Introduction

In a landmark ruling by the National Company Law Appellate Tribunal (NCLAT) Chennai, it was held that shares cannot be transmitted without obtaining a Succession Certificate. The case was presided over by Mr. Justice Venugopal M. (Judicial Member) and Ms. Shreesha Merla (Technical Member). The case is cited as Avanti Metals Pvt. Ltd. Vs. Alkesh Gupta – NCLAT Chennai.

Acquiring a Succession Certificate

In order to get a succession certificate, an individual with a vested interest must adhere to a prescribed legal process, commencing with the submission of a formal request to the appropriate district court. The court’s jurisdiction is established based on the deceased individual’s domicile at the time of death or the location of any owned property.

Process for Acquiring a Succession Certificate

• Petition Preparation: The petitioner is required to diligently draft, endorse, and authenticate a petition, and subsequently lodge it with the district judge, accompanied by the requisite court fees.
• Submission to Court: The district judge will preside over a preliminary hearing of the petition. Upon admission, a specific date for the final hearing will be scheduled, and notifications will be dispatched to the pertinent parties.
• Issuance of Certificate: Following the conclusive hearing and thorough evaluation of all relevant parties, the district court will determine the entitlement of the applicant to the succession certificate. If the judge is content, they will issue the certificate.
• Bond Submission: The district judge has the authority to request the applicant to furnish a bond, along with sureties or alternative forms of security, to safeguard against any potential financial damage that may occur as a result of the certificate’s utilisation or mishandling.

Details of the Petition

The petition for a succession certificate must contain essential information, including the precise time and location of the deceased individual’s passing, their primary place of residence, particulars regarding property located within the court’s jurisdiction, immediate family members or close relatives, the petitioner’s legal entitlements, absence of any grounds to challenge the validity of the certificate, as well as details concerning debts and securities.

Legal enforceability of Succession Certificate

A succession certificate holds jurisdiction across the whole territory of India. In order for a document issued by an Indian representative in a foreign nation to be valid in India, it must be duly stamped in accordance with the Court Fees Act of 1870. The main objective of the certificate is to safeguard individuals who are making payments for debts in a sincere manner and authorise the certificate holder to manage the financial matters of the deceased individual.

Impact of the Succession Certificate

Although the certificate enables legal transactions on behalf of the deceased individual, it does not inherently grant ownership or establish legal heirs. The identification of legitimate heirs entails a distinct legal process.

Key Findings of the Tribunal

The Hon’ble NCLAT made several key observations in their ruling:

1. Transmission of shares on the basis of a Will: The tribunal noted that this can raise complicated issues which require evidence to be read by the parties and need to be determined by a Court of Law.
2. Probate proceedings and rectification of register: If the probate proceedings are pending in a Civil Court, then the petition under the Companies Act for rectification of register would not be maintainable.
3. Dispute as to the heirship of a deceased shareholder: The tribunal held that where there is a dispute as to the heirship of a deceased shareholder, the Company could refuse transfer of shares, until such dispute is resolved by a Competent Court of Law.
4. Role of the Succession Certificate: The Succession Certificate, which specifies the debts and securities, entitles a legal heir not only to receive the Interest or Dividends but also to negotiate or transfer them.
5. Section 44 of the Companies Act, 2013: From this section, it is clear that shares are construed as movable property governed by the Articles of Association of the Company and Article 8.15 mandates that a Succession Certificate is required for the transmission of the shares.
6. Transmission of Shares without a Succession Certificate: The tribunal concluded that the prayer of the first Respondent herein seeking transmission of Shares without even obtaining a Succession Certificate, cannot be sustained.

Conclusion

This Tribunal is of the considered view that submission of a Succession Certificate, as provided for under the Articles of Association of the Appellant Company, is required for the transmission of shares of the deceased Member. This ruling underscores the importance of a Succession Certificate in the transmission of shares and sets a precedent for future cases.

Our Comments

Understanding the complex legal procedures involved in obtaining a succession certificate is crucial for those who are managing the challenges of settling an estate where the deceased person did not leave a will. Prospective candidates should consult with a lawyer to negotiate the jurisdictional requirements and procedural stages, assuring the inclusion of specific details in the petition, particularly addressing the deceased individual’s place of residence, family information, and financial responsibilities. Highlighting the significance of the preliminary hearing, candidates must provide a persuasive argument to increase the probability of being admitted. It is vital to be aware of the potential criteria for submitting bonds and to have a clear understanding of the issues for worldwide validity, especially for assets located in other countries. Effective expectation management is crucial, as the succession certificate grants authority to the rightful heir in financial affairs, but it does not inherently establish legal heirs or grant ownership rights. Obtaining expert legal advice throughout the process guarantees a more seamless experience and fosters assurance in navigating the complex legal terrain.

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A resolution plan is priced on the claims placed before the committee of creditors (“CoC”). Late claims in CIRP, particularly those raised long after the CoC has approved a resolution plan but while its approval remains pending before the Adjudicating Authority, can affect the certainty of the resolution process. The National Company Law Appellate Tribunal (“NCLAT”) considered such a claim in appeals arising from the insolvency of a real estate developer and also examined whether a memorandum of understanding established a financial debt.

The D.S. Kulkarni Proceedings and the Late Claim

In the corporate insolvency resolution process (“CIRP”) of D.S. Kulkarni Developers Ltd., the CoC approved a resolution plan on 13 August 2021. Applications by the appellants asserting claims were filed in February 2023, about a year and a half later, while approval of the plan by the Adjudicating Authority was still pending.

In appeals decided in January 2024, including Deepak Sakharam Kulkarni & Anr. v. Manoj Kumar Agarwal, RP of D.S. Kulkarni Developers Ltd. & Ors., the NCLAT (Justice Ashok Bhushan, Chairperson, with a Technical Member) held, as reported:

• the memorandum of understanding relied on by the appellant did not establish that the transactions fell within the definition of financial debt in Section 5(8) of the Insolvency and Bankruptcy Code, 2016 (“IBC”); and
• the mere pendency of the application for approval of the resolution plan before the Adjudicating Authority does not give a claimant the right to file a late claim more than a year and a half after the CoC approved the plan.

The Two Questions Separated

Was there a financial debt at all? A document titled as a memorandum of understanding does not, by its label, create financial debt. Section 5(8) requires a disbursal against consideration for the time value of money, and the Supreme Court in Anuj Jain, IRP for Jaypee Infratech Ltd. v. Axis Bank Ltd., (2020) 8 SCC 401, held that both elements must be present. In Global Credit Capital Ltd. v. Sach Marketing Pvt. Ltd. (Supreme Court, 25 April 2024), the Court directed attention to the real nature of the transaction as it appears from the documents read as a whole.

Was the claim in time? Regulation 12 of the CIRP Regulations governs the period for submission of claims. Following the amendment effective 18 September 2023, as described in published commentary, a proviso to Regulation 12(1) allows claims to be submitted up to the date of issue of the request for resolution plans, or ninety days from the insolvency commencement date, whichever is later. A late claim filed after the CoC has approved a plan falls well outside that period.

The Wider Authority

The approach is consistent with the Supreme Court’s decisions:

• Committee of Creditors of Essar Steel India Ltd. v. Satish Kumar Gupta, (2020) 8 SCC 531 — a successful resolution applicant cannot be faced with undecided claims after its plan has been accepted.
• Ghanashyam Mishra and Sons Pvt. Ltd. v. Edelweiss Asset Reconstruction Co. Ltd., (2021) 9 SCC 657 — claims not part of an approved plan stand extinguished.
• M/s RPS Infrastructure Ltd. v. Mukul Kumar, 2023 INSC 816 — the fact that the Adjudicating Authority has not yet approved the plan does not mean the plan can go back and forth, making the CIRP an endless process.

The counterweight is Greater Noida Industrial Development Authority v. Prabhjit Singh Soni, 2024 INSC 102, where the Supreme Court held that the form of a claim is directory rather than mandatory, that a claim supported by proof must be considered, and that the NCLT has inherent power to recall an order approving a plan in an appropriate case. The distinction is between a claim that was before the professional and was not dealt with, and a claim brought long after the process moved on.

The Position after 26 May 2026

The Insolvency and Bankruptcy Code (Amendment) Act, 2026 reinforces finality while tightening the professional’s duties:

• Section 18(b), as amended, requires claims to be collated in the specified manner, with an Explanation that the interim resolution professional shall verify claims and, if required, determine their value.
• Section 31(6) provides that, unless the plan provides otherwise, claims prior to approval are extinguished and no proceedings, including assessment proceedings, may be continued or instituted; Explanation III deems this to apply to plans approved since the Code commenced, except matters that have attained finality.
• Section 31(2A) requires the Adjudicating Authority to decide on a plan within thirty days, recording reasons for delay, which shortens the window in which late claims have historically emerged.
• Section 35(1)(a), in liquidation, now requires the liquidator to maintain an updated list of claims rather than invite fresh claims, and Sections 38 to 42 have been omitted.

Practical Guidance

• Creditors should monitor the public announcement under Section 15 and file within the Regulation 12 period; a commercial party is expected to be aware of newspaper announcements.
• A claim based on an informal document should be supported by evidence of disbursal, the agreed return and accounting treatment, not merely the document’s title.
• Where a claim was filed but not dealt with, the remedy lies in pointing to the record before the professional, as in Greater Noida, rather than in filing afresh after approval.

Frequently Asked Questions

1. Can a late claim be filed after the CoC approves a resolution plan?
A late claim may face serious limitations once the CoC has approved the resolution plan, particularly where the claim was not submitted within the applicable period under Regulation 12.

2. Does pending approval of a resolution plan allow a new claim to be filed?
Not by itself. The pendency of plan approval before the Adjudicating Authority does not automatically create a right to submit a claim long after the CoC has approved the plan.

3. What did the NCLAT hold in the D.S. Kulkarni case?
The NCLAT held that the pending approval of the resolution plan did not justify the appellants’ substantially delayed claims and that the memorandum of understanding did not establish financial debt under Section 5(8) of the IBC.

4. What is the relevance of Regulation 12 to late claims in CIRP?
Regulation 12 prescribes the framework and applicable period for submitting claims during CIRP. Claims filed substantially outside that period may not be entertained merely because the resolution plan is awaiting approval.

Legal Information Disclaimer

This article provides general information about Indian law as it stood on 16 September 2026. It is not legal advice, and reading it does not create an advocate–client relationship. Statutes, rules and judicial interpretations change, and their application depends on the facts of each matter. Readers should consult the current official text of the laws and judgments cited and should not act on this information without advice specific to their circumstances. This article is published for legal awareness and education and is not intended to advertise or solicit professional work.

Sources / Authorities

1. Insolvency and Bankruptcy Code, 2016 — Sections 5(8), 15, 18, 31, 35 (as amended) — IBBI – Legal Framework
2. Insolvency and Bankruptcy Code (Amendment) Act, 2026 (No. 6 of 2026) — Gazette text (IBBI); Notification S.O. 2625(E) dated 22 May 2026 — IBBI
3. IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 — Regulation 12 — IBBI – Regulations
4. Deepak Sakharam Kulkarni & Anr. v. Manoj Kumar Agarwal, RP of D.S. Kulkarni Developers Ltd. & Ors., NCLAT, New Delhi, January 2024 — Indian Kanoon
5. Anuj Jain, IRP for Jaypee Infratech Ltd. v. Axis Bank Ltd., (2020) 8 SCC 401, Supreme Court of India
6. Global Credit Capital Ltd. v. Sach Marketing Pvt. Ltd., Supreme Court of India, 25 April 2024
7. Committee of Creditors of Essar Steel India Ltd. v. Satish Kumar Gupta, (2020) 8 SCC 531; Ghanashyam Mishra and Sons Pvt. Ltd. v. Edelweiss Asset Reconstruction Co. Ltd., (2021) 9 SCC 657; M/s RPS Infrastructure Ltd. v. Mukul Kumar, 2023 INSC 816; Greater Noida Industrial Development Authority v. Prabhjit Singh Soni, 2024 INSC 102

The post Claims Filed Long After CoC Approval: The NCLAT’s Approach to Late Claims During CIRP in the D.S. Kulkarni Proceedings appeared first on Bhatt & Joshi Associates.

Introduction

The corporate insolvency resolution process under the Insolvency and Bankruptcy Code, 2016 represents a paradigm shift in how India addresses financial distress in companies. Within this framework, resolution plans serve as the cornerstone mechanism through which stressed assets are revived and creditor interests protected. However, what happens when the very foundation upon which a resolution plan was approved undergoes fundamental transformation? The National Company Law Appellate Tribunal recently addressed this critical question in a landmark judgment that examined whether the Committee of Creditors could withdraw an approved resolution plan when the successful resolution applicant transferred its shareholding to third parties, effectively selling the approved plan. This judgment illuminates the delicate balance between contractual sanctity and the prevention of fraud within insolvency proceedings.

The case underscores a fundamental tension inherent in the insolvency resolution process. On one hand, the Insolvency and Bankruptcy Code establishes that resolution plans, once approved by the Committee of Creditors through the approval resolution plan process, become binding agreements that cannot be unilaterally withdrawn. On the other hand, the framework must prevent manipulation where resolution applicants gain approval based on their credentials and financial standing, only to transfer control to entities that might never have received Committee approval. This analysis examines the legal principles, statutory provisions, and judicial precedents that govern scenarios permitting Withdrawal of Resolution Plan and performance security forfeiture, providing stakeholders with clarity on the applicable circumstances.

Understanding the Corporate Insolvency Resolution Framework

The Insolvency and Bankruptcy Code, 2016 was enacted to consolidate and amend laws relating to reorganization and insolvency resolution of corporate persons in a time-bound manner. [1] The Code represents Parliament’s recognition that India’s previous insolvency regime was fragmented across multiple legislations, resulting in prolonged delays that eroded asset values and discouraged credit markets. The legislative intent, as reflected in the preamble, emphasizes maximization of asset value, promotion of entrepreneurship, availability of credit, and balancing stakeholder interests through a predictable, time-bound process.

Section 12 of the Code establishes the temporal framework within which the Corporate Insolvency Resolution Process must unfold. The provision mandates that the resolution process shall be completed within 180 days from the date of admission of the application to initiate such process. [2] This period may be extended by the Adjudicating Authority for a further period not exceeding 90 days, provided the Committee of Creditors passes a resolution instructing the Resolution Professional to file such application with 66 percent of voting shares. [3] The Insolvency and Bankruptcy Code Amendment Act, 2019 introduced an outer limit of 330 days, including extensions and time taken in legal proceedings, creating what the statute describes as a mandatory completion deadline designed to prevent indefinite prolongation of insolvency proceedings.

The scheme of the Code proceeds through several distinct phases. Upon admission of an insolvency application under Sections 7, 9, or 10, the Adjudicating Authority declares a moratorium under Section 14, which prohibits the institution of suits, continuation of pending proceedings against the corporate debtor, and any action to foreclose, recover or enforce security interests. During this moratorium period, management control transfers from the board of directors to the Resolution Professional, who assumes responsibility for managing the affairs of the corporate debtor as a going concern. The Resolution Professional constitutes the Committee of Creditors comprising financial creditors, prepares an information memorandum detailing the corporate debtor’s assets and liabilities, and invites resolution plans from prospective applicants.

Section 30 of the Code governs the submission and consideration of resolution plans. Under Section 30(2), the Resolution Professional must examine each resolution plan to confirm compliance with mandatory requirements, including payment of insolvency resolution process costs in priority, payment to operational creditors not less than what they would receive in liquidation under Section 53, management provisions for the corporate debtor, implementation and supervision mechanisms, and conformity with such other requirements as may be specified by the Insolvency and Bankruptcy Board of India. [4] The Committee of Creditors may approve a resolution plan by a vote of not less than 66 percent of voting shares of financial creditors, following which the Resolution Professional submits the approved plan to the Adjudicating Authority under Section 30(6).

Section 31 establishes the Adjudicating Authority’s role in approving resolution plans. If satisfied that the resolution plan approved by the Committee of Creditors meets the requirements of Section 30(2), the Adjudicating Authority shall by order approve the resolution plan, which then becomes binding on the corporate debtor, its employees, members, creditors, guarantors, and other stakeholders involved in the resolution plan. [5] The proviso to Section 31(1) mandates that before approving any resolution plan, the Adjudicating Authority must satisfy itself that the plan contains provisions for its effective implementation, reflecting legislative concern that approved plans must be practically executable rather than theoretical exercises.

Performance Security under CIRP Regulations

The Insolvency and Bankruptcy Board of India, exercising its regulatory powers under the Code, promulgated the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016. These regulations provide detailed procedural mechanisms for conducting the resolution process. Regulation 36B governs the Request for Resolution Plans, which the Resolution Professional issues inviting prospective applicants to submit resolution plans. This regulation underwent significant amendment through the IBBI (Insolvency Resolution Process for Corporate Persons) (Amendment) Regulations, 2019, which introduced Regulation 36B(4A) addressing performance security requirements.

Regulation 36B(4A) provides that the request for resolution plan shall require the resolution applicant, in case its resolution plan is approved under sub-section (4) of section 30, to provide a performance security within a timeline specified in such request. The Explanation to this sub-regulation clarifies that performance security means security provided by the resolution applicant in such nature, value, duration and source as may be specified in the request for resolution plans with the approval of the Committee, having regard to the nature of resolution plan and business of the corporate debtor. This provision was specifically designed to create adequate disincentives deterring resolution applicants from not honoring their commitments under approved resolution plans.

The rationale for introducing performance security requirements emerged from past litigation experiences where successful resolution applicants failed to comply with implementation timelines after obtaining plan approval. The regulatory framework sought to address situations where applicants, having secured approval based on attractive proposals, subsequently sought to renegotiate terms or abandoned implementation altogether. Performance security serves as a financial commitment mechanism ensuring that only genuine, capable, and credible resolution applicants submit plans, as the security remains at risk if implementation fails or if the applicant contributes to implementation failure.

Critically, Regulation 36B(4A) stipulates that performance security shall stand forfeited if, after approval of the resolution plan by the Adjudicating Authority, the resolution applicant fails to implement or contributes to the failure of implementation of that plan. [6] This forfeiture provision operates post-approval, creating a statutory consequence for non-performance. However, the regulation does not explicitly address whether performance security may be forfeited in circumstances arising before Adjudicating Authority approval, such as when a resolution applicant breaches undertakings given during the Committee of Creditors approval stage. This ambiguity became the subject of judicial interpretation in subsequent cases.

Regulation 39(4) requires the Resolution Professional to endeavor to submit the resolution plan approved by the Committee to the Adjudicating Authority at least fifteen days before the maximum period for completion of corporate insolvency resolution process under Section 12, along with a compliance certificate in Form H and evidence of receipt of performance security required under Regulation 36B(4A). This sequencing makes clear that performance security must be provided after Committee approval but before Adjudicating Authority approval, creating an intermediate stage where the security exists but the plan has not yet received final judicial sanction. This temporal gap proved significant in determining whether forfeiture could occur based on pre-approval breaches.

The Binding Nature of Resolution Plans

A fundamental question pervading insolvency jurisprudence concerns the precise moment at which a resolution plan becomes binding and the nature of that binding effect. The Supreme Court addressed this issue comprehensively in Ebix Singapore Private Limited v. Committee of Creditors of Educomp Solutions Limited, a judgment that has profoundly influenced subsequent interpretation of the Insolvency and Bankruptcy Code. [7] In Ebix, the resolution applicant sought to withdraw its resolution plan after receiving Committee of Creditors approval but before Adjudicating Authority approval, citing changed circumstances including prolonged delays in the approval process and ongoing investigations into the corporate debtor’s affairs.

The Supreme Court held that a resolution plan, even prior to approval by the Adjudicating Authority, is binding inter se between the Committee of Creditors and the successful resolution applicant. The Court reasoned that the resolution plan cannot be construed purely as a contract governed by the Contract Act in the period intervening its acceptance by the Committee and approval by the Adjudicating Authority. Instead, resolution plans are creatures of the statutory framework established by the Insolvency and Bankruptcy Code, and their validity, nature, and enforceability are regulated by the procedure laid down under the Code rather than general contract principles. This characterization has profound implications, as it means resolution applicants cannot invoke contract law remedies such as frustration or withdrawal based on changed circumstances.

The Ebix judgment emphasized that the Code contains no provision permitting withdrawal of a resolution plan except through the specific procedure provided under Section 12A, which allows withdrawal of the insolvency application itself upon 90 percent Committee of Creditors approval. Section 12A, however, applies only to applicants invoking Sections 7, 9, or 10 of the Code and does not extend to resolution applicants seeking to withdraw after plan approval. The Court applied the principle of casus omissus, holding that judicial construction cannot fill a statutory omission, and therefore courts cannot create a withdrawal mechanism through interpretation where the legislature deliberately chose not to provide one.

Moreover, the Supreme Court rejected arguments that the Adjudicating Authority could exercise residual powers to permit resolution plan withdrawal. The Court held that recognizing such withdrawal power would introduce an additional tier of negotiations wholly unregulated by statute, undermining the time-bound nature of the resolution process. Permitting modifications or withdrawals at the resolution applicant’s behest would disturb statutory timelines, delay the process, and lead to asset value depletion during prolonged proceedings. The judgment stressed that if the legislature intended to allow withdrawals by successful resolution applicants, it would have prescribed specific timelines for exercising such options, as it did for other aspects of the process.

The binding nature of resolution plans serves several policy objectives within the insolvency framework. First, it provides certainty to creditors that once they approve a plan through democratic voting, that decision will not be subject to unilateral reversal by the resolution applicant. Second, it preserves the integrity of the competitive bidding process by preventing successful applicants from using their winning position to renegotiate terms or withdraw strategically. Third, it protects the time-bound nature of the process by foreclosing the possibility of repeated cycling through resolution plan submissions. These considerations informed the Supreme Court’s categorical holding that resolution plans are binding from the moment of Committee approval.

Exceptions to the No-Withdrawal Principle

While the general principle established in Ebix prohibits withdrawal of Committee-approved resolution plans, judicial interpretation has recognized narrow exceptions where the foundational premises justifying that prohibition do not apply. The National Company Law Appellate Tribunal clarified in subsequent cases that although the Committee of Creditors cannot unilaterally pray for withdrawal of a resolution plan since the plan is binding on the Committee, this legal position may not apply in cases where the resolution applicant himself has breached terms, conditions, and undertakings given during the approval process. This distinction recognizes that the sanctity of resolution plans depends upon their foundation in accurate representations and commitments made by the applicant.

The exception operates on the principle that when a resolution applicant fundamentally alters the very basis upon which the Committee of Creditors granted approval, the Committee should not be held to its original decision. The Committee’s commercial wisdom, which the Code protects from judicial second-guessing, was exercised based on specific information about the applicant’s identity, credentials, financial capacity, and proposed structure. When those foundational elements prove false or undergo material change through the applicant’s own actions, requiring the Committee to proceed would transform respect for commercial wisdom into blind adherence to decisions made under false pretenses.

Courts have identified several circumstances potentially warranting invocation of this exception. First, if the resolution applicant acquires ineligibility under Section 29A subsequent to Committee approval, such as through conviction for offenses or becoming a willful defaulter, the changed eligibility status may justify plan reconsideration. Section 29A establishes persons ineligible to be resolution applicants, including undischarged insolvents, willful defaulters, promoters or management personnel of companies with outstanding non-performing assets, disqualified directors, persons convicted of offenses punishable with imprisonment, and persons prohibited by the Securities and Exchange Board of India from trading in securities. Acquiring such ineligibility after approval undermines the statutory scheme requiring eligible applicants.

Second, significant changes in the corporate structure or control of the resolution applicant that alter its fundamental character may warrant withdrawal. If the applicant was approved based on specific ownership structures, management capabilities, or group affiliations, and those elements undergo transformation such that a different entity effectively controls the applicant, the Committee’s original assessment becomes inapplicable. The Committee approved a particular entity with particular characteristics; if that entity fundamentally changes into something different, the Committee’s approval was essentially obtained under circumstances materially different from what will actually implement the plan.

Third, breaches of specific undertakings or addendums that formed part of the resolution plan approval process may justify withdrawal. Resolution applicants often provide letters of intent, undertakings, or supplementary commitments addressing Committee concerns about implementation capacity, funding arrangements, or structural matters. When applicants violate these undertakings before implementation even commences, it demonstrates either inability or unwillingness to honor commitments, justifying Committee reconsideration. The undertakings are not peripheral formalities but substantive assurances inducing Committee approval; their breach goes to the heart of the approval decision.

The NCLAT’s Analysis in the Jubilee Metal Case

The National Company Law Appellate Tribunal applied these principles in examining whether the Committee of Creditors could withdraw an approved resolution plan where the successful resolution applicant underwent significant shareholding changes. The Tribunal noted that after the Committee approved the resolution plan, information emerged regarding changes in the directorship and constitutionality pattern of the resolution applicant. The resolution applicant was a company interconnected through a chain of subsidiaries ultimately owned by a specific individual. Following changes in directorship, that ultimate beneficial owner ceased to be the director of a pivotal entity in the corporate chain, fundamentally altering control and ownership structures.

The Tribunal observed that the Letter of Intent and accompanying undertaking contained specific provisions wherein the resolution applicant committed not to dilute its investment in subsequent entities within the corporate structure. This undertaking represented a material inducement to Committee approval, as creditors wanted assurance that the specific entity they evaluated and approved would maintain control throughout implementation. The Committee’s commercial wisdom was exercised based on assessment of that particular applicant’s credentials, credibility, and financial capacity. The undertaking not to dilute investment ensured continuity between the evaluated entity and the implementing entity.

The Tribunal characterized the situation as essentially involving sale of the resolution plan approved by the Committee to a third party. The Committee approves resolution plans looking to the credentials of the resolution applicant and its credibility and finances. When shareholding changes occur such that different persons ultimately control and benefit from the approved plan, it subverts the evaluation and approval process. The new controllers may lack the qualifications, financial capacity, or credibility that led the Committee to approve the original applicant. Permitting such transfers would render the eligibility and evaluation processes meaningless, as applicants could serve as stalking horses for ineligible or unqualified persons.

The National Company Law Appellate Tribunal concluded that while the law is well settled that even the Committee of Creditors cannot go back and pray for withdrawal of a resolution plan since the plan is binding on the Committee, this legal position may not apply where after approval of the resolution plan by the Committee, the resolution applicant himself has breached the terms, conditions, and undertakings given by him. The breach in this case was not technical or peripheral but went to the fundamental basis of approval. The Committee approved a specific applicant based on specific ownership and control structures, with specific undertakings about maintaining those structures. The applicant’s violation of those undertakings justified treating the situation as one of the recognized exceptions to the no-withdrawal principle.

The Tribunal held that the Committee could seek withdrawal of the resolution plan that remained pending before the Adjudicating Authority for approval. The timing proved significant, as the plan had received Committee approval but not yet obtained Adjudicating Authority sanction under Section 31. This intermediate stage meant that while the plan was binding inter se the Committee and applicant, it had not yet achieved the full statutory effect of becoming binding on all stakeholders. The Tribunal concluded that withdrawal was appropriate given the fundamental breach, and the matter could be remitted for the Committee to consider alternative resolution plans or proceed to liquidation if no viable alternatives existed.

Forfeiture of Performance Security in Pre-Approval Breaches

The question of whether performance security could be forfeited when breaches occur before Adjudicating Authority approval presented interpretive challenges. Regulation 36B(4A) explicitly provides that performance security shall stand forfeited if, after approval of the resolution plan by the Adjudicating Authority, the resolution applicant fails to implement or contributes to failure of implementation. The regulation’s text appears to limit forfeiture to post-approval implementation failures, raising the question whether forfeiture remains unavailable for pre-approval breaches regardless of their severity or materiality.

The National Company Law Appellate Tribunal held that Regulation 36B(4A) contemplates one specific contingency for forfeiture but does not exclude forfeiture of performance security in other conditions as contemplated in the Request for Resolution Plan. This interpretation recognizes that Regulation 36B(4A) establishes a statutory minimum forfeiture provision without precluding additional forfeiture conditions that the Committee of Creditors may specify in the Request for Resolution Plans. The regulatory framework grants the Committee flexibility to define performance security parameters including nature, value, duration, source, and significantly, conditions triggering forfeiture.

The Tribunal reasoned that the Request for Resolution Plans represents the Committee’s commercial wisdom about what security protections are necessary given the nature of the resolution plan and business of the corporate debtor. If the Committee determines that performance security should be forfeited not only for post-approval implementation failures but also for pre-approval breaches such as violating undertakings, providing false information, or materially changing the applicant’s structure, such conditions are permissible provided they are clearly specified in the Request for Resolution Plans. Resolution applicants submit plans knowing these conditions and providing security subject to them.

This interpretation aligns with the broader purpose of performance security within the insolvency framework. The security serves to ensure genuine participation by capable, credible applicants who will honor their commitments throughout the process, not merely after Adjudicating Authority approval. If applicants could breach undertakings with impunity before approval, knowing the security cannot be forfeited until after approval, it would undermine the security mechanism’s deterrent effect. Applicants might engage in strategic breaches during the Committee approval stage, gambling that creditors will proceed despite violations rather than restart the process.

The Tribunal’s holding created a balanced framework. Regulation 36B(4A) establishes mandatory forfeiture for post-approval implementation failures, operating automatically based on the statutory provision. Additionally, the Committee may specify in the Request for Resolution Plans additional forfeiture conditions addressing pre-approval conduct, provided such conditions are clearly articulated. This approach respects the Committee’s commercial wisdom in structuring appropriate security arrangements while providing resolution applicants with notice of the standards they must meet. The forfeiture in the specific case aligned with conditions specified in the Request for Resolution Plans, making it permissible despite occurring before Adjudicating Authority approval.

Implications for Corporate Insolvency Resolution Process

This jurisprudence establishes several important principles for stakeholders participating in corporate insolvency resolution processes. For resolution applicants, the clear message emerges that resolution plans and associated undertakings must be honored scrupulously from the moment of submission through implementation completion. The binding nature of Committee-approved plans means applicants cannot strategically withdraw when circumstances change or better opportunities emerge elsewhere. Moreover, breaching undertakings provided during the approval of the resolution plan process exposes applicants not only to plan withdrawal but also to forfeiture of performance security, creating substantial financial consequences for non-compliance.

Resolution applicants must carefully evaluate their capacity to maintain their proposed structure, funding arrangements, and other commitments throughout the potentially lengthy period between plan submission and final implementation. Changes in shareholding, directorship, or control structures should be disclosed to the Committee and Resolution Professional immediately, with applicants seeking Committee consent before implementing such changes. Proceeding with material changes without Committee knowledge or approval will be characterized as selling the resolution plan to third parties, justifying withdrawal and forfeiture. Applicants should document their compliance with all undertakings and maintain communication with the Resolution Professional about any developments affecting their capacity to implement the approved plan.

For Committees of Creditors, these principles underscore the importance of carefully drafting undertakings, letters of intent, and Request for Resolution Plans provisions. The Committee should identify concerns about resolution applicant stability, structure, and commitment, then require specific undertakings addressing those concerns. These undertakings should be documented clearly as conditions of plan approval, with explicit consequences including plan withdrawal rights and performance security forfeiture specified for violations. The Request for Resolution Plans should articulate comprehensive forfeiture conditions covering both post-approval implementation failures under Regulation 36B(4A) and pre-approval breaches such as material misrepresentations, structural changes without consent, or violations of specific undertakings.

Committees should establish monitoring mechanisms ensuring prompt detection of breaches. The Resolution Professional should be instructed to verify resolution applicant compliance with undertakings on an ongoing basis, obtaining certifications, conducting due diligence on corporate structures, and reporting any concerns to the Committee immediately. When breaches are detected, Committees should act decisively to invoke withdrawal rights and forfeit security before the situation deteriorates further. Delay in addressing breaches may be interpreted as waiver or acquiescence, weakening the Committee’s position. The framework empowers Committees to protect creditor interests, but that power must be exercised vigilantly.

For Resolution Professionals, these judgments clarify obligations regarding verification of resolution plan compliance. Resolution Professionals must examine each resolution plan to confirm compliance with Section 30(2) requirements, but this examination extends beyond mechanical checklist verification. Professionals should investigate the resolution applicant’s corporate structure, ownership, control, and financial capacity, verifying that information provided is accurate and current. When undertakings are provided, Professionals should establish systems for monitoring ongoing compliance rather than treating undertakings as one-time submissions.

If the Resolution Professional discovers breaches, material changes in the applicant’s circumstances, or information suggesting the plan approval was obtained based on false or incomplete disclosures, the Professional bears responsibility to inform the Committee immediately. The Professional may need to recommend plan withdrawal and forfeiture to protect creditor interests. Moreover, under Regulation 39(4), the Professional must provide evidence of receipt of performance security before submitting the approved plan to the Adjudicating Authority. This creates a verification obligation ensuring security is provided in accordance with the Request for Resolution Plans conditions before the process proceeds to judicial approval.

Judicial Approach to Commercial Wisdom and Limited Review

The jurisprudence surrounding resolution plan withdrawal and performance security forfeiture reflects broader principles about judicial deference to Committee of Creditors commercial wisdom. The Supreme Court established in Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta that the Adjudicating Authority’s review of resolution plans is limited, focused on ensuring compliance with Section 30(2) requirements rather than assessing the commercial merits of the plan. [8] The Committee’s decision to approve a particular plan reflects its commercial wisdom about feasibility, viability, and maximization of asset value, and courts should not substitute their judgment for that of financial creditors who bear the economic consequences.

However, this deference to commercial wisdom does not extend to situations where the factual predicates underlying the Committee’s decision prove false or are undermined by the resolution applicant’s subsequent conduct. When an applicant obtains approval through misrepresentations, concealment of material information, or violation of undertakings given to induce approval, the Committee’s decision was based on a distorted picture. Deference to commercial wisdom presumes that wisdom was exercised based on accurate information; when information proves inaccurate due to applicant misconduct, the foundation for deference collapses. Courts can intervene to permit withdrawal not because they are second-guessing the commercial decision but because the decision itself was compromised by applicant misconduct.

The limited review principle also means that Adjudicating Authorities cannot create procedural remedies with substantive outcomes on the insolvency process absent clear statutory authorization. The Ebix judgment emphasized that residual powers cannot be exercised to permit actions the Code does not contemplate, such as resolution plan withdrawal by applicants after Committee approval. However, when the Committee itself seeks resolution plan withdrawal based on applicant breaches falling within recognized exceptions, this does not constitute judicial creation of unauthorized procedures. Rather, it represents the Committee exercising its decision-making authority based on changed circumstances created by applicant misconduct, with the Adjudicating Authority simply declining to approve a plan the Committee no longer supports.

Conclusion

The jurisprudence surrounding sale of resolution plans and forfeiture of performance security establishes a nuanced framework balancing competing imperatives within the insolvency resolution process. Resolution plans approved by the Committee of Creditors are binding agreements that generally cannot be withdrawn, protecting the integrity and finality of the resolution process. This principle prevents strategic gaming where applicants obtain approval then seek better terms or abandon plans when circumstances change. However, narrow exceptions exist where resolution applicants breach undertakings, materially alter their fundamental characteristics, or acquire ineligibility, justifying Committee withdrawal requests despite the general no-withdrawal rule.

Performance security provisions under Regulation 36B(4A) create consequences for implementation failures, with security subject to forfeiture when resolution applicants fail to implement or contribute to implementation failure after Adjudicating Authority approval. Additionally, Committees may specify in the Request for Resolution Plans additional forfeiture conditions addressing pre-approval breaches, provided such conditions are clearly articulated. This framework empowers Committees to protect creditor interests while providing resolution applicants with notice of the standards governing their participation.

The principles emerging from this jurisprudence reinforce that participation in corporate insolvency resolution processes demands utmost good faith, transparency, and commitment to honor undertakings throughout the process. Resolution applicants must recognize that obtaining Committee approval creates binding obligations that cannot be unilaterally discarded. Committees must exercise their commercial wisdom based on accurate information and establish clear frameworks for monitoring compliance and responding to breaches. Resolution Professionals must verify information rigorously and report concerns promptly. Adjudicating Authorities must apply limited review principles while recognizing exceptions where applicant misconduct justifies Committee withdrawal requests.

As India’s insolvency framework continues maturing, these principles will guide stakeholders navigating the complex terrain between contractual sanctity and fraud prevention, between finality and flexibility, between protecting resolution applicants from arbitrary Committee changes of heart and protecting Committees from applicant manipulation. The jurisprudence recognizes that these competing values need not be irreconcilable; rather, they can be harmonized through principled application distinguishing between legitimate exercise of Committee commercial wisdom and illegitimate attempts to escape binding commitments through strategic breaches or structural manipulations designed to evade the substance of undertakings while nominally complying with their letter.

References

[1] Insolvency and Bankruptcy Code, 2016, Preamble. Available at: https://www.indiacode.nic.in/handle/123456789/2154 

[2] Insolvency and Bankruptcy Code, 2016, Section 12(1). Available at: https://ibclaw.in/section-12-time-limit-for-completion-of-insolvency-resolution-process-chapter-ii-corporate-insolvency-resolution-processcirp-part-ii-insolvency-resolution-and-liquidation-for-corporate-persons-the/ 

[3] Insolvency and Bankruptcy Code, 2016, Section 12(2) and 12(3). Available at:  https://ibbi.gov.in/uploads/legalframwork/547c9c2af074c90ac5919fa8a5c60bd4.pdf 

[4] Insolvency and Bankruptcy Code, 2016, Section 30(2). Available at: https://ibclaw.in/section-30-submission-of-resolution-plan/ 

[5] Insolvency and Bankruptcy Code, 2016, Section 31(1). Available at: https://taxguru.in/corporate-law/approval-resolution-plan-section-31-ibc.html 

[6] IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, Regulation 36B(4A). Available at: https://ibbi.gov.in/uploads/legalframwork/2020-08-17-234040-pjor6-59a1b2699bbf87423a8afb5f5c2a0a85.pdf 

[7] Ebix Singapore Private Limited v. Committee of Creditors of Educomp Solutions Limited, (2021) 9 SCC 657. Available at: https://ibclaw.in/ebix-singapore-pte-ltd-vs-committee-of-creditors-of-educomp-solutions-ltd-and-anr-supreme-court/ 

[8] Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta, (2020) 8 SCC 531. Available at https://ibbi.gov.in/uploads/order/d46a64719856fa6a2805d731a0edaaa7.pdf 

[9] Jubilee Metal Pvt Ltd v. Mr. Surendra Raj Gang RP of Metenere Ltd and Anr., Company Appeal (AT) (Insolvency) No. 1550 of 2023, NCLAT New Delhi. Available at: https://ibclaw.in/jubilee-metal-pvt-ltd-v-mr-surendra-raj-gang-rp-of-metenere-ltd-anr-nclat-new-delhi/ 

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The Insolvency and Bankruptcy Code, 2016 has fundamentally transformed the corporate insolvency landscape in India by establishing a time-bound framework for resolution and liquidation of financially distressed companies. Within this framework, the role of the Committee of Creditors in liquidation under IBC is crucial, as it decides the course of action for corporate debtors. Recent judgments by the National Company Law Appellate Tribunal have provided clarity on key issues, including whether a Committee of Creditors can be constituted with a single operational creditor and the requirement that liquidation decisions be supported by reasoned justifications. These rulings have significant implications for creditors, corporate debtors, and resolution professionals navigating the insolvency process.

The Legislative Framework Governing Liquidation

The Insolvency and Bankruptcy Code establishes a structured mechanism for initiating liquidation proceedings when resolution efforts fail or prove impossible. Section 33 of the Code delineates the circumstances under which liquidation may be commenced. The provision grants the Adjudicating Authority the power to order liquidation in specific situations: when no resolution plan is received before the expiry of the insolvency resolution process period, when a submitted resolution plan fails to meet statutory requirements and is consequently rejected, or when the Committee of Creditors decides to liquidate the corporate debtor during the resolution process itself [1].

The statutory scheme empowers the Committee of Creditors with significant authority. Under Section 33(2) of the Code, where the resolution professional intimates the Adjudicating Authority of the Committee’s decision to liquidate at any time during the corporate insolvency resolution process but before confirmation of a resolution plan, approved by not less than sixty-six percent of the voting share, the Adjudicating Authority must pass a liquidation order. This provision reflects the legislature’s intent to vest primary decision-making authority in the hands of creditors who have financial stakes in the corporate debtor’s assets [2].

The composition and functioning of the Committee of Creditors is governed by Sections 21 and 24 of the IBC. The Committee typically consists of all financial creditors of the corporate debtor, excluding related parties. Financial creditors are entitled to voting rights proportionate to their claims. Operational creditors, conversely, occupy a different position within the statutory framework. They may attend meetings of the Committee if their aggregate dues constitute at least ten percent of the total debt, but they possess no voting rights regardless of the magnitude of their claims [3].

This distinction between financial and operational creditors finds its roots in the recommendations of the Bankruptcy Law Reforms Committee. The Committee observed that operational creditors typically lack the capacity to assess the commercial viability of a corporate debtor and are generally unwilling to accept the risks associated with postponing payments in exchange for potentially better future prospects. Financial creditors, being institutions that have extended credit with consideration for the time value of money, are better positioned to make informed decisions about resolution versus liquidation.

The Jaipur Trade Expocentre Judgment and Reasoned Decision-Making

The NCLAT’s judgment in Jaipur Trade Expocentre Private Limited v. Metro Jet Airways Training Private Limited and Others represents a watershed moment in understanding the obligations of the Committee of Creditors when deciding to liquidate a corporate debtor. The tribunal unequivocally held that decisions of the Committee to liquidate must be accompanied by reasons and cannot be made arbitrarily [4].

In this particular matter, the Committee of Creditors had passed a resolution to liquidate the corporate debtor. The resolution recorded specific reasons supporting the liquidation decision: the company had no employees, no active business operations, no registered office, had failed to file annual accounts with the Ministry of Corporate Affairs since March 31, 2011, had not filed any returns, and had conducted no transactions since 2017. The tribunal examined these recorded reasons and found them sufficient to justify the liquidation decision.

The tribunal emphasized that while the statutory scheme under Section 33(2) empowers the Committee of Creditors to decide on liquidation after its constitution, this power cannot be exercised capriciously. The requirement of providing reasons serves multiple purposes within the insolvency framework. First, it ensures transparency in the decision-making process, allowing stakeholders to understand the basis for liquidation. Second, it facilitates meaningful judicial review by enabling the Adjudicating Authority and appellate tribunals to assess whether the Committee’s decision is grounded in legitimate commercial considerations. Third, it protects against arbitrary exercises of power that might prejudice the interests of other stakeholders.

This principle aligns with the broader jurisprudence established by the Supreme Court in landmark cases interpreting the Code. The apex court has consistently held that while the commercial wisdom of the Committee of Creditors is supreme and deserves judicial deference, it must operate within the boundaries of the statutory framework. The requirement of reasoned decision-making represents one such boundary that safeguards the integrity of the insolvency process.

Single Operational Creditor and Committee Constitution

A particularly contentious issue that has emerged in insolvency jurisprudence concerns whether a Committee of Creditors can be constituted with a single operational creditor. The NCLAT addressed this question with clarity in its analysis of V. Duraisamy v. Jeyapriya Fruits and Vegetables Commission Agent and Others. The tribunal held that the Insolvency and Bankruptcy Code contains no provision enabling the constitution of a Committee of Creditors with a single operational creditor when no claims have been received from financial creditors [5].

In the Duraisamy case, the corporate debtor had been struck off by the Registrar of Companies for failing to file financial statements. An operational creditor subsequently filed a petition under Section 9 of the Code seeking initiation of corporate insolvency resolution process. Following admission of the petition, the Interim Resolution Professional issued a public announcement inviting claims from creditors. However, not a single claim was received from any financial creditor. The only claim before the resolution professional came from the operational creditor who had initiated the proceedings.

The Adjudicating Authority directed the Interim Resolution Professional to constitute a Committee of Creditors with the sole operational creditor as its member. On appeal, the NCLAT reversed this direction and held that the corporate insolvency resolution process should be closed with respect to the corporate debtor. The tribunal reasoned that the statutory scheme contemplates the Committee of Creditors as a body of financial creditors possessing the commercial acumen and risk appetite necessary to make informed decisions about resolution. Operational creditors, while entitled to attend meetings when their dues exceed the statutory threshold, are deliberately excluded from voting precisely because they lack the characteristics that justify membership in the decision-making body.

This interpretation finds support in the fundamental architecture of the Code. Section 21 defines the Committee of Creditors as comprising all financial creditors of the corporate debtor. Section 24 permits operational creditors to participate in meetings without voting rights under specified conditions. The statutory language and structure leave no room for constituting a Committee consisting exclusively of operational creditors in the ordinary course.

Importantly, the Jaipur Trade Expocentre judgment clarified that the Duraisamy decision does not establish any ratio preventing the constitution of a Committee of Creditors where a single operational creditor is involved alongside financial creditors. The tribunal distinguished between two scenarios: one where no claims are filed and no Committee is constituted at all (as in Duraisamy), and another where a Committee is duly constituted but happens to include a single operational creditor along with financial creditors. The latter scenario does not violate any provision of the Code.

Judicial Review of Liquidation Decisions

The extent of judicial review over decisions regarding liquidation by the Committee of Creditors under the IBC represents a critical aspect of insolvency jurisprudence. In Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta, the Supreme Court established foundational principles that define the scope of judicial intervention, balancing respect for the Committee’s commercial wisdom with the need to ensure compliance with statutory requirements. [6].

The apex court held that the Adjudicating Authority’s jurisdiction is circumscribed by Section 30(2) of the Code when reviewing resolution plans. The authority cannot interfere with the commercial wisdom of the Committee of Creditors. However, it retains limited jurisdiction to ensure that the Committee has taken into account certain fundamental considerations: that the corporate debtor needs to continue as a going concern during the insolvency resolution process, that the value of the corporate debtor’s assets should be maximized, and that the interests of all stakeholders including operational creditors have been adequately addressed.

This principle extends to decisions regarding liquidation. While the Committee of Creditors possesses authority to decide whether to pursue resolution or liquidation under IBC, the decision must reflect consideration of the statutory objectives. The Adjudicating Authority cannot substitute its own business judgment for that of the Committee, but it can examine whether the decision is supported by reasons and whether it contravenes any provision of law.

The NCLAT has repeatedly affirmed that the decision of the Committee of Creditors regarding liquidation, when properly made with reasons and in accordance with statutory requirements, is entitled to significant deference. Courts will not interfere merely because an alternative course of action might have been preferable. The standard of review focuses on procedural propriety and statutory compliance rather than the substantive merits of the business decision.

Treatment of Operational Creditors in Insolvency

The position of operational creditors within the insolvency framework warrants careful examination. While these creditors lack voting rights in the Committee of Creditors, the Code incorporates several protections to safeguard their interests. Section 30(2)(b) of the Code, as amended in 2019, mandates that operational creditors must receive at least the higher of two amounts in any resolution plan: the liquidation value of their claims under Section 53, or the amount they would receive if the resolution plan amount were distributed according to the priority order specified in Section 53 [7].

This statutory mandate emerged following the Supreme Court’s intervention in the Essar Steel litigation. The original NCLAT judgment in that matter had directed equal distribution among all creditors, disregarding the distinction between secured and unsecured creditors and between financial and operational creditors. The Supreme Court reversed this approach and upheld the Committee’s authority to determine distribution among different classes of creditors, subject to the minimum payment requirements.

The apex court clarified that equitable treatment does not mean equal treatment. Creditors in different classes are entitled to differential treatment based on the nature of their claims and security interests. However, the Court emphasized that while the Committee has discretion in determining what to pay and how much to pay to each class of creditors, the decision must demonstrate that the Committee has balanced the interests of all stakeholders and that it has not completely excluded operational creditors from any meaningful recovery.

In practical terms, operational creditors face significant challenges in insolvency proceedings. Their exclusion from voting rights means they cannot directly influence critical decisions such as approval of resolution plans or decisions to liquidate. Their only recourse lies in approaching the Adjudicating Authority or appellate tribunals if they believe their statutory rights have been violated. The limited judicial review available focuses on ensuring minimum statutory protections rather than maximizing recovery for operational creditors.

The Supreme Court in Swiss Ribbons Private Limited v. Union of India examined constitutional challenges to the differential treatment of financial and operational creditors. The Court upheld the classification as based on intelligible differentia serving the legitimate objectives of the Code. The Court noted that financial creditors typically have longer-term relationships with corporate debtors and are better equipped to evaluate prospects for revival. Operational creditors, being primarily concerned with recovery of dues for goods supplied or services rendered, lack the same incentive to take risks associated with corporate revival [8].

Commercial Wisdom and Stakeholder Interests

The doctrine of commercial wisdom represents a cornerstone principle in insolvency jurisprudence. The Supreme Court has repeatedly emphasized that the Committee of Creditors, being composed of sophisticated financial institutions with economic stakes in the outcome, is best positioned to make decisions about the fate of corporate debtors. Courts should not second-guess these decisions unless they contravene statutory provisions or reflect procedural irregularities.

However, commercial wisdom is not absolute and must operate within the framework established by the Code. When the Committee of Creditors decides on liquidation under IBC, it must ensure that its decisions reflect the core objectives of the insolvency regime: time-bound resolution, maximization of asset value, and protection of stakeholder interests. In making such decisions, the Committee should carefully weigh whether liquidation would produce better outcomes than continued resolution efforts, whether the corporate debtor’s assets are deteriorating, whether operational viability can be restored, and the potential impact on stakeholders, including employees and operational creditors.

The requirement of providing reasons for liquidation decisions serves as a check on the exercise of commercial wisdom. Without this requirement, the Committee could make decisions based on considerations that might not align with statutory objectives or stakeholder interests. The recording of reasons creates a paper trail that enables meaningful review and ensures accountability.

Procedural Requirements for Liquidation

When a Committee of Creditors decides to proceed with liquidation under IBC, a clear procedural framework ensures transparency and protects stakeholders. The resolution professional must inform the Adjudicating Authority, providing supporting documentation such as minutes of the Committee meeting, the reasons for the liquidation decision, and proof that the required sixty-six percent voting threshold was met.

Upon receiving intimation of the Committee’s decision, the Adjudicating Authority examines whether procedural requirements have been satisfied. This includes verifying that proper notice was given to all Committee members, that the voting was conducted in accordance with the Code and applicable regulations, and that the decision was supported by adequate reasons. If satisfied, the authority passes a liquidation order directing that the corporate debtor be liquidated in the manner prescribed by the Code, issuing a public announcement of liquidation, and requiring the order to be sent to the authority with which the corporate debtor is registered.

The liquidation order triggers several consequences. Under Section 33(5), no suit or other legal proceeding can be instituted by or against the corporate debtor once liquidation commences, subject to specified exceptions. Section 33(7) deems the liquidation order as notice of discharge to officers, employees, and workmen of the corporate debtor, unless the liquidator continues business operations during liquidation. These provisions create a moratorium that protects the corporate debtor’s assets and facilitates orderly liquidation proceedings [9].

Conclusion

The NCLAT’s jurisprudence on liquidation decisions under the Insolvency and Bankruptcy Code reflects a careful balance between empowering creditors with decision-making authority and ensuring that such authority is exercised responsibly with adequate safeguards. The requirement that liquidation decisions under IBC, be supported by reasons represents a meaningful check on the Committee of Creditors’ powers while preserving the primacy of commercial wisdom. The clarification that Committees cannot be constituted with single operational creditors in the absence of financial creditors upholds the fundamental architecture of the Code, which places resolution and liquidation decisions in the hands of creditors best equipped to make them.

These principles serve the broader objectives of the insolvency regime: providing time-bound resolution, maximizing asset value, and balancing stakeholder interests. While operational creditors occupy a subordinate position within the Committee structure, the statutory framework incorporates minimum protections to ensure they are not entirely excluded from meaningful recovery. The limited scope of judicial review respects commercial wisdom while ensuring compliance with statutory mandates and procedural fairness.

As insolvency jurisprudence continues to evolve, these foundational principles established by the NCLAT and Supreme Court will guide future cases. The emphasis on reasoned decision-making, proper Committee constitution, and balancing stakeholder interests will shape how corporate insolvencies are resolved and liquidations are conducted. For creditors, corporate debtors, and insolvency professionals, understanding these principles is essential to navigating the insolvency process effectively and ensuring that outcomes align with the statutory framework and commercial realities.

References

[1] Insolvency and Bankruptcy Code, 2016, § 33, No. 31, Acts of Parliament (India). Available at: https://www.indiacode.nic.in/show-data?actid=AC_CEN_2_11_00055_201631_1517807328273&orderno=39 

[2] IBC Laws, “Section 33 of IBC – Insolvency and Bankruptcy Code, 2016: Initiation of liquidation.” Available at: https://ibclaw.in/section-33-initiation-of-liquidation/ 

[3] Insolvency and Bankruptcy Code, 2016, § 24, No. 31, Acts of Parliament (India). Available at: https://ibclaw.in/section-24-meeting-of-committee-of-creditors/ 

[4] Jaipur Trade Expocentre Pvt. Ltd. v. Metro Jet Airways Training Pvt. Ltd. and Ors., Company Appeal (AT) (Insolvency) No. 1224 of 2023, NCLAT New Delhi (Dec. 21, 2023). Available at: https://ibclaw.in/jaipur-trade-expocentre-pvt-ltd-v-metro-jet-airways-training-pvt-ltd-and-ors-nclat-new-delhi/ 

[5] V. Duraisamy v. Jeyapriya Fruits and Vegetables Commission Agent & Ors., (2023) ibclaw.in 405 NCLAT. Available at: https://www.scconline.com/blog/post/2023/07/08/corporate-debtor-cannot-constitute-committee-of-creditors-with-a-single-operational-creditor-under-ibc-nclat/ 

[6] Committee of Creditors of Essar Steel India Ltd. v. Satish Kumar Gupta & Ors., (2020) 8 SCC 531 (India). Available at: https://ibclaw.in/summary-of-landmark-judgment-of-supreme-court-in-committee-of-creditors-of-essar-steel-india-limited-vs-satish-kumar-gupta-ors-under-ibc/ 

[7] Insolvency and Bankruptcy Code (Amendment) Act, 2019, § 30(2)(b), effective from August 16, 2019. Available at: https://www.snrlaw.in/operational-creditors-in-insolvency-a-tale-of-disenfranchisement/ 

[8] Swiss Ribbons Pvt. Ltd. v. Union of India, (2019) 4 SCC 17 (India). Available at: https://www.lexology.com/library/detail.aspx?g=28bf9d14-8644-4ea9-aba0-58fc8848b0ba 

[9] The Legal School, “Section 33 of IBC: A Detailed Overview of Liquidation Procedure.” Available at: https://thelegalschool.in/blog/section-33-ibc 

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Two parties pool money to develop a property. One puts in seventy-five per cent, the other twenty-five. They share costs, profits and losses in the same ratio. The document calls the contribution a “profit-sharing loan” and provides for interest if a payment is delayed. When the project sours, can the smaller contributor file a petition under Section 7 of the Insolvency and Bankruptcy Code, 2016 (“IBC”) as a financial creditor, or does the profit-sharing investment qualify as financial debt under the IBC?

The National Company Law Appellate Tribunal (“NCLAT”) answered no in M/s Realpro Realty Solutions Pvt. Ltd. v. Sanskar Projects and Housing Ltd., Company Appeal (AT) (Insolvency) No. 374 of 2023, decided on 13 December 2023 by a Bench of Justice Ashok Bhushan (Chairperson) with Barun Mitra and Arun Baroka (Members, Technical).

The Statutory Test

Section 5(8) defines “financial debt” as a debt along with interest, if any, which is disbursed against the consideration for the time value of money, and then lists nine inclusive categories, among them money borrowed against payment of interest and, in clause (f), any amount raised under any other transaction having the commercial effect of a borrowing. Section 5(7) defines a “financial creditor” as a person to whom a financial debt is owed.

The Supreme Court settled the essential condition in Anuj Jain, Interim Resolution Professional for Jaypee Infratech Ltd. v. Axis Bank Ltd., (2020) 8 SCC 401: there must be disbursal, and the disbursal must be against consideration for the time value of money. In Orator Marketing Pvt. Ltd. v. Samtex Desinz Pvt. Ltd., (2023) 3 SCC 753, the Court held that an interest-free term loan also qualifies, so the absence of interest is not decisive.

The Facts and the Reasoning

The agreement recited that the parties had “decided to make joint investment/acquisition” of specified floors of a Delhi property “for common objective to earn and share profits or gain”. Capital contribution was in the ratio 75:25; construction cost, statutory fees, provident fund, employees’ state insurance and other expenses were to be shared in the same ratio; the investor was to bear fifteen per cent of the working profit towards administration and indirect expenses; profits were to be shared 75:25; and interest at fifteen per cent per annum was payable by either side on delayed payment. A miscellaneous clause said that nothing in the agreement should be construed as creating a partnership or joint venture.

The Adjudicating Authority dismissed the Section 7 application, and the NCLAT affirmed. Its reasoning turned on four points.

The label does not decide the character. The appellant relied on the expression “profit-sharing loan” and on the disclaimer clause. The Appellate Tribunal read the agreement “in a composite and holistic manner”, finding “unmistakable signs of reciprocal rights and obligations… besides evidence of common participation as well as sharing of profits and losses”. A clause denying a joint venture does not convert a risk-sharing arrangement into a loan.

Sharing losses is the tell. A lender is repaid whether or not the venture profits. A party that bears twenty-five per cent of the losses, of the construction cost and of the statutory levies is exposed to the business, not to a borrower’s credit. The Tribunal held that money so provided “tantamount to financing the operations of the joint venture and not a disbursal of loan for the purposes of exclusive utilization by the Respondent”.

Interest on late payment is not consideration for the time value of money. The fifteen per cent rate was payable by either party on delayed settlement of amounts due between them. It compensated for delay in a reciprocal arrangement; it was not the return on a disbursal.

A contractual breach is not a default under the Code. The Tribunal added that a Section 7 application is not maintainable for an alleged breach of the terms of a contract, and that questions of breach fall outside the summary nature of proceedings under the Code. It expressly left the investor free to pursue other remedies, including the specific performance clause in the agreement.

The Tribunal distinguished Mack Soft Tech Pvt. Ltd. v. Quinn Logistics India Ltd., where the disburser had acquired the majority shareholding of the corporate debtor, and that context supported the finding of disbursal for the time value of money.

How to Tell the Two Apart?

No single factor is conclusive. The Supreme Court in Global Credit Capital Ltd. v. Sach Marketing Pvt. Ltd. (25 April 2024) directed attention to the real nature of the transaction as it appears from the documents read as a whole, and held that a transaction may be a financial debt under the IBC even where the documents do not use that language, if the substance is a disbursal against consideration for the time value of money.

The Changes from 26 May 2026

The Insolvency and Bankruptcy Code (Amendment) Act, 2026 (Act 6 of 2026), in force in the relevant respects from 26 May 2026, did not alter the core of Section 5(8), but three changes matter to an investor considering a Section 7 petition:

• Section 7(5), as substituted, requires the Adjudicating Authority to admit the application within fourteen days where default, completeness and the absence of disciplinary proceedings against the proposed resolution professional are established, with Explanation I stating that where the Authority is so satisfied there is no other ground on which the application may be rejected. This displaces the discretion recognised in Vidarbha Industries Power Ltd. v. Axis Bank Ltd. (2022). It makes the threshold question — is this a financial debt at all — the decisive battleground.
• Explanation II to Section 7(5) treats a record of default with an information utility, where the debt is owed to a financial institution and the application is filed by it, as sufficient to ascertain default.
• Section 64A introduces a penalty of not less than ₹1 lakh and up to ₹2 crore for initiating frivolous or vexatious proceedings under Part II, which raises the cost of using the Code as a substitute for a civil suit.

The long-standing bar in Section 65 on initiating proceedings fraudulently or with malicious intent for a purpose other than resolution or liquidation continues to apply.

Practical Implications

For investors. If insolvency remedies matter, the arrangement must be documented as a loan: a stated principal, a repayment schedule, a return not contingent on project profit, and accounting treatment as borrowing in both parties’ books. Calling a contribution a “loan” while agreeing to share losses achieves the opposite of what is intended.

For developers and promoters. Revenue-sharing and collaboration structures carry a corresponding advantage: the counterparty cannot ordinarily trigger a corporate insolvency resolution process on a disputed profit entitlement. That advantage depends on the documents reflecting genuine risk-sharing, not on a label.

For both. Disputes about shares of profit, cost and account are contractual, and the forum for them is a civil court or the agreed arbitral tribunal. The Code is a collective proceeding for resolving insolvency, and it is not designed to decide who owes what under a collaboration agreement.

Frequently Asked Questions

Can a profit-sharing investment qualify as financial debt under the IBC?
Not necessarily. Where the investor shares project losses, costs and profits, the arrangement may be a joint venture or investment rather than financial debt.

Can an investor file a Section 7 application for a profit-sharing dispute?
Not where the underlying transaction does not constitute financial debt. A contractual dispute may need to be pursued through civil or agreed arbitral remedies.

Does calling an investment a “loan” make it financial debt?
No. The substance of the transaction matters. The agreement must be read as a whole to determine whether there was a disbursal against the consideration for the time value of money.

Is interest enough to establish financial debt under the IBC?
No. Interest payable for delayed payments in a reciprocal arrangement does not, by itself, establish consideration for the time value of money.

Legal Information Disclaimer

This article provides general information about Indian law as it stood on 16 September 2026. It is not legal advice, and reading it does not create an advocate–client relationship. Statutes, rules and judicial interpretations change, and their application depends on the facts of each matter. Readers should consult the current official text of the laws and judgments cited and should not act on this information without advice specific to their circumstances. This article is published for legal awareness and education and is not intended to advertise or solicit professional work.

Sources / Authorities

1. M/s Realpro Realty Solutions Pvt. Ltd. v. Sanskar Projects and Housing Ltd., Company Appeal (AT) (Insolvency) No. 374 of 2023, NCLAT, Principal Bench, New Delhi, 13 December 2023 — Indian Kanoon
2. Insolvency and Bankruptcy Code, 2016 — Sections 3(11), 3(12), 5(7), 5(8), 7, 64A, 65 (as amended) — IBBI – Legal Framework
3. Insolvency and Bankruptcy Code (Amendment) Act, 2026 (No. 6 of 2026) — Gazette text (IBBI); Notification S.O. 2625(E) dated 22 May 2026 — IBBI
4. Anuj Jain, Interim Resolution Professional for Jaypee Infratech Ltd. v. Axis Bank Ltd., (2020) 8 SCC 401, Supreme Court of India
5. Orator Marketing Pvt. Ltd. v. Samtex Desinz Pvt. Ltd., (2023) 3 SCC 753, Supreme Court of India
6. Swiss Ribbons Pvt. Ltd. v. Union of India, (2019) 4 SCC 17, Supreme Court of India
7. Global Credit Capital Ltd. v. Sach Marketing Pvt. Ltd., Supreme Court of India, 25 April 2024

Authorized by Prapti Bhatt

The post Is a Profit-Sharing Investment a Financial Debt under the IBC? Joint Ventures, Section 5(8) and the Realpro Realty Decision appeared first on Bhatt & Joshi Associates.

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

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