NCLAT rules on financial debt under the Insolvency and Bankruptcy Code

NCLAT rules on financial debt under the Insolvency and Bankruptcy Code

The tribunal was hearing an appeal against an order of the Chandigarh bench of NCLT

The National Company Law Appellate Tribunal (NCLAT) has held that an amount invested by a promoter in a real estate project would not fall within the ambit of the 'financial debt' as defined under the Insolvency and Bankruptcy Code (IBC).

The bench of Justice Anant Bijay Singh (Judicial Member) and Shreesha Merla (Technical Member) noted that the relationship between the appellant and the respondent was of a landowner and a developer. Therefore, any amount invested towards the completion of the real estate project could not be viewed as financial debt.

NCLAT was hearing an appeal against an order of the Chandigarh bench of the National Company Law Tribunal (NCLT). The latter had dismissed a petition filed by the appellant under IBC, seeking to initiate the Corporate Insolvency Resolution Process (CIRP) against the respondent company.

In 2011, the appellant had entered into a Memorandum of Understanding (MoU) with the respondent. In 2012, they signed a Joint Venture Agreement to develop a plot of land and construct studio apartments, a club, a jogging track, shops, a dormitory and a children's park.

The project, Valley View Apartments, was to be launched and promoted in the name of the appellant.

It was claimed that between 2011 and 2018, the appellant paid an amount of Rs.4,21,37,850 to the respondent, who defaulted in returning the amount. To recover it, the appellant set in motion the process under the IBC. The appellant claimed before the NCLAT that it fulfilled all the essential characteristics to be defined as a 'financial creditor' under IBC.

Initially, NCLAT wondered whether the appellant, who invested in the project in the capacity of a promoter, came within the ambit of the definition of a 'financial creditor'. The tribunal finally noted that it was evident that the appellant was classified as a promoter and the respondent as a developer.

The bench then passed the judgment, "On careful perusal of the MoU, it is clear that the amount invested by the appellant towards the completion of the project cannot be termed as a 'financial debt' as defined under IBC. Therefore, the appellant does not fall within the definition of the 'allottee'"

While advocates Sumant Bharadwaj, Vedant Bharadwaj and Mridula Ray Bharadwaj appeared for the appellant, the respondent was represented by advocate Arihant Goyal.