NCLT: In Garb of a Lender, a ‘Speculative Investor’ Cannot be Assigned the Status of a Financial Creditor for Merely Recovering Monies

NCLT: In Garb of a Lender, a ‘Speculative Investor’ Cannot be Assigned the Status of a Financial Creditor for Merely Recovering Monies

The National Company Law Tribunal (NCLT), New Delhi, by its division-member bench comprising of P.S.N Prasad (Judicial Member) and Rahul Bhatnagar (Technical Member), while adjudicating an application under Section 7 of Insolvency and Bankruptcy Code, 2016 (“IBC, 2016”) in Rohit Prasad vs M/s S and N Lifestyle Infraventures Pvt. Ltd. observed that, the status of “Financial Creditor” cannot be accorded to a person who, in the garb of a lender comes in the project as a speculative investor and for mere recovery of monies files exorbitant claims.

In the present case, Mr. Rohit Prasad (“Financial Creditor”) had granted a loan of Rs. 99,99,999 in favor of M/s. S and N Lifestyle Infraventures Pvt. Ltd (“Corporate Debtor”) for purchase of 5% equity share at a housing project at The Highlands, Dehradun vide a general agreement dated 18 October, 2014. The amount was agreed to be locked in for a period of 4 years from the date of the agreement and the Corporate Debtor guaranteed to pay the Financial Creditor his investment and profit in the project pro-rata to his equity share.

It was further an unconditional guarantee that the Corporate Debtor would pay the Financial Creditor a minimum amount not less than Rs. 2,00,00,000 as return of capital and profit, in any condition.

It was further agreed that in the event Corporate Debtor fails to complete the project within 4 years, then an additional grace period of 3 months would be provided and the Corporate Debtor would pay an additional 1.5% interest per month for these 3 months.

It was contended by the Financial Creditor that even after the end of 4 years and additional 3 months, no payment had been made by the Corporate Debtor to the Financial Creditor.

Opposed to this, the Corporate Debtor argued that the investment of Rs. 99,99,999/- doesn’t fall within the definition of financial debt as the Financial Creditor invested for 5% equity shares in the project and not the company. Since, there was no amount which was due and payable by the Corporate Debtor to the Financial Creditor and there was only a default in transferring the land, no claim arises under Insolvency and Bankruptcy Code. 2016 (IBC, 2016) due to lack of consideration for Time Value of Money, contended the Corporate Debtor.

The bench primarily considered three issues:

Firstly, whether the parties had entered into contingent or forward sale agreement?

The bench on examining the terms and conditions of the agreement held, it was manifestly clear that the Agreement was a sale agreement with settled base return and profits amounting to contingencies with a maximum ceiling.

The NCLT was of the view that it was an investment done by the applicant/Financial Creditor in the housing project where he was 5% equity holder in the project and therefore had a share in the profit to the tunes of 5%.

Secondly, whether the amount claimed by the applicant as per Part IV of Application amounting to Rs. 4,76,00,000 (Principal Amount of Rs 3,50,00,000 plus interest Rs 1,26,00,000) is a financial debt under section 5 (8) (f) of IBC?

Thirdly, whether the Applicant falls in the category of Financial Creditor as per Section 5 (7) of IBC?

While determining both Issue ii and Issue iii together, the bench noted on bare perusal of Section 5 (7) of IBC states "financial creditor" means any person to whom a financial debt is owed and includes a person to whom such debt has been legally assigned or transferred.

In this regard, the NCLT observed, “we are of the view that as per the debt claimed by Applicant i.e., against the investment of Rs 1 crore, claiming Rs 3.5 Crore as principle and Rs 1.26 Crore interest is a Lucrative Agreement Situation. Moreover, in event of Non-payment by Respondent, Applicant has secured his interests as per clause 12 of agreement, by way of transfer of land by respondent to applicant for amount payable as per the market value.”

After referring to a catena of judgements, the bench was of the view that the status of “Financial Creditor” cannot be accorded to a person who, in the garb of a lender comes in the project as a speculative investor and for mere recovery of monies files exorbitant claims.

“Therefore, the benefit of section 5(8)(f) of IBC will not enure in his favor and the amount claimed in Part IV of the application does not amount to become Financial Debt as per code,” the NCLT discerned.

Accordingly, the application filed under section 7 of the IBC, 2016 against the corporate debtor was not maintainable and was dismissed by the NCLT.