NCLT: Land Owners Executing Joint Development Agreements are Not ‘Operational Creditors’

NCLT: Land Owners Executing Joint Development Agreements are Not ‘Operational Creditors’

The National Company Law Tribunal (NCLT), Principal Bench by its coram comprising of Chief Justice (Retd.) Ramalingam Sudhakar (President) and Avinash K. Srivastava (Technical Member) while adjudicating an application filed under Section 9 of the Insolvency and Bankruptcy Code, 2016 (IBC) observed that, an agreement in the nature of a Joint Development Agreement for a project with sharing of profit in an agreed ratio does not come within the ambit of an operational debt.

The factual matrix of the case is that Mrs. Gurmeet Kaur Gill (Operational Creditor) and three other land owners (Collectively referred as Land Owners) entered into a Collaboration Agreement dated 13 August, 2012 with M/s Raheja Developers Limited (Corporate Debtor) for development on the Total land of the Land Owners admeasuring 24.15 acres. Out of the Total Land, a license was obtained for development of a residential group Housing Project on an area admeasuring 12.48 acres.

A revised MOU dated 7 October, 2016 was signed between the Land Owners and the Corporate Debtor vide which the Land Owners permitted the Corporate Debtor to construct, develop, maintain, and sell the Land Owner’s share and provided exclusive right to the Corporate Debtor to sell the units and another saleable area of the project. It was agreed that in consideration of the abovementioned rights, the Corporate Debtor would develop the project on their own cost and pay certain amount to the Land Owners under various heads including “Revenue sharing.”

The applicant through its counsel served a Demand Notice dated 7 December, 2018 for which the corporate debtor replied vide its reply dated 18 December, 2018. Applicant further submitted that land and construction over the land is the main component for development of any real estate project by a real estate company. The Licensed Land and development right over the land were directly related to the units/product which are being developed, marketed and sold by the Corporate Debtor being a real estate company for their commercial operation/production. Moreover, the real estate companies generally treat land and building over there as stock in trade in their books. Therefore, it was submitted that the Land Owners of the Licensed Land are Operational Creditors.

Per contra, the corporate debtor contended that the petition under Section 9 was not maintainable as the debt does not fall within the purview of Operational Debt. The parties are in joint collaboration and the licenses are in the name of the Land Owners. It was further contended that a Backup Security Agreement dated 25 October, 2016 was executed between the parties vide which a net amount of Rs. 130 crores are payable to the Operational creditor as minimum security which was inclusive of the alleged debt of 9.1 crores.

The issue that came for consideration before the bench was whether the dues to Land owners under collaboration agreements read with agreement dated 25 October, 2016 taken collectively as a whole can be treated as ‘Operational Debt’ within the provisions of the IBC?

The bench on perusal of Section 5(21) of the IBC which defines the term ‘operational debt,’ observed that it means a claim in respect of the provision of goods and services.

The bench confined itself to the interpretation of the impugned agreements/MOU in terms of claims with respect to goods and services.

In the instant case at hand, the Tribunal noted that it was very much clear that the Applicant along with other land owners obtained the license of the land from the competent authority and agreed with the Corporate Debtor for development of the Land with consideration.

The Tribunal on perusal of these various agreements/MOU entered upon between parties and reading them taking as a whole noted that, that the nature of transactions involved in the case was a Joint Development Agreement wherein the Developer will develop the land and share the profit in the agreed ratio as per the term of agreements/MOU between the Applicant along with other land owners and itself (CD).

In this regard, the bench commented that, “It has been reiterated in many cases both by this Adjudicating Authority as well as by Hon’ble NCLAT that Joint Development agreement are not within the ambit of financial debt as defined in the code.”

The NCLT rejected the Applicant’s suggesting that there is a direct nexus between the unit sold by the developer and the licensed land for which ownership belongs to applicant along with other land owners and so they come under the ambit of “Operational Creditor” as a person to whom operational debt is owed.

“We think that the Applicants are attempting to give a very wide interpretation to Section 5(21) which cannot be the legislative intention. Reasonably, parties vide various agreements share a legal and binding relationship and have mutual financial obligations towards each other. But these transactions are not in the nature of ‘Operational Debt.’ It is the Licensed Land and rights associated with it are in question. The development of the said land is within the Developer’s sphere and benefits accrued from that land is what the Applicant along with other landowners and developer will share amongst each other in a specified ratio,” stated the bench.

Hence, the NCLT opined that such type of agreement cannot be considered under the ambit of “Operational debt” under Section 5(21) and “Operational Creditor” under section 5(20) and thereby under Section 9 of the IBC, 2016.

The bench further remarked that, there may be variety of real estate development contracts under different names which can be entered upon which may have a component in the nature of a loan. For example, Collaboration Agreement, Joint Development Agreement, the purpose of which is the mutual binding legal relationship in exchange of consideration. These types of agreements cannot come under the purview of operational debt as understood under the Code.

What must be seen is the real intention between the parties, stated the NCLT.

The NCLT was of the opinion that the said contract was in nature of joint development of project with sharing of profit in an agreed ratio amongst them. rather than a claim in respect of the provision of goods or services.

Therefore, the NCLT held that such agreements cannot be read in isolation alone rather must be seen collectively as a whole. There is no case to be covered and admitted under section 9 of the IBC. It allowed the parties to pursue the matter to seek appropriate remedy as per law.

With the aforesaid observations, the Tribunal dismissed the petition.