India: Nikhil Mehta & Sons (HUF) & Others V AMR Infrastructure Limited – A Look At Why The NCLAT Overruled The NCLT

The Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as "IBC") is a fairly new legislation and therefore the provisions are still in the early stages of interpretation and haven't become settled law yet. An example of such a provision can be found under section 5(7) of the IBC which defines "Financial Creditor". The definition of "Financial Creditor" came under scrutiny in the NCLT Principal Bench judgment of Nikhil Mehta & Sons (HUF) & Others v AMR Infrastructure Limited1 and further before the NCLAT on appeal.2

In the given case, the Applicants-Appellants had signed a Memorandum of Understanding with the Respondent, wherein the Appellants would purchase properties from the Respondent. In return for a substantial portion of the total money paid upfront, the Respondent promised to pay monthly "assured returns" from the time of signing of the MOU till the time the possession was delivered to the Appellants. After paying these assured returns for some time, the Respondent defaulted on its payments. Following this, the Appellants filed an application under section 7 of the IBC. The question to be decided was whether this arrangement was a simple sale transaction and the Appellants were mere buyers or, whether the Appellants were financial creditors under section 5(7) read with section 5(8) of the IBC and therefore, were allowed to make an application under section 7 of the IBC.

The Appellants had contended that, the transaction was a method of raising funds from the market at low rate and the "assured returns" were in the nature of interest. The Appellants relied on an order passed by SEBI, wherein it held that such transactions where the developer assured to pay assured returns to the buyer "are not pure real estate transactions, rather they satisfy all the ingredients of a Collective Investment Scheme as defined under section 11AA of the SEBI Act." Based on this, the Appellants contended that the transaction was in the nature of "fund mobilisation activity" and the "assured returns" was nothing more than the interest paid on such funds. To support this contention, the Appellants also relied on the fact that in the balance sheet of the Respondent these assured returns were getting shown as "Commitment Returns" under "Financial Cost" and were also deducting TDS on this amount under the head "Interest, other than Interest on Securities."

The NCLT in its Judgment examined the definitions of "Financial Creditor and "Financial Debt". It came to the conclusion that a Financial Debt would be a debt along with interest that was disbursed against time value of money – meaning, that the inflow and outflow must be distanced by time and there would be some compensation for the time value of money. The NCLT observed –

"The Key feature as postulated by section 5(8) is its consideration for time value for money. In other words, the legislature has included such financial transactions in the definition of 'Financial debt' which are usually for a sum of money received today to be paid for over a period of time in a single series of payments in the future. It may also be a sum of money invested today to be repaid over a period of time in a single or a series of instalments to be paid in the future."

Based on this logic, the NCLT concluded that the present transaction was a simple sale transaction and the mere payment of "assured returns" was not enough to bring it under sections 5(8) of the IBC as there was no "consideration for the time value of money".

On appeal, the NCLAT upheld the NCLT's observation regarding section 5(8) and "time value of money" being an essential requirement of a financial debt. However it took a different view with respect to the Appellants' status as financial creditors. The NCLAT observed that in the MOU signed between the Appellants and the Respondent, the Appellants were referred to as "Investors". Thus, the Appellants were "investors" who were investing in a "committed returns plan" whereas, the Respondent agreed to pay a monthly committed return to their Investors. Logically, it followed that committed returns would be in the nature of "debt" under section 3(11) of the IBC.

Moving on to the debate regarding whether the debt would be a financial debt or not, the NCLAT after a perusal of the financial returns of the Respondent noticed that the assured returns payable by them were shown under "commitment charges", at par with "Interest on Loans" under the heading of "Financial Costs". In addition, the Respondent had also under section 194A of the Income Tax Act, 1961 deducted TDS from these payments under the head of "Interest, other than securities". Further, the NCLAT also observed that this transaction was of a nature that was a sale which had the commercial effect of borrowing and the Appellants had disbursed the amount against the "time consideration of money". Based on these factors, the NCLAT concluded that the amounts invested by the Appellants was not a mere sale transaction, but would indeed come under the meaning of Financial Debts under section 5(8) of the IBC.

It is pertinent to note that in an even more recent judgment of Anil Mahindro and Another v Earth Iconic Infrastructure (P) Ltd3 the NCLAT reiterated the position it had taken in the Nikhil Mehta Case. In this case, the facts were similar to the Nikhil Mehta Case. An MOU was signed by the Appellants and the Respondents wherein the Respondents promised to pay "committed returns" till the time possession of the sale properties were handed over to the Appellants. When the Respondents stopped paying the committed returns amount, the Appellants filed an application under section 7 of the IBC. The Principal Bench of the NCLT Delhi rejected the application as it considered this transaction a simple sale transaction.4 On appeal however, the NCLAT revered this finding. Based on its own pronouncement in the Nikhil Mehta Appeal Judgment, the NCLAT held that in the present case also, the Appellants were playing the role of investors, the money given by them to the Respondents was in the nature of a loan, satisfying the condition of amount "disbursed against the consideration for time value of money" and, the committed returns were in the nature of "interest". Thus, there was a debt under section 5(8) of the IBC and the Appellants were Financial Creditors under section 5(8) of the IBC.


1 (ISB)-03(PB)/2017 (January 23, 2017)

2 Nikhil Mehta and Sons v AMR Infrastructure Company Appeal (AT) (Insolvency) No. 7 of 2017 (July 21, 2017)

3 Company Appeal (AT) (Insolvency) No. 74 of 2017 (August 2, 2017)

4 In line with its reasoning in Nikhil Mehta v AMR Infrastructure (ISB)-03(PB)/2017 (January 23, 2017)

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