Homebuyers' Advances Used For Project Development Are Financial Debt Under IBC: NCLT Mumbai

The National Company Law Tribunal (NCLT) at Mumbai has recently reiterated that amounts paid by homebuyers in a real estate project will qualify as financial debt if the money is used for financing and development of the project.

Relying on the Supreme Court's ruling in Pioneer Urban Land and Infrastructure Ltd. v. Union of India, a bench of Judicial Member Nilesh Sharma and Technical Member Sameer Kakar observed,

“Applying the aforesaid legal position to the facts of the present case, it is evident that the upfront amounts paid by the Applicants to the CD were utilized for financing and development of the Project and, therefore, possess the commercial effect of borrowing and qualify as 'financial debt' within the meaning of Section 5(8)(f) of the Code. Consequently, the applicants, being allottees in a real estate project, are entitled in law to be classified and treated as Financial Creditors under Section 5(7) of the Code.”

The tribunal was dealing with an insolvency plea filed through Ajay Sanadhya, acting as a nominated representative of 136 allottees in a project called Shiv Residency Phase II.

The allottees had paid substantial amounts for allotment of plots but alleged that the developer, Vatsalya Builders and Developers Pvt. Ltd., failed to hand over possession despite repeated reminders. The default claimed by the applicants was more than 8.88 crore. The record showed that payments were made between 2009 and 2014 and that the plots were not handed over even after several years.

The developer opposed the plea, arguing that the claim was barred by limitation since the agreements were executed many years earlier. It also contended that the allottees could not be treated as financial creditors and submitted that some of the agreements had been executed through a person who was not authorised by the company.

The developer further stated that it had offered to refund the principal amounts to the allottees, but the offer was refused, and therefore the insolvency proceedings were not maintainable.

Rejecting these objections, the tribunal held that the failure to hand over the plots amounted to a continuing breach of contractual obligations. It recorded that the developer had not delivered the plots for more than 13 years despite repeated letters from the allottees.

The tribunal also rejected the developer's argument based on refund, observing that the applicants had paid money for the allotment of plots and could not be forced to accept return of the principal amount after such a long delay.

Reaffirming the law laid down in Pioneer Urban, the bench held that money raised from an allottee in a real estate project has the commercial effect of borrowing and therefore falls within the definition of financial debt under the Code.

Having found that financial debt and default were established, the tribunal admitted the petition, initiated the corporate insolvency resolution process, and imposed a moratorium under Section 14 of the Insolvency and Bankruptcy Code.

Click Here To Read/Download Order