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 profit-sharing loan given to respondent. NCLAT held that the transaction was a joint venture agreement for property development with 25:75 resource sharing ratio, not financial debt. The arrangement involved investment for profit-sharing rather than disbursement for time value of money as required under Section 5(8) IBC. Since appellant was collaborator, not financial creditor under Section 5(7) IBC, Section 7 application was not maintainable. Adjudicating Authority's findings upheld.

---

---

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.

---