NCLAT Delhi: Advance Paid By A Speculative Buyer In Real Estate Doesn't Fall Under Financial Debt Under IBC

Background Facts:

On 10.03.2012, an agreement to sell ('Agreement') was executed between Naman Infradevelopers Pvt. Ltd. (Appellant) and Metcalfe Properties Pvt. Ltd. (Corporate Debtor). Clause 10 of the Agreement stated that the sale deed shall be executed on or before March 2013. Further, it included a condition stating that in case of failure by the seller to execute the sale deed in favor of the purchaser, the seller shall become liable to return the entire amount received with an interest of 24% per annum from the date of payment of the amount till the actual payment.

An advance payment of Rs. 5 crores was made by the Appellant with the balance amount being paid by the purchaser during the registry of the plots and also paid some further amounts. There was a failure on the part of the Corporate Debtor to effect the Registry and proposed to convert the outstanding amount into a loan and to repay the same with interest within four months post entering into the Settlement agreement. In line with this, the Debtor agreed to a payment of Rs. 14.91 crores with 24% interest on or before 22.07.2022 and a penal interest of 12% in case of delay in repayment.

The Appellant filed a Corporate Insolvency Resolution Process ('CIRP') under Section 7 of IBC wherein the NCLT via its Order dated 20.10.2023 held that the debt owed is not a financial debt under Section 5(8) of IBC as the money was not disbursed as a loan with consideration for the time value of money rather was paid as an advance for purchase of residential plots and the Appellant would be a speculative buyer and not an allotee.

Aggrieved by the Order, the Appellant has filed an appeal before the NCLAT.

NCLAT Verdict:

The NCLAT Delhi dismissed the appeal and held that the advance paid by a speculative buyer in Real Estate does not fall within the purview of Section 5(8) of the IBC.

It placed reliance on Section 5(8) of IBC which is read as follows:

Section 5(8) “financial debt” means a debt alongwith interest, if any, which is disbursed against the consideration for the time value of money and includes—

(a) money borrowed against the payment of interest;

(b) any amount raised by acceptance under any acceptance credit facility or its de-materialised equivalent;

(c) any 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 in respect of any lease or hire purchase contract which is deemed as a finance or capital lease under the Indian Accounting Standards or such other accounting standards as may be prescribed;

(e) receivables sold or discounted other than any receivables sold on non-recourse basis;

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

Explanation. -For the purposes of this sub-clause,-

(i) any amount raised from an allottee under a real estate project shall be deemed to be an amount having the commercial effect of a borrowing; and

(ii) the expressions, “allottee” and “real estate project” shall have the meanings respectively assigned to them in clauses (d) and (zn) of section 2 of the Real Estate (Regulation and Development) Act, 2016 (16 of 2016);]

(g) any derivative transaction entered into 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 taken into account;

(h) any counter-indemnity obligation in respect 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 in respect of any of the guarantee or indemnity for any of the items referred to in sub-clauses (a) to (h) of this clause;

The Appellate Tribunal noted that the decision in Venkat Rao Marpina v. Vemuri Ravi Kumar and Anr. (2023) cannot be relied upon since presently, the Appellant was never an allottee or a home buyer but was a speculative buyer, thus, falling outside the scope of Section 5(8) of the Code.

It observed that the NCLT was right in passing the said Order 20.10.2023 and relying upon the cases of Mansi Brar Fernandes vs. Sudha Sharma and Anr affirming the order of the Appellate Tribunal in the matter of Nidhi Rekhan Vs M/s Samyak Projects Pvt Ltd. wherein it was held that

“where the appellant is a speculative investor, he cannot claim status and benefits as a financial creditor under Explanation (i) of Section 5(8)(f) of the IBC and is not interested in the financial well-being growth and vitality of the Corporate Debtor but is just interested in investment and has come in the garb of an allottee, such petition needs to be dismissed.”

NCLAT concluded that presently, the Appellant cannot be given the status of 'Financial Creditor' as the Appellant is a speculative investor and has filed the CIRP application only for recovery of its money with profit and interest and not for the financial well-being of the Corporate Debtor.

Case Title: Naman Infradevelopers Pvt. Ltd. vs. Metcalfe Properties Pvt. Ltd.

Case No.: Company Appeal (AT)(INS) No.74 of 2024

Counsel for Appellant: Mr. Rishi Sood, Mr Gurjot Singh, Mr. Tushar Rathee, Advocates.

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