Advance Paid Under Land-Development MoU Not Financial Debt, Can't Trigger CIRP: NCLAT

The National Company Law Appellate Tribunal at Delhi recently held that advance amounts paid under a 2013 land development Memorandum of Understanding for acquiring and amalgamating land in Noida were not financial debt under the Insolvency and Bankruptcy Code and upheld the dismissal of insolvency applications filed by Airwil JKM Infrastructure Pvt. Ltd. and JKM Infrastructure Pvt. Ltd. against Cadillac Infotech Pvt. Ltd.

The appeals arose from the rejection of the pleas filed to initiate insolvency proceedings on the ground that the Rs 15.20 crore amounts advanced were given as part of a joint development understanding and were not money lent.

A bench of Chairperson Justice Ashok Bhushan and Member Technical Barun Mitra, observed,

“The developer has made advance payment and was to make further payment so as to Corporate Debtor can acquire plot no.10 and amalgamate the same for carrying the development in 20000 sq. mtr. which is under the policy of NOIDA permitted the sale of spaces. Acquiring of plot no.10 was integral part of the project and amount of Rs.15 Crore which was given to the Appellant in addition to Rs.1.75 Crore was towards the project of development in which ultimately the owner and developer has to receive their percentage of share in entire sale able built up area and share in the covered and open parking space(s) with pro rata share in the open space (s), utility area (s), common services, etc. shall be owned and possessed by the Owner. Thus, the amount given by the Corporate Debtor was not nature of loan or any financial assistance having time value of money.”

The dispute originated from an MoU dated 7 August 2013 between Airwil JKM Infrastructure Pvt. Ltd., the developer, and Cadillac Infotech Pvt. Ltd., the owner of four plots allotted by NOIDA for an IT project. Under the MoU, Airwil JKM agreed to pay Rs.15 crore, consisting of Rs.10 crore interest free refundable and Rs.5 crore non refundable, to enable the owner to purchase adjoining Plot No.10 and amalgamate all five plots.

Only after amalgamation were the parties to execute a formal development agreement with profit sharing fixed at 46.25 percent for the owner and 53.75 percent for the developer. All development costs, approvals, construction, sales and maintenance were to be handled jointly or exclusively by the developer. Airwil JKM paid Rs.12.50 crore and its group entity JKM Infrastructure paid Rs.2.70 crore.

Amalgamation was delayed and achieved in July 2014. A Property Development Agreement was later executed in September 2014 with another group company and was terminated in 2015, which led to arbitration.

An arbitral award in 2018 directed refund of the amounts received and was partly upheld by the Delhi High Court in 2021, and appeals are still pending. Relying on non repayment of the money advanced under the MoU, the developer sought to start insolvency proceedings claiming financial debt and default.

The developer argued that the amount was refundable under the MoU if the amalgamation was not completed in time and said the Corporate Debtor had acknowledged the money received and failed to return it. The respondent argued that the money was part of a collaborative development arrangement involving profit sharing and mutual obligations and was not a loan.

The developer argued that the amount was refundable under the MoU if amalgamation was delayed and claimed default based on non repayment. They submitted that the Cadillac acknowledged the amounts received and therefore they constituted financial debt.

However, Cadillac argued that the MoU created a collaborative obligation for project development with shared responsibilities and profit sharing and was not a loan.

Subsequently, the appellate tribunal observed that the nature of the transaction must be determined from the document itself. Holding that the payment was an investment for joint development and not a borrowing, It concluded, “the real nature of transaction is more akin to a joint venture or development agreement rather than a pure financial lending arrangement.”

The tribunal also noted that a commercial suit for recovery of the same amount is pending before the Delhi High Court and clarified that the dismissal of the CIRPS plead does not affect that remedy. Both appeals were dismissed