Homebuyers Seeking Refund Through Arbitration Cannot Claim Financial Creditor Status: NCLAT New Delhi

The New Delhi National Company Law Appellate Tribunal (NCLAT) on 19 August held that homebuyers who invoke arbitration to seek refund of their investment cannot simultaneously claim the status of financial creditors under the Insolvency and Bankruptcy Code (IBC), holding that their conduct amounts to giving up their status as allottees claiming financial debt.

A Bench comprising Judicial Member Justice Sharad Kumar Sharma and Technical Member Indevar Pandey dismissed connected appeals filed by Sumit Bansal, Monica Bansal and Parul Bansal against the refusal to recognise them as financial creditors in the insolvency proceedings of RG Residency Pvt. Ltd. It observed:

“…when they had filed an arbitration proceeding in which they have claimed for the refund of the amount of sale consideration, then they themselves by their own action have renounced or waived their status, being that of the allottee who could claim to be declared as a financial creditor so as to be brought within the ambit of Section 5(8) of the I&B…”

The dispute arose from agreements for sale executed in 2015 between the appellants and RG Residency for purchase of flats in a real estate project. The appellants claimed that they had paid the full consideration of Rs. 1.35 crore and had received “No Dues Certificates” along with symbolic possession of the flats.

The agreements recorded the payment of consideration, assured delivery by 30 September 2018 and provided for appreciation cheques. They also contained an arbitration clause for resolution of disputes.

After the project was not completed within the promised timeline, the appellants sought a refund of their investment. The cheques issued by RG Residency towards the refund were dishonoured, leading to proceedings under Section 138 of the Negotiable Instruments Act. The appellants also invoked Clause 10 of the sale agreements and initiated arbitration proceedings seeking refund with interest.

During the insolvency proceedings, the appellants filed an application under Section 60(5) of the IBC before the NCLT, contending that they were homebuyers and should therefore be recognised as financial creditors and their claims admitted in full.

The Tribunal directed remittance of the amount of Rs. 1.35 crore but declined to recognise the appellants as financial creditors. This led to the appeals before the NCLAT, which examined the definitions of “financial creditor” and “financial debt” under Sections 5(7) and 5(8) of the IBC, as well as the definition of “debt” under Section 3(11).

The Bench also held that a financial creditor must establish the existence of a financial debt owed by the corporate debtor. It noted that the appellants had accepted refund cheques and presented them for encashment, showing that the original liability arising from the sale transaction was no longer subsisting in the same form. It observed:

“The very conduct of the appellant do not bring themselves that, the corporate debtor owes a debt in the shape of a liability which is continue in nature so as to enable him to claim for a declaration as a financial creditor.

…we would say that in order to acquire status of financial creditor, the feature of being a financial creditor, there has had to be a financial debt as covered under Sub-Section 8 of Section 5 and it is owed by the corporate debtor which prescribes for with continuity of existing liability of remittance and will not include within itself the already remitted amount to be called as debt to the classified as financial creditor.”

Further. the Tribunal held that the appellants' decision to invoke the arbitration clause and seek refund was inconsistent with subsequently claiming the status of financial creditors as homebuyers. It observed:

“… As soon as the appellant have filed a claim by invoking Clause 10 of the agreement for sale raising a claim for the refund of the amount to be remitted to them, the appellant by their own conduct, cannot be brought within an ambit of financial creditor under Sub-Section 7 of Section 5 of the Code even on reading of the Explanation of Sub-Clause (f) of Sub-Section 8 of Section 5 of the Code”

Accordingly, the NCLAT upheld the NCLT's order and dismissed the appeals.

For Appellants: Advocates Namit Suri and Ravi

For Respondents: Advocates Kumar Anurag Singh, Zain A. Khan and Mohd. Abran Khan