Tripartite Agreement Trap: Home Loans to Buyers are Not Financial Debt of Developer: NCLAT

The Tripartite Agreement Trap: When Banks Lose Financial Creditor Status in Real Estate Insolvency

This case memo discussed the ruling of the Hon’ble NCLAT Principal Bench, New Delhi, in the matter of UCO Bank v. Debashish Nanda, RP Bulland Buildtech Pvt. Ltd., [Company Appeal (AT) (Insolvency) No. 465 of 2024], where the Court held that home loans disbursed by a bank to buyers cannot be considered a financial debt owed by a project’s developer, dismissing UCO Bank’s plea to be recognised as a Financial Creditor in the insolvency case of Bulland Buildtech Pvt Ltd, the developer of the Bulland Elevates project in Greater Noida[1].

This ruling holds paramount importance for domestic lenders and Housing Finance Corporations engaged in the home loan business, particularly those utilizing Tripartite Agreements with builders and borrowers as this ruling establishes a critical legal threshold for admissibility of a bank’s claim against a builder undergoing insolvency resolution under IBC.

FACTS OF THE CASE

• The Corporate Debtor  M/s. Bulland Buildtech Pvt. Ltd. is a Real Estate Company engaged in a residential project, “Bulland Elevates.”
• The Company allotted various flats to several persons. Several unitholders entered into Tripartite Agreement with UCO Bank and the company, under which financial facility was obtained by the borrower for purchase of the units.
• UCO Bank sanctioned home loans to 45 unitholders (borrowers) from 2013 onwards, and the amounts were paid to the Corporate Debtor  on the instruction of homebuyers.
• CIRP against the Corporate Debtor  was initiated vide order dated 22.03.2021.
• UCO Bank filed its claim in ‘Form–C’ dated 05.04.2021 for an amount of Rs.18,82,07,927/-, relying on sanctioned letters and the Tripartite Agreements.
• The Interim Resolution Professional (IRP) declined to accept the claim by email dated 22.04.2021.
• UCO Bank filed I.A. No.4373/2023 praying for direction to the RP to verify/consider/admit the claim.
• The RP objected to the claim, noting that the CoC had already approved a resolution plan on 21.03.2022. The RP pleaded that the loan was disbursed “without due diligence”, and that the allottees were “not genuine homebuyers.” The CRM data and homebuyer software does not support the claim.
• The Adjudicating Authority (NCLT) rejected I.A. 4373/2023 by order dated 08.01.2024, leading to the present appeal.

ISSUE FOR CONSIDERATION

The issue that arose for consideration in the appeal is as to “whether the claim submitted by the appellant in ‘Form–C’ for an amount of Rs.18,82,07,927/- was a financial debt owed by the Corporate Debtor  and as to whether the RP was obliged to accept the claim as financial creditor.”

CONTENTION RAISED

Appellant (UCO Bank)

• Under Tripartite Agreement with the unitholder, UCO Bank and the Corporate Debtor, home loan was sanctioned to the borrower which was paid to the Corporate Debtor  under the instruction of borrower.
• That the Bank got its charge registered with CERSAI with respect to some of the units.
• That the security interest was created in favour of the UCO Bank in the units for which home loan was sanctioned.
• That the Bank has filed application before the Debt Recovery Tribunal (DRT) against unitholders and the company in which proceeding, decree has been passed by the DRT on different date in the year 2019-2020 in favour of the Bank against the borrowers and the M/s. Bulland Buildtech Pvt. Ltd.
• That the Appellant, having disbursed the amount to the company, is the “financial creditor of the Corporate Debtor  within meaning of Section 5(8) of the IBC.”
• That the Corporate Debtor  was “obligated to indemnify the Appellant Bank” as per the contractual arrangement. The transaction is a “financial debt within the meaning of Section 5, sub-section (8)(i)” because the Corporate Debtor  had taken the “liability to indemnify the Bank.”

Resolution Professional (RP) And Successful Resolution Applicant (SRA)

• That the Appellant is not the financial creditor of the Corporate Debtor as the amount was sanctioned by the Bank to the allottees and on the instructions to the allottees was paid to the Corporate Debtor . “Corporate Debtor  has neither applied nor availed any financial assistance from the UCO Bank.”
• That the allottees were the actual Financial Creditor within the meaning of “Section 5(8)(f) of the Code” since the amounts have been “raised by the Corporate Debtor  from the individual allottees and not from the UCO Bank.”
• That out of the units claimed by the appellant, 20 units have been allotted to other allottees whose claims have been admitted, and 13 units were not allotted to any allottees and said units are reflected as vacant inventory.
• That the decrees passed by the DRT were not the basis of claim filed by the UCO Bank nor they were relied in the application.
• Further, the SRA submitted that the resolution plan was submitted on the basis of admitted claims and the claim of the appellant was “never admitted.”

RULING OF THE COURT

The Court in this case ruled that on the basis of loan sanctioned by the Bank to the homebuyer and there being no clause in the Tripartite Agreement making builder liable to make repayment, the claim submitted by Bank in ‘Form–C’ is not covered in the definition of claim under Section 3(6), as noted above and that the Adjudicating Authority (NCLT) did not commit any error in rejecting the application filed by the appellant.

REASONING OF THE COURT

1. On the Nature of obligations under the Tripartite Agreement

The Court examined one Tripartite Agreement entered between Mrs. Praveen Gupta borrower mortgager/first party as one part, UCO Bank as second part and M/s. Bulland Buildtech Pvt. Ltd. as third part and analyzed the following clauses:

• Clause 9: “That the first party undertake that in case they fail to repay the dues under & on account of said credit limits as per the agreed terms and conditions, then the second party shall have absolute right to get the said space transferred, alienated, sold and/or dealt with the same in any manner to realise their entire outstanding dues, and the first party shall not have any right to create any obstruction and objection thereto.”
• Clause 12: “That in case of the failure of the said first party, to liquidate the entire outstanding amount of the second party, under the said credit limits, the second party shall be entitled to get sold and auctioned the said space in the manner as deem fit, with/without recourse to the court of law and the sale proceeds thereof, shall be appropriated towards the outstanding dues and the first party shall not make any objection, &challenge to such action of the second party.”
• Clause 41 (relied upon by the Appellant/UCO Bank): “That the owner and the builder herein jointly and/or severally agree/s and accept/s the present terms and conditions of this agreement and binds itself from the said terms and conditions and the same are not repeated herein separately only for avoidance of the repetition and desirous of being brief and short. The owner and builder are further agreed that all the terms and conditions hereof shall be applicable upon them, so far as the same pertains to the rights to the bank over the said space, in the capacity of owner and builder, as may be applicable which are applicable against the first party herein.”

The Court observed that these clauses relate to obligation of the first party i.e., the borrower homebuyer. It further noted that under none of the clauses of Tripartite Agreement the Corporate Debtor  has undertaken to make the payment to the Bank of financial facilities which was extended to the borrower in event of failure of the borrower to pay the outstanding.

2. Whether the Tripartite Agreement makes the Bank Financial Creditor of the Corporate Debtor ?

In this regards, the court observed as follows:

• That the claim shall arise only when the Tripartite Agreement gives any right to payment to the Bank from the Corporate Debtor .
• That none of the clauses in the Tripartite Agreement cast any obligation of the Corporate Debtor  to make repayment of the loan to the Bank.
• That the present case is not a kind of Agreement to enter with respect to subvention scheme and the Corporate Debtor  never undertook to pay any invoice as in normal subvention scheme.
• That the entire liability to pay the home loan was on the borrower and Corporate Debtor  has never undertaken to repay the loan.

3. Whether the clauses of Tripartite Agreement specially Clause-41 contains an indemnity by the builder to indemnify the Bank , effectively bringing the transaction within the meaning of Section 5, sub-section (8)(i) of IBC?

In this regards, the court observed as follows:

• That Section 124 of the Contract Act, 1872 which defines a ‘contract of indemnity’ requires a promise by one party to save the other from loss caused to him by the conduct of the promisor himself, or by the conduct of any other person.
• That Clause-41 is only “reiteration of earlier terms and conditions of the Agreement” and does not require the Builder to discharge the liability of the Borrower for repayment to the Bank. Moreover, none of the clauses of Tripartite Agreement contain any contract of indemnity.

4. On the nature of the financial transaction in the instant case:

In this regards, the court observed as follows:

• Relying on ‘Global Credit Capital Ltd. & Anr.’ Vs. ‘Sach Marketing Pvt. Ltd. & Anr.’ [2024 SCC OnLine SC 649], the Court noted that “the true nature of transaction has to be found out.”
• Since there is no liability of the Corporate Debtor  to repay the amount which was sanctioned and disbursed to the homebuyer by the Bank, the transaction DOES NOT constitute a Financial Debt (within the meaning of IBC) owed by the Corporate Debtor  to the Bank.
• That since the decrees obtained by Bank from the DRT were not the basis of claim filed by the UCO Bank nor they were relied in the application filed for accepting the claim, therefore they are not relevant for consideration in this instant case.

OTHER NOTABLE RULINGS

Axis Bank vs. Value Infracon India Pvt. Ltd. & Anr., NCLAT [2021 SCC OnLine NCLAT 426]

• The NCLAT in this case, where Axis Bank had sanctioned loan to 42 homebuyers, held that the ‘liability to repay the home loan is on the individual home buyers’ and that including banks in the CoC would ‘defeat the very spirit and objective of the Code.’
• The Court affirmed that the “Presence of a mere tripartite agreement does not change the character of the amount borrowed by the home buyer vis-a-vis the bank and vis-a-vis the ‘Corporate Debtor ’.

Canara Bank vs. Vivek Kumar, RP of M/s. AVJ Developers (India) Ltd., NCLAT [Comp. App. (AT) (Ins.) No.390/2023]

• In contrast to the abovementioned ruling, the NCLAT in this case noticed ‘Clause 16(c)’ of the Tripartite Agreement which stated that “the entire advance by the bank on account of the borrower shall be refunded by the builder to the Bank.”
• The Tribunal found that this clause made the ‘primary responsibility’ of repayment rest on the Corporate Debtor /Builder, and the secondary responsibility on the borrower/homebuyer.
• Therefore, the Tribunal held that in that case, there was a ‘Financial Debt advanced by the Bank to the Corporate Debtor .’

Implications of the UCO Bank Ruling

This judgment reinforces the principle that for a bank to be considered a “Financial Creditor” of a Corporate Debtor  (Builder) in an IBC proceeding, the Tripartite Agreement must explicitly contain a term placing the primary and unequivocal obligation of loan repayment directly upon the Builder. Absent such a clear obligation of the Corporate Debtor  to make repayment of the loan to the Bank, the loan remains a debt of the individual homebuyer (who is the actual Financial Creditor under Section 5(8)(f) of the IBC), and the Bank cannot claim the status of Financial Creditor based solely on the disbursement of funds to the Builder or standard security clauses like those related to alienating the unit. The distinction hinges entirely on whether the agreement creates a direct “right to payment to the Bank from the Corporate Debtor ,” as argued in the Canara Bank case discussed above. This mandates an immediate review of all standard Tripartite Agreement templates used across the industry to ensure clear indemnity or repayment clauses are present, similar to the distinguishing factor found in the Canara Bank judgment.

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(This IBC update has been prepared by Shubham Sharma, student at Chanakya National Law University. He can be reached out at 2636@cnlu.ac.in)

[1] https://timesofindia.indiatimes.com/city/noida/nclat-rejects-uco-bank-claim-in-bulland-buildtech-insolvency-case/articleshow/124968885.cms