NCLT Initiates Insolvency Against Construction Firm, Citing Loan 'Repayable on Demand' in Financials

Mumbai: The National Company Law Tribunal (NCLT), Mumbai Bench, comprising Sh. Prabhat Kumar (Member, Technical) and Sh. Sushil Mahadeorao Kochey (Member, Judicial), has admitted a plea to initiate the Corporate Insolvency Resolution Process (CIRP) against Royal Fantasy Constructions Pvt. Ltd. The Tribunal held that subsequent fund disbursements and the company's own audited financial statements, which classified loans as “Repayable on demand,” superseded the repayment conditions laid out in an earlier Shareholder Agreement, thus establishing a clear default of a financial debt under Section 7 of the Insolvency and Bankruptcy Code (IBC), 2016.

Background of the Case

The petition was filed by Euro Corporate Services Private Limited (Financial Creditor) against Royal Fantasy Constructions (Corporate Debtor) for a default amounting to ₹2.02 crore. The Creditor claimed to have advanced funds over several years, which were treated as a loan with an agreed-upon interest rate.

The core legal question was whether the funds advanced constituted a "financial debt" that was currently due and payable, or if they were an investment tied to the completion and profitability of a real estate project, as governed by a Share Subscription cum Shareholder Agreement (SSA) from 2010.

Arguments from Both Sides

Petitioner's Submissions (Euro Corporate Services): - The Financial Creditor argued that it had advanced significant sums to the Corporate Debtor, which were acknowledged as loans. - It was highlighted that the Corporate Debtor had regularly paid interest and deducted Tax Deducted at Source (TDS) on these payments, acknowledging the nature of the transaction as a loan. - The Corporate Debtor had executed 'Confirmation of Accounts' from time to time, admitting the outstanding liability, which stood at ₹1.94 crore as of March 31, 2024. - The Creditor pointed out that the terms of the SSA were effectively abandoned by both parties, evidenced by a mutual agreement to reduce the interest rate from 12% to 9% during the COVID-19 pandemic and the Debtor's failed promise to secure the loan with a flat.

Respondent's Submissions (Royal Fantasy Constructions): - The Corporate Debtor contended that the transaction was not a simple loan but an investment governed by the 2010 SSA. - They invoked Clause 4.6 of the SSA, which stipulated that repayment was contingent upon the company generating "surplus funds" from its real estate project, a condition they claimed had not been met. - It was argued that the Creditor, through its shareholders (the Maheshwari family), was intrinsically linked to the project as an investor and not merely a lender. - The Debtor asserted its solvency and argued that the petition was a premature attempt to recover funds before the project's completion.

Tribunal's Analysis and Findings

The NCLT meticulously analyzed the financial transactions and legal arguments, ultimately siding with the Financial Creditor. The Bench's decision rested on several key observations:

• Subsequent Transactions Superseded SSA: The Tribunal noted that significant fund transfers occurred in the financial year 2021-22, long after the 2010 deadline stipulated in the SSA for fund infusion. This led to the conclusion that these later transactions could not be governed by the old agreement. The judgment states: "This clearly demonstrates that the amounts paid in the year 2021-22 can not relate back to the Share Subscription cum Shareholder Agreement."

• Financial Statements as Admission: Crucially, the NCLT pointed to the Corporate Debtor's own audited financial statements. A note in the 2022 financials explicitly classified loans from related and other parties as “Repayable on demand.” The Tribunal found this to be a critical admission that overrides the SSA's conditions.

• Existence of Surplus Funds: Even while dismissing the Debtor's reliance on the SSA, the Tribunal examined the claim that no surplus funds existed. It reviewed the cash flow statements provided by the Debtor, which revealed a net surplus from operating activities in the preceding two financial years, contradicting the Debtor's primary defense. "The above clearly reveals that there has been surplus from revenue in preceding two financial year(s)... Accordingly, the contention of the Corporate Debtor that the amounts due to the Petitioner had not become payable... is contrary to facts on record."

• Principle of Default under IBC: The NCLT reiterated the established legal principle from the Supreme Court's ruling in Innoventive Industries Limited vs. ICICI Bank , emphasizing that once a financial debt and its default are proven, the Adjudicating Authority must admit the Section 7 petition. The Debtor's solvency was deemed irrelevant to this determination.

Final Decision and Implications

Finding that a financial debt existed, exceeded the statutory threshold, and was in default, the NCLT admitted the petition. A moratorium under Section 14 of the IBC was imposed on Royal Fantasy Constructions Pvt. Ltd.

Mr. Raj Kumar Dad has been appointed as the Interim Resolution Professional (IRP) to oversee the company's affairs. This judgment serves as a strong reminder that a company's own financial disclosures and subsequent conduct can redefine the nature of its liabilities, potentially superseding conditions laid out in foundational agreements when facing insolvency proceedings.