 2023 and admitted the Section 7 petition.

The parties were directed to appear before the NCLT for further orders on 1 July 2025. The appellate decision was delivered by Justice Yogesh Khanna, Member (Judicial), and Ajai Das Mehrotra, Member (Technical).

The ruling is fact-specific

An ordinary advance toward a genuine property purchase does not automatically become financial debt merely because the sale later fails. The applicant must establish the statutory elements of financial debt through the transaction documents and surrounding evidence.

Relevant indicators may include the purpose of disbursement, repayment obligations, interest or another form of time value, accounting entries, treatment of the property as security and the commercial conduct of the parties.

Businesses should ensure that financing documents state their commercial purpose clearly. Using a sale document as security without consistent repayment and accounting records can create avoidable disputes over the true nature of the transaction.

Practical lessons for creditors and companies

• Record the purpose and date of every disbursement.
• State the repayment date and interest or other commercial return clearly.
• Ensure that security documents are consistent with the loan agreement.
• Maintain matching ledger descriptions and financial-statement treatment.
• Preserve bank records showing where and for whose benefit funds were paid.
• Do not assume that the title of a document will override its substantive clauses.
• For a Section 7 application, establish debt and default with complete, consistent evidence.

Key takeaways

• The decisive judgment was delivered by the NCLAT, not the Mumbai NCLT.
• The appeal number is Company Appeal (AT) (Insolvency) No. 501 of 2023.
• The judgment was delivered on 23 May 2025.
• Funds paid toward the corporate debtor's SBI settlement were treated as a loan.
• The agreements recorded repayment, interest and security features.
• Both parties' ledgers described the transaction as a loan account.
• The NCLAT set aside the dismissal and admitted the Section 7 petition.
• An agreement to sell can support a finding of financial debt only when the complete evidence shows a financing transaction satisfying Section 5(8).

Conclusion

Advantagesai Projects Private Limited v. Akshay Techforge Private Limited shows that insolvency tribunals must examine commercial substance instead of relying only on the title of a document. The repayment obligation, interest terms, purpose of the funds, security clauses and ledger treatment collectively established that the arrangement was a loan.

The ruling remains fact-dependent. It does not convert every unsuccessful property transaction into financial debt, but it confirms that an agreement to sell may form part of a financing structure where the evidence establishes disbursement for time value of money and the commercial effect of borrowing.