Assured returns as ‘financial debt’ and legal remedies available to flat buyers under the Insolvency and Bankruptcy Code – An article by Vijay K. Sondhi

Assured returns as ‘financial debt’ and legal remedies available to flat buyers under the Insolvency and Bankruptcy Code (“IBC”)[1] 

The position of Flat buyers under the IBC has been a contentious issue. The recent NCLAT decision in Nikhil Mehta v. AMR Infrastructure[2] has, to a great extent, cleared the airs on the issue. In this case, the NCLAT has ruled that a purchaser of real estate, under an ‘Assured-return’ plan, would be considered as a ‘Financial Creditor’ for the purposes of IBC and is, therefore, entitled to initiate corporate insolvency process against the builder, in case of non-payment of such ‘Assured/Committed return’ and non-delivery of unit.

In this case the Appellant had booked a residential unit, office space and a shop in a project being developed by AMR. The unit never came to be delivered to the Appellant. The contractual arrangement between the Appellant and the Builder is important. The Appellant had an MoU with AMR, whereby AMR had assured ‘Assured/Committed returns’ to him, from the date of execution of the MoU till the handing over of the physical possession of the unit(s). This was ostensibly done in view of the substantial down payment made by the Appellant. The Assured returns were paid for some time, however, the payments dwindled and then stopped altogether. Despite various demands, no further payments were made by the Builder. This constrained the Flat buyer to initiate Insolvency process against the Builder.

Much to the chagrin of the Flat buyer/Appellant, the NCLT dismissed the Application on the singular premise that the agreement in question was clearly a ‘pure and simple agreement of sale and purchase of a piece of property and has not acquired the status of a financial debt as the transaction does not have consideration for the time value of money. The NCLT held, that disbursal of monies ‘against the consideration for the time value of money’ was an essential precondition for the debt to qualify as a ‘financial debt’; the NCLT, ruled, that the same was absent in the present case and the clause relating to ‘assured return’ is associated with the delivery of possession and, therefore, not a ‘Financial Debt’.

This led to the matter being escalated to the NCLAT, where it was vehemently argued that : through this mechanism of ‘Assured returns’, a huge amount of money was mobilized by AMR to ensure the development of the project, without any collateral or security. In absence of this scheme, AMR would have been constrained to procure this amount from financial institutions at extremely high interest rates. Instead, this amount was secured from unsuspecting buyers on the guarantee and under the garb of ‘Assured/Committed returns’. It was argued that this made the Appellant (and by extension, the other flat buyers) more akin to an ‘Investor’ or ‘Creditor’ to whom money is owed, rather than a mere purchaser of property. Reliance was sought to be placed by the Appellant on the admitted and documented payment of ‘Commitment Charges’ by AMR to the Appellant under the head of ‘Financial Costs’.

The NCLAT, reversing the decision of the NCLT, ruled in favour of the Flat Buyer and held it to be a ‘Financial Creditor’. The operative part of the decision reads: “It is clear that Appellants are ‘investors’ and has chosen ‘committed return plan. The Respondent in their turn agreed upon to pay monthly committed return to investors.”

It is manifest that what swung the decision in favour of the flat buyer was the fact that the amount deposited by ‘investors’, including the appellant “was shown as committed return while giving the ‘financial cost’/at par with interest on loans”. This accounting treatment made the debt more akin to a ‘financial debt’ than anything else. Further, AMR had deducted Tax at source (“TDS”) on the ‘Assured return’ payments made to the Appellant under the head of ‘Interest, other than Interest on securities’, thereby making the entire arrangement more identifiable as a loan arrangement (premised on time value of money) than anything else, on which periodical interest was due and payable.

NCLAT further went on to rule that the ‘debt’ in this case was disbursed against the consideration for the ‘time value of money’ which is the primary ingredient that is required to be satisfied in order for an arrangement to qualify as ‘Financial Debt’ and for the lender to qualify as a ‘Financial Creditor’, under the scheme of IBC.

With these observations, Appellant was held to be a ‘Financial Creditor’.

I feel that the decision is a welcome one and based on sound business/economic rationale. It is a fundamental economic principle that money today is more valuable than same amount of money tomorrow. Possession of a sum of money today is certain but expectation of the same amount of money in future involves uncertainty. There is always a lurking possibility that the future money never gets repaid and possession of the property never gets delivered for whatever reason. This is where ‘Assured-return’ scheme kicks in and tries to neutralize that risk and offsets the opportunity cost of parting with a huge amount in advance, without anything tangle in return immediately. To preserve the ‘time value of money’, ‘assured return’ clauses are provided and should be construed in that light. Further, the payment of ‘interest’ on the amount paid by purchaser is nothing but recognition of ‘time value of money’. The judgment correctly brings within the fold of ‘Financial Debt’ such an arrangement and allows the purchaser to invoke insolvency as a ‘Financial Creditor’.

This judgment is extremely important for one more reason as, in a related development earlier, the NCLT in Col. Vinod Awasthy v. AMR Infrastructure Ltd. (Principal Bench-Delhi)[3] faced with the question as to whether flat buyer is an ‘operational creditor or not?’ held that a purchaser of a flat cannot be treated as a provider of ‘goods’ or ‘services’ to the builder and therefore, does not qualify as an ‘Operational Creditor’ and cannot initiate Insolvency Process. In this backdrop, the judgment under discussion assumes great significance as it protects and preserves an effective remedy, for at least a class of flat buyers(who have assured return clauses), under the IBC.

However, the situation still remains a bit uncertain for flat buyers whose contracts do not incorporate similar clauses; it appears that this class of flat buyers might not qualify as ‘Financial’ or ‘Operational’ creditors, and therefore, may not be entitled to invoke insolvency process under IBC. However, even those flat buyers who do not qualify as either ‘Financial’ or ‘Operational’ creditors, may still file their claims with the Insolvency Resolution Professional (“IRP”) in terms of form F[4], provided of course, the insolvency process otherwise stands initiated at the behest of an ‘Operation’ or ‘Financial’ creditor. For those flat buyers who are interested in taking possession of their units on payment of balance amounts, once the Insolvency process is in motion, the collective wisdom of the IRP and the Creditors Committee governs whether the Company goes towards a revival (which may mean continuance of projects and delivery) or liquidation, in which case the assets are liquidated, and in all probability, flat buyers end up being entitled only to refund of their money, either as Financial or other creditors, depending on the nature of their agreement with the builder. However, Flat buyers, under the IBC, absent an assured-return clause, do not fall under the category of secured creditors like banks and may figure very low in the pecking order and consequently may get their money back only if something is left after repaying secured and operational creditors.

In this regard, Supreme Court’s intervention in the Jaypee Infratech case is notable. In a petition filed by IDBI Bank, an Interim Resolution Professional (IRP) was appointed to liquidate Jaypee Infratech’s assets. However, under the scheme of IBC, debts due to financial creditors like banks take precedence over claims of flat buyers. Notably in this case, the monies due to IDBI were in the range of 526 crores, as opposed to 32,000 home buyers who had infused a staggering sum of Rs. 25,000 crores in Jaypee Infratech.

In this background, the Supreme Court, in exercise of its powers under Article 142 of the Constitution, intervened and with a view to protect the interests of the home buyers, directed Jaypee Group to deposit a sum of Rs 2,000 crore within 45 days and assured the flat-buyers that, if deemed necessary, the court may ask the Jaypee to deposit another Rs 10,000-15,000 crore for the speedy completion of the projects. It also asked the insolvency professional to draw up a resolution plan for the company within 45 days, which should take care also of the interests of the homebuyers. The court further prevented Jaypee Infratech from alienating any assets or creating third-party rights. The directors of both companies cannot travel abroad without the court’s permission. Notably, the Supreme Court has also pierced the corporate veil and overcame the technical difficulty which arose due to the fact that most flat-buyers received the flat allocation letters from Jaiprakash Associates Limited (JAL), which is the holding company, however, payments were made to Jaypee Infratech Limited (JIL), another SPV created by it for that purpose. However, this possible attempt at trying to disclaim liability (and hedge risks!) on the basis of ‘limited liability’/ ‘separate legal entities’ was somewhat pierced through by the Supreme Court in having JAL take responsibility for the crisis, notwithstanding that it was JIL and not JAL which was under liquidation. The move has been decried by certain quarters, primarily for being against the principles of corporate limited liability. Further, it has been argued that there is “no rationale for asset stripping in a company that is not party to the insolvency proceedings.” However, all said and done, the intervention and oversight of the Supreme Court is extremely welcome and may ensure the protection of the legitimate interests of home buyers, who otherwise stood the risk of being disadvantaged due to the existing scheme of things under the Insolvency and Banking legal regime, and its strict/technical application.


[1] The author of this article, Vijay K. Sondhi is a Senior Partner at Luthra and Luthra Law Offices, New Delhi, India. (Views and opinions expressed in this article are those of the authors and do not necessarily reflect the views of the firm). Research contribution by Bharat Chugh, Managing Associate, Luthra and Luthra Law Offices.

[2] Company Appeal (AT) (Insolvency) No. 7 of 2017; Judgment delivered on 21st July, 2017. The judgment has been followed by the NCLAT recently in Anil Mahindroo & And v. Earth Iconic Infrastructure (P) Ltd (Date of Decision 02.08.2017) to the same effect.

[3] NCLT, Principal Bench, Delhi in CP No. (IB)-10(PB)/2017; Date of Decision 20.02.2017.

[4]  The Insolvency and Bankruptcy Board of India (“IBBI”) recently on 16 August, 2017 amended the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, and the Insolvency and Bankruptcy Board of India (Fast Track Insolvency Resolution Process for Corporate Persons) Regulations, 2017 and introduced a form (Form F) for submission of claims by creditors other than financial and operational creditors to the interim resolution professional (“IRP”) by virtue of the newly inserted regulation 9A under the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 carves out a detailed provision for filing and proving claims by other creditors.

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