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.

WHETHER A FLAT PURCHASER CAN BE REGARDED AS AN OPERATIONAL CREDITOR UNDER IBC 2016,CODE?

WHETHER A FLAT PURCHASER CAN BE REGARDED AS AN OPERATIONAL CREDITOR UNDER IBC 2016,CODE?

WHO IS A FINANCIAL CREDITOR UNDER IBC 2016?

Section 5 (7) of the IBC Code defines who is a “financial creditor” under IBC Code 2016.

Thus, a financial creditor is

"A person to whom a financial debt is owed and includes a person to whom such debt has been legally assigned or transferred".

In order to ascertain whether a person is a financial creditor, the debt owed to such a person must fall within the ambit a 'Financial Debt' as under Section 5(8) of the IBC.

WHAT IS A FINANCIAL DEBT UNDER THE IBC 2016?

"A debt along with interest, if any, which is disbursed against the consideration for time value of money and includes-

a	Money borrowed against payment of interest
b	Any amount raised by acceptance under any acceptance credit facility or its de-materialized equivalent;
c	Any amount raised pursuant to any note purchase facility or the issue of bonds, notes, debentures, loan stock or any similar instrument;
d	The amount of any liability in respect of any lease or hire purchase contract which is deemed as a finance or capital lease under the Indian Accounting Standards or such other accounting standards as may be prescribed;
e	Receivable sold or discounted other than any receivable sold on non-recourse basis;
f	Any amount raised under any other transaction, including, any forward sale or purchase agreement, having the commercial effect of borrowing;
g	Any counter-indemnity obligation in respect of a guarantee, indemnity, bond, documentary letter of credit or any other instrument issued by a bank or financial institution;
h	The amount of any liability in respect of any of the guarantee or indemnity for any of the items referred to in sub-clauses (a) to (h) of this clause"

WHO IS AN OPERATIONAL CREDITOR UNDER IBC CODE?

An operational creditor is defined under Section 5(20) of the IBC to mean

"Any person to whom an operational debt is owed and includes any person to whom such debt has been legally assigned or transferred".

In order to ascertain whether a person would fall within the definition of an operational creditor, the debt owed to such a person must fall within the definition of an operational debt as defined under Section 5(21) of the IBC.

An operational debt is defined under section 5(21) of the IBC to mean:

"a claim in respect of the provisions of goods or services including employment or a debt in respect of the repayment of dues arising under any law for the time being in force and payable to the Central Government, any State Government or any local authority".

Differentiation between Operational Creditor and Financial Creditor

Opeatational Creditor	Financial Creditor
Operational creditors are those whose liabilities from the entity comes from a transaction on operations	Financial creditors are those whose relationship with the entity is a pure financial contract, such as a loan or debt security.

The Code also provides for cases where a creditor has both a solely financial transaction as well as an operational transaction with the entity. In such a case, the creditor can be considered a financial creditor to the extent of the financial debt and an operational creditor to the extent of the operational debt."

In Col. Vinod Awasthy v. AMR Infrastructure Limited, dealt with the question of   whether a flat purchaser would fall within the definition of an 'Operational Creditor' as defined under Section 5(20) of the IBC.

NCLT dealt who is an operational creditor under IBC and explained that

"Operational Creditors are those whose liability from the entity comes from a transaction on operations.

Any supply of goods or services, employment or dues which were payable under any statute to the Centre / State Government or local bodies.

In the above case, NCLT observed that it is sine qua non to prove that the creditor falls within the ambit and scope of the definition of either 'Financial Creditor' under Section 5(7) or 'Operational Creditor' under Section 5(20) of the IBC.

National Company Law Tribunal, Principal Bench, New Delhi observed in the above case held that a flat purchaser cannot be considered as an operational debtor under IBC Code.

Petitioner can avail other remedies available to him such as under the law of the contract, the General Law of the land or Consumer Protection Act and now RERA the Real Estate (Regulation and Development) Act 2016.

It is to be noted that in earlier cases such as Pawan Dubey and another v. J.B.K. Developers Private Limited and Mukesh Kumar v. AMR Infrastructure Limited held the same view that flat purchasers cannot be considered as operational creditor under IBC Code.