Advance Given For Profit-Sharing In Real Estate Project Cannot Be Treated As 'Financial Debt': NCLAT New Delhi

A Bench comprising Justice Ashok Bhushan (Chairperson) and Mr. Barun Mitra (Technical Member) observed that the advance payment made for the construction of a real estate project “Medina Heights” cannot be considered as a financial debt under section 5(8) of the IBC. It held that the payment was made for profit sharing lacking the essential ingredient of consideration for time value of money.

M/s Accurate Infrabuild Pvt. Ltd undertook to develop a real estate project and sought financial assistance from the Appellant. The Appellant advanced a sum of Rs. 1 crore that had to be repaid with interest at 18% per annum, along with a 15% share in project profits upon completion as per oral understanding between the parties.

Despite completion of the project, the payment was not made. The Appellant issued legal notices and subsequently filed an application under section 7 of the IBC. The NCLT rejected the application holding that the payment was a speculative investment, not a financial debt. Aggrieved, the Appellant had filed an appeal before the NCLAT.

The Appellant submitted that the amount was advanced against a fixed rate of interest at 18% establishing the consideration for time value of money. It was further submitted that the ICICI Bank's certificates, audited balance sheets showing loan from shareholders and TDS certificated on interest confirmed the transaction. It was further submitted that the absence of a written agreement does not preclude a debt from being admitted as a financial debt as oral agreements are valid under the IBC.

Per contra, the Respondent submitted that the investment lacked characteristics of a financial debt and was in the nature of investment linked to project profits. It was further submitted that the transaction lacked the commercial effect of borrowing.

The Tribunal noted that the amount disbursed was undisputed. It held that "there exists sufficient proof that disbursal had taken place. The fact that the above sum was received by the Corporate Debtor stands reinforced by their financial statements for FY 2010 and 2011 reflecting the amount as 'loan from directors and shareholders.” The Tribunal further observed that merely TDS deduction could not establish a loan transaction.

“For the transaction to have been interest-bearing in the true sense, the interest payment should have been paid annually and by logical corollary corresponding TDS deductions ought to have been reflected. This does not seem to have happened. Thus, we are of the view that deduction of TDS for only two years is insufficient to determinatively conclude that interest liability was a quintessential adjunct of the sum disbursed by the Appellant”, the Bench observed.

The Tribunal further observed that the transaction made with the purpose of deriving profits on completion of a real estate project can be considered as a financial debt as it has the effect of commercial borrowing. But this share of profit was never made part of the application under section 7 of the IBC and therefore the transaction cannot be treated as financial debt.

The Tribunal further observed that the alleged default was linked to the completion of the project which was not completed due to procedural and regulatory compliances. It held that “the Madina project was still in progress and compliances, both procedural and regulatory, were still pending. Hence, we are inclined to agree that no occasion for default can be said to have occurred as the debt was not due or payable.”

It relied on the Supreme Court's judgment in Anuj Jain and observed that “for any debt to be treated as financial debt, the pre-requisite is disbursal of money to the borrower for utilization by the borrower and that the disbursal must be against consideration for time value of money even if it is not interest- bearing. As to when a Financial Creditor who has disbursed money to a Corporate Debtor against consideration for time value of money can trigger the insolvency resolution process against the Corporate Debtor.”

Accordingly, the Tribunal dismissed the appeal holding that the transaction lacked essential elements for being considered as a financial debt.

Case Title: M/s Meck Pharmaceuticals and Chemicals Pvt. Ltd. Versus M/s Accurate Infrabuild Pvt. Ltd.

Case Number: Company Appeal (AT) (Insolvency) No. 544 of 2024

Judgment Date: 29/10/2025

For Appellant : Mr. Jaimin K. Dave, Mr. Karan Valecha and Ms. Hirva Dave, Advocates.

For Respondent : Mr. Gaurav Mitra, Ms. Honey Satpal, Mr. Nipun Singhvi, Ms. Pooja Singh, Ms. Aarushi Mishra and Mr. Akash Agarwalla, Advocates.