Contractor's Acceptance of Flats as Payment Does Not Qualify as Financial Creditor: NCLT Rules

The National Company Law Tribunal (NCLT), Mumbai Bench, has dismissed an application seeking to reclassify a contractor as a 'financial creditor' in the insolvency proceedings of Radius & Deserve Builders LLP. The bench, comprising Ms. Lakshmi Gurung (Member Judicial) and Sh. Hariharan Neelakanta Iyer (Member Technical), held that an operational creditor cannot be converted into a financial creditor through a property settlement.

The application challenged the Resolution Professional's decision to categorize the applicant, Capacite Infraprojects Limited, as an 'other creditor' instead of a 'financial creditor in a class homebuyer'. The core issue arose because the corporate debtor had offered to allot 10 residential flats to Capacite as a settlement for an outstanding operational debt of over Rs. 42 crores.

The applicant argued that by accepting this allotment, it acquired the status of an 'allottee' under the Real Estate (Regulation and Development) Act (RERA), and consequently, its claim should be treated as a 'financial debt' under Section 5(8)(t) of the Insolvency and Bankruptcy Code (IBC).

However, the NCLT rejected this contention. The bench held that the fundamental requirement for being a financial creditor is that money must be 'raised from' an allottee for a real estate project, which has the commercial effect of a borrowing. In this case, the Tribunal found that no money was disbursed by Capacite to the corporate debtor; instead, the flats were offered as a 'barter arrangement' to settle a pre-existing operational debt for construction services.

The NCLT relied on the Supreme Court's judgment in Pioneer Urban Land and Infrastructure Ltd. v. Union of India and a recent NCLAT order, both of which pointed out that a transaction to settle dues for services does not constitute the 'disbursal of funds' required to create a financial debt.

The NCLT noted that the applicant had initially filed a petition under Section 9 of the IBC as an operational creditor, and this underlying nature of the debt could not be changed by a subsequent settlement. Consequently, the NCLT dismissed the application, ruling that an operational creditor cannot be converted into a financial creditor through a property settlement. The Tribunal directed the Resolution Professional to re-examine and verify the applicant's claim as that of an 'operational creditor'.

This decision highlights the importance of adhering to the legal definitions and distinctions between different types of creditors in insolvency proceedings. It also reinforces the principle that the nature of a debt at the time of its creation cannot be altered by subsequent agreements, even if they involve property settlements.