If a builder has taken a lump sum amount upfront from a homebuyer but fails to hands over the unit and also does not pay the money back promptly, consumers are free to initiate insolvency proceedings in a bankruptcy court for the recovery of their funds. But insolvency proceedings can be initiated by the buyers only if they have a proper agreement in place with the builder detailing the regular payments that are to be made.
Arrears of assured returns and money owed by a builder to a buyer with whom an agreement is in place to make regular payments qualifies as ‘financial debt’, the National Company Law Appellate Tribunal (NCLAT) has said. Persons getting assured returns can be termed as ‘financial creditors’ and can file for a corporate insolvency resolution process under Insolvency and Bankruptcy Code (IBC), the NCLAT has ruled in an appeal filed by Nikhil Mehta and Sons against AMR Infrastructure.
Nikhil Mehta entered into a ‘Committed Return Plan’ with AMR Infrastructure, under which the former paid a substantial portion of the total sale consideration upfront at the time of execution of the memorandum of understanding (MoU). As part of this plan, AMR undertook to pay a particular amount to the buyer (Nikhil Mehta) each month as ‘Committed Returns/Assured Returns’ from the date of execution of the MoU till the time the actual physical possession of the unit is handed over.
AMR started paying the committed returns, but stopped payments from April 2014 “unilaterally and without assigning any reason”. Following this, Nikhil Mehta filed an application for initiating insolvency under IBC before the National Company Law Tribunal (NCLT), principal bench, New Delhi.
NCLT dismissed the application, stating that arrears of assured returns would not be covered by the term ‘financial debt’. Following this, Nikhil Mehta filed an appeal before the NCLAT. The appeal stated, “The concept and plan of payment of ‘Committed Returns/ Assured Returns’ by builders/ real estate developers such as the respondent (AMR) is a method adopted by them to mobilise funds/raise finance from the general public/open market at much lower rates than what is normally made available by banking and other financial institutions.”
This is done “without having the obligation to offer security or any collateral and without there being any regulatory body to supervise and oversee such a transaction, thereby making the appellants (AMR) the ‘financial creditors’”, Nikhil Mehta and Sons contended. The respondent (AMR) was also deducting tax deducted at source on the amount which it was paying as ‘Committed Returns/Assured Returns’. “This, therefore, makes it clear that the payment made by the respondent to the appellants in the form of ‘Committed Returns/Assured Returns’ is nothing but a payment of “interest” to the appellants by the respondent,” the appeal stated.
Setting aside the decision of the NCLT, the NCLAT said that it failed to appreciate the nature of transactions. K S Ravichandran of KSR &Co Company Secretaries said, “The Insolvency Law Committee (ILC) had considered this decision of the NCLAT and it found that from homebuyer’s perspective the definition is sufficient, but the committee held that it may be necessary to add explanation.”
The NCLAT ruled, “It is clear that appellants are ‘investors’ and have chosen ‘committed return plan’. The respondent agreed to pay monthly committed return to 17 investors. Thus, the amount owed to the appellants come within the meaning of ‘debt’.”