NCLT Delhi Reaffirms That Investment On Profit-Sharing Basis Does Not Qualify As Financial Debt
Pranav B Prem
The National Company Law Tribunal (NCLT), New Delhi Bench has reaffirmed that an investment made on a profit-sharing basis does not constitute a financial debt within the meaning of Section 5(8) of the Insolvency and Bankruptcy Code, 2016, and therefore cannot be used to initiate corporate insolvency resolution proceedings under Section 7. The ruling came in an application filed by Modern Solar Private Limited, which sought to classify ₹20 lakh transferred to Claro Energy Private Limited in 2013 as a loan carrying interest and claimed default.
A Bench comprising Judicial Member Mahendra Khandelwal and Technical Member Anu Jagmohan Singh examined the email correspondence exchanged between the parties and concluded that the money advanced was an investment linked to the Sitamarhi water supply project and intended for profit sharing. The Tribunal observed that for a claim to qualify as a financial debt, the transaction must involve disbursement against the time value of money, which was missing in the present case.
Modern Solar contended that the corporate debtor had approached it seeking goods and services for the Sitamarhi project undertaken for the Public Health Engineering Department, Bihar, and that ₹20 lakh was transferred through two RTGS payments on 2 March 2013 and 19 March 2013 as a loan. Relying on emails dated 3 October 2013 and 6 February 2014 — the latter enclosing a calculation sheet reflecting interest at 18% — and a cheque issued on 22 February 2014 that was later dishonoured, the applicant argued that the liability was clearly acknowledged as a loan and attracted financial debt status.
Claro Energy, on the other hand, asserted that the amount was an investment made towards working capital for the Sitamarhi project and that the applicant was to receive a share in profits. It relied on the applicant’s own email dated 4 October 2013, which stated that “it was always understood that the investment is on the basis of profit sharing.” Claro further submitted that email correspondence dated 8 March 2014 reiterated that the money was an investment and that discussions about converting it into a loan were never finalised, but merely considered to facilitate the applicant’s exit from the project. The company also argued that there was no agreement prescribing repayment terms, interest obligations or any guaranteed return — all of which are essential features of a financial debt.
After examining the documentary record, the Tribunal held that the emails dated 4 October 2013, 8 March 2014 and 18 April 2014 demonstrated that the sum of ₹20 lakh was advanced as working capital towards an investment on a profit-sharing basis. It also found that the February 2014 email relied upon by the applicant only reflected discussions regarding restructuring of the investment and did not crystallise into a binding loan arrangement. Therefore, the requirement of “time value of money”, which is integral to financial debt under Section 5(8), was not satisfied.
The Bench referred to the NCLAT ruling in Jagbasera Infratech Private Ltd. v. Rawal Variety Construction Ltd., which held that where a person contributes funds as a promoter or investor expecting residual gains from the success of a project, the contribution cannot be regarded as a financial debt under the Code. The Tribunal noted that the same legal principle squarely applied to the present matter.
Concluding that the amount advanced was an investment rather than a loan and therefore did not constitute financial debt, the Tribunal held that the application under Section 7 was not maintainable. The insolvency petition filed by Modern Solar Private Limited against Claro Energy Private Limited was accordingly dismissed, with no order as to costs.
Appearance
For Applicant: Siddhant Jaiswal and Abhishek Verma, Advs.
For Respondent: Mr.Rohit Anil Rathi, Mr. Yashas RK, Ms. Nihiraka Singh, Advs.
Cause Title: Modern Solar Private Limited v. Claro Energy Private Limited
Case No: I.A. (CO. ACT) NO.: 49/ND/2024 IN T.P. (CO. ACT) NO.: 53/PB/2022 Old CP No. 39/2016
Coram: Judicial Member Mahendra Khandelwal, Technical Member Anu Jagmohan Singh
