Investment in Real Estate Ventures with Profit-Sharing Arrangements Cannot Be Treated as Financial Debt Under IBC: NCLAT Delhi
Introduction
The National Company Law Appellate Tribunal (NCLAT), Delhi has delivered a significant ruling clarifying the boundaries between financial debt and investment arrangements in the context of insolvency proceedings. In the matter of Meck Pharmaceuticals And Chemicals Private Limited Vs Accurate Infrabuild Private Limited, the appellate tribunal emphasized that mere advancement of funds coupled with profit-sharing expectations in real estate developments does not automatically satisfy the statutory requirements of financial debt as contemplated under Section 5(8) of the Insolvency and Bankruptcy Code, 2016.
Background of the Dispute
Genesis of the Transaction
The respondent, a corporate entity engaged in real estate development, approached the appellant seeking financial assistance for a residential project titled "Madina Heights." The corporate entity required an infusion of Rs. 1 crore to facilitate the construction activities. According to the appellant's contentions, an oral arrangement was concluded whereby the borrowed sum would be repaid upon project completion, accompanied by interest at 18% per annum and an additional 15% share in the project's profitability.
The transfer of Rs. 1 crore was executed on 19.02.2010 through banking channels. Despite the purported completion of the construction project, the appellant alleged that the corporate entity failed to honor its repayment obligations, leading to the issuance of legal notices and ultimately culminating in proceedings under Section 7 of the Insolvency and Bankruptcy Code, 2016.
Procedural History
After issuing a legal notice dated 03.11.2020 demanding repayment, followed by a formal demand notice on 01.07.2021, the appellant instituted insolvency proceedings on 13.04.2022. The total claim presented amounted to Rs. 6.30 crore, comprising the principal sum of Rs. 1 crore and accumulated interest of Rs. 5.30 crore.
The National Company Law Tribunal, Ahmedabad Bench-II, through its order dated 17.01.2024, dismissed the application filed under Section 7 of the Insolvency and Bankruptcy Code, 2016, holding it to be non-maintainable. Aggrieved by this adjudication, the appellant preferred an appeal under Section 61 of the Insolvency and Bankruptcy Code, 2016.
Contentions Advanced by the Parties
Arguments of the Appellant
The appellant's legal counsel advanced several grounds challenging the adjudicating authority's order:
Documentary Evidence of Disbursal: The appellant relied upon banking certificates issued by ICICI Bank dated 04.05.2021 evidencing the credit of Rs. 1 crore to the respondent's account on 19.02.2010.
Acknowledgment in Financial Statements: The respondent's audited balance sheets for the financial years ending 31.03.2010 and 31.03.2011 reflected the receipt under the classification "Loan from Directors and Shareholders," thereby acknowledging the debt obligation.
Tax Deduction at Source: TDS Form 26AS demonstrated deductions on interest payments, supporting the contention that the arrangement carried interest obligations and thus represented consideration for time value of money.
Absence of Written Agreement: Relying on judicial precedents including Agarwal Polysacks Ltd. Vs K.K. Agro Foods and Storage Ltd. and Pradeep Tayal Vs Essbert Fashion Pvt. Ltd., it was argued that written contracts are not mandatory prerequisites for establishing the existence of financial debt.
Project Completion and Default: The appellant asserted that the construction project reached completion in August 2019, triggering the repayment obligation. The failure to discharge this liability constituted default, justifying the invocation of insolvency proceedings.
Arguments of the Respondent
The respondent's counsel presented counter-arguments challenging the maintainability of the proceedings:
Nature of Transaction: It was contended that the advanced sum constituted an investment for speculative returns rather than a loan transaction. The absence of defined tenure and repayment schedule indicated an equity-like arrangement lacking the characteristics of financial debt.
Burden of Proof: The primary responsibility of demonstrating debt and default rests with the financial creditor. The appellant failed to discharge this burden convincingly, particularly regarding the occurrence of default.
Incomplete Project Status: The respondent vigorously disputed the appellant's claim of project completion, asserting that regulatory and procedural compliances remained pending, negating the crystallization of any repayment obligation.
Limitation Concerns: Drawing attention to the demand notice dated 01.07.2021 which indicated the default date as 18.02.2010, it was argued that the proceedings initiated in 2022 were barred by limitation in the absence of any debt acknowledgment post-2011.
Profit-Sharing Exclusion: The appellant's claim excluded the 15% profit-sharing component, undermining the contention that the transaction incorporated consideration for time value of money.
Legal Framework Governing Financial Debt
Statutory Provisions Under the Insolvency and Bankruptcy Code
The NCLAT examined the relevant definitional provisions that form the foundation of insolvency proceedings:
Definition of Claim - Section 3(6) encompasses both the right to payment and remedies for contractual breaches giving rise to payment obligations, regardless of whether such rights are adjudicated, fixed, disputed, or secured.
Definition of Debt - Section 3(11) characterizes debt as any liability or obligation concerning a claim that has become due, encompassing both financial debts and operational debts.