NCLT Dismisses Edelweiss ARC’s Insolvency Plea Against Om Omega Shelters, Terms It Profit-Sharing Investment, Not Financial Debt

Mumbai: The National Company Law Tribunal (NCLT) has dismissed a Corporate Insolvency Resolution Process (CIRP) petition filed by Edelweiss Asset Reconstruction Company Limited ( financial creditor) against Om Omega Shelters Private Limited Corporate Debtor).

The NCLT held that the relationship between the parties did not constitute a financial debt but rather amounted to an investment for profit, specially as the financial creditor had already taken control of the project through the Maharashtra Government’s amnesty scheme.

Under this scheme, the Slum Rehabilitation Authority (SRA) had terminated the corporate debtor as the developer and appointed the financial creditor as the lender and joint developer, along with Anantaya Buildcon LLP. The SRA further directed the newly- appointed entities to reimburse the actual expenses incurred by the corporate debtor.

The NCLT emphasized that the primary objective of the Insolvency & Bankruptcy Code (IBC) is resolution of the corporate debtor, not recovery of debt by a creditor. It reiterated that the provisions of the IBC must not be misused as a substitute for debt recovery mechanisms.

Edelweiss Asset Reconstruction Company Limited, a Non-Banking Financial Company (NBFC), had filed the CIRP under Section 7 of the IBC, seeking recovery of a total default amount of Rs 989.95 crore, which included the principal amount of Rs 655.07 crore, a default interest Rs 242.19 crore and an Internal Rate of Return (IRR) of Rs 92.68 crore. The alleged date of default was March 31, 2022.

Om Omega Shelters Private Limited, incorporated on December 7, 2020, had earlier operated as a partnership firm engaged in construction and development. The underlying debt originated from term loans and financial facilities extended by entities like ECL Finance Limited, Edelweiss Retail Finance Limited, and Edelweiss Finvest Private Limited to various entities including Parinee Realty Pvt. Ltd., PD Constructions Pvt. Ltd., and their promoters Dhaval and Vipul Shah. These debts were successively assigned to RARE Asset Reconstruction Ltd., then to Asset Care and Reconstruction Enterprise Ltd. (ACRE), and finally to Edelweiss ARC.

In 2021, the debts were novated and aggregated into a consolidated loan of Rs 655.07 crore, split into two term loans and restructured through a Master Restructuring Agreement (MRA) dated April 15, 2021.

The corporate debtor argued that the MRA was essentially a joint venture redevelopment agreement, not a conventional loan agreement. They claimed that repayment of the restructured debt was to come solely from the sale of units allocated to the financial creditor, meaning there was no typical debtor-creditor relationship to justify CIRP.

They also contended that the financial creditor had “hijacked” the project under the amnesty scheme, thereby eliminating their revenue stream required for repayment. Furthermore, they argued that the loan was never disbursed to Om Omega Shelters, but to Parinee, a partner of the former partnership firm. As such, they claimed there was no direct borrower-lender relationship between the parties.

The corporate debtor submitted that they had incurred expenses of Rs 681.84 crore on the Slum Rehabilitation Scheme (SRS) project and that the financial creditor had now assumed control of the same. They also pointed out that the loan recall notice was issued after Edelweiss had applied under the amnesty scheme.

Edelweiss, in its rejoinder, argued that the corporate debtor had acknowledged the debt and default. It defended its participation in the amnesty scheme as lawful, and denied being in control of the corporate debtor’s management. Edelweiss further contended that as an asset reconstruction company, its scope was restricted to securitization and thus entering into a joint development agreement was not its business model.

The NCLT found that key clauses of the MRA explicitly linked repayment to the sale proceeds of the “Lender’s Allocated Area” and that Edelweiss was entitled to “additional upside” and had an obligation to contribute to “project contingency.” These elements, the Tribunal noted, reflected a profit-sharing arrangement and not a conventional loan.

The Tribunal concluded that since the financial creditor had already taken possession of the mortgaged properties and charged assets, and the corporate debtor was only entitled to reimbursement of costs, initiating CIRP would not achieve the resolution of the corporate debtor, as envisaged by the IBC.

Consequently, the NCLT allowed the application filed by the corporate debtor seeking dismissal of the petition. The Tribunal also stated that the corporate debtor's counterclaim for expenses was beyond its adjudication and advised seeking remedies before the appropriate forum.