2023 (12) TMI 571 - AT - Insolvency and Bankruptcy

NCLAT upholds rejection of Section 7 application as profit-sharing loan constitutes joint venture, not financial debt

NCLAT dismissed the appeal challenging rejection of Section 7 application for initiation of CIRP. The appellant claimed financial creditor status based on ... Maintainability of section 7 application - initiation of CIRP - profit-sharing loan given by the Appellant to the Respondent - financial debt in terms of IBC or not - whether Appellant could claim the status of a Financial Creditor for the purposes of filing Section 7 application? - HELD THAT:- The Adjudicating Authority has returned the finding that the Section 7 application filed by the Appellant was not maintainable since the Appellant neither fell in the category of a “financial creditor” nor the alleged transaction fell within the ambit of “financial debt” in terms of the statutory provisions enshrined in the IBC. The above findings of the Adjudicating Authority have been predicated on the terms of Agreement entered between the Appellant and the Respondent. It has been held by the Adjudicating Authority that both parties being involved in the joint development of the subject property for which purpose they have entered into a collaborative agreement and hence the amount paid by the Appellant in terms of the financial arrangements outlined therein, is an investment for making profits which cannot be treated as a financial debt qua the Respondent. A plain understanding of a joint venture is a combination of two or more parties/entities that seeks the development of any enterprise or project for profit and entails sharing the risks associated with its development. Applying the above to the facts of the present case, from a perusal of the terms and conditions of the Agreement, when read in a composite and holistic manner, it can well be said that the Appellant and Respondent had entered into a particular business arrangement of accomplishing development of the subject property in which they had agreed to pool their resources proportionately in an agreed upon ratio of 25:75 and in the process share the profits, losses and costs associated with it - There are unmistakable signs of reciprocal rights and obligations contained therein besides evidence of common participation as well as sharing of profits and losses in the construction and development of the subject property. This spirit of being profit-sharing partners is well engrained in the Agreement and therefore we are of the considered opinion that the Adjudicating Authority has committed no error in holding that the Appellant by virtue of the funds invested by them in terms of the Agreement cannot claim the status and benefits of a Financial Creditor as defined under Section 5(7) of the IBC. The present transaction is in the nature of investment for profit and not disbursement for time value of money and hence does not fall within the canvas of financial debt as defined under Section 5(8) of the IBC. The essential elements of financial debt in the context of IBC consists of disbursal accompanied by consideration for time value of money. The terms and conditions of the Agreement between the Appellant and the Respondent makes it clear that the Appellant was a collaborator and not a financial creditor. There was no disbursement for time value of money by the Appellant within meaning of Section 5(8) of IBC. The Adjudicating Authority has correctly adverted to the real nature of the transaction between the parties to hold that the same cannot become the basis of filing a Section 7 application. The findings of the Adjudicating Authority agreed upon that the Appellant is not a Financial Creditor in terms of Section 5(7) of IBC and that there was no financial debt in terms of Section 5(8) of IBC and hence the application under Section 7 of the IBC could not be entertained - there are no error in the impugned order. Appeal dismissed. Issues Involved:1. Whether the profit-sharing loan given by the Appellant to the Respondent can be construed as a financial debt under the Insolvency and Bankruptcy Code, 2016 (IBC).2. Whether the Appellant qualifies as a Financial Creditor under Section 5(7) of the IBC.3. Whether the Section 7 application filed by the Appellant is maintainable.Summary:Issue 1: Whether the profit-sharing loan given by the Appellant to the Respondent can be construed as a financial debt under the IBC.The Tribunal examined the definitions under Sections 3(11), 5(7), and 5(8) of the IBC to determine whether the profit-sharing loan qualifies as a financial debt. The Tribunal noted that the agreement between the parties was for joint investment and profit/loss sharing in the development of a property. The agreement stipulated that both parties would share costs and profits in a 75:25 ratio. The Tribunal concluded that the investment was not a loan disbursed against the consideration for the time value of money but rather an investment with profit-sharing terms. Therefore, it did not meet the criteria for a financial debt under Section 5(8) of the IBC.Issue 2: Whether the Appellant qualifies as a Financial Creditor under Section 5(7) of the IBC.The Tribunal found that the Appellant did not qualify as a Financial Creditor. The agreement was characterized as a joint venture for profit-sharing, with both parties sharing costs and profits. The Tribunal emphasized that the agreement did not create a debtor-creditor relationship but rather a collaborative partnership. The Appellant's role was that of an investor, not a lender, and thus did not meet the definition of a Financial Creditor under Section 5(7) of the IBC.Issue 3: Whether the Section 7 application filed by the Appellant is maintainable.Given that the transaction did not constitute a financial debt and the Appellant was not a Financial Creditor, the Tribunal held that the Section 7 application was not maintainable. The Tribunal noted that the Appellant could pursue other legal remedies, such as a suit for specific performance of the contract, but the summary nature of proceedings under the IBC did not allow for such claims.Conclusion:The Tribunal upheld the Adjudicating Authority's decision, concluding that the Appellant was not a Financial Creditor and the transaction was not a financial debt under the IBC. Consequently, the Section 7 application was dismissed. The Appellant was advised to explore other legal remedies to address their grievances.