NCLT admits Pen India's plea against Reliance arm

Mumbai: The National Company Law Tribunal (NCLT) has admitted a petition initiated by film company Pen India against Reliance Entertainment Studios, embarking on the corporate insolvency resolution process (CIRP). This occurred due to a ₹20-crore security deposit agreement signed on November 14, 2022, wherein Pen India provided ₹20 crore to Reliance Entertainment Studios.

The agreement stipulated an interest rate of 21% per annum, compounded monthly. Pen India alleged a default of ₹11.94 crore as of June 30, 2024. Additionally, Friday Filmworks paid ₹15 crore to Pen India on behalf of Reliance under a separate agreement on October 6, 2023. The NCLT observed that the full amount advanced under the security deposit agreement remained unrecovered.

Pen India contended that the transaction constituted financial debt under Section 5(8) of the Insolvency and Bankruptcy Code (IBC), as it involved consideration for the time value of money, interest, and a repayment commitment. Reliance, however, claimed the transaction was a security deposit, not a lending arrangement, citing Clause 15 of the agreement.

They also argued that Clause 4(B) entailed repayment via a third-party satellite or digital rights provider, thereby nullifying Reliance's liability. Furthermore, Reliance challenged the petition under the Maharashtra Money-Lending (Regulation) Act, asserting Pen India lacked a valid license and that the 21% interest rate surpassed the statutory limit.

Despite these objections, the NCLT upheld the petition, asserting the commercial essence of the transaction as a financial debt. They acknowledged Reliance's repeated acknowledgment of the outstanding liability and proposed repayment timetables, but ultimately found Reliance in default for failing to pay the due amount by June 30, 2024, and adhere to the revised schedule.