Inter-Corporate Deposits and Financial Debt: A Study of NCLAT’s Interpretation

An In-depth Analysis of the Case: Ansal Housing Ltd. vs. Samyak Projects Pvt. Ltd.

Introduction

The relationship between corporate entities often involves financial arrangements that blur the lines between commercial collaboration and lending transactions. When such relationships develop within joint venture frameworks, particularly in the real estate sector, the characterization of financial assistance becomes legally significant under insolvency proceedings. The National Company Law Appellate Tribunal’s decision in Ansal Housing Ltd. vs. Samyak Projects Pvt. Ltd. [1] decided on December 6, 2023, presents a watershed moment in understanding how Inter-Corporate Deposits function within joint ventures and whether they qualify as financial debt under the Insolvency and Bankruptcy Code, 2016.

This judgment addresses fundamental questions about the nature of financial assistance extended between joint venture partners and establishes important precedents for real estate developers, corporate lenders, and insolvency practitioners. The case emerged from a dispute where Ansal Housing Limited extended an Inter-Corporate Deposit of twenty-five crore rupees to Samyak Projects Private Limited for land acquisition in a joint real estate development project. When the relationship soured, Ansal Housing attempted to initiate Corporate Insolvency Resolution Process under Section 7 of the IBC, claiming status as a financial creditor. The Tribunal’s reasoning and conclusions provide clarity on the intersection of joint venture arrangements and insolvency law.

Understanding Inter-Corporate Deposits

Inter-Corporate Deposits represent short-term unsecured borrowing arrangements between corporate entities, typically utilized for addressing immediate liquidity requirements or working capital needs. These financial instruments have gained prominence in Indian corporate finance as they offer flexibility without the procedural complexities associated with traditional bank financing. The deposits generally range from seven days to one hundred eighty days, though the specific tenure depends on the agreement between parties and regulatory constraints.

The regulatory framework governing ICDs primarily stems from the Companies Act, 2013, rather than direct oversight by the Reserve Bank of India. Section 186 of the Companies Act establishes the boundaries within which companies can extend loans, make investments, or provide guarantees [2]. According to this provision, a company cannot make loans or investments exceeding sixty percent of its paid-up share capital, free reserves, and securities premium account, or one hundred percent of its free reserves and securities premium account, whichever is higher, without obtaining shareholder approval through special resolution. Every ICD transaction requires approval by the company’s Board of Directors through a board resolution, and companies must disclose such loans or deposits in their financial statements with details including interest rates and related party relationships.

While the RBI does not directly regulate ICDs between non-banking entities, it does impose restrictions on Primary Dealers who can accept Inter-Corporate Deposits up to fifty percent of their net worth for periods not less than seven days, though they cannot participate in ICD lending [3]. The interest rate charged on ICDs cannot be lower than the prevailing yield of government securities of similar maturity, ensuring that these instruments do not become vehicles for value transfer between related parties at below-market rates.

The Insolvency and Bankruptcy Code Framework

The Insolvency and Bankruptcy Code, enacted in 2016, revolutionized India’s approach to corporate insolvency by introducing a time-bound resolution process that prioritizes the revival of financially distressed companies over liquidation. The Code establishes a creditor-driven framework where financial creditors hold significant power in determining the resolution strategy for a corporate debtor. Understanding the distinction between financial creditors and operational creditors becomes essential because this classification determines procedural rights, voting powers in the Committee of Creditors, and the priority of claims in distribution waterfalls.

Section 5(7) of the IBC defines a financial creditor as “any person to whom a financial debt is owed and includes a person to whom such debt has been legally assigned or transferred to.” [4] This seemingly straightforward definition gains complexity when examined alongside the definition of financial debt. The critical element lies not in the identity of the creditor but in the nature of the debt itself.

Section 5(8) of the IBC provides an inclusive definition of financial debt as “a debt along with interest, if any, which is disbursed against the consideration for the time value of money” [4]. The provision then enumerates specific categories including money borrowed against payment of interest, amounts raised under acceptance credit facilities, amounts raised through bond issuances, amounts under hire purchase or lease agreements deemed as finance leases, receivables sold through factoring, amounts under forward sale or purchase agreements having commercial effect of borrowing, and counter-indemnity obligations relating to guarantees issued by banks or financial institutions.

The phrase “consideration for the time value of money” serves as the touchstone for determining whether a debt qualifies as financial debt. This concept recognizes that money has inherent value over time, and compensation for parting with money for a period constitutes the essence of financial debt. The Supreme Court in Pioneer Urban Land and Infrastructure Ltd. v. Union of India [5] clarified that for any debt to be treated as financial debt under the Code, there must be disbursement of money to the borrower for utilization by the borrower, and such disbursement must be against consideration for time value of money.

The Ansal Housing Case: Factual Matrix

The dispute between Ansal Housing Limited and Samyak Projects Private Limited arose from their collaboration on four real estate projects under Joint Venture Agreements. According to the arrangement, Ansal Housing would function as the developer responsible for project execution, construction, and marketing, while Samyak Projects would provide land for development. The parties agreed to a revenue sharing ratio of 67.5 percent for Ansal Housing and 32.5 percent for Samyak Projects from sales receivables generated by the projects [1].

To facilitate land acquisition for one of these projects located in Sector 83, Gurgaon, specifically for the development of a project called Ansal’s Hub 83, Samyak Projects required substantial capital to make payments to landowners. Ansal Housing agreed to extend an Inter-Corporate Deposit of twenty-five crore rupees to Samyak Projects specifically for this purpose. The parties formalized this arrangement through an ICD Agreement that documented the terms and conditions of the financial assistance.

When disagreements emerged and Samyak Projects allegedly failed to discharge its repayment obligations under the ICD Agreement, Ansal Housing initiated proceedings before the National Company Law Tribunal in New Delhi by filing a petition under Section 7 of the IBC. The application sought commencement of Corporate Insolvency Resolution Process against Samyak Projects, with Ansal Housing claiming status as a financial creditor based on the unpaid Inter-Corporate Deposit amount constituting financial debt.

The National Company Law Tribunal, New Delhi Bench, dismissed the application through an order dated February 28, 2023, holding that Ansal Housing did not qualify as a financial creditor and that the liability under the Inter-Corporate Deposit did not constitute financial debt under the IBC. Aggrieved by this dismissal, Ansal Housing filed an appeal before the National Company Law Appellate Tribunal, leading to the judgment under discussion.

The NCLAT’s Reasoning and Decision

The National Company Law Appellate Tribunal, presided over by Justice Ashok Bhushan (Chairperson) and Mr. Barun Mitra (Technical Member), undertook a detailed analysis of the relationship between the parties and the nature of the financial assistance provided. The Tribunal began by reaffirming settled legal principles regarding financial debt, citing the Supreme Court’s decisions in Pioneer Urban Land and Infrastructure Ltd. v. Union of India [5] and Anuj Jain, Interim Resolution Professional for Jaypee Infratech Ltd. v. Axis Bank Limited [6].

The Tribunal emphasized that for an Inter-Corporate Deposit to qualify as financial debt under the IBC, the disbursement must be made against consideration for the time value of money. In examining the Joint Venture Agreements alongside the ICD Agreement, the NCLAT noted that these documents could not be read in isolation but must be understood as interconnected arrangements defining the overall relationship between the parties.

The Tribunal observed that both agreements indicated mutual rights, obligations, and arrangements for sharing profits and losses in the real estate projects. The collaborative and profit-sharing nature of the partnership was evident throughout both agreements. The NCLAT found that the NCLT had correctly recognized the interdependence of the Joint Venture Agreement and the ICD Agreement, treating them as integral to each other rather than as separate, standalone transactions.

Significantly, the NCLAT noted that both parties, as development partners, jointly contributed to the project, with land acquisition being a crucial aspect of the joint venture. The financial assistance provided by Ansal Housing to Samyak Projects effectively constituted financing for the joint venture’s operations rather than a traditional lending transaction. The shared liability for profits and losses, the defined responsibilities within the joint venture structure, and the binding nature of both the JVA and ICD established a legal relationship characterized by mutual financial obligations arising from partnership rather than debtor-creditor dynamics.

The Tribunal also referenced its earlier decision in Jagbasera Infratech Pvt. Ltd. v. Rawal Variety Construction Ltd. [7], which held that an amount invested in a joint venture project by any party in their capacity as a promoter or investor does not fall within the ambit of the definition of financial debt under Section 5(8) of the Code. This principle proved determinative in the present case.

The NCLAT concluded that the transaction between Ansal Housing and Samyak Projects was an investment for profit rather than a disbursement for the time value of money. Because the Inter-Corporate Deposits was inextricably linked to the joint venture arrangement and the parties’ shared economic interests in the real estate projects, it fell outside the scope of financial debt as defined in the IBC. Consequently, Ansal Housing could not be classified as a financial creditor under Section 5(7) of the IBC, and the application under Section 7 was not maintainable. The Tribunal dismissed the appeal, affirming the order of the Adjudicating Authority [1].

Judicial Precedents on Financial Debt

The NCLAT’s decision in the Ansal Housing case draws strength from an evolving body of jurisprudence that has progressively refined the understanding of financial debt under the IBC. The Supreme Court’s interpretation in various landmark decisions has shaped how tribunals approach the classification of different financial arrangements.

In Pioneer Urban Land and Infrastructure Ltd. v. Union of India [5], decided on August 9, 2019, the Supreme Court upheld the constitutional validity of the Insolvency and Bankruptcy Code (Second Amendment) Act, 2018, which included real estate allottees as financial creditors under Section 5(8)(f) of the IBC. The Court held that amounts raised from homebuyers constitute financial debt because they are used as a means of financing real estate projects and, on failure of the project, money is repaid based on time value of money. This judgment established that the “commercial effect of a borrowing” is a critical factor in determining whether a transaction constitutes financial debt.

The Supreme Court in Anuj Jain, Interim Resolution Professional for Jaypee Infratech Ltd. v. Axis Bank Limited [6], decided in 2020, reinforced that the essential condition of financial debt is disbursement against consideration for time value of money. This principle has been consistently applied by tribunals to evaluate whether specific financial arrangements qualify as financial debt.

More recently, the Supreme Court in Orator Marketing (P) Ltd. v. Samtex Desinz (P) Ltd. [8], decided in 2023, clarified that financial debt includes even interest-free loans, provided the disbursement is against consideration for time value of money. This ruling expanded the scope of financial debt beyond arrangements that explicitly provide for interest payments, recognizing that the mere forbearance of money for a period constitutes consideration for its time value.

The NCLAT’s decision in Jagbasera Infratech Pvt. Ltd. v. Rawal Variety Construction Ltd. [7], decided in 2022, specifically addressed investments made in joint venture projects. The Tribunal held that amounts invested by a party in their capacity as a promoter or investor in a joint venture do not qualify as financial debt under Section 5(8) of the Code. This principle directly influenced the outcome in the Ansal Housing case.

Implications for Joint Ventures and Real Estate

The NCLAT’s ruling in Ansal Housing Ltd. vs. Samyak Projects Pvt. Ltd. carries significant implications for how joint ventures, particularly in the real estate sector, structure their financial arrangements and resolve disputes. The decision clarifies that not all Inter-Corporate Deposits automatically qualify as financial debt, especially when they are embedded within a larger joint venture framework characterized by profit-sharing and mutual obligations.

For real estate developers entering into joint ventures, this judgment underscores the importance of carefully structuring financial contributions. When one party provides financial assistance to another within a joint venture context, and such assistance is intrinsically linked to the joint venture’s objectives and profit-sharing arrangements, it may be characterized as an investment or capital contribution rather than debt. This classification affects not only insolvency proceedings but also tax treatment, accounting presentation, and the availability of remedies for recovery.

The decision also highlights that the IBC’s primary objective remains the resolution of corporate debtors rather than serving as a debt recovery mechanism for commercial disputes between business partners. When parties enter into joint ventures with mutual obligations and shared economic interests, disputes arising from such arrangements may be more appropriately resolved through arbitration, civil suits, or other commercial dispute resolution mechanisms rather than through insolvency proceedings.

However, the judgment does not create a blanket prohibition on financial creditor status for all ICDs within joint ventures. The critical factors that led to the NCLAT’s conclusion in this case included the interdependence of the ICD and the Joint Venture Agreement, the profit-sharing arrangement, the use of funds for joint venture operations (specifically land acquisition), and the mutual obligations that characterized the relationship. Inter-Corporate Deposits that are genuinely independent lending transactions, even between joint venture partners, may still qualify as financial debt if they satisfy the statutory requirements.

The Broader Context: Resolution versus Recovery

The NCLAT’s observation that the primary intent and object of the IBC is resolution of the corporate debtor and not recovery of a creditor’s debt reflects a fundamental principle underlying India’s insolvency regime. The Code was designed to provide a framework for rescuing viable businesses facing temporary financial distress, maximizing the value of assets, and balancing the interests of all stakeholders, including creditors, employees, and shareholders.

When disputes between joint venture partners are disguised as insolvency proceedings, they risk misusing the Code’s machinery for purposes it was not designed to serve. The Tribunal’s reluctance to permit the initiation of insolvency proceedings in the Ansal Housing case stems from this concern. Allowing a joint venture partner to trigger insolvency based on amounts that are essentially investments or capital contributions would undermine the joint venture structure and convert partnership disputes into insolvency matters.

This principle aligns with the Supreme Court’s guidance in Swiss Ribbons Pvt. Ltd. v. Union of India [9], which emphasized that the IBC represents a paradigm shift in treating insolvency, moving away from a debtor-centric approach to a creditor-driven process focused on maximizing asset value and achieving time-bound resolution. However, the Court also recognized that the Code should not be misused or weaponized for extraneous purposes.

Conclusion

The National Company Law Appellate Tribunal’s decision in Ansal Housing Ltd. vs. Samyak Projects Pvt. Ltd. represents a nuanced interpretation of Inter-Corporate Deposit financial debt under the IBC, particularly in the context of joint venture arrangements. By holding that an Inter-Corporate Deposit extended within a joint venture framework, interconnected with profit-sharing arrangements and used for joint venture operations, does not constitute financial debt, the Tribunal has provided clarity on the boundaries of insolvency law’s application to partnership disputes.

The judgment reinforces several key principles: first, that the classification of a debt as financial debt depends on substance rather than form; second, that joint venture investments characterized by mutual obligations and profit-sharing arrangements generally fall outside the definition of financial debt; third, that the IBC should not be employed as a mechanism for resolving commercial disputes between business partners; and fourth, that the Code’s primary objective remains corporate resolution rather than debt recovery.

As Indian jurisprudence on insolvency continues to evolve, this decision will serve as an important reference point for evaluating the nature of financial arrangements within joint ventures. It reminds parties structuring real estate developments and other collaborative ventures to carefully document their arrangements, clearly delineate debt from equity or partnership contributions, and recognize that the choice of dispute resolution mechanism must align with the true nature of their relationship. For the insolvency bar and bench, the case offers guidance on distinguishing genuine financial debt from investments that, despite being styled as loans or deposits, are fundamentally rooted in partnership dynamics.

References

1. Ansal Housing Limited v. M/s. Samyak Projects Pvt. Ltd., Company Appeal (AT)(Insolvency) No. 542 of 2023, NCLAT New Delhi (December 6, 2023). Available at: https://indiankanoon.org/doc/122414888/
2. The Companies Act, 2013, Section 186 (India). Available at: https://www.mca.gov.in/Ministry/pdf/CompaniesAct2013.pdf
3. Reserve Bank of India, Master Circular on Resource Mobilisation by Primary Dealers. Available at: https://m.rbi.org.in/scripts/BS_ViewMasCirculardetails.aspx?id=8088
4. The Insolvency and Bankruptcy Code, 2016, Sections 5(7) and 5(8) (India). Available at: https://ibbi.gov.in/uploads/legalframwork/3ab0c6eca2c74d59bea190cf831af78e.pdf
5. Pioneer Urban Land and Infrastructure Ltd. v. Union of India, (2019) 8 SCC 416. Available at: https://indiankanoon.org/doc/118478827/
6. Anuj Jain, Interim Resolution Professional for Jaypee Infratech Ltd. v. Axis Bank Limited & Ors., (2020) 8 SCC 401. Available at: https://main.sci.gov.in/supremecourt/2019/19287/19287_2019_6_1501_23679_Judgement_23-Jul-2020.pdf
7. Jagbasera Infratech Pvt. Ltd. v. Rawal Variety Construction Ltd., 2022 SCC OnLine NCLAT. Available at: https://ibclaw.in/samyak-projects-pvt-ltd-vs-ansal-properties-and-infrastructure-ors-nclat-new-delhi/
8. Orator Marketing (P) Ltd. v. Samtex Desinz (P) Ltd., (2023) 3 SCC 753. Available at: https://main.sci.gov.in/supremecourt/2021/19903/19903_2021_4_1501_41668_Judgement_19-Jan-2023.pdf
9. Swiss Ribbons Pvt. Ltd. v. Union of India, (2019) 4 SCC 17. Available at: https://main.sci.gov.in/supremecourt/2017/24228/24228_2017_4_1501_14732_Judgement_25-Jan-2019.pdf