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The National Company Law Appellate Tribunal (NCLAT) has remitted a case back to NCLT, Delhi which involves a question of what constitutes “financial creditor”.
In the instant case, Nikhil Mehta and Sons, the Buyer(s)/Appellant(s) had entered into different agreements/MoU(s) with AMR Infrastructure, the Respondent/Corporate Debtor, for purchase of three properties.
One of these properties was purchased by the Buyers under the “committed return plan” as per which the Buyer paid a substantial portion of the total sale consideration upfront at the time of execution of MoU. In return for this lump sump payment of almost 80% of the sale consideration, the Corporate Debtor undertook to pay a particular (monthly) amount to the Buyers till the actual physical possession of the unit was handed over to them. After paying a few instalments, the Corporate Debtor unilaterally stopped paying these instalments without assigning any reasons.
The Buyers then approached the NCLT under Section 7 of the Insolvency and Bankruptcy Code, 2017, which allows financial creditors to approach the NCLT for initiation of corporate insolvency resolution process in case of a default.
The NCLT had rejected the application because a) In their opinion, the Buyers did not fall under the definition of “financial creditors” since the debt in question was not a “financial debt” as postulated in Section 5(8) of the Code and; b) In view of winding up proceedings already pending before the Delhi High Court, the suit under Section 7 was not maintainable.
Therefore the two principle questions for consideration before the NCLAT were a) Whether the Buyers fell within the definition of “financial creditors” and, b) Whether an application under Section 7 is maintainable where winding up proceedings have been initiated at the High Court already.
In answering the first question, the NCLAT referred to various provisions of the MoU as well as the nature and conduct of parties to the transaction. It was observed that the amount deposited by the Buyers, was referred to as a “commitment charge” under the head “financial cost” in the annual returns of the Corporate Debtor – a cost which which technically includes interest on loans as well.
Further, TDS certificates showed the payment of this instalment as an “interest other than interest on securities”. While agreeing with the explanation offered by NCLT as to what constitutes a “financial creditor”, the NCLAT noted that the NCLT failed to appreciate the “nature of the transaction” and came to a (wrong) conclusion,
“that it is a pure and simple agreement of sale and purchase of a piece or property and has not acquired the status of a financial debt as the transaction does not have consideration for the time value of money.”
However, the NCLAT’s judgment remains silent as regards the second question.
The NCLAT has set aside NCLT’s order and remitted the case back to NCLT.
(Read the order)