NCLAT Chennai: Advances By Property Buyers To Real Estate Developers Are ‘Borrowing’ And Financial Debt

The Appellate Tribunal held that homebuyers have been added in the Explanation to Section 5(8)(f) of the Insolvency and Bankruptcy Code (Code). Thus, the advances given by Property buyers to real estate developer will be considered as ‘borrowing’, and such amounts raised from allottees falls within the scope of Section 5(8)(f) of the Code.

Background Facts:

The Suspended Director of the Corporate Debtor has appealed against the NCLT Hyderabad’s order in which it had admitted a petition under Section 7 Petition under the Code filed by the Financial Creditor.

The Corporate Debtor develops and promotes real estate layouts. Three sale agreements were entered into between the Corporate Debtor and the Financial creditor in August and September 2016 for the purchase and development of 10 plots for which the creditor had paid an advance of Rs. 1.36 Crores. However, the Applicant claimed that the Hyderabad Metropolitan Development Authority (HMDA) mortgaged the said plots for the purpose of facilitating the development of the layout. It argued that the financial creditor neither bought the plots nor requested repayment and is therefore only entitled to Rs. 35,97,500.

The Applicant contended that the financial creditor is not a genuine homebuyer but a speculative investor who intended to sell five of the 10 plots to third parties for a higher price. It alleged that the financial creditor has now arbitrarily claimed about Rs. 2.27 crores including Rs. 1.58 crores as interest contradicting its earlier admitted claim of Rs. 35,97,500.

A Suit for specific performance preferred by the Creditor to restrain the Corporate Debtor from alienating the unmortgaged plots was also dismissed admitting that only Rs. 35,97,500/- was due and payable. The Applicant, thus, contended that in the absence of any interest agreed to be paid and the admission of Section 7 application and the amount claimed is unjustified since the amount due does not meet the threshold amount as per the Code.

NCLAT Verdict:

The NCLAT dismissed the application and made two key observations. Firstly, it observed that the creditor qualifies as a Financial Creditor under Section 5(8) of the Code and is not merely a speculative investor since the case of Nidhi Rekhan vs. Samyak Projects Pvt. Ltd. and Ankit Goyal vs. Sunitha Agarwal & Ors. relied upon by the applicant was distinguishable from the instant case. In these cases, the allottees were assured a rate of return whereas in the present one, the assured interest was conditional upon the failure to obtain approval from HMDA as per Clause 3 of the Agreement. The assured rate of return cannot be equated with the said clause of the agreement.

Moreover, homebuyers have been added in the Explanation to Section 5(8)(f) of the Code. Thus, the NCLAT held that the advances given by Property buyers to real estate developer will be considered as ‘borrowing’, and such amounts raised from allottees falls within the scope of Section 5(8)(f) of the Code.

Further, the Appellate Tribunal held that interest should not be added and confirmed that the claim amount met the threshold limit of Rs. 1 crore for the Section 7 application. It examined the clauses of the Sale Agreement and highlighted that Clause 3 of the agreement stipulated that if the vendor fails to obtain HMDA Approval within three months, the vendor agrees to repay the amount with an interest of 24% per annum. The NCLAT found that the amount mentioned in the earlier civil suit cannot be equated to the claim amount in the Section 7 Petition.

The NCLAT pointed out that the interest comes into play as per the clauses of the Sale Agreement, especially since the Final HMDA Approval was obtained only in January 2019, and the plots were not registered or the amounts refunded until April 2019.

In conclusion, it also held that the liquidation proceedings have been initiated against the Corporate Debtor since there is no point in challenging the admissibility of the Section 7 application.

Case Title: Venkat Rao Marpina vs. Vemuri Ravi Kumar

Case No.: C.P.(IB)/107/7/HDB/2021

Counsel for Applicant: Mr. P.H. Arvindh Pandian, Senior Advocate, Mr. M. Roshan Atiq, Advocate

Counsel for Financial Creditor: Mr. Uma Shankar Gollapudi, Advocate

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