A recent ruling by the National Company Law Tribunal (NCLT) Guwahati Bench has shed light on the distinction between financial debt and joint venture investments. In the case of Chiragsala Sales Pvt. Ltd vs Vaishno Devi Traders Private Limited (CP (IB) No.33/GB/2022), the NCLT dismissed a petition filed by a financial creditor seeking to initiate a Corporate Insolvency Resolution Process (CIRP) against a corporate debtor.
Background:
- Vaishno Devi Traders (Debtor) approached Chiragsala Sales (Creditor), a finance and investment company, for funds to participate in an e-auction for land development.
- A Memorandum of Understanding (MoU) was signed outlining joint participation in the auction and land development, but without a formal joint venture agreement.
- Creditor disbursed Rs. 3 crore to Debtor between 2019 and 2020, with repayment demands made later.
The debtor disputed the claims, arguing the money was an investment in the joint venture, not a loan.
Arguments:
- Creditor: Claimed the transaction was a loan based on the disbursed amount, interest charged, and Debtor's repayment defaults.
- Debtor: Emphasized the MoU and joint venture intent, arguing the MoU governed the funds as a joint capital, not a loan.
NCLT Verdict:
- The NCLT found Creditor's claims of a loan "difficult to believe," citing the lack of formal loan documents and security typical for finance companies.
- Referring to a previous NCLAT judgment, the Bench ruled that investments in partnerships or joint ventures fall outside the definition of financial debt under the Insolvency and Bankruptcy Code (IBC).
- Based on this, the NCLT dismissed the petition, concluding that the transaction constituted an investment in a joint venture, not a financial debt.
Implications:
This ruling clarifies the interpretation of "financial debt" under the IBC, emphasizing the distinction between debt and joint venture investments. It offers valuable guidance for companies and investors navigating financial arrangements within joint ventures.
Key Takeaways:
- Formal agreements and documentation are crucial for clarity in financial transactions.
- The nature of the funds (loan vs. investment) and the parties' intent are key factors in determining financial debt under the IBC.
- This ruling provides legal precedent for similar cases involving joint venture investments
