NCLAT: In Real Estate, Advance Paid By Speculative Buyer Not Financial Debt Under IBC

NCLAT: In Real Estate, Advance Paid By Speculative Buyer Not Financial Debt Under IBC

The bench upholds the order of the National Company Law Tribunal

The New Delhi bench of the National Company Law Appellate Tribunal (NCLAT) has held that the advance paid by a speculative buyer in real estate does not fall within the purview of Section 5(8) of the Insolvency and Bankruptcy Code (IBC), 2016.

On 10 March 2012, an agreement to sell was executed between Naman Infradevelopers Pvt Ltd (appellant) and Metcalfe Properties Pvt Ltd (corporate debtor).

Clause 10 of the agreement stated the sale deed to be executed on or before March 2013. It included a condition stating that in case of failure by the seller to execute the sale deed in favor of the purchaser, the former was liable to return the entire amount received with an interest of 24 percent per annum from the date of payment till the entire payment materialized.

The appellant made an advance payment of Rs.5 crores, with the balance amount being paid by the purchaser during the registry of the plots.

However, the corporate debtor failed to affect the registry and proposed to convert the outstanding amount into a loan and to repay the same with interest within four months post-entering the ‘Settlement Agreement’.

The debtor agreed to a payment of Rs.14.91 crores with 24 percent interest on or before 22 July 2022 and a penal interest of 12 percent in case of repayment delay.

The appellant filed a Corporate Insolvency Resolution Process (CIRP) under Section 7 of IBC wherein the National Company Law Tribunal (NCLT) via its 20 October 2023 order held that it was not a financial debt under Section 5(8) of IBC. That’s because the amount was not disbursed as a loan with consideration for the time value of money. It was paid as an advance for the purchase of residential plots. Thus, the appellant was not an allotee, but a speculative buyer.

Aggrieved by the order, the appellant approached the NCLAT.

However, the NCLAT dismissed the appeal and held that the advance paid by a speculative buyer in real estate did not fall under Section 5(8) of the IBC.

The tribunal placed reliance on Section 5(8) of the IBC. It explained that financial debt meant a debt along with interest, if any, which was disbursed against the consideration for the time value of money.

It included:

(a) The money borrowed against the payment of interest.

(b) The amount raised under any acceptance credit facility or its de-materialized equivalent.

(c) The amount raised pursuant to any note purchase facility or the issue of bonds, notes, debentures, loan stock or any similar instrument.

(d) The amount of any liability on any lease or hire purchase contract, deemed as a finance or capital lease under the Indian Accounting Standards or other such accounting standards.

(e) Receivables sold or discounted other than any receivables sold on a non-recourse basis.

(f) Amount raised under any other transaction, including forward sale or purchase agreement, having the commercial effect of a borrowing.

The explanation for the purpose of the sub-clause:

(i) An amount raised from an allottee under a real estate project shall have the commercial effect of borrowing.

(ii) The expressions ‘allottee’ and ‘real estate project’ shall have the meanings respectively assigned in clauses (d) and (zn) of Section 2 of the Real Estate (Regulation and Development) Act, 2016.

(g) Any derivative transaction entered in connection with protection against or benefit from fluctuation in any rate or price and for calculating the value of any derivative transaction, only the market value of such transaction shall be considered.

(h) Any counter-indemnity obligation of a guarantee, indemnity, bond, documentary letter of credit or any other instrument issued by a bank or financial institution.

(i) The amount of any liability of any guarantee or indemnity for items referred to in sub-clauses (a) to (h) of this clause.

The bench comprising Justice Ashok Bhushan (chairperson), Justice Yogesh Khanna (judicial member), and Barun Mitra (technical member) noted that the decision in the Venkat Rao Marpina v. Vemuri Ravi Kumar and Anr (2023) case, could not be relied upon. That was because the appellant was never an allottee or a homebuyer, but a speculative buyer, thus, falling outside the scope of Section 5(8) of the IBC.

The judges observed that the NCLT rightfully passed the order relying upon the cases of Mansi Brar Fernandes vs. Sudha Sharma and Anr and the Nidhi Rekhan Vs Samyak Projects Pvt Ltd, wherein it was held, “If the appellant is a speculative investor, he cannot claim status and benefits as a financial creditor under Section 5(8)(f) of the IBC. He is not interested in the financial well-being, growth and vitality of the corporate debtor, but only in investment. He has come in the garb of an allottee, so such petition needs to be dismissed.”

The tribunal stated that the appellant filed the CIRP application only to recover its money with profit and interest and not for the corporate debtor’s financial well-being.