The Mumbai Bench of the National Company Law Tribunal (NCLT) has admitted a Section 7 insolvency petition against Reliance Entertainment Studios Private Limited, initiating the Corporate Insolvency Resolution Process (CIRP) over an alleged default of ₹11.94 crore owed to Pen India Private Limited. A Bench comprising Justice Nilesh Sharma (Judicial Member) and Sameer Kakar (Technical Member) pronounced the order.
The dispute arose from a ₹20 crore security deposit for the film Auron Mein Kahan Dum Tha. Pen India had advanced ₹20 crore to Reliance Entertainment Studios under a Security Deposit Agreement dated November 14, 2022, in connection with financing the release of the film. The amount was disbursed on November 29, 2022.
Reliance Entertainment Studios subsequently paid ₹15 crore through Friday Filmworks Pvt. Ltd., leaving approximately ₹5 crore principal outstanding, along with interest stipulated at 21% per annum, compounded monthly. The creditor claimed a total outstanding amount of ₹11.94 crore as of the filing of the insolvency application.
Pen India stated that Reliance Entertainment Studios had acknowledged the outstanding liability on several occasions and had promised repayment in instalments, but failed to make the first payment due on June 30, 2024.
Reliance Entertainment Studios opposed the insolvency proceedings, contending that the transaction was expressly characterised in the agreement as not being a money-lending or borrowing transaction and therefore could not constitute a financial debt under the IBC. It also relied on a contractual mechanism under which the unpaid amount could be recovered from a third-party satellite/digital provider of the film. Reliance argued that its liability had consequently been extinguished and that Pen India was attempting to use the IBC as a recovery mechanism.
The company further argued that the transaction, if treated as money lending, would fall foul of the Maharashtra Money-Lending (Regulation) Act, 2014, including because of the absence of a money-lending licence and the 21% interest rate.
Rejecting Reliance’s primary objection, the Tribunal held that the true nature of the transaction has to be determined from its substance and commercial effect, rather than merely from the label assigned by the parties.
The Bench noted that the agreement recorded that Reliance had sought financial assistance of ₹20 crore and was required to repay the amount with interest. The agreement provided for 21% annual interest compounded monthly, demonstrating that the money was disbursed against consideration for the time value of money. The Tribunal held:
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“Where monies were disbursed against consideration for the time value of money and carry a corresponding obligation of repayment, the transaction would constitute a financial debt irrespective of the label assigned by the parties. The Security Deposit Agreement, read as a whole, satisfies these essential ingredients.
It further rejected reliance on the contractual clause describing the transaction as not being a money-lending transaction, holding that the clause could not be read in isolation from the rest of the agreement.
The Tribunal concluded that the amount advanced under the Security Deposit Agreement constituted a financial debt under Section 5(8) of the IBC. It also held that the contractual provisions relied upon by Reliance did not extinguish its repayment obligation and that objections based on the Maharashtra Money-Lending Act and the disputed status recorded with the Information Utility were without merit.
The Bench found that Pen India had established a default exceeding the statutory threshold, that the debt was within limitation, and that the application was otherwise complete.
Accordingly, the NCLT admitted the Section 7 application and initiated CIRP against Reliance Entertainment Studios. It also declared a moratorium under Section 14 of the IBC, restraining, among other things, the institution or continuation of proceedings against the corporate debtor and the transfer or disposal of its assets.
The Tribunal clarified that it had not crystallised the exact amount claimed at this stage, leaving the same to be collated by the Interim Resolution Professional (IRP).
