Financial debt: funds repayable with a profit share can constitute commercial borrowing, allowing insolvency admission despite arbitration.

Whether funds totalling the disbursed sum constituted financial debt was decided by characterising the agreement's refundable deposit plus 50:50 profit share as consideration for the time value of money and thus having the commercial effect of a borrowing; outcome: treated as financial debt. Whether default existed was resolved by the corporate debtor's admission of receipt, termination of the agreement and non refund, resulting in established default. Whether pending arbitration barred insolvency proceedings was resolved by holding that once debt and default are established, pendency of arbitral proceedings does not preclude admission of an insolvency petition.

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Issues: (i) Whether the sum of Rs.13.20 crores disbursed by Respondents constitutes a "financial debt" within Section 5(8) of the Insolvency and Bankruptcy Code, 2016; (ii) Whether default has been established by the Corporate Debtor in respect of the said sum; (iii) Whether the pendency of arbitral proceedings bars initiation/admission of proceedings under Section 7 of the Insolvency and Bankruptcy Code, 2016.

Issue (i): Whether the Rs.13.20 crores disbursed constitutes "financial debt" under Section 5(8) of the Insolvency and Bankruptcy Code, 2016.

Analysis: The agreement provided for an interest-free security deposit refundable after project completion and a 50:50 profit share in lieu of interest; clauses 6-9 manifest a right to refund with profit share representing consideration for time value of money. The disbursed funds were utilised for development and the Corporate Debtor repeatedly described the amounts as financial assistance in board resolutions, correspondence, pleadings and ledger entries; TDS entries and ledger treatment were part of the material. The definition of financial debt in Section 5(8), including clause (f) covering transactions having the commercial effect of a borrowing, and relevant precedents support treating transactions that effectuate consideration for time value of money as financial debt even if labelled otherwise.

Conclusion: The Rs.13.20 crores disbursed qualifies as a financial debt within Section 5(8)(f) of the Insolvency and Bankruptcy Code, 2016.

Issue (ii): Whether default has been established by the Corporate Debtor in respect of the Rs.13.20 crores.

Analysis: The Corporate Debtor unilaterally terminated the agreement on 24.12.2022 while admitting receipt and utilisation of the funds; no refund was made after termination. The admitted receipt, termination and non-refund establish non-payment of the debt when it became due for repayment upon termination.

Conclusion: Default is established against the Corporate Debtor in respect of the Rs.13.20 crores.

Issue (iii): Whether pendency of arbitral proceedings precludes admission of a Section 7 petition under the Code.

Analysis: Section 7 proceedings may proceed where debt and default are established; the pendency of arbitration does not bar initiation or admission of insolvency proceedings once the adjudicating authority is satisfied on debt and default, consistent with the statutory scheme and applicable authorities addressing primacy of Section 7 adjudication.

Conclusion: Pendency of arbitral proceedings does not bar admission of the Section 7 petition.

Final Conclusion: The disbursed amount of Rs.13.20 crores is a financial debt, default is established, and the Section 7 petition admitting CIRP was rightly upheld; the appeal is dismissed and the NCLT order admitting the Section 7 petition is affirmed.

Ratio Decidendi: Where funds are disbursed under an agreement that provides for return of the amount with a profit share representing consideration for time value of money, such disbursement has the commercial effect of a borrowing and falls within Section 5(8)(f) of the Insolvency and Bankruptcy Code, 2016; once debt and default are established, pendency of arbitration does not bar admission under Section 7 of the Code.

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