MOU And Loan Agreement For Land Acquisition As Investment, Not Financial Debt Under IBC: NCLT Mumbai

Brief Facts:

RT Advisory Services LLP. (Petitioner/ Financial Creditor) claimed an outstanding amount of Rs. 5,19,97,608.21/-. On May 5, 2019, the Financial Creditor and Sardesai Engineering Private Limited (Respondent/Corporate Debtor) entered into a Memorandum of Understanding (MOU) for the sale and transfer of the Corporate Debtor's entire shareholding to the Financial Creditor. At that time, the shares were valued at Rs. 14.50 Crores/- which were payable in tranches. A Loan Agreement was subsequently which allowed the Corporate Debtor to request up to Rs. 7,50,00,000/- at an interest rate of 12% per annum. According to the Loan Agreement, the Financial Creditor disbursed a total of Rs. 10,26,31,513.36/- to the Corporate Debtor but only Rs. 5,56,71,001 was repaid/-. Disputes arose in January 2021 over the MOU due to the Corporate Debtor's refusal to record share transfers to the Financial Creditor or its associates. A Demand Notice was issued for repayment of the outstanding amount. In response, the Corporate Debtor falsely denied entering into the Loan Agreement. Thereafter, the Petitioner approached the NCLT and filed company petition under Section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC).

Observations by the NCLT:

The NCLT noted that the Financial Creditor argued that the default amount arose from a MOU and a Loan Agreement between the parties. On the other hand, the Corporate Debtor contended that the transaction was essentially an investment made by the Financial Creditor aimed at acquiring land with the Corporate Debtor being specifically incorporated for this purpose.

The MOU outlined that the Financial Creditor intended to acquire the entire shareholding of the Corporate Debtor for a sum of Rs. 14,50,00,000/-. The Corporate Debtor's principal asset was the land located in Pimpri Chinchwad, Pune. The MOU's recital F indicated that substantial expenses were required and the Shareholders lacked the necessary resources. Consequently, the Shareholders agreed to sell their shares in the Corporate Debtor to the Financial Creditor. The MOU also stated that the Shareholders would execute various documents to effectuate this transaction including the Share Purchase Agreement and other necessary documents for transferring leasehold rights and other sale instruments.

The NCLT held that it was evident that the transaction was primarily aimed at acquiring the immovable property held by the Corporate Debtor. Following this, a Loan Agreement was executed with a tenure of three years and a disbursal amounting to Rs. 7,50,00,000/-. The loan agreement revealed that the Financial Creditor, as per the MOU, was to acquire 100 percent shareholding in the Corporate Debtor. The Corporate Debtor, in turn, owned leasehold land in Pimpri Chinchwad and required funds for its development and operational expenses.

The recital in the Loan Agreement clarified that the money was raised to develop the land owned by the Corporate Debtor indirectly acquired through the share purchase outlined in the MOU.

The NCLT noted that the underlying transaction was primarily an investment aimed at acquiring land rather than a financial debt as defined under Section 5(8) of the IBC. It held that the intent behind both the MOU and the Loan Agreement was to facilitate the acquisition and development of land with the Financial Creditor initially intended to control the Corporate Debtor. It noted that the structure aligned more with an investment in the development of the land rather than a financial debt.

The NCLT referred to Ansal Housing Limited vs. Samyak Projects Private Limited Company where it was held that financial assistance provided for land acquisition in a joint venture context does not qualify as financial debt under IBC. The NCLT held that the primary focus of the IBC is to resolve corporate insolvency rather than merely recovering debts.

Therefore, the application was held to be non-maintainable.

Case Title: RT Advisory Services LLP vs Sardesai Engineering Private Limited

Case Number: CP (IB) No.634/MB/2023

For the Financial Creditor : Mr. Aman Kacheria, Advocate.

For the Corporate Debtor : Mr. Charles Dsouza, Advocate

Date of Judgment: 19.07.2024

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