NCLT New Delhi : Speculative Investment Without Commercial Effect Of Borrowing Not A 'Financial Debt'
Pranav B Prem
The National Company Law Tribunal (NCLT), New Delhi Bench-III, comprising Shri Bachu Venkat Balaram Das (Judicial Member) and Shri Atul Chaturvedi (Technical Member), has dismissed a Section 7 application filed under the Insolvency and Bankruptcy Code, 2016 (IBC) by M.K. Jain and others against Krrish Realtech Pvt. Ltd. The Tribunal held that the transaction in question was a speculative investment lacking the essential element of a financial debt and, therefore, did not qualify the applicants as financial creditors.
Background of the Dispute
The dispute arose from a Memorandum of Understanding (MoU) executed in January 2018 between the applicants and the corporate debtor, Krrish Realtech Pvt. Ltd. Under the MoU, the applicants paid more than ₹14 crore for the purchase and re-allotment of plots in a real estate project named “Krrish Provence Estate.” The plots originally belonged to Kelvin Buildcon Pvt. Ltd., which had an MoU with the corporate debtor for re-allotment of alternate plots in lieu of those initially allotted.
According to the applicants, the corporate debtor failed to honour the commitment for re-allotment or to return the money. This led to arbitral proceedings where the Arbitrator passed an interim award in favour of the applicants, directing the corporate debtor to pay ₹12.3 crore with interest. The award was upheld by the Delhi High Court, but the amount remained unpaid. The applicants, treating themselves as financial creditors, filed an application under Section 7 of the IBC to initiate Corporate Insolvency Resolution Process (CIRP) against the corporate debtor.
Key Observations by the Tribunal
The Tribunal meticulously examined the nature of the transaction and came to the conclusion that the applicants were not financial creditors within the meaning of Section 5(7) read with Section 5(8) of the IBC.
It observed that the applicants were never allottees or homebuyers in the project, nor did they possess any agreement for sale or allotment letter. Instead, the applicants’ investment was made pursuant to the MoU, which the Tribunal described as a “private arrangement” for the purpose of acquiring plots initially allotted to Kelvin Buildcon.
The Tribunal found that the applicants were fully aware that the plots in question were not being directly sold by the corporate debtor but were part of a transaction involving Kelvin Buildcon. Moreover, the applicants were also aware that Kelvin Buildcon had not paid any money to the corporate debtor. Despite this, the applicants sought to benefit from the transaction, which included clauses for profit-sharing and proceeds from appreciation of plot values.
The Tribunal emphasized that such terms pointed towards a speculative investment rather than a genuine financial transaction. It noted: “This Tribunal has no hesitation to hold that the MoU dated 15.01.2018 was speculative in nature, and structured as an investment.”
No Commercial Effect of Borrowing
A key reason for rejection of the application was the absence of the “commercial effect of borrowing,” an essential element under Section 5(8)(f) of the IBC. The Tribunal stated that the transaction did not involve any disbursement against the consideration for time value of money.
Referring to the ruling of the National Company Law Appellate Tribunal (NCLAT) in Naman Infradevelopers Pvt. Ltd. v. Metcalfe Properties Pvt. Ltd. Company Appeal (AT) (INS) 74/2024, the Tribunal reiterated that speculative investors cannot be treated as financial creditors merely because their investment has not yielded returns. The Tribunal remarked: “The Applicants were neither ‘Allottees’ nor ‘Home Buyers’, nor could they be treated as ‘Financial Creditors’ under Explanation (i) to Section 5(8)(f) of the Code.”
Additionally, the Tribunal also referred to Meehika Buildcon LLP v. City Star Infrastructure Ltd. [Comp. App. (AT) (Ins) 47/2024] , where NCLAT held that if money is invested merely to clear title issues, an insolvency application under Section 7 would not be maintainable.
Enforcement of Arbitral Award Not Grounds for CIRP
Another crucial finding of the Tribunal was that the applicants had already initiated execution proceedings before the Delhi High Court to enforce the arbitral award. The Tribunal held that merely obtaining an award does not convert the claim into a financial debt. It observed: “Filing of this Application under Section 7 of the Code, while simultaneously prosecuting execution proceedings, shows the intent of the Applicants to arm twist the Corporate Debtor to recover the money allegedly due.” The Tribunal concluded that the applicants should pursue the remedy of execution before the appropriate civil forum rather than invoking the insolvency process.
Verdict
Holding that the transaction was speculative and lacked the commercial attributes of a financial debt, the NCLT dismissed the insolvency application filed by M.K. Jain and others. It reiterated that IBC cannot be used as a substitute for recovery proceedings or to enforce arbitral awards.
Appearance
For Applicant: Mr. Gaurav Mitra, Mr. Vipul Wadhwa, Advs.
For Respondent: Mr. Dhruv Pande, Adv.
Cause Title: M.K. Jain & Ors. vs. M/s. Krrish Realtech Pvt. Ltd.
Case No: IB-348(ND)/2024
Coram: Shri Bachu Venkat Balaram Das [Hon’ble Member (Judicial)], Shri Atul Chaturvedi [Hon’ble Member (Technical)]
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