NCLAT triggers insolvency against an unincorporated Joint Venture IBC

On 30 Nov 2018, the NCLAT has held that insolvency can be triggered against an unincorporated joint venture between two companies. Effectively, insolvency will be triggered against both companies. It is a landmark judgement in several aspects.

The most important aspect is that it gives relief to property buyers, where under the grab of tri-patry agreement between a buyer and a developer and landowner, or such similar cases where due to infights of developer(s) and/or landowner(s), the property buyer suffers.

A single application against two Corporate Debtor is allowed. There is no provision under the Code where a petition for Insolvency Resolution Process can be initiated against two Corporate Debtors who have collaborated for a Joint Venture.

Applicant financial credit did not file the application in the required format and also did not name interim resolution professional.

The appeal was filed against the order dt 12 March 2018 of NCLT, New Delhi bench which disallowed initiating corporate insolvency resolution process against two corporate debtors under a single application of a financial creditor / property buyer.

Two companies, AMB Infrabuild Pvt. Ltd. and Earth Galleria Pvt. Ltd. entered into a collaboration agreement for developing a complex. The former being the owner of the land and the latter being the developer. The collaboration agreement between them established the rights of both parties for the purposes of this project i.e. sale of the property to the extent of their respective share. Thereafter, a tripartite MoU was entered into between the two companies and an allottee, Mrs. Mamatha for booking a property for a sum of Rs. 3 crore. Of which advance of Rs. 5 lakh was paid.

In the said Memorandum of Understanding, the ‘Developer’ and the ‘Land Owner’ has been jointly referred to as the “Company” and the Appellant has been shown as the “Allottee”.

While these companies formed a joint venture for developing this project, they did not register this joint venture as a separate company.

Both companies failed to allot the promised property to the purchaser. The failure to allot was on account of two entities, the relationship between both of which was based on a collaboration agreement.

NCLAT held "If the two ‘Corporate Debtors’ collaborate and form an independent corporate unit entity for developing the land and allotting the premises to its allottee, the application under Section 7 will be maintainable against both of them jointly and not individually against one or other. In such case, both the ‘Developer’ and the ‘Land Owner’, if they are corporate should be jointly treated to be one for the purpose of initiation of ‘Corporate Insolvency Resolution Process’ against them."

The NCLAT accordingly remitted the case back to NCLT for admission, after notice to the parties. And also stated that before admission of the case, it will be open to the Respondents to settle the matter and in such case, the Appellant may withdraw the case.

We need to watch – if the settlement reaches or the aggrieved Corporate appeals to the Supreme Court.