Mumbai: NCLT Admits Insolvency Proceedings Against Prime Focus Over ₹353.79 Crore Default Plea

Mumbai, May 14: The National Company Law Tribunal (NCLT) has admitted the Corporate Insolvency Resolution Process (CIRP) against media and entertainment company Prime Focus Limited on a petition filed by Reliance Alpha Services Private Limited over an alleged default of Rs 353.79 crore.

The applicant successfully established the existence of debt and default through loan agreements, financial statements, TDS deductions, and correspondence exchanged between the parties.

The petition was filed under Section 7 of the Insolvency and Bankruptcy Code, 2016, by Reliance Alpha Services Private Limited before the NCLT.

Reliance Alpha cites Rs 200 crore loan arrangement

According to the tribunal, Reliance Alpha claimed that an amount of Rs 200 crore had originally been disbursed to Reliance MediaWorks Limited between 2015 and 2017 under an inter-corporate deposit arrangement, which was later transferred to Prime Focus under a Business Transfer Agreement (BTA).

The tribunal noted that a loan agreement dated February 25, 2019, was subsequently executed between Reliance Alpha and Prime Focus, treating Rs 200 crore as the principal amount carrying interest at 10% per annum.

Reliance Alpha alleged that Prime Focus defaulted on payment of interest from December 1, 2021 onwards, after extensions granted for repayment of dues expired. The financial creditor later recalled the loan through a notice dated July 6, 2023, demanding Rs 353.79 crore, including accrued interest.

Prime Focus opposes insolvency plea

Prime Focus opposed the insolvency plea, contending that the alleged liability arose from a contingent contractual obligation linked to the transfer of certain immovable assets under the BTA and did not qualify as a “financial debt” under the IBC.

The company argued that no fresh loan disbursement had been made directly to it and that disputes regarding the transfer of assets were already pending before the Bombay High Court in a commercial suit.

The company further argued that certain conditions under the BTA, including transfer of studio premises and occupation certificates, had not been fulfilled and, therefore, the debt liability had never crystallised.

“It is stated that the occupation certificates with respect to the Studio had not been obtained till date. It is stated that the Corporate Debtor recorded the Studio in its books of accounts at its fair value, i.e. INR 200.14 crores, on the presumption that it stood transferred and on the assurance of the Respondent that it would provide the Occupation Certificates and accordingly made the disclosure in its financial statements for the Financial Year 2018-19. It is stated that since the Corporate Debtor accounted for the Studio as an acquisition and executed the Loan Agreement with the Applicant on 25.02.2019, the above disclosures were made. It is stated that till date, the Applicant has failed to transfer the Business Assets under the BTA. It is stated that on account of non-transfer of the Adlabs building, which was to be used as the Corporate Debtor’s office, it had to take alternate premises on rent and pay nearly Rs 1.92 crore towards rent. It is the contention of the Corporate Debtor that they have admitted the debt facilities of INR 200 crores,” the application copy filed by Reliance Alpha Services Private Limited stated.

Tribunal cites financial records and TDS deductions

The tribunal observed that the Corporate Debtor had never denied the existence of the Business Transfer Agreement (BTA) and had, in fact, accepted and capitalised certain assets in its books of accounts.

It further noted that the Corporate Debtor had paid part consideration through the issuance of securities under the BTA, recognised the loan as a liability in its financial records, deducted and deposited TDS under Section 194A of the Income Tax Act, sought additional time from the applicant for payment of interest, and had also executed a loan agreement with the applicant.

“These facts prove beyond doubt that there was a loan for consideration for the time value of money,” the order stated.

The tribunal also relied on emails seeking extension of time for payment of interest, execution of a personal guarantee by promoter Namit Malhotra, and deduction of TDS under Section 194A of the Income Tax Act on interest payments as evidence establishing the financial nature of the debt.

NCLT says pending disputes do not bar insolvency proceedings

The bench held that once the existence of financial debt and default exceeding the statutory threshold was established, the pendency of disputes before the Bombay High Court or objections relating to incomplete transfer of assets under the BTA would not bar admission of a Section 7 insolvency application.

“The pendency of commercial suit before Hon’ble Bombay High Court or the dispute as to alleged non-transfer of some of the business assets pursuant to the BTA do not make Application under Section 7 inadmissible as existence of debt and default exceeding the threshold of Rs 1 crore has been established by the Financial Creditor,” the tribunal held, referring to the observation passed by the Supreme Court in the matter of Innoventive Industries Ltd. vs. ICICI Bank.

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“Thus, it is clear from perusal of the record that an amount exceeding the threshold limit of Rs 1 crore under Section 4 of the Code is due and payable by the Corporate Debtor to the Applicant and that the Corporate Debtor has committed default in respect of the same. Hence, we find that the Applicant has been able to substantiate the existence of a financial debt due and payable by the Corporate Debtor which remained unpaid. The debt so owed by the Corporate Debtor to the Applicant falls within the definition of ‘financial debt’ under Section 5(8) of the Code,” the order stated.

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