NCLAT Dismisses Appeals: MoU Between Airwill JKM and Cadillac Infotech Not a Financial Debt

The National Company Law Appellate Tribunal upholds NCLT's decision, ruling that transactions for joint plot development do not constitute financial debt under the Insolvency and Bankruptcy Code.  

In a significant ruling, the National Company Law Appellate Tribunal (NCLAT) has dismissed the appeals filed by Airwill JKM Infrastructure Pvt. Ltd. and JKM Infrastructure Pvt. Ltd., challenging the National Company Law Tribunal (NCLT), New Delhi's decision. The case involved the interpretation of a Memorandum of Understanding (MoU) between Airwill JKM and Cadillac Infotech Pvt. Ltd., where the former sought to initiate a Corporate Insolvency Resolution Process (CIRP) against Cadillac Infotech, claiming the existence of a financial debt.

The judgment, delivered by Justice Ashok Bhushan and Member (Technical) Barun Mitra, centered on whether the transactions under the MoU constituted a "financial debt" as per Section 5(8) of the Insolvency and Bankruptcy Code (IBC), 2016. The tribunal found that the MoU, which involved joint development of plots owned by Cadillac Infotech, did not qualify as a financial debt. The NCLAT emphasized that the arrangement was akin to a joint venture or development agreement rather than a pure financial lending arrangement.

The case arose from a 2013 MoU, where Airwill JKM Infrastructure Pvt. Ltd. agreed to jointly develop plots with Cadillac Infotech, with the latter acquiring an additional plot to be amalgamated for the development of an IT project. The MoU outlined financial contributions from Airwill JKM, including an interest-free refundable deposit intended for the project's development. However, the project faced hurdles, leading to disputes and subsequent legal proceedings, including arbitration.

The NCLAT underscored that the purpose of the IBC is the resolution of the corporate debtor, not the recovery of debt. The tribunal concurred with the NCLT's view that the transaction did not involve a financial debt as defined under the IBC. The judgment highlighted that the MoU's terms pointed to a collaborative development project, with revenue sharing and responsibilities demarcated between the parties.

The appellants, represented by Senior Counsel Gaurav Mitra, argued that the MoU constituted a financial arrangement, with the expectation of refund in case of non-fulfillment of certain conditions. However, the NCLAT dismissed these contentions, noting that the real nature of the transaction was for joint development, not a financial lending arrangement.

This ruling reiterates the importance of assessing the true nature of transactions under the IBC framework. The decision also provides clarity on the distinction between financial debt and joint venture agreements, impacting how similar cases might be adjudicated in the future.

The appellants retain the right to pursue recovery through other legal avenues, including a commercial suit already filed in the Delhi High Court. This NCLAT decision serves as a reminder of the IBC's primary objective: resolving corporate insolvencies rather than serving as a debt recovery tool.

Bottom Line:

Under Insolvency and Bankruptcy Code (IBC), Section 7 applications claiming financial debt must demonstrate the existence of financial debt as defined under Section 5(8) of IBC. Transactions that are akin to joint ventures or development agreements rather than pure financial lending arrangements do not qualify as financial debt under IBC.

Statutory provision(s): Insolvency and Bankruptcy Code, 2016, Section 7, Section 5(8)

Airwill JKM Infrastructure Pvt. Ltd. v. Cadillac Infotech Pvt. Ltd., (NCLAT)(Principal Bench, New Delhi) : Law Finder Doc Id # 2812278