the National Company Law Appeal Tribunal (“NCLAT”) Main bench composed of Judge Anant Bijay Singh (Judicial Member) and Ms Shreesha Merla (Technical Member), while adjudicating on an appeal brought under section 61(3) of the Insolvency and Bankruptcy Code, 2016 (“IBC”) in the matter of M/s Jagbasera Infratech Pvt. Ltd v Rawal Variety Construction Ltd., ruled that the amount invested in a joint venture project as “promoter” and “investor” does not fall within the definition of “financial debt” within the meaning of Article 5(8) of the IBC . The order was placed on 04.04.2022.
The appeal was filed by M/s Jagbasera Infratech Pvt. Ltd (“Appellant/Financial Creditor”), challenging the order of 11.12.2018 issued by the National Company Law Tribunal, Chandigarh Bench, in CP(IB) No.273/CHD/HP/2018. By the order under appeal, the NCLT, Chandigarh Bench dismissed the Appellant’s petition under Section 7 of the IBC, for initiating the Corporate Insolvency Resolution Process (“CIRP”) ) against M/s Rawal Variety Construction Ltd. (“Respondent/Corporate Debtor”) and had observed the following:
“20. The term “grantee” is defined in paragraph (d) of article 2 of the RERA law. It is said that the beneficiary in relation to a real estate project means the person to whom a land, apartment or buildings, as the case may be, has been allocated, sold (whether in full ownership or on lease) or otherwise transferred by7 the developer, and includes the person who subsequently acquires said allotment by sale, transfer or otherwise, but does not include a person to whom said land, apartment or building, as the case may be, is given on rent. We note that in the circumstances, the applicant can be considered as an assignee under the RERA law. As a promoter, the applicant is also interested in carrying out the project to be marked for the purposes of the company and cannot be an awardee at all. »
The appellant’s claims
The Appellant argued that it entered into a Memorandum of Understanding and a Joint Venture Agreement with the Respondent on 09.28.2011 and 02.27.2012 respectively. Between 21.10.2011 and 14.05.2018, the Appellant paid an amount of Rs. 4,21,37,850/- to the Respondent, however, the latter failed to return the said amount. Therefore, default in repayment falls within the definition of “financial debt” within the meaning of Article 5(8) of the IBC.
It has further been argued that the Appellant is a “Developer” and that he is interested in the forward sale of apartments as part of the Respondent’s real estate project. The Appellant’s investment was a forward sale or purchase contract having the commercial effect of a loan. It was argued that the amount was disbursed as consideration for the time value of money and therefore the appellant meets all the essential requirements to be a “financial creditor” under section 5 (7 ) of the IBC. Given that the Project should have been completed by 31.12.2013 at the latest, and that there is an acknowledged default, the Respondent owes it the amount lent which became due after the date of default on 31.12.2013.
The Respondent’s Arguments
The Respondent argued that, under the terms of the Memorandum of Understanding, the Appellant should bear the cost of the land. It was further alleged that the Appellant is carrying on a forward selling business through a purchase agreement and has invested an amount of Rs.4,21,37,850/- in his capacity as a “promoter” only . Since the Appellant is admittedly a “promoter”, the Appellant does not fall within the definition of “financial creditor” under Section 5(7) of the IBC and the petition under Section 7 was properly dismissed.
Whether the appellant who invested in the real estate joint venture project as a “developer” can fall within the definition of “financial creditor” under IBC Section 5(7)?
The NCLAT Bench observed that, pursuant to the Memorandum of Understanding, the Appellant is a “developer” seeking to develop the land and build the studio, club, jogging track, stores and other amenities thereon. The Appellant had entrusted the Project to the Respondent who is presented as the “Developer” in the said memorandum of understanding and the joint venture project was to be launched and promoted on behalf of the Appellant.
It was further observed that the MoU specifies that the “promoter” is authorized to borrow in its own name from banks or financial institutions for the project. There will be no liability on the promoter for repayment of loans or interest. The Chamber found that a reading of the Memorandum of Understanding and the Joint Venture Agreement shows that the relationship between the Appellant and the Respondent is that of a landowner and developer and, further, the amount invested by the appellant for the completion of the project does not qualify as a “financial debt” under section 5(8) of the IBC. The nature of the transactions between the appellant and the respondent does not fall within the definition of “recipient”.
The Chamber also relied on the judgment rendered in Mukesh N. Desai vs. Piyush Patel & Ors., Society Appeal (AT) (Ins) No. 780/2020, by NCLAT itself in which it was ruled as follows:
“15. The memorandum of understanding entered into is an agreement of reciprocal rights and obligations. We are satisfied that both parties being “joint development partners” who have entered into a kind of consortium to develop the land in question and to any breach of the terms of the contract, the Section 7 application filed under the Code would not stand as the amount cannot be construed as a “financial liability” as there is no sum(s) ) i.e. due, assigned or transferred in accordance with the provisions of Article 5(8) of the Code. residual gain, the amount invested in the land cannot be considered a “financial debt” as defined under Article 5(8) of the Code…”
The Chamber observed that the amount invested in the ‘Joint Venture Project’ by the Appellant in his capacity as ‘Promoter’ and ‘Investor’ does not fall within the scope of the definition of ‘Financial Debt’ as defined in s. 5(8) BAC and, therefore, dismissed the appeal.
Case title: M/s Jagbasera Infratech Private Ltd. against Rawal Variety Construction Ltd., Company Appeal (AT) (Insolvency) No.150 of 2019.
Counsel for the Appellant: Adv. Dr. Sumant Bharadwaj, Adv. Vedant Bharadwaj and Adv. Mridula Ray Bharadwaj.
Counsel for Respondent #1: Adv. Arihant Goyal.
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