Amount invested in real estate project by promoter is not financial debt under Section 5(8) of IBC: NCLAT

The National Company Law Appellate Tribunal (NCLAT) has held that an amount invested by a promoter in a real estate project would not fall within the ambit of 'financial debt' as defined under Section 5(8) of the Insolvency and Bankruptcy Code (IBC) [Jagbasera Infratech Private Ltd v. M/s Rawal Variety Construction]..The Bench of Judicial Member Justice Anant Bijay Singh and Technical Member Shreesha Merla noted that the relationship between the appellant and the respondent in this case was that of land owner and developer, and thus, any amount invested towards the completion of the real estate project could not be viewed as a financial debt..The Tribunal was hearing an appeal against an order of the Chandigarh Bench of the National Company Law Tribunal (NCLT) which dismissed a petition filed by the appellant under Section 7 of the IBC, seeking to initiate the Corporate Insolvency Resolution Process (CIRP) against the respondent company..The appellant had entered into a Memorandum of Understanding (MoU) with the respondent in 2011 and a Joint Venture Agreement in 2012 to develop a plot of land owned by it and to construct studio apartments, club, jogging track, shops, dormitory, children park on the said plot. The Joint Venture Project, called ‘Valley View Apartments Project’, was to be launched and promoted in the name of appellant.It was claimed that between 2011 and 2018, the appellant paid an amount of ₹4,21,37,850 to the respondent, which defaulted in returning the said amount. The appellant thus sought to set in motion the process under the IBC for recovery of the said amount. Before the NCLAT, the appellant claimed that it fulfilled all the essential characteristics to be defined as a 'financial creditor’ under Section 5(7) of the Code..The main question before the NCLAT was whether the appellant, who has invested in a real estate Joint Venture Project in the capacity of a promoter, can fall within the ambit of the definition of financial creditor as defined under Section 5(7) of the IBC.After going through the MoU, the Tribunal noted that it was crystal clear that the appellant was classified as a promoter and the respondent as a developer. In this light, the judgment stated,"A careful perusal of the Memorandum of Understanding shows that the relationship between the Appellant and Respondent is that of land owner and developer and furthermore viewed from any angle the amount invested by the Appellant towards the completion of the Project cannot be termed to be a ‘Financial Debt’ as defined under Section 5(8) of the Code. Having regard to the nature of the transactions between the Appellant and the Respondent this Tribunal is of the earnest view that the Appellant does not fall within the definition of term ‘Allottee’.".Thus, it was held that the amount invested in the Joint Venture Project by the appellant in its capacity as a promoter or investor does not fall within the ambit of the definition of ‘financial debt’ as defined under Section 5(8) of the Code..Advocates Sumant Bharadwaj, Vedant Bharadwaj and Mridula Ray Bharadwaj appeared for the appellant. Advocate Arihant Goyal represented the respondent..[Read judgment]