Annual Return comes to rescue a home buyer to prove his debt as Financial debt for initiation of CIRP under Insolvency bankruptcy Code 2016 against a Home Developer –

Annual Return comes to rescue a home buyer to prove his debt as Financial debt for initiation of CIRP under Insolvency bankruptcy Code 2016 against a Home Developer –

NCALT Observers in Nikhil Mehta & Sons vs. AMR Infrastructure Ltd.

FACTS OF THE CASE

Appellants had signed a MOU with the AMR Infrastructure Ltd wherein the NIKIL would buy flats from the Respondent. In return for money paid as upfront, the AMR promised to pay monthly "assured returns" from the time of signing of the MOU till the time the possession was delivered to the Appellants.

After paying these assured returns for some time, the Respondent defaulted on its payments. Following this, Nikhil Mehta filed an application under section 7 of the IBC.

The question to be decided was whether this arrangement was a simple sale transaction and the Appellants were mere buyers or, whether the Appellants were financial creditors under section 5(7) read with section 5(8) of the IBC and therefore, were allowed to make an application under section 7 of the IBC.

VIEWS OF NCLT

The NCLT in its Judgment examined the definitions of "Financial Creditor and "Financial Debt". NCLT was of the view  that a Financial Debt would be a debt along with interest that was disbursed against time value of money – meaning, that the inflow and outflow must be distanced by time and there would be some compensation for the time value of money.

NCLT concluded that the present transaction was a simple sale transaction and the mere payment of "assured returns" was not enough to bring it under sections 5(8) of the IBC as there was no "consideration for the time value of money". It rejected the application made by Appellants to initiate CIRP action under IBC 2016.

VIEWS OF NCLAT

On appeal, the NCLAT observed that in the MOU signed between the Appellants and the Respondent, the Appellants were referred to as "Investors"

Further, the NCLAT also viewed that this transaction was of a nature that was a sale which had the commercial effect of borrowing and the Appellants had disbursed the amount against the "time consideration of money".

Based on these factors, the NCLAT concluded that the amounts invested by the Appellants was not a mere sale transaction, but would indeed come under the meaning of Financial Debts under section 5(8) of the IBC.

NCLAT : In Nikhil Mehta & Sons vs. AMR Infrastructure Ltd, further observed that Where the commitment charges, which include interest of loan, shown against the head ‘financial cost’ have been accepted by the corporate debtors in their annual return, the appellants have thereby successfully proved that they are ‘financial creditor’ within meaning of clause (7) of section 5.