CS Divesh Goyal

IBC is not a Recovery Law, it is Revival Law

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.

CASE ELEMENT:

Case Name Col. Vinod Awasthy v. AMR Infrastructures Ltd.
Bench Name The National Company Law Tribunal (NCLT), Principle Bench
Link: http://nclt.gov.in/Publication/Principal_Bench/2017/Others/Col.%20Vinod%20Awasthy%20(Final).pdf
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

A. Factual Background:

COL. VINOD AWASTHY V. AMR INFRASTRUCTURES LTD.

I. 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.

II. 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.

III. It was agreed to handover the flat till December, 2014 however no possession given till date.

IV. According to the Petitioner this advance against the property should consider as Operational Creditor.

IN SHORT:

In this case, the petitioner had paid a real estate developer, AMR Infrastructures Ltd. (“AMR”), a certain sum in 2011 as an advance for booking a flat, with possession of the flat to be delivered subsequently. However, AMR failed to deliver possession within the stipulated time and stopped making the assured return payments to the petitioner after December 2013. The petitioner filed an “operational creditor” application under Section 9 of the Code to commence insolvency resolution proceedings against AMR.

B. PROVISIONS RELATING TO OPERATIONAL CREDITOR UNDER THE IBC, 2016:

AS PER SECTION 5(20) “operational creditor” means a person to whom an operational debt is owed and includes any person to whom such debt has been legally assigned or transferred;

AS PER SECTION 5(20) ““operational debt” means a claim in respect of the provision of goods or services including employment or a debt in respect of the repayment of dues arising under any law for the time being in force and payable to the Central Government, any State Government or any local authority.

FINDINGS OF THE NCLT BENCH: 

The issues the Tribunal considered were whether the petitioner qualified as an “operational creditor” and whether the payments owed by AMR constituted “operational debt” under the Code?

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

> 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.

FURTHER REFERRED CASES:

The Tribunal, Principal Bench also passed very similar orders in two other cases with nearly identical facts, including another case against the same developer, AMR (Mukesh Kumar v. AMR Infrastructure (C.P. No. (IB)-30(PB)/2017) March 31, 2017; Pawan Dubey & Anr v. JBK Developers Pvt. Ltd. (C.P. No. (IB)-19(PB)/2017) March 31, 2017).

Case Name Nikhil Mehta & Sons (HUF) & ors V. AMR Infrastructures Ltd
Bench Name The National Company Law Tribunal (NCLT), Principle Bench
Link: http://nclt.gov.in/Publication/Principal_Bench/2017/Others/AMR%20Infrastructure%20Ltd.%20(Nikhil%20Mehta).pdf
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.

1. 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.

2. 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 dishonored for the reasons, inter alia, of insufficient funds.

3. 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.

4. 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.

5. 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.

6. 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.

PROVISIONS RELATING TO FINANCIAL CREDITOR UNDER THE IBC, 2016:

AS PER SECTION 5(7) “financial creditor” means any person to whom a financial debt is owed and includes a person to whom such debt has been legally assigned or transferred to;

AS PER SECTION 5(8) “financial debt” means a debt along with 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;

(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’.

DISCUSSION ON THE TERM “FINANCIAL CREDITOR”

The opening words of the definition clause would indicate that a financial debt is a debt along with interest which is disbursed against the consideration of time value of money and it may include any of the events enumerated in sub-clause (a) to (i).

Therefore, the first essential requirement of financial debt has to be met viz that the debt is disbursed against the consideration of the time value of money. The key feature of financial transaction as postulated by section 5(8) as its consideration for time value of money.

In other words, the legislature has included such financial transaction in the definition of ‘Financial Debt’ which are usually for a sum of money received today to be paid for over a period of time in a single or series of payments in future. It may also be a sum of money invested today to be repaid over a period of time in a single or series of installments to be paid in future.

In Black’s Law Dictionary (9th edition) the expression ‘Time Value’ has been defined to mean ‘the price associated with the length of time that an investor must wait until an investment matures or the related income is earned”.

In both cases, the inflows and outflows are distanced by the time and there is a compensation for time value of money.

It is significant to notice that in order to satisfy the requirement of  this provision. The financial transaction should be in the nature of debt and no equity has been implied by the opening words of section 5(8) of IBC.

CONCLUSION:

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.”

(Author – CS Divesh Goyal, ACS is a Company Secretary in Practice from Delhi and can be contacted at csdiveshgoyal@gmail.com)

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