Amount invested in a Joint Venture by an Investor or Promoter is not Financial Debt
What is ‘Financial Debt’?
- Under the Insolvency and Bankruptcy Code, 2016 (IBC), Section 3(11) defines ‘debt’ as “a liability or obligation in respect of a claim which is due from any person and includes a financial debt and operational debt.”
- Section 5(8) defines ‘Financial Debt’ as “a debt along with interest, if any, which is disbursed against the consideration for the time value of money.” The sub-section also includes examples of what is considered to be financial debt.
Who is a ‘Financial Creditor’?
- Section 5(7) of the IBC defines ‘Financial Creditor’ as “any person to whom a financial debt is owed and includes a person to whom such debt has been legally assigned or transferred to.”
How can a Financial Creditor initiate Corporate Insolvency Resolution Process (CIRP)?
- Section 7 of the IBC provides that a financial creditor, either by itself or jointly with other financial creditors may file an application for initiating CIRP against a Corporate Debtor before the Adjudicating Authority (National Company Law Tribunal) when a default has occurred.
- It also provides that a default includes a default in respect of a financial debt owed not only to the applicant financial creditor but to any other Financial Creditor of the Corporate Debtor.
What is a Joint Venture?
- Joint Venture can be defined as a combination of two or more parties that seek the development of a single enterprise or project for profit, sharing the risks associated with its development.
- The parties may be natural or artificial persons.
- A Partnership and a Joint Venture are different as, when two entities enter into a partnership a new entity with a separate legal identity is created however, if two entities enter into a Joint Venture, the two or more entities entering into the Joint Venture retain their separate legal entities.
Is the amount invested in a Joint Venture project by the Promoter or Investor, considered a Financial Debt?
Case – M/s Jagbasera Infratech Private Ltd. vs Rawal Variety Construction Ltd. [Company Appeal (AT) (Insolvency) No. 150 of 2019]
Court – National Company Law Appellate Tribunal (NCLAT)
Key Issue – Whether the amount invested in a Joint Venture by an Investor or Promoter, a Financial Debt?
Bench – Justice Mr. Anant Bijay Singh (Judicial Member) and Ms. Shreesha Merla (Technical Member)
Date of Pronouncement of Order – 04.04.2022
Prayer of the Appellant – To set aside the order passed by the National Company Law Tribunal (NCLT) wherein the NCLT dismissed the Appellant’s petition for initiation of CIRP against the Respondent.
Facts of the matter –
The Appellant and the Respondent entered into a Memorandum of Understanding (MOU) and a Joint Venture (JV) Agreement in the furtherance thereof wherein, the Appellant was referred to as ‘Promoter’ and the Respondent was referred to as the ‘Developer’. Under the MOU and the JV Agreement, the Promoter wanted to develop a said plot of land by building studio apartments, club, jogging track, shops, etc. and entrusted the Project namely, ‘Valley View Apartments Project’ to the Developer.
For the purposes of the development of the said plot of land and in accordance with the provisions of the MOU and JV Agreement entered into by both the parties, the Promoter paid an amount of Rs. 4,21,37,850/- over a period of 7 years i.e., from 2011 to 2018. According to the provisions of the MOU and the JV Agreement, the Project was supposed to be completed on or before 31.12.2013.
The Appellant filed a petition under Section 7 of the IBC to initiate CIRP against the Respondent with the aim to recover the amount of Rs. 4,21,37,850/- but the same was rejected by the NCLT on the grounds that there was no term of the assured return in any agreement which may amount to the repayment for the time value of money. NCLT held that the Promoter did not fall under the definition of Financial Creditor as this was not a case of a forward sale or purchase agreement having effect of borrowing rather the petitioner was equally interested in the project to be marked for sale.
The Appellant challenged the order of the NCLT dismissing his petition and contended that the Appellant is a Promoter in the Project and was interested in forward sale of furnished studio flats constructed in the Project and hence, the investment made by the Appellant was for a forward sale or purchase agreement and had the commercial effect of borrowing. The Appellant also submitted that the amount was paid by the Appellant against consideration of time value of money and that the Appellant fulfills all the essential conditions of being a Financial Creditor. Also, as the Respondent defaulted in returning the said amount, the same falls within the definition of financial debt.
The NCLAT observed that as the MOU clearly classifies the Appellant as a ‘Promoter’ who seeks to develop the said plot of land and has entrusted the Project to the Respondent who is arrayed as the ‘Developer’. Furthermore, the MOU provides that the Promoter shall be entitled to raise loans in its own name for the project and the Developer shall not be liable for repayment of any such loans or interest. The bench also observed that the relationship between the Appellant and the Respondent is that of land owner and developer and viewed from any angle, the amount invested by the Appellant towards the completion of the Project cannot be termed to be Financial Debt under the Section 5(8) of the IBC.
Thus, the Tribunal referred to a similar case decided in the past and held that the amount invested in the Joint Venture Project by the Appellant in his capacity as a ‘Promoter’ and ‘Investor’ does not fall within the definition of Financial Debt as defined under Section 5(8) of the IBC and dismissed the appeal.
To read the complete order, click here.
Upon a careful perusal of Section 5(8) of the IBC, the essentials of an amount of money to become ‘Financial Debt’ are –
- The amount of money must be a debt
- The debt must be disbursed against consideration
- The consideration must be for the time value of money
If any amount of money or any debt fulfils all the above-mentioned essentials, it will be deemed to be a ‘Financial Debt’ under the scope of IBC and a default in the repayment of the same are sufficient grounds to initiate CIRP against a Corporate Debtor.
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ii)We have not done investigation of correctness of facts and the limited opinion represents our understanding of the provisions of the law on the matter. The compliance mentioned above is not exhaustive and other compliance may also be involved depending on case to case basis.
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