Vasathi Anandi Owners Welfare Association Survey Vs Vasathi Housing Ltd (NCLT Hyderabad)
Introduction: The National Company Law Tribunal (NCLT) in Hyderabad recently ruled on a significant case regarding the classification of the Corpus Fund used for the maintenance of apartments by homebuyers. The case involves a dispute between Vasathi Anandi Owners Welfare Association (VAOWA) and Vasathi Housing Limited, with VAOWA seeking to initiate Corporate Insolvency Resolution Process (CIRP) under Section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC).
Detailed Analysis: The dispute centers around the application filed by VAOWA, representing homebuyers, alleging a default of Rs 5,33,12,287 by Vasathi Housing Limited. The principal argument by Vasathi Housing is that the amount collected for the Corpus Fund, meant for apartment maintenance, does not qualify as ‘financial debt’ under the IBC.
The tribunal, comprising Sanjay Puri and Rajeev Bhardwaj, examined the nature of the Corpus Fund and its intended use. It was observed that the Corpus Fund, collected under the agreement of sale, was explicitly earmarked for maintenance purposes and not for profit. The possession of apartments had already been handed over to the allottees, and the fund’s primary purpose was to ensure proper project maintenance.
The judgment emphasizes that the Corpus Fund cannot be considered a financial debt under Section 5(8)(f) of the IBC. The tribunal cited relevant judgments, including the landmark case of Anuj Jain, RP for Jaypee Infratech Ltd. vs. Axis Bank Ltd., to establish that for a debt to be a financial debt, it must be disbursed against the consideration for the time value of money.
The tribunal also addressed arguments related to the validity of VAOWA as a Financial Creditor, pointing out that the Corpus Fund was collected for maintenance and not for profit-oriented purposes.
Conclusion: In conclusion, the NCLT Hyderabad dismissed the application under Section 7 of the IBC, stating that the amount collected as Corpus Fund does not meet the criteria for classification as financial debt. The judgment underscores the nature and purpose of the Corpus Fund, which, in this case, was akin to a prepayment for maintenance services rather than a financial borrowing. The decision clarifies the distinction between funds raised for development and those collected for maintenance in the context of real estate projects.
This ruling has broader implications for similar cases, establishing a precedent that Corpus Funds earmarked for maintenance may not be treated as financial debts under the IBC. It provides clarity on the legal classification of such funds and reinforces the principle that IBC is not a mechanism for the recovery of contested dues but a tool for resolving insolvency issues.
FULL TEXT OF THE NCLT JUDGMENT/ORDER
The Hyderabad Bench of the National Company Law Tribunal (NCLT) ruled that the amount in corpus fund used for maintenance of apartments by homebuyers not ‘financial debt’ under the Insolvency and Bankruptcy Code, 2016 (IBC).
The application was filed by the Vasathi Anandi Owners Welfare Association (“VAOWA”) (Financial Creditor/ FC Association) under Section 7 of Insolvency and Bankruptcy Code, 2016 (IBC, 2016) seeking to initiate CIRP declaring moratorium and appointment of Interim Resolution Professional (IRP) against Corporate Debtor (“CD”), Vasathi Housing Limited., for a default of Rs 5,33,12,287.
The present application was filed before the Adjudicating Authority on the ground that CD has defaulted to make a payment of INR 5,33,12,287/- of which the principal is calculated @ 100 Sq. Ft as per agreement of sale i.e., INR 4,76,35,700 and Interest is calculated @ 6.5 % from last payment i.e., INR 56,76,587.
The CD submitted that the FC has not lent any Financial Debt as defined under section 5(8) of the IBC and therefore FC Association cannot be called as a Financial Creditor under section 5(7) of the IBC. 21. It is further argued that there was no agreement between the Petitioner and CD and therefore it cannot be called as a Financial Creditor. Another argument of the Petitioner is that the Bye-Laws and objective clause of the Petitioner Society do not have any provision which allows filing of the present CP and FC has no locus standi in the present CP.
A Two-Member Bench comprising Sanjay Puri, Technical Member and Rajeev Bhardwaj, Judicial Member observed that “Therefore, in our considered view, the amount in question is akin to a prepayment made to a service provider, with maintenance services being the relevant service in this case. A comprehensive examination of Section 5(8)(f) of the IBC, 2016, in conjunction with the aforementioned judgments, unequivocally establishes that the said amount does not meet the criteria for classification as Financial Debt.”
“In the present case, it is acknowledged that possession has already been handed over to the allottees, and the issue pertains to the Corpus Fund, which was intended for ensuring the proper maintenance of the project. It cannot be held that the primary motivation for collecting such a corpus fund was profit-oriented” the Bench noted.
1. This is an application filed by the Vasathi Anandi Owners Welfare Association (“VAOWA”) (Financial Creditor/ FC Association) represented by Sunil Kumar Samal, President of Vasathi Anandi Owners Welfare Association under Section 7 of Insolvency and Bankruptcy Code, 2016 (IBC, 2016) seeking to initiate CIRP declaring moratorium and appointment of Interim Resolution Professional (IRP) against Corporate Debtor (“CD”), Vasathi Housing Limited., for a default of Rs 5,33, 12,287.00 (Rupees Five Crore Thirty Three Lakh Twelve Thousand Two Hundred and Eighty Seven only)
2. The Corporate Debtor was incorporated on 31.01.2009 having Identification Number as U70102TG2009PLC06267 for the purpose of purchasing, taking on lease, selling, developing, improving, leasing, building residential, commercial, social rural and urban townships and other structures with respect to property, and provide conveniences. The registered office is at 8-2-269/S/61, Plot No 61, Safar Society, Banjara Hills Road No 2, Hyderabad, Telangana, 500034. Therefore, this bench has jurisdiction to deal with this application.
3. The present application was filed on 30.11.2019 before this Adjudicating Authority on the ground that CD has defaulted to make a payment of INR 5,33,12,287/- of which the principal is calculated @ 100 Sq. Ft as per agreement of sale i.e., INR 4,76,35,700 and Interest is calculated @ 6.5 % from last payment i.e., INR 56,76,587.
4. It is submitted that CD has developed a residential project ‘ANANDI PROJECT’ and the FC is a society formed by the homebuyers in that It is submitted by the applicant that 483 apartments were built in this project, where each buyer had paid Rs 100 /Sq Ft of the apartment towards Corpus Fund under agreement of sale entered between homebuyers and CD. The interest accrued on Corpus Fund was meant to be utilized for maintenance of “ANANDI PROJECT” and the Corpus Fund was meant to be held by CD till 31.12.2013. It is also submitted that under terms of agreement of sale it is explicitly stated that collected Corpus Fund along with accrued interest shall be transferred to society (or an institution authorized by society and developer jointly) on 31.12.2013.
5. It is further submitted that CD delivered the possession of apartments to the homebuyers but many of the amenities such as swimming pool, tennis court, shuttle services, promised under agreement of sale pertinent to ‘ANANDI PROJECT’ are still pending to be executed/developed.
6. It is submitted that on 18.07.20 17, FC invited CD for a meeting to discuss regarding corpus fund and other pending works executed by CD and on 09.09.20 17, FC and CD had a meeting and the Minutes of meeting were also emailed.
7. It is submitted that on 02.02.20 18, CD has responded stating that an amount of INR 2 crores has been transferred to account of society and details of total corpus fund collected as Principal would be shared and it is contended by FC that the payment of INR 2 crores has been paid only on 22.01.2018 viz 10 days prior to reverting to FC.
8. It is contended by FC that CD has paid part (INR 2 crores) of Corpus fund collected from members of FC and there are 483 members in FC as homebuyers with respect to Sq. Ft amount collected is totalling to INR 4,76,35,700 yet the pending amount of corpus fund along with interest has not been paid.
9. It is submitted that on a meeting held on 13.03.20 18 between FC and CD for which Minutes of meeting communicated on 21.03.2018. In said meeting CD without disclosing principal amount collected towards Corpus fund of ‘ANANDI PROJECT’ stated explicitly that an interest of 5% shall be paid on the balance corpus fund. It is further submitted that on 22.03.20 18, FC agreed to above proposition made by CD.
10. It is contended by FC that despite acknowledgement of amount collected as Corpus fund of ‘ANANDI Project’ payable to FC with an interest @ 5%, CD has not taken any steps and avers that the said amount has been due from 22.01.2018. Calculation of default amount due from Vasathi Housing Limited payable to VAOWA for the corpus fund paid by owner @ Rs 100 per Sq.ft of plinth super built area of each flat is as follows:
