Budhpur Buildcon Pvt. Ltd. Vs Abhay Narayan Manudhane(NCLAT Delhi)
Summary: The National Company Law Appellate Tribunal (NCLAT), Principal Bench, New Delhi, considered an appeal filed by Budhpur Buildcon Pvt. Ltd. against the order dated 2 August 2021 passed by the NCLT Mumbai Bench in I.A. No. 2129 of 2020 in C.P. No. 27 of 2019. The dispute concerned the rejection of the appellant’s claim of ₹14,391 crore as a financial debt under Section 5(8) of the Insolvency and Bankruptcy Code, 2016. The claim had been submitted against Housing Development and Infrastructure Limited (HDIL), which was undergoing the Corporate Insolvency Resolution Process (CIRP). The Resolution Professional, Abhay Narayan Manudhane, rejected the claim through a communication dated 28 September 2020. The appellant challenged that rejection before the NCLT, which upheld the Resolution Professional’s decision. Aggrieved by the dismissal of its application, Budhpur Buildcon approached the NCLAT under Section 61 of the Code, seeking recognition as a financial creditor and reversal of the impugned orders.
The underlying dispute arose from several development agreements executed between HDIL and Adani Developers Pvt. Ltd., whose relevant business interests were subsequently transferred to Budhpur Buildcon. The agreements, executed between 2007 and 2018, concerned the development of land parcels under slum rehabilitation schemes in Mumbai. HDIL was responsible for undertaking rehabilitation-related development, while the appellant was entitled to obtain specified saleable areas and development rights upon fulfilment of contractual obligations. According to the appellant, the total consideration payable under the project agreements was approximately ₹1,192 crore, structured through periodic payments intended to finance construction of the rehabilitation component. The appellant contended that these arrangements were not merely conventional development agreements but involved financing provided to HDIL for carrying out its business activities. Consequently, it argued that the transactions possessed the commercial effect of borrowing under Section 5(8)(f) of the IBC.
A central feature of the controversy was Clause 4 of the Supplemental Agreement dated 20 March 2012. This clause provided that if HDIL failed to perform its contractual obligations within the prescribed timelines and did not cure the default within 60 days, it would become liable to pay interest at 2% per month on the specified amounts, including paid consideration. Budhpur Buildcon submitted that ₹721.03 crore had been disbursed under the project agreements and calculated a claim of ₹14,391 crore based on the contractual interest stipulation. Significantly, the claim did not seek repayment of the principal amounts advanced under the agreements; it was confined to the interest allegedly payable because of HDIL’s failure to perform its obligations. The appellant nevertheless maintained that the contractual description of the amount as interest, together with the financing character of the underlying transactions, brought the claim within the statutory definition of financial debt.
The appellant relied on the Supreme Court’s decisions in Pioneer Urban Land and Infrastructure Ltd. Vs Union of India, (2019) 8 SCC 416, and Swiss Ribbons Pvt. Ltd. Vs Union of India, 2019 SCC OnLine SC 73. It argued that the definition of financial debt was sufficiently broad to encompass transactions having the commercial effect of borrowing, even where the contractual arrangement was not structured as a conventional loan. According to the appellant, the funds advanced enabled HDIL to undertake the rehabilitation project, and the appellant’s commercial interests were closely connected with the successful completion of that project. It further contended that its financial involvement and knowledge of the development arrangements placed it in a position to evaluate prospective resolution plans. On this basis, it claimed entitlement to participate in the Committee of Creditors as a financial creditor and challenged the NCLT’s findings as legally and factually unsustainable.
The Resolution Professional opposed the appeal, contending that the disputed amount represented penal interest or compensation for breach of contract, rather than consideration for the time value of money. The respondent emphasised that the appellant’s claim was submitted on 8 January 2020, after the prescribed cut-off date of 20 November 2019. Although additional information was sought on 28 March 2020, verification was affected by the COVID-19 pandemic, and the claim was ultimately rejected on 28 September 2020. The Resolution Professional maintained that the project agreements were commercial arrangements involving reciprocal obligations, development rights, saleable areas and contractual remedies. The respondent also disputed the appellant’s status as an allottee under real estate legislation and argued that the transactions did not possess the commercial effect of borrowing. The dispute concerning the security deposit of approximately ₹340 crore and the parties’ respective performance obligations further demonstrated, according to the respondent, the commercial nature of their relationship.
The NCLAT examined the definitions of financial creditor under Section 5(7), financial debt under Section 5(8), and claim under Section 3(6) of the Code. It observed that the existence of a contractual right to payment does not automatically establish a financial debt. The essential requirement is that the liability must possess the characteristics contemplated by Section 5(8), particularly disbursal against consideration for the time value of money. The Tribunal considered the Supreme Court’s interpretation of these requirements in Pioneer Urban Land and Infrastructure Ltd. and Anuj Jain, Interim Resolution Professional for Jaypee Infratech Ltd. Vs Axis Bank Ltd. It distinguished transactions involving financing or borrowing from claims arising because a contracting party failed to perform its obligations. The Tribunal found that the development agreements contained provisions concerning project execution, payment schedules, development rights, forfeiture, damages and penal interest, which could not by themselves transform the contractual arrangement into a financial borrowing.
The Tribunal particularly examined Clause 4 of the 2012 Supplemental Agreement and found that the stipulated interest of 2% per month became payable only upon contractual default and failure to remedy that default within the specified period. Its purpose was therefore connected with the consequences of breach rather than compensation for the use of borrowed money. The NCLAT also considered the principles governing liquidated damages and penalties under Section 74 of the Indian Contract Act, 1872, including the Supreme Court decision in Fateh Chand Vs Balkishan Dass, (1964) 1 SCR 515. The Tribunal held that the mere use of the expression “interest” in a business agreement could not establish the existence of financial debt. Where the amount claimed is essentially a penalty or damages arising from non-performance of contractual obligations, its character must be determined from the substance of the transaction rather than its contractual nomenclature.
The NCLAT also addressed the objections concerning verification of the claim and the progress of the insolvency proceedings. The NCLT had found that the Resolution Professional was entitled to examine the nature and admissibility of claims and was not required to accept every claim merely because it had been submitted. It had also treated the seven-day verification timeline under Regulation 13 of the CIRP Regulations as directory rather than mandatory, relying on State of Bihar Vs Bihar Rajya Bhumi Vikas Bank Samiti, (2018) 9 SCC 472. During the appeal, the appellant sought interim protection against further action by the Committee of Creditors, including possible liquidation. However, the NCLAT declined to halt the insolvency process, observing that the CIRP had already continued for a considerable period and that preventing further proceedings merely because an individual claimant disputed its creditor classification would be inconsistent with the objectives of the Code.
The NCLAT ultimately dismissed the appeal and upheld the NCLT’s order dated 2 August 2021, confirming the Resolution Professional’s rejection of Budhpur Buildcon’s ₹14,391 crore claim as financial debt. It concluded that the claim arose from contractual provisions imposing penal interest or damages for default and did not satisfy the statutory requirements of financial debt under Section 5(8) of the IBC. Accordingly, Budhpur Buildcon was not entitled to recognition as a financial creditor on the basis of that claim. The Tribunal vacated any subsisting interim order, disposed of the pending applications and made no order as to costs. The decision distinguishes financial obligations involving disbursal for the time value of money from contractual compensation for breach, and confirms that penal interest stipulated in a commercial development agreement does not, merely because it is described as interest, constitute financial debt.
Cases Discussed
- Anuj Jain, Interim Resolution Professional for Jaypee Infratech Limited Vs Axis Bank Limited & Ors. (Supreme Court of India), (2020) 8 SCC 401 — The Tribunal relied on the requirement of disbursal against consideration for the time value of money in determining whether a transaction constitutes financial debt.
- Pioneer Urban Land and Infrastructure Limited & Anr. Vs Union of India & Ors. (Supreme Court of India), (2019) 8 SCC 416 — Both parties relied on this judgment concerning the definition of financial debt, disbursal, time value of money and transactions having the commercial effect of borrowing.
- Swiss Ribbons Pvt. Ltd. & Anr. Vs Union of India & Ors. (Supreme Court of India), 2019 SCC OnLine SC 73 — Cited by the appellant concerning the characteristics of financial creditors and their relationship with the financial viability of the corporate debtor.
- State of Bihar Vs Bihar Rajya Bhumi Vikas Bank Samiti (Supreme Court of India), (2018) 9 SCC 472 — Relied upon in the NCLT’s reasoning concerning whether a procedural timeline is mandatory or directory when no consequence for non-compliance is prescribed.
- Himachal Pradesh Housing and Urban Development Authority & Anr. Vs Ranjit Singh Rana (Supreme Court of India), (2012) 4 SCC 505 — Referred to within the quoted passages from Pioneer Urban concerning the meaning of payment and repayment.
- Union of India Vs Raman Iron Foundry (Supreme Court of India), (1974) 2 SCC 231 — Discussed within the extracted Pioneer Urban judgment concerning claims for unliquidated damages and the statutory definition of a claim under the IBC.
- Fateh Chand Vs Balkishan Dass (Supreme Court of India), (1964) 1 SCR 515; AIR 1963 SC 1405 — Cited regarding Section 74 of the Indian Contract Act and the distinction between contractual penalties and reasonable compensation for breach.
The judgment also discusses older decisions, including Arjan Bibi Vs Asgar Ali and Mia Vs Naderjjama Mia, in connection with contractual interest and damages. Their complete citations require separate verification.
