NCLT Rules, Disbursal Of Funds Under Funding Agreement With Guaranteed Return Amounts To Financial Debt U/S 5(8) IBC
Pranav B Prem
The National Company Law Tribunal (NCLT), Mumbai Bench – Court VI, comprising Justice Nilesh Sharma (Judicial Member) and Mr. Sameer Kakkar (Technical Member), has held that a disbursal of funds under a funding agreement that provides for a guaranteed return amounts to a financial debt under Section 5(8) of the Insolvency and Bankruptcy Code, 2016 (IBC). The Bench observed that the presence of a guaranteed profit element reflects the time value of money, which is an essential ingredient of a financial debt.
The petition under Section 7 of the IBC was filed by Sunil Tulsidas Gadekar and Shakir Ali Sajjad Ali Shaikh (Applicants/Financial Creditors) against Vindhyawashini Marine Services Pvt. Ltd. (Corporate Debtor), seeking initiation of the Corporate Insolvency Resolution Process (CIRP). The applicants had disbursed ₹60 lakh to the Corporate Debtor under a Funding Agreement executed on August 16, 2016. As per the terms of the agreement, the Corporate Debtor was to use the funds exclusively for clearing its debts and restoring its vessel “C.B. Chenab” for chartering operations. The agreement also provided that the applicants would be entitled to receive a 45% annual profit on the funded amount and a 30% ownership share in the vessel. The revenue generated from the chartering of the vessel was to be shared in the ratio of 22.5% each by the applicants and 55% by the Corporate Debtor.
However, contrary to the agreement, the Corporate Debtor allegedly diverted the funds for the purchase of a new vessel and failed to pay the promised returns. This led the applicants to initiate arbitration proceedings under Section 9 of the Arbitration and Conciliation Act, 1996, before the Bombay High Court, which appointed a sole arbitrator. The arbitral tribunal passed an award directing the Corporate Debtor to pay ₹23,75,000 and ₹21,45,000, along with 45% interest per annum from the date of the Funding Agreement until realization. When the Corporate Debtor failed to comply with the award, the applicants filed the present Section 7 application before the NCLT.
The Corporate Debtor, however, contested the claim, arguing that the Funding Agreement was invalid as it was neither registered nor notarized. It was contended that the transaction was merely a joint venture arrangement and not a borrowing, and hence, there was no relationship of creditor and debtor between the parties. The Corporate Debtor further submitted that the Section 7 application was, in effect, an attempt to execute the arbitral award, which could not be done under the IBC.
Rejecting these arguments, the NCLT observed that the Corporate Debtor had participated in the arbitral proceedings, where the validity of the Funding Agreement had already been upheld. It held that the debtor could not now turn around to question the authenticity of the same agreement. The Tribunal further held that the arbitral award, which remained unsatisfied, gave rise to a fresh cause of action for the applicants to file a Section 7 petition under the IBC. Relying on the judgments of the Supreme Court in Kotak Mahindra Bank Ltd. v. A. Balakrishnan [(2022) 9 SCC 186] and Dena Bank v. C. Sivakumar Reddy [(2021) 10 SCC 330], the Bench reiterated that a liability arising out of a decree or recovery certificate constitutes a financial debt within the meaning of Section 5(8) of the IBC.
The Tribunal noted that although the Funding Agreement did not explicitly use the word “interest,” the guaranteed 45% profit clearly represented a return linked to the passage of time, thereby satisfying the element of time value of money. Relying on the NCLAT’s ruling in Adhunik Corporation Ltd. v. Shivam India Ltd. (Company Appeal (AT) (Insolvency) No. 1427 of 2023), the NCLT observed that where funds are disbursed with a guaranteed return, the transaction assumes the character of a financial debt under the Code. It held that the applicants’ funds were not mere investments or profit-sharing contributions but had the effect of commercial borrowing.
The Tribunal distinguished the case from transactions arising out of joint venture agreements, holding that this was not an equity-based contribution but a disbursal of money with a guaranteed return of 45% per annum, thereby creating a financial liability. Since the arbitral award had attained finality and remained unsatisfied, default was established, satisfying the conditions for initiation of CIRP under Section 7. Consequently, the NCLT admitted the application, initiated the Corporate Insolvency Resolution Process (CIRP) against Vindhyawashini Marine Services Pvt. Ltd., and declared a moratorium under Section 14 of the IBC. Mr. Umesh Balaram Sonkar was appointed as the Interim Resolution Professional (IRP), and the applicants were directed to deposit ₹3,00,000 towards initial CIRP costs.
In conclusion, the NCLT held that the funding agreement with a guaranteed return carried the commercial effect of borrowing, bringing it within the ambit of financial debt under Section 5(8) of the IBC. The Tribunal reaffirmed that even in the absence of a formal loan agreement, transactions involving a time-bound monetary return can qualify as financial debts, provided they embody the essential feature of time value of money.
Appearance
Financial Creditor: Adv. Ms. Pooja Batra, Adv. Mr. Rajesh Dubey.
Corporate Debtor: Adv. Mr. Adeel Parkar
Cause Title: Sunil Tulsidas Gadekar v. Vindhyawashini Marine Services Private Limited
Case No: C.P. (IB)/282(MB)2025
Coram: Justice Nilesh Sharma (Judicial Member), Mr. Sameer Kakkar (Technical Member)
