NCLT Dismisses Insolvency Petition by Modern Solar Against Claro Energy

Investment on Profit-Sharing Basis Not Classified as Financial Debt, Rules Tribunal

In a significant ruling, the National Company Law Tribunal (NCLT) New Delhi Bench has dismissed the insolvency petition filed by Modern Solar Private Limited against Claro Energy Private Limited. The Tribunal ruled that the transaction in question, which involved an advance of INR 20,00,000 by Modern Solar, was an investment on a profit-sharing basis and did not constitute a financial debt under the Insolvency and Bankruptcy Code, 2016 (IBC).

The judgment, delivered by a bench comprising Shri. Mahendra Khandelwal, Member (Judicial), and Smt. Anu Jagmohan Singh, Member (Technical), emphasized that the essential characteristics of financial debt, such as the time value of money and fixed repayment obligations, were absent in this case. 

The case revolved around a transaction where Modern Solar advanced funds to Claro Energy for a project with the Public Health Engineering Department in Bihar. Modern Solar alleged that the amount was a loan carrying interest and sought to initiate corporate insolvency resolution proceedings under Section 7 of the IBC. However, Claro Energy contended that the funds were an investment for profit-sharing in the Sitamarhi project, not a loan.

The Tribunal, after examining the email correspondence and documents submitted, concluded that the transaction was indeed an investment based on profit-sharing. Notably, emails from Modern Solar acknowledged the investment nature of the funds. The NCLT relied on precedents, particularly the judgments in "M/s Jagbasera Infratech Private Ltd. v. Rawal Variety Construction Ltd." and "Chiragsala Sales Pvt. Ltd. v. Vaishno Devi Traders Pvt. Ltd.", which reiterated that investments do not qualify as financial debts.

The Tribunal's decision underscores the importance of clearly distinguishing between loans and investments in financial transactions, especially in the context of insolvency proceedings. The dismissal of the petition highlights the need for parties to provide clear evidence of the nature of financial arrangements.

Bottom Line:

An amount advanced as an investment on a profit-sharing basis cannot be treated as financial debt under Section 5(8) of the Insolvency and Bankruptcy Code, 2016, and proceedings under Section 7 of the Code cannot be maintained.

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

Modern Solar Private Limited v. Claro Energy Private Limited, (NCLT)(New Delhi Bench) : Law Finder Doc Id # 2814020