NCLT Hyderabad: Equity Investment with Conditional Repayment Not Operational Debt

NCLT Hyderabad: Equity Investment with Conditional Repayment Not Operational Debt

Introduction

The National Company Law Tribunal (NCLT), Hyderabad Bench, has held that an equity investment with conditional repayment made through a commercial memorandum of understanding (MoU) doesn't qualify as operational debt.

Factual Background

The operational creditor, Neeta Zanvar, invested Rs. 1 crore in the corporate debtor, Filatex Fashions Ltd., in consideration of shares as security. When the default occurred, the creditor sold its shares and recovered an amount of Rs. 57.29 lakhs. The corporate debtor agreed to pay the due amount of Rs. 2.75 Cr through a second MoU, but failed to repay the same.

Procedural Background

The operational creditor filed an application under Section 9 of the Insolvency and Bankruptcy Code (IBC), seeking initiation of Corporate Insolvency Resolution Process (CIRP) against the corporate debtor.

Issues

The primary issue before the NCLT was whether the equity investment with conditional repayment qualifies as operational debt under the IBC.

Contentions of Parties

Operational Creditor: The operational creditor contended that the corporate debtor's failure to repay the due amount constitutes an operational debt.

Corporate Debtor: The corporate debtor argued that the investment was made towards the acquisition of equity shares, and the loss incurred in the sale of shares is an investment risk that cannot be recovered as operational debt.

Reasoning & Analysis

The bench of Shri Rajeev Bhardwaj (Judicial Member) and Shri Sanjay Puri (Technical Member) observed that:

• Nature of Investment: The investment was made towards the acquisition of equity shares, not towards any supply of goods or services.
• Operational Debt Definition: The plain reading of Section 5(21) of the IBC provides that claims arising out of equity investment or share subscription don't qualify as operational debt.
• Novation of Contract: The second MoU constituted a novation of the original contract, replacing the prior obligation.
• IBC Proceedings: The IBC proceedings cannot be used as a substitute for debt recovery, and the applicant should resolve it through civil courts or arbitration forums.

Implications

This judgment highlights the importance of understanding the nature of investments and the definition of operational debt under the IBC. It also underscores the need for parties to resolve disputes through appropriate forums, rather than relying on IBC proceedings for debt recovery.

In this case the petitioner was represented by Mr. Mayur Mundra, Advocate. Meanwhile the respondent was represented by Mr. M.Harsh Chowdhary, Advocate.