Amount Invested In A Joint Venture Project In Capacity Of A Promoter And Investor Not A Financial Debt: NCLAT

Background Facts

The appeal was filed by M/s Jagbasera Infratech Pvt. Ltd ("Appellant/Financial Creditor"), challenging the order dated 11.12.2018 passed by the National Company Law Tribunal, Chandigarh Bench, in CP(IB) No.273/CHD/HP/2018. By the Impugned Order, the NCLT, Chandigarh Bench has dismissed the petition filed by the Appellant 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 as under:

"20. The term 'Allotee' is defined in Clause (d) of Section 2 of RERA Act. It says that allottee in relation to a real estate project means the person to whom a plot, apartment or buildings, as the case may be has been allotted, sold (whether as freehold or leasehold) or otherwise transferred by7 the promoter, and includes the person who subsequently acquires the said allotment through sale, transfer or otherwise but does not include a person to whom such plot, apartment or building, as the case may be, is given on rent. We find that under the circumstances the petitioner can be considered an allottee under RERA Act. As a Promoter, the petitioner is equally interested in the completion of the project to be marked for the purpose of the business and cannot be an allottee at all."

Contentions Of The Appellant

The Appellant submitted that it had entered into a Memorandum of Understanding (MoU) and a Joint Venture Agreement with the Respondent on 28.09.2011 and 27.02.2012 respectively. Between 21.10.2011 to 14.05.2018, the Appellant had paid an amount of Rs. 4,21,37,850/- to the Respondent, however, the latter defaulted in returning the said amount. Therefore, the repayment default falls within the definition of 'financial debt' under Section 5(8) of the IBC.

It was further submitted that the Appellant is a 'Promoter' and interested in forward sale of flats in the Real Estate project of the Respondent. The investment by the Appellant was for a forward sale or purchase agreement having the commercial effect of borrowing. It was contended that the amount was disbursed against consideration for time value of money and therefore, the Appellant fulfils all the essentials of being a 'Financial Creditor' under Section 5(7) of the IBC. As the Project ought to have been completed on or before 31.12.2013, and as there is an admitted default, the Respondent owes the amount lent to it which has become due and payable after the date of default on 31.12.2013.

Contentions Of The Respondent

The Respondent submitted that as per terms of the MoU the Appellant was to bear the cost of land. It was further submitted that the Appellant is engaged in the business of forward sale through purchase agreement and has invested a sum of Rs.4,21,37,850/- in its capacity as a 'Promoter' only. As 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 Section 7 petition has been rightly dismissed.

Issue

Whether the Appellant who has invested in the Real Estate Joint Venture Project in the capacity of a 'Promoter' can fall within the ambit of the definition of 'Financial Creditor' under Section 5(7) of the IBC?

Decision Of The NCLAT

The NCLAT Bench observed that as per the MoU, the Appellant is a 'Promoter' who seeks to develop the plot and construct the studio apartment, club, jogging track, shops and other amenities upon it. The Appellant had entrusted the Project to the Respondent who is arrayed as the 'Developer' in the said MoU and the Joint Venture project was to be launched and promoted in the name of Appellant.

It was further observed that the MoU specifies that 'Promoter' shall be entitled to raise loans in its own name from banks or financial institutions for the project. There shall be no liability on the Developer for repayment of the loans or interest. The Bench opined that a perusal of the MoU and the Joint Venture Agreement shows that the relationship between the Appellant and Respondent is that of land owner and developer and furthermore, the amount invested by the Appellant towards the completion of the Project cannot be termed to be 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 'Allottee'.

The Bench also placed reliance on the judgment passed in Mukesh N. Desai v Piyush Patel & Ors., Company Appeal (AT)(Ins) No.780/2020, by NCLAT itself wherein it has been held as follows:

"15. The MoU entered into is an Agreement of reciprocal rights and obligations. We are of the earnest view that both parties being 'Joint Development Partners' who entered into a consortium of sorts for developing the subject land and for any breach of terms of the contract, Section 7 Application filed under the Code would not be maintainable as the amount cannot be construed as 'Financial Debt' as there is no sum(s) i.e., owed, assigned or transferred to in compliance of the provisions of Section 5(8) of the Code. To reiterate, being a profit share owner, who in the event of the success of the Project would receive the residual gain, the amount invested in the land cannot be said to be a 'Financial Debt' as defined under Section 5(8) of the Code..."

The Bench observed 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 ambit of the definition of 'Financial Debt' as defined under Section 5(8) of the IBC and accordingly, dismissed the appeal.

Case Title: M/s Jagbasera Infratech Private Ltd. v Rawal Variety Construction Ltd., Company Appeal (AT) (Insolvency) No.150 of 2019.

Counsel for Appellant: Adv. Dr. Sumant Bharadwaj, Adv. Vedant Bharadwaj and Adv. Mridula Ray Bharadwaj.

Counsel for Respondent No. 1: Adv. Arihant Goyal.

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