The Appellant (“Suspended Director”) being the suspended director of the Corporate Debtor (“Company”) has assailed the order passed by the National Company Law Tribunal, Hyderabad (“Adjudicating Authority”) allowing the petition filed under Section 7 (“Section 7 Petition”) of the Insolvency and Bankruptcy Code, 2016 (“IBC”). The Section 7 Petition was filed by an “Allottee”, i.e., the Respondent in the Appeal, who had executed three different ‘Agreements of Sale’ (“Agreement”) with the Company and had paid a sum of Rs.1,36,00,000/- as an advance for the said transaction.
It was contended on behalf of the Suspended Director that the Allottee is not a genuine home buyer but a speculative investor as he has sought to sell 5 plots out of the 10 plots to third parties for higher consideration and has then filed the Section 7 Petition, falsely claiming to be a financial creditor. Further, the Suspended Director also contended that the Allottee was only entitled to a sum, which was lesser than the threshold amount of Rs.1,00,00,000/-. It was the case of the Suspended Director that the Allottee had filed a separate suit for specific performance against the Company, which was dismissed and thereafter, an appeal was filed by the Allottee making an admission of the principal amount, which was due and payable by the Company, which was lesser than the threshold amount.
The Suspended Director, therefore, contended that (a) the Allottee does not fall within the category of a ‘financial creditor’; and (b) the Allottee cannot be permitted to add the interest component to the principal amount due and payable. The NCLAT, accordingly, framed the above two issues.
OBSERVATIONS AND ORDER BY THE NCLAT
The NCLAT has reiterated the settled position that a home buyer/ allottee is to be regarded as a financial creditor in terms of Section 5(8)(f) of the IBC. In the facts of the present case, the NCLAT held that an Allottee qualifies as a ‘financial creditor’ considering the fact that the advances given by a home buyer/ allottee to a real estate developer are to be considered as ‘borrowing’ and such amounts raised by the real estate developers from a home buyer/ allottee fall within the scope of Section 5(8) of the IBC.
The NCLAT further observed that the expression ‘borrowing’ is wide enough to include an advance given by the home buyers to a real estate developer for ‘temporary use’, i.e., for use in construction of the project so long as it is intended by the agreement to give ‘something equivalent’ to the money, back to the home buyers, under Section 5(8) of the IBC. Therefore, the NCLAT held that the Allottee is a ‘financial creditor’ and the amount paid is a ‘financial debt’.
While dealing with the contention of the Suspended Director that the Allottee is a speculative investor, the NCLAT elaborated that the Allottee is not a speculative investor as the ‘interest’ payable as per Clause 3 of the Agreement ‘cannot be equated to an assured rate of return‘ and is ‘conditional’ to not obtaining the approval of Hyderabad Metropolitan Development Authority (“HMDA”). In the facts of the present case, NCLAT deemed it essential to reproduce the relevant clause from the Agreement to state that the interest payable to the Allottee is not in the nature of an ‘assured return’. The said clause from the Agreement is set out as follows:
“Clause 3: If the vendor fails to get HMDA Approval within three months of this agreement then vendor agrees to repay the amount paid by the vendee within 2 months with an interest of 24 % per annum (payable based on number of days from the date of execution of this Agreement).”
The NCLAT also had the occasion to distinguish the judgments titled Nidhi Rekhan v. Samyak Projects Pvt. Ltd. and Ankit Goyat v. Sunitha Agarwal & Ors, wherein an allottee/ home buyer was held to be a speculative investor on the ground that the allottee had entered into an agreement with the real estate developer, the terms of which entailed a down payment and balance payment with an assured rate of return. The NCLAT observed that the facts of the present case are distinguishable as there is no ‘assured rate of return’, and hence the Allottee is not a speculative investor.
While dealing with the amount claimed to be due to the Allottee, the NCLAT noted the quantum of interest comes into play as per the relevant clauses of the Agreement. It was further observed by the NCLAT that despite having received the entire sale consideration from the Allottee, the Company had neither registered the plots nor refunded the amount. Therefore, the NCLAT held that the Company was liable to pay interest to the Allottee as per the terms of the Agreement, and accordingly, the threshold limit to file the Section 7 Petition has been duly met.
We feel that the NCLAT has passed the judgment within the four corners of the settled position of law. When the IBC was promulgated, the interest of the home buyers was not kept in mind and therefore, the home buyers were left in the lurch. It is imperative to reinstate and reiterate the background of why the home buyers were given the status of ‘financial creditors’, and why the interest of the home buyers has been protected, initially by way of Supreme Court judgments and thereafter, by amending the provisions of IBC to include the home buyers in the definition of ‘financial creditors’.
The NCLAT has rightly distinguished the facts of the present case from the judgments of Nidhi Rekhan (supra) and Ankit Goyal (supra), wherein it was held that the status of financial creditor cannot be provided to a person who, in the garb of an allottee comes in the project as a speculative investor to seek benefits from a ‘lucrative agreement’ wherein a high rate of assured return has been promised by the corporate debtor and then for no reason cancels the allotment and seeks refund. Such persons cannot be termed as allottees under Section 5(8)(f) of the IBC.
The NCLAT has also referred to the judgment of Pioneer Urban Land and Infrastructure Limited (supra) wherein the Supreme Court has observed that it is open to a real estate developer to point out that the insolvency resolution process under the IBC has been invoked fraudulently, with malicious intent or for any purpose other than the insolvency resolution.
However, in the facts of the present case, the NCLAT has observed that the Allottee is a genuine home buyer and therefore, cannot be classified as a speculative investor, more specifically, as there is no ‘assured rate of return’ or any other commercial benefit which was offered to the Allottee. Having said so, it would not be out of place to mention that the law does not lay down any guidelines to ascertain the status of an allottee/ home buyer. The same has to be dealt with, on a case-to-case basis. Like in the present case, the Allottee was held to be a genuine home buyer, despite having purchased 10 plots out of which 5 plots were sought to be sold to third parties. It would be interesting to see the law evolve on this aspect in the time to come.
Before parting, we would also like to point out that in our view, the observations of the NCLAT in relation to the amount ‘due and payable’ are correct as the same includes the components of principal outstanding and also the interest component, especially in view of the fact that the Agreement between the Company and the Allottee had a provision that enabled the Allottee to claim interest in case of a default by the Company.
 Pioneer Urban Land and Infrastructure Limited and Ors. v. Union of India (UOI) and Ors., AIR 2019 SC 4055.
 Company Appeal (AT) (Ins) No. 1035 of 2020.
 Company Appeal (AT) (Ins) No. 1020/2019.
 Bikram Chatterji v. Union of India, (2019) 19 SCC 161.