Conditional Repayment Linked to Project Completion Not Financial Debt: NCLAT upholds NCLT’s Rejection of Insolvency Petition [Read Order]

The Principal Bench of National Company Law Appellate Tribunal (NCLAT), Delhi has dismissed the appeal filed by the appellant The appellate tribunal upheld the order of the Ahmedabad Bench‑II of the National Company Law Tribunal (NCLT), which had earlier rejected Meck’s Section 7 petition seeking initiation of corporate insolvency resolution proceedings against the respondent holding that conditional repayment linked to project completion does not constitute financial debt under Section 5(8) of the Insolvency and Bankruptcy Code (IBC).

The issue emerged from a transaction in February 2010, when Meck Pharmaceuticals and Chemicals Pvt. Ltd. 's the appellant, disbursed ₹1 crore to Accurate Infrabuild, the respondent for the construction of a real estate project named “Madina Heights.”

The appellant claimed that the sum was advanced as a loan, repayable with interest at 18% per annum and accompanied by a 15% share in project profits. According to the appellant, this arrangement satisfied the statutory definition of “financial debt” under Section 5(8) IBC, as it involved disbursal against consideration for time value of money.

The appellant relied on documentary evidence, including an ICICI Bank certificate confirming transfer of funds, audited accounts of the corporate debtor for FY 2010 and 2011 showing the amount as a loan, and TDS certificates reflecting deduction of tax on interest. It argued that default occurred upon completion of the project in September 2019, and that its Section 7 petition filed in April 2022 was within limitation.

The respondent contested the claim, asserting that the arrangement was not a loan but an investment tied to project completion and speculative profits. It contended that the project was not yet complete, that no default had occurred, and that the petition was barred by limitation. The corporate debtor stressed that repayment conditional on project completion lacked the commercial effect of borrowing, and therefore did not constitute financial debt.

The two member bench of Ashok Bhushan(Chairperson) and Barun Mitra(Technical Member) in the analysis, acknowledged that disbursal of ₹1 crore was proven and reflected in the corporate debtor’s accounts. It also noted that the absence of a written contract was not fatal, citing precedents such as Agarwal Polysacks Ltd. v. K.K. Agro Foods and Orator Marketing v. Samtex Desinz, which held that written agreements are not mandatory to establish financial debt. However, the tribunal emphasised that the real nature of the transaction must be examined.

The Tribunal concluded that repayment linked to project completion and profit‑sharing was speculative in nature and lacked the essential ingredient of disbursal against the time value of money. It held that the arrangement did not carry the commercial effect of borrowing and therefore did not qualify as financial debt under Section 5(8) IBC.

On limitation, the tribunal noted inconsistencies in Meck’s demand notices, which alternately cited default dates of 2010 and 2019, and found no continuous acknowledgement of liability after 2011.

Accordingly, the Tribunal upheld the NCLT’s dismissal of the Section 7 petition, ruling that Meck Pharmaceuticals had failed to establish itself as a financial creditor.

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