NCLT admits Reliance Entertainment Studios to insolvency over Rs 11.94 crore

MUMBAI: A film financing deal has taken a dramatic turn, with the Mumbai bench of the National Company Law Tribunal (NCLT) admitting Reliance Entertainment Studios into insolvency proceedings over a payment default of Rs 11.94 crore linked to the financing of Auron Mein Kahan Dum Tha.

In an order dated August 19, the tribunal held that Rs 20 crore paid by Pen India towards the film’s release qualified as financial debt under the Insolvency and Bankruptcy Code (IBC). It subsequently imposed a moratorium on the company and appointed Umesh Balaram Sonkar as interim resolution professional.

The NCLT clarified, however, that it has not fixed the final amount payable to Pen India. The interim resolution professional will verify and collate the company’s claim as part of the insolvency process.

Pen India had advanced Rs 20 crore to Reliance Entertainment Studios under a security deposit agreement signed in November 2022. The agreement provided for repayment with interest at 21 per cent a year, compounded monthly.

A subsequent agreement saw Friday Filmworks, which is partly owned by Reliance, pay Rs 15 crore to Pen India in October 2023. Pen India claimed that Rs 4.49 crore remained outstanding as principal, along with Rs 7.44 crore in interest.

Reliance disputed the insolvency petition, arguing that the Rs 20 crore payment was expressly described as a security deposit rather than a loan. It also claimed that its liability had been discharged under a contractual provision allowing repayment through a third-party satellite or digital rights provider.

The tribunal rejected both arguments, holding that the substance and commercial effect of a transaction, rather than the label used in an agreement, determine whether it qualifies as financial debt. The NCLT found that the arrangement contained the essential characteristics of borrowing.

It also held that the third-party payment provision did not remove Reliance Entertainment Studios’ primary obligation to repay the amount. Instead, it provided an alternative mechanism for settling the liability.

The tribunal further pointed to the company’s subsequent conduct. Reliance had acknowledged the outstanding dues and proposed repayment schedules on multiple occasions after the Rs 15 crore payment.

In April 2024, the company proposed clearing the dues in two instalments by June 30 and September 30. It later revised the proposal to three instalments, with the final payment scheduled for December 31, 2024. Neither repayment plan was honoured.

According to the NCLT, these acknowledgements and repayment proposals were inconsistent with Reliance’s later contention that no liability remained.

The tribunal also rejected Reliance’s argument that Pen India was an unlicensed moneylender under the Maharashtra Money-Lending (Regulation) Act, 2014. It found no evidence that Pen India was engaged in the business of moneylending, noting that the transaction was a specific commercial arrangement connected to a film project.

Reliance had also highlighted that National E-Governance Services Limited, an information utility, had recorded the alleged default as “disputed”. The NCLT said this did not prevent a Section 7 insolvency application, distinguishing it from Section 9 proceedings where a pre-existing dispute can be grounds for rejection.

The tribunal therefore admitted the insolvency petition and commenced the corporate insolvency resolution process against Reliance Entertainment Studios. The final amount recoverable by Pen India will now be determined through the insolvency process.