NCLT: Homebuyers’ corpus fund for apartment maintenance does not qualify as financial debt under IBC
NCLT: Homebuyers’ corpus fund for apartment maintenance does not qualify as financial debt under IBC
The Hyderabad bench of the National Company Law Tribunal (NCLT) has held that the amount deposited in the corpus fund towards the maintenance of constructed apartments by homebuyers does not qualify as ‘financial debt’ under Section 5(8)(f) of the Insolvency and Bankruptcy Code (IBC), 2016.
Vasathi Anandi Owners Welfare Association (financial creditor), represented by its president, had filed a Corporate Insolvency Resolution Petition (CIRP) application under Section 7 of IBC for a default of Rs.5.33 crores against Vasathi Housing Limited (corporate debtor).
A residential project, 'Anandi’ was developed by the corporate debtor and the homebuyers (financial creditors) formed a society in it. A total of 483 apartments were built under the project, wherein each buyer paid Rs.100/per sq. ft. of the apartment towards the corpus fund under the Agreement of Sale entered between the homebuyers and the corporate debtor.
The project was to utilize the interest accrued on the corpus fund, meant to be held by the corporate debtor till 31 December 2013. As per the Agreement of Sale, the collected fund, along with accrued interest, was to be transferred to the society on 31 December 2013.
The possession of the apartments was provided to the homebuyers. However, several amenities, including a swimming pool, tennis court, and shuttle services, were pending.
The corporate debtor paid only a part of the fund collected (around Rs.2 crores), whereas from 483 members as financial creditors, the collected amount totaled Rs.4.76 crores.
The corporate debtor acknowledged the amount collected as the corpus fund payable to the homebuyers with an interest at 6.5 percent. However, no steps were taken to pay the due amount from 22 October 2018.
The NCLT bench comprising Rajeev Bhardwaj (Judicial Member) and Sanjay Puri (Technical Member) dismissed the CIRP application and held that the amount deposited in the corpus fund towards the maintenance of constructed apartments by homebuyers did not qualify as ‘financial debt' under Section 5(8)(f) of IBC.
The tribunal observed that not every amount raised in real estate projects fell under 'financial debt'. The raised amount must be from an 'allottee' and relate to a 'real estate project'. It referred to clauses (d) and (zn) of the Real Estate (Regulation and Development) Act, 2016 to consider whether the amount was under the 'real estate project' as defined in RERA 2016 and referred to Section 5(8)(f).
NCLT explained that the homebuyers and the society could not be treated as allottees under Section 5(8)(f), as the corpus fund was not collected under any real estate project. As per clause 12 of the Agreement of Sale, it was apparent that the fund being an interest-free deposit towards maintenance, had no stipulation for any consideration for the time value of the money deposited. This was an essential feature of any financial debt as per the decision of the Supreme Court in the Anuj Jain IRP for Jaypee Infratech Ltd. vs. Axis Bank Ltd case.
NCLT held that the apex court had also clarified in the Pioneer Urban Land Infrastructure Ltd. & Anr. vs. Union of India & Ors matter that in the case of allottees, only those amounts disbursed with the primary objective of earning profit could be deemed as financial debt and fell under the purview of Section 5(8)(f).
The tribunal noted that the fund was collected under the Agreement of Sale only to ensure maintenance of the apartments out of the interest accruing thereon, and not for the development of land into plots or apartments or any profit-oriented motive.
Thus, the NCLT stated that the corpus fund amount was like a pre-payment made to a service provider for maintenance. It did not meet the criteria for classification as ‘financial debt’.
It observed that a similar proposition was propounded by the NCLT, Mumbai in the Innova Premises Co-operative Society Limited vs. Marathon Nextgen Realty Limited case. Therefore, the CIRP application filed under Section 7 of IBC was dismissed.
