NCLT Hyderabad: Amount In Corpus Fund For Maintenance Of Apartments By Homebuyers Does Not Qualify As 'Financial Debt' In IBC

Background Facts:

Vasathi Anandi Owners Welfare Association ('Financial Creditor') represented by the President of Vasathi Anandi Owners Welfare Association filed a Corporate Insolvency Resolution Petition ('CIRP') application under Section 7 of IBC for a default of Rs. 5.33 crores against Vasathi Housing Ltd. ('Corporate Debtor').

A residential project in the name of 'Anandi Project' was developed by the Corporate Debtor and the homebuyers i.e. the Financial Creditor had formed a society in that Project. A total of 483 apartments were built in this project, where each buyer had paid Rs. 100/Sq. Ft. of the apartment towards Corpus Fund under the Agreement of Sale entered between homebuyers and the Corporate Debtor.

The Project was to utilize the interest accrued on the Corpus Fund which was meant to be held by Corporate Debtor till 31.12.2013. As per the Agreement of Sale, the collected Corpus Fund along with accrued interest was to be transferred to society on 31.12.2013. The possession of the apartments was provided to the homebuyers however, various amenities as promised like a swimming pool, tennis court, and shuttle services are still pending to be developed.

The Corporate Debtor has paid only a part of the Corpus Fund collected i.e. around Rs. 2 crores and there are 483 members in Financial Creditor as homebuyers for Sq. Ft amount collected is totalling to INR 4.76 crores yet the pending amount of corpus fund along with interest has not been paid.

The Corporate Debtor has acknowledged the amount collected as Corpus fund payable to the Financial Creditor with an interest @6.5%, however, no steps have been taken to pay the said amount as has been due from 22.01.2018.

NCLT Verdict:

The NCLT Hyderabad dismissed the CIRP application and held that the amount deposited in Corpus Fund towards the maintenance of constructed apartments by Homebuyers does not qualify as 'Financial Debt' within the meaning of Section 5(8)(f) of IBC.

The Tribunal observed that not every amount raised in real estate projects falls under 'Financial Debt' in IBC. The amount raised 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, and pointed out to consider whether the amount raised for the 'corpus fund' was under the 'real estate project' as defined in RERA 2016 and referred to in section 5(8)(f) of IBC.

Section 5(8)(f) is read out as follows:

Sectiom 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 nonrecourse basis;

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

2[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;

NCLT highlighted that the homebuyers and the society cannot be treated as allottees under Section 5(8)(f) of IBC as the Corpus Fund was not collected under any real estate project. Further, as per clause 12 of the Agreement of Sale, it becomes apparent that the corpus fund being an interest-free deposit towards maintenance had no stipulation for any consideration for the time value of the money so deposited, which is an essential feature of any financial debt as per the Supreme Court decision in Anuj Jain IRP for Jaypee Infratech Ltd. vs. Axis Bank Ltd.

Moreover, the Supreme Court had also clarified in Pioneer Urban Land Infrastructure Ltd. & Anr. vs. Union of India & Ors. that, in the case of allottees, only those amounts disbursed with the primary objective of earning profit can be deemed as financial debt and fall under the purview of the Explanation to Section 5(8)(f).

It observed that presently, the Corpus Fund was collected under the Agreement of Sale of apartments built under the Project only to ensure maintenance of these apartments out of the interest accruing thereon and not intended for the development of land into plots or apartments or any profit-oriented motive.

In conclusion, NCLT pointed out that the Corpus Fund amount is similar to a prepayment made to a service provider for maintenance and the same does not meet the criteria for classification as Financial Debt. It observed that a similar proposition was propounded by NCLT Mumbai in Innova Premises Co-operative Society Limited vs. Marathon Nextgen Realty Limited and dismissed the CIRP application filed under Section 7 of IBC.

Case Title: Vasathi Anandi Owners Welfare Association v. Vasathi Housing Ltd.

Case No.: Company Petition-CP(IB) No. 50/7/HDB/2020

Counsel for the Creditor: Ms. Mr. P Pratap, Advocate

Counsel for the Corporate Debtor: Mr. V. Sethu Madhav Rao, Advocate

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