Maintenance Charges And IFMS Not Financial Debt Under Section 5(8) Of IBC: NCLT New Delhi

Brief Facts:

The matter pertained to an application jointly filed by ILD Owners Welfare Association, a registered Resident's Welfare Association representing the owners/residents of the “ILD Trade Centre” (“the Society” or “the Financial Creditor”). The application was made under Section 7 of the Insolvency and Bankruptcy Code, 2016 and Rule 4 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016. The Society sought an Order to initiate the Corporate Insolvency Resolution Process (“CIRP”), declare a moratorium and appoint an Interim Resolution Professional against M/s. ALM Infotech City Private Limited, the Corporate Debtor.

The Applicant/Financial Creditor argued that the Respondent/Corporate Debtor as the Developer of the ILD Trade Centre project collected ₹2.95 crores as an interest-free maintenance deposit from the residents. This amount was supposed to be handed over to the Applicant/Financial Creditor according to the Conveyance Deed. Despite repeated requests, the Corporate Debtor didn't transfer this amount. The Applicant argued that this interest-free maintenance deposit of ₹2.95 crores constituted a Financial Debt.

The NCLT directed the Applicant to file an affidavit confirming that the amount in question qualified as Financial Debt under Section 5(8) of the IBC, 2016. The affidavit referred to a Conveyance Deed executed between the Allottees and the Corporate Debtor which referred to Clause 26 stipulating that the financial debt was to be handed over to the Financial Creditor/Society upon its formation.

The Applicant further contended that the money raised by the Corporate Debtor for maintenance purposes, paid by the apartment owners at the time of possession, was to be held by the Corporate Debtor until the society was formed. According to Clause 26 of the Conveyance Deed, the Corporate Debtor was obligated to transfer the Maintenance Security Deposit to the society to enable it to maintain the apartments. The Applicant argued that the amount in question constituted Financial Debt within the meaning of Section 5(8) of the IBC 2016.

Observations by the NCLT:

The NCLT referred to the NCLT Delhi bench decision in The Verandas Apartment Owners

Assocation Vs. M/s. Saluja Construction Company Ltd where the Tribunal referred to Section 5(8) of the IBC, 2016, which defines financial debt as a debt, along with interest, disbursed against the consideration for the time value of money. The NCLT noted that this includes various forms of borrowing such as money borrowed against the payment of interest, amounts raised by acceptance under credit facilities, and amounts raised under transactions having the commercial effect of a borrowing.

Further, the Delhi bench referred to the decision of the Supreme Court in Anuj Jain, RP for Jaypee Infratech Ltd. vs. Axis Bank Ltd which clarified that for a debt to be classified as financial debt, it must be disbursed against the consideration for the time value of money. This principle applies even to transactions under clauses (a) to (i) of Section 5(8). Furthermore, in 'Pioneer Urban Land Infrastructure Ltd. & Anr. vs. Union of India & Ors.', the Supreme Court held that the disbursement by allottees towards real estate projects should have profit as the main aim for it to be considered financial debt.

The Delhi bench noted that the possession was already handed over to the allottees, and the issue was limited to the maintenance corpus. The collected corpus was intended to ensure proper maintenance of the project which indicated that profit was not the main aim. Consequently, the Delhi bench held that the amount was akin to an advance payment for maintenance services not a financial debt.

Further, the NCLT referred to the decision of the NCLT, Mumbai Bench in the case of Innova Premises Co-operative Society Limited vs. Marathon Nextgen Realty Limited where it was held that amounts collected for maintenance purposes do not qualify as financial debt. The NCLT, Hyderabad Bench in Vasathi Anandi Owners Welfare Association vs. Vasathi Housing Limited also held that corpus funds collected for maintenance without consideration for the time value of money do not qualify as financial debt under Section 5(8) of the IBC.

Therefore, the NCLT held that the amounts paid as maintenance charges and IFMS do not amount to financial debt within the meaning of Section 5(8) of the IBC. Consequently, the application filed under Section 7 of the IBC was deemed not maintainable and was dismissed.

Case Title: ILD Owners Welfare Association vs M/s. ALM Infotech City Private Limited

Case Number: C.P.(IB)–229(ND)/2024

For the Financial Creditors: Mr. Sonal Anand, Mr. Aayush Sai, Advs.

Date of Judgment: 30.07.2024

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