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SHORT SUMMARY

In this Flash editorial column, the author begins by referring the provisions of Operational & Financial Creditor of Insolvency and Bankruptcy Code, 2016 in relation to Treatment of Advance for Real Estate Project.

As IBC code has prescribed two types of Creditors: (i) Operational Creditor (ii) Financial Creditor. The main shove of the article, is upon the question 'Whether advance given to the Company for 'Property/ Flat/ etc. fall under Operational Creditor or Financial Creditor.'

In this editorial author discuss the decisions of Hon'ble National Company Law Tribunal (NCLT), New Delhi Bench in case of Col. Vinod Awasthy v. AMR Infrastructures Ltd. and Nikhil Mehta & Sons (HUF) & ors V. AMR Infrastructures Ltd. There are some other cases also on the same ground and decisions.

This is article no. 242 of the series of editorials written by the author on corporate laws {Including Companies Act, 2013, SEBI, RBI Regulations, IBC, LLP Act, 2008 etc.}.

Case element:


Case Name

Col. Vinod Awasthy v. AMR Infrastructures Ltd.

Bench Name

The National Company Law Tribunal (NCLT), Principle Bench

Link:

Click here

Date of Order

20th February, 2017

Order Passed by

Chief Justice M.M. Kumar, President
R VaraDharan, Judicial Member

Section

9

Type of Creditor

Operational Creditor


Factual Background: Col. Vinod Awasthy v. AMR Infrastructures Ltd.

Application filed under Section 9 of IBC. The petitioner booked a flat for a total consideration of INR 1,980,000. Petitioner paid advance amount of Rs. 987,284/-. MOU entered between both the Parties.Respondent Company undertaken to pay a sum of INR 9,050/- every month as ‘assured return' till the date of possession of advanced amount. Respondent pay the assured return for some time but failed to pay thereafter.It was agreed to handover the flat till December, 2014 however no possession given till date.According to the Petitioner this advance against the property should consider as Operational Creditor.Provisions relating to Operational Creditor under the IBC, 2016:That 'operational debt 'as defined in Section 5(20) of the Code was debt that may arise out of the provision of goods or services including dues on account of employment or a debt in respect of repayment of dues arising under any law for time being in force and payable to centre or local authority.'              

That, petitioner in the present case has neither supplied any goods nor has rendered any service to acquire the status of an ‘Operational Creditor'. The payments owed by AMR could, therefore, not be considered 'operational debt' and the petitioner could not be considered an operational creditor. 

We are further of the view that given the time line in the code it is not possible to construe section 9 read with section 5(20) & (21) of the code so widely to include within its scope even the cases where dues are on account of advance made to purchase the flat or a commercial site from a construction company like the Respondent in the present case especially when the petitioner has remedy available under the consumer protection act and the general law of the land. Therefore, we are not inclined to admit the petition.

Case Name
Nikhil Mehta & Sons (HUF) & ors V. AMR Infrastructures Ltd

Bench Name
The National Company Law Tribunal (NCLT), Principle Bench

Link: Click here

Date of Order
23rd January, 2017

Order Passed by
Chief Justice M.M. Kumar, President
R VaraDharan, Judicial Member

Section 7
Type of Creditor
Financial Creditor

Factual Background:
Nikhil Mehta & Sons (HUF) & ors V. AMR Infrastructures Ltd

This application filed under Section 7 of IBC. The petitioner booked two office space under the project known as 'Kessel-I- Valley' and executed MOU on 12.07.2007.  Petitioner paid advance for flats. Respondent Company undertaken to pay a sum of INR 82,214/- every month as ‘assured return' till the date of possession of the unit was delivered to the applicant. Respondent started paying the monthly 'Assured Returns'. It is alleged that the cheques issued by the Respondent was dishonoured for the reasons, inter alia, of insufficient funds.It is alleged that a number of persons have initiated winding up proceedings against the Respondent Company which are pending in the High Court of Delhi, and are listed for 28.03.2017. Copy of order dated 30.05.2016 passed by High Court Delhi has been placed on record.The petitioner issued 3 legal notices demanding different amounts being the amount of month 'assured returns' due as per the MOU and payable to the applicant. The aforesaid amount is an admitted debt by respondent. Therefore, the instant application has been filed for corporate insolvency resolution process under section 7 of the Act.As per petitioner the default of the amount of 'Assured Returns' payable by the Respondent would be sufficient to satisfy the requirement of Section 7 read with Section 5(7) and (8) of the IBC.(a) money borrowed against the payment of interest;

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

(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;

Findings of the NCLT Bench: 

The issues the Tribunal considered were whether the petitioner qualified as an 'Financial creditor' and if the payments owed by AMR constituted 'Financial debt' under the Code

Based on the above factual background, the NCLT dismissed the case and held as follows:

The agreement to sell a flat or office space etc. Merely because some 'assured amount' of return has been promised and it stand breached, such a transaction would not acquire the status of a ‘financial debt' as the transaction does not have consideration for the time value of money, which is a substantive ingredient to be satisfied for fulfilling requirements of the expression ‘Financial Debt'. 

Essentially in the case in hand 'Assured Returns' is associated with the delivery of possession of the aforementioned properties and has got nothing to do with the requirements of Section 5(8). It is the consideration for the time value of the money which is ‘mercifully missing' in the transaction in hand. 

As per the discussion, we are unable to persuade ourselves to accept that the applicants are covered by the expression 'Financial Creditor' in term. The arrears of 'Assured returns' would also not be covered by the expression ‘financial debt'.  

Based on the above judgments NCLT one can opine that advance given to the Company for 'Property/ Flat/ etc' neither falls under Operational Creditor nor under Financial Creditor.'


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Category Corporate Law, Other Articles by - CS Divesh Goyal 



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