NCLT Hyderabad: Equity Investment Through MoU With Conditional Repayment Not an Operational Debt Under IBC
Pranav B Prem
The National Company Law Tribunal, Hyderabad Bench, comprising Mr. Rajeev Bhardwaj (Member-Judicial) and Mr. Sanjay Puri (Member-Technical), has held that an equity investment made through a commercial memorandum of understanding (MoU) with conditional repayment does not constitute an operational debt under the Insolvency and Bankruptcy Code, 2016 (IBC). The Bench dismissed the petition filed under Section 9 of the Code, holding that such a claim arises from an investment transaction rather than an operational relationship.
The application was filed by Mrs. Neeta Zanvar, as an operational creditor, seeking initiation of the Corporate Insolvency Resolution Process (CIRP) against M/s. Filatex Fashions Limited for an alleged default of ₹2.75 crore. The petitioner and the corporate debtor had executed an MoU on December 13, 2017, under which the petitioner agreed to provide financial assistance to the company in exchange for equity shares. Pursuant to the MoU, she invested ₹1 crore and was allotted twenty lakh shares of ₹5 each. The terms of the MoU provided that, in the event of non-performance, the respondent would be liable to repay the principal amount along with interest at 24% per annum.
Following non-compliance with the MoU, the applicant sold the shares on September 14, 2021, and recovered ₹57.29 lakh. As per the MoU, the respondent became liable to repay the shortfall along with interest. Subsequently, a second MoU dated June 30, 2023, was executed, wherein the respondent acknowledged its liability and agreed to pay ₹2.75 crore, which included interest and incidental charges. Upon failure to make payment, the applicant issued a demand notice under Section 8 of the IBC.
The respondent contested the maintainability of the petition, contending that the claim arose from a share transaction and was, therefore, in the nature of a commercial or investment dispute, not an operational debt. It was argued that equity is not a loan and does not fall under the definitions of either financial or operational debt as per Sections 5(8) and 5(21) of the Code. The respondent further submitted that the application was a disguised attempt to recover losses suffered in the sale of shares and that proceedings under the IBC cannot be used as a substitute for recovery of disputed dues. Reliance was placed on Pioneer Urban Land and Infrastructure Ltd. & Anr. v. Union of India & Ors., (2019) 8 SCC 416, where the Supreme Court held that IBC proceedings are not intended for civil or contractual disputes.
The applicant, in reply, asserted that the transaction was in the nature of financial assistance, with the issuance of shares serving merely as security, and that the respondent’s acknowledgment of liability in the subsequent MoU established the debt and default. It was also contended that the Section 8 demand notice had been validly issued by an authorised advocate.
Tribunal’s Observations
The Bench observed that it was undisputed that the applicant had invested ₹1 crore in the corporate debtor pursuant to the MoU dated December 13, 2017, and had been allotted equity shares. The Tribunal examined whether the claim could be treated as an “operational debt” under Section 5(21) of the Code. It noted that the plain language of Section 5(21) confines operational debt to claims arising from the provision of goods or services, employment, or statutory dues, and that a claim arising from an equity investment or share subscription cannot fall within that ambit.
Quoting Clauses 7 and 9 of the MoU, the Bench highlighted that the arrangement clearly pertained to an equity investment with a profit-sharing mechanism based on market performance, and that the promise of refund or returns did not alter the nature of the transaction. The Tribunal observed, “No goods were supplied, nor services rendered by the applicant to the respondent. The entire foundation of the claim rests upon a commercial MoU governing investment and share exit strategies.” Accordingly, the transaction lacked the character of an operational relationship. Referring to Anuj Jain, IRP v. Axis Bank Ltd., (2020) 8 SCC 401, and the NCLAT rulings in Shubha Sharma v. Mansi Brar and Nidhi Rekhan v. Samyak Projects Pvt. Ltd., the Bench reiterated that the existence of a mere investment or commercial arrangement with conditional repayment cannot be construed as operational debt.
The Tribunal also noted that the subsequent MoU dated June 30, 2023, constituted a novation under Section 62 of the Indian Contract Act, 1872, thereby extinguishing the obligations under the earlier agreement. Any breach of this new MoU would not automatically convert the claim into a valid operational debt under the IBC. The Bench observed that even assuming a breach, the dispute was contractual and had to be pursued before civil courts or arbitral tribunals, citing Mobilox Innovations Pvt. Ltd. v. Kirusa Software Pvt. Ltd., (2018) 1 SCC 353, where the Supreme Court cautioned against the use of IBC proceedings as a recovery mechanism.
The Bench further found that the Section 8 demand notice issued by the applicant was defective, as there was no record of authorisation empowering the advocate to issue the notice on behalf of the operational creditor. The Tribunal relied on Uttam Galva Steels Ltd. v. DF Deutsche Forfait AG, Company Appeal (AT) (Insolvency) No. 39 of 2017, where it was held that such a notice issued without proper authorisation is invalid.
Holding that the claim did not qualify as an operational debt and that no operational default had been established, the Tribunal dismissed the petition. It reiterated that IBC proceedings cannot be invoked for enforcement of investment-related or speculative transactions. The Bench concluded that the applicant’s remedy, if any, lies in civil or arbitral proceedings rather than under the insolvency framework. Accordingly, the application filed under Section 9 of the IBC was dismissed as not maintainable, with no order as to costs.
Appearance
For the Petitioner: Mr.Mayur Mundra, Counsel
For the Respondent: M.Harsh Chowdhary, Counsel
Cause Title: Neeta Zanvar V. Filatex Fashions Ltd
Case No: C.P. (IB) No. 30/9/HDB/2024
Coram: Shri Rajeev Bhardwaj (Judicial Member), Shri Sanjay Puri (Technical Member)
