NCLAT New Delhi Upholds NCLT Order; Holds Advance Payment For Real Estate Project Made For Profit Sharing Not A Financial Debt Under IBC
Pranav B Prem
The National Company Law Appellate Tribunal (NCLAT), Principal Bench, New Delhi, comprising Justice Ashok Bhushan (Chairperson) and Mr. Barun Mitra (Technical Member), has upheld the decision of the National Company Law Tribunal (NCLT), Ahmedabad Bench-II, which had dismissed a Section 7 application filed by M/s Meck Pharmaceuticals and Chemicals Pvt. Ltd. against M/s Accurate Infrabuild Pvt. Ltd. The Appellate Tribunal held that the advance payment made for the construction of a real estate project cannot be treated as a financial debt under Section 5(8) of the Insolvency and Bankruptcy Code, 2016 (IBC), since it lacked the essential element of consideration for time value of money.
The appellant had filed an application before the NCLT under Section 7 of the IBC, claiming that it had advanced a sum of ₹1 crore to the corporate debtor for the development of a real estate project named “Madina Heights.” According to the appellant, the amount was advanced on an oral understanding that it would carry interest at 18% per annum and that, upon completion of the project, the appellant would also receive a 15% share of the profits. It was contended that despite completion of the project, the corporate debtor failed to repay the amount or share the profits. Legal notices were issued demanding repayment, but no payment was made, prompting the appellant to initiate insolvency proceedings.
The NCLT rejected the Section 7 petition, holding that the transaction was speculative in nature and lacked the commercial characteristics of borrowing. The appellant, therefore, preferred an appeal before the NCLAT, arguing that the advance was made with clear consideration for time value of money, as evidenced by the agreed interest rate of 18% and the deduction of TDS on interest. It was further submitted that the corporate debtor’s balance sheets for the financial years 2010 and 2011 reflected the transaction as a “loan from directors and shareholders,” and that even in the absence of a written agreement, an oral understanding could establish the existence of a financial debt under the IBC.
The respondent refuted these claims, asserting that the amount was not a loan but an investment linked to project profits, which lacked the fundamental elements of a financial transaction. It was contended that the project was still under progress and had not been completed due to pending procedural and regulatory compliances, and therefore, no default could be said to have occurred. The respondent also argued that the transaction did not carry the commercial effect of borrowing and that the appellant had failed to produce any contemporaneous documentation specifying tenure, repayment terms, or interest obligations.
After examining the materials on record, the NCLAT observed that while the disbursal of ₹1 crore by the appellant to the corporate debtor was not disputed, there was no sufficient evidence to prove that the money was disbursed against consideration for time value of money, which is a sine qua non for classifying a debt as “financial debt” under Section 5(8) of the IBC. The Bench noted that the deduction of TDS for only two financial years (2010 and 2011) was inadequate to establish that the payment was genuinely interest-bearing. It held that for a transaction to be considered as a financial debt, the element of interest or commercial return must be consistently demonstrated, which was missing in this case.
The Tribunal also noted that the appellant’s claim of profit sharing further reinforced that the payment was made as an investment rather than a loan. The Bench observed that while a transaction made to derive profits from a project could, in some cases, reflect the commercial effect of borrowing, such profit-sharing must be clearly pleaded as part of the claim. Since the appellant did not include the profit component in its Section 7 application, the Tribunal held that the transaction could not be treated as one made for financial consideration.
The Bench also addressed the issue of default, observing that the alleged default was contingent upon the completion of the “Madina Heights” project, which, according to the record, was still ongoing. The NCLAT held that no default could arise in respect of a debt that was not yet due or payable, emphasizing that insolvency proceedings under Section 7 can be triggered only when a clear, subsisting default has occurred.
Relying on the Supreme Court’s ruling in Anuj Jain, Interim Resolution Professional for Jaypee Infratech Ltd. v. Axis Bank Ltd. [(2020) 8 SCC 401], the Tribunal reiterated that for a debt to qualify as a financial debt, there must be disbursal of money against consideration for time value of money, and the transaction must exhibit the commercial effect of borrowing. It held that the transaction in the present case lacked these essential ingredients and was, at best, an investment made with an expectation of profit.
The Tribunal also observed that the appellant had failed to substantiate the claim of regular interest payments or any subsequent acknowledgment of debt after 2011. The absence of documentary proof showing continuing liability on the part of the corporate debtor led the Tribunal to conclude that the alleged loan was not a financial debt within the meaning of Section 5(8) of the IBC. In conclusion, the NCLAT upheld the order of the NCLT Ahmedabad, affirming that the amount advanced by the appellant was an investment for profit-sharing and not a financial debt disbursed for time value of money. It further held that no default had occurred since the project was still incomplete and that the application under Section 7 was rightly rejected. The appeal was accordingly dismissed as devoid of merit.
Appearance
For Appellant: Mr. Jaimin K. Dave, Mr. Karan Valecha and Ms. Hirva Dave, Advocates.
For Respondent: Mr. Gaurav Mitra, Ms. Honey Satpal, Mr. Nipun Singhvi, Ms. Pooja Singh, Ms. Aarushi Mishra and Mr. Akash Agarwalla, Advocates.
Cause Title: M/s Meck Pharmaceuticals and Chemicals Pvt. Ltd. Versus M/s Accurate Infrabuild Pvt. Ltd.
Case No: Company Appeal (AT) (Insolvency) No. 544 of 2024
Coram: Justice Ashok Bhushan (Chairperson), Mr. Barun Mitra (Technical Member)
