Joint Venture Investments and Financial Debt: A NCLAT Judgment Analysis
Understanding the Nature of Profit-Sharing Loans in the Context of the Insolvency and Bankruptcy Code (IBC)
In a recent judgment, the National Company Law Appellate Tribunal (NCLAT) deliberated on whether a profit-sharing loan can be construed as a Financial Debt under the terms of the Insolvency and Bankruptcy Code (IBC).
The judgment was delivered by a coram consisting of Mr. Justice Ashok Bhushan (Chairperson), Mr. Barun Mitra (Technical Member), and Mr. Arun Baroka (Technical Member). The case in question was “RealPro Realty Solutions Pvt Ltd vs Sanskar Projects and Housing Ltd”1.
Key Findings In joint venture investments under IBC
The judgment provided several key findings that help clarify the nature of joint venture investments and their status under the IBC.
Understanding of a Joint Venture Investments
A joint venture was defined as a combination of two or more parties/entities that seeks the development of any enterprise or project for profit and entails sharing the risks associated with its development.
Status of the Appellant
The Appellant, by virtue of the funds invested by them in terms of the Agreement, cannot claim the status and benefits of a Financial Creditor as defined under Section 5(7) of the IBC.
Shared Liability for Profit
When shared liability for profit is so clearly manifested in the Agreement, it is evident that both parties are development partners and co-sharers in the development of the subject property. The terms of the Agreement laid the foundations of a legal and binding relationship with mutual financial obligations towards each other.
Nature of the Transaction
The present transaction is in the nature of investment for profit and not disbursement for the time value of money and hence does not fall within the canvas of financial debt as defined under Section 5(8) of the IBC.
Conclusion : Joint venture investments Under IBC
This judgment provides significant insights into how joint venture investments are viewed in the context of the IBC. It clarifies that such investments, which are essentially profit-sharing loans, cannot be construed as financial debt. This has implications for the status of entities involved in such agreements and their rights and obligations under the IBC.