NCLAT Rejects Advance Payment as Financial Debt in Real Estate Project

The National Company Law Appellate Tribunal (NCLAT) in New Delhi upheld the decision of the National Company Law Tribunal (NCLT) to reject an application under Section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC), filed by M/s Meck Pharmaceuticals and Chemicals Pvt. Ltd. against M/s Accurate Infrabuild Pvt. Ltd. The NCLAT ruled that the advance payment made for a real estate project cannot be treated as a financial debt under Section 5(8) of the IBC.

A Bench comprising Justice Ashok Bhushan (Chairperson) and Mr. Barun Mitra (Technical Member) observed that the advance payment made for the construction of a real estate project, “Medina Heights,” cannot be considered as a financial debt. The payment was made for profit sharing and lacked the essential ingredient of consideration for the time value of money.

M/s Accurate Infrabuild Pvt. Ltd. undertook to develop a real estate project and sought financial assistance from the Appellant. The Appellant advanced a sum of Rs. 1 crore that had to be repaid with interest at 18% per annum, along with a 15% share in project profits upon completion, as per an oral understanding between the parties. Despite the project's completion, the payment was not made. The Appellant issued legal notices and subsequently filed an application under Section 7 of the IBC. The NCLT rejected the application, holding that the payment was a speculative investment, not a financial debt. Aggrieved, the Appellant filed an appeal before the NCLAT.

The Appellant submitted that the amount was advanced against a fixed rate of interest at 18%, establishing the consideration for the time value of money. It was further submitted that ICICI Bank's certificates, audited balance sheets showing loans from shareholders, and TDS certificates on interest confirmed the transaction. The Appellant argued that the absence of a written agreement does not preclude a debt from being admitted as a financial debt, as oral agreements are valid under the IBC.

Per contra, the Respondent submitted that the investment lacked the characteristics of a financial debt and was in the nature of an investment linked to project profits. It was further submitted that the transaction lacked the commercial effect of borrowing. The Tribunal noted that the amount disbursed was undisputed and that there was sufficient proof that the disbursal had taken place. The fact that the sum was received by the Corporate Debtor was reinforced by their financial statements for FY 2010 and 2011, reflecting the amount as 'loan from directors and shareholders.'

The Tribunal further observed that merely TDS deduction could not establish a loan transaction. “For the transaction to have been interest-bearing in the true sense, the interest payment should have been paid annually, and corresponding TDS deductions ought to have been reflected. This does not seem to have happened. Thus, we are of the view that deduction of TDS for only two years is insufficient to determinatively conclude that interest liability was a quintessential adjunct of the sum disbursed by the Appellant,” the Bench observed.

The Tribunal further observed that the transaction made with the purpose of deriving profits on the completion of a real estate project can be considered a financial debt as it has the effect of commercial borrowing. However, this share of profit was never made part of the application under Section 7 of the IBC, and therefore, the transaction cannot be treated as financial debt.

The Tribunal further observed that the alleged default was linked to the completion of the project, which was not completed due to procedural and regulatory compliances. It held that “the Madina project was still in progress and compliances, both procedural and regulatory, were still pending. Hence, we are inclined to agree that no occasion for default can be said to have occurred as the debt was not due or payable.”

It relied on the Supreme Court's judgment in Anuj Jain, observing that “for any debt to be treated as financial debt, the pre-requisite is disbursal of money to the borrower for utilization by the borrower, and that the disbursal must be against consideration for the time value of money, even if it is not interest-bearing. As to when a Financial Creditor who has disbursed money to a Corporate Debtor against consideration for the time value of money can trigger the insolvency resolution process against the Corporate Debtor.”

Accordingly, the Tribunal dismissed the appeal, holding that the transaction lacked essential elements for being considered as a financial debt.