Insolvency Proceedings Against Un-Incorporated Joint Ventures

The National Company Law Appellate Tribunal, (New Delhi bench) (“NCLAT“) has passed an order in the matter of Mrs. Mamatha Vs AMB Infrabuild Pvt. Ltd. & Ors. in Company Appeal (AT) (Insolvency) No. 155 of 2018 dated 30th November, 2018 ruling that when insolvency proceedings are brought against an unincorporated joint venture between two companies, both the companies are effectively held to be corporate debtors.

Facts of the Case

The appellant, Mrs. Mamatha (“Appellant“), being an allottee of the development of a commercial complex to be undertaken by the Joint Venture of AMB Infrabuild Pvt. Ltd. (“AMB“) and Earth Galleria Pvt. Ltd (“Earth Galleria“) (together called “Corporate Debtors”), filed an application under Section 7 of the Insolvency and Bankruptcy Code, 2016 (“the Code“) jointly for initiation of Corporate Insolvency Resolution Process against the Corporate Debtors. The National Company Law Tribunal, (New Delhi Bench) (“NCLT“), rejected the application by an Order dated 12th March 2018 on the grounds that an application under Section 7 of the Code could not be filed jointly against the two Corporate Debtors, while stating that: “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.” Thereafter, preferring an Appeal before the NCLAT, the question that arose for consideration in the case was whether the application under Section 7 is jointly maintainable against the Corporate Debtors.

The Corporate Debtors had entered into a Collaboration Agreement on 3rd May, 2013, for the development of a piece of land as mentioned therein, where AMB was referred to as the ‘Owner’ of the land and Earth Galleria was referred to as the ‘Developer’. While these companies formed a joint venture for developing the project, they did not register this joint venture as a separate company.

Thereafter, a Memorandum of Understanding was signed on the 20th of June, 2014 (“2014 MoU“) between Earth Infrastructure Ltd. (“Earth Infrastructure“) and the Appellant, in respect to booking of a Commercial Cineplex unit. It is not clear what interest Earth Infrastructure had/has in the joint venture or in the property being developed by it. On perusal of the extract of the 2014 MoU provided in the NCLAT order, we note that neither of the Corporate Debtors appears to be a party to the 2014 MoU.

Further, a Memorandum of Understanding dated 6th of February, 2016 (“2016 MoU“) was then executed between the Appellant and the Corporate Debtors. In the 2016 MoU, the Corporate Debtors, have been jointly referred to as the “Company”. We also note that the 2016 MoU records part payment of consideration which the Company (i.e., both the Corporate Debtors) has acknowledged.

Ruling of the NCLAT:

Based on the facts and observations, the NCLAT was of the view that the NCLT had failed to take into consideration the aforesaid facts and had wrongly held that the Corporate Insolvency Resolution Process could not be initiated against the two corporate debtors.

Further, the NCLAT opined that “if the two Corporate Debtors collaborated and form an independent corporate unit entity for the purpose of developing the land and allotting the premises to its allottees, the application under Section 7 of the Code would be maintainable against both of them jointly and not individually against one or the other. In such case, both the ‘Developer’ and the ‘Land Owner’, if they are corporate entities should be jointly treated to be one for the purpose of initiation of Corporate Insolvency Resolution Process against them.” The impugned order of the NCLT dated 12th March, 2018 due to which the Appeal was sought was set aside and the NCLAT accordingly remitted the case back to the NCLT for admission.

Our Observations:

With due reverence to the view of the NCLAT held in the present case, we note that the Order does not throw any light on whether the “financial debt” (as defined under the Code) due to the Appellant was due from both AMB and Earth Galleria jointly, or whether only one of them had undertaken obligations to the Appellant. Further, the NCLAT concluded that since the project was being advertised as a “joint venture project”, under the Collaboration Agreement, AMB and Earth Galleria had formed an independent corporate unit entity for developing the land. The Collaboration Agreement however states that the development and the implementation of the project was to be done by Earth Galleria and AMB had a right to physical areas in the Project which they were entitled to sell independently.

We additionally note that the Order of the NCLAT acknowledges the Collaboration Agreement dated 3rd May, 2013 indicated that Earth Galleria would sell the premises of the project to the extent of its own shares and the AMB would sell the developed portion of its own shares however, does not take into account which company’s share, the allotted premises of the Appellant falls under.

Additionally, by a public notice issued by the ROC – Delhi bearing reference number ROC-DEL/248/STK-5/2018/2912 dated 08th June, 2018 with effect from 08th August 2018, Earth Galleria, one of the Corporate Debtors, was struck off the Register of Companies and now stands dissolved. The questions therefore that remain unanswered are which entity owes the financial debt due and payable to the Appellant and what is the effect of one of the Corporate Debtors being Struck-off by the ROC. 

Significance to Real Estate Entities:

This judgement sets a precarious precedent for development agreements that may permit marketing of a project as a “joint venture project” despite individual responsibilities and liabilities of the constituent parties being earmarked.

Landowners and developers, who are often made parties in agreements selling the other’s built up areas, should ensure that their obligations in the project are clearly specified and limited even in such sale agreements with allottees and not just in their inter-se agreements. 

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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