Advance paid by real-estate developer to property owner is operational debt under IBC: NCLT

The National Company Law Tribunal (NCLT), Mumbai has ruled that the advance paid by a real-estate developer to a property owner for a re-development project qualifies as operational debt under the Insolvency & Bankruptcy Code, 2016 (Sunteck Realty Limited vs Goodwill Theatres Private Limited)..The order was passed by a two-member Bench of Suchitra Kanuparthi, Member (Judicial) and Chandra Bhan Singh, Member (Technical). .The petitioner, a real-estate developer, had moved the NCLT under Section 9 IBC against the corporate debtor for default of Rs. 3.12 crore..The parties had executed a term sheet in August 2018 after the corporate debtor approached the petitioner for the redevelopment of his property..Pursuant to the term sheet, the petitioner paid an amount of Rs. 2.51 crores as an advance. The term sheet clarified that on failure to execute the Development Management Agreement within 60 days, the term sheet would automatically be terminated unless mutually extended in writing and the corporate debtor would re-pay the advance along with the interest..For various reasons, the term sheet was terminated and the Development Management Agreement was never executed between the parties..It was the petitioner’s grievance that the advance amount paid by it to the corporate debtor was not returned in spite of repeated reminders..A demand notice was issued under Section 8 for the recovery of Rs. 3,05,95,868 inclusive of interest and subsequently, the petitioner moved the NCLT..In response, the corporate debtor not only denied the termination of the term sheet but also contended that the petitioner was not an operational creditor within IBC as it had not provided any goods or services to it..It was inter alia pointed out that the term sheet was not a binding agreement between the parties and was merely an agreement to enter into an agreement..The corporate debtor also said that there was a pre-existing and bonafide dispute between the parties..The petitioner argued that liability to pay an advance money of Rs. 2.51 crores along with interest @ 24 % p.a. was admitted..Stating that under the term sheet, the corporate debtor had agreed to appoint and engage the petitioner for the performance of the services, the petitioner claimed that the advance money paid for availing goods and services was an ex-facie debt under IBC..In view of the documents and arguments of both the sides, the NCLT stated that by virtue of the “binding term sheet”, the corporate debtor had agreed to appoint the petitioner as its project manager for the performance of the services in relation to the project..The NCLT also concluded that the amount of Rs. 2.51 crores as paid to the corporate debtor was part of the service rendered by the petitioner to the corporate debtor and thus qualified as operational Debt in terms of Section 5(21) IBC..“Intention of parties while executing the binding Term Sheet clearly indicate that the Petitioner was engaged to perform the services in relation to the project as an agent/contractor on behalf of the owner and the Project Manager to accept an engagement to undertake, provide and carry out such services subject to payment of Development Management Agreement fees by the Corporate Debtor.. The mutual obligation and covenants as detailed in the binding Term Sheet and thus demonstrates that this is the service which was required to be provided by the Petitioner to the Corporate Debtor and hence, this is construed to be an Operational Debt within the meaning of Section 5(21) of the Code,” the NCLT said,.The NCLT further observed that the execution of Development Management Agreement would have qualified the petitioner to claim the Development Management Agreement fees which is an operational debt. .Since the Development Management Agreement was not executed, the termination of the binding term sheet triggered the liability of refund of moneys which could be construed as the part of the operational debt and part services rendered to the corporate debtor in accordance with mutual obligations set out in the term sheet..The NCLT accordingly opined that it was a fit case for admission and order of moratorium under Section 14 IBC was issued. .The Petitioner was represented by advocates Rohan Cama, Jasmine Sheth, a/w Advocate Deepu Jojo, i/b Wadia Ghandy and Company.Corporate Debtor was represented by Advocate Bipin Joshi..[Read Order]