India: Case Note: Settlement For Repayment Between Builder And Buyer Is "Financial Debt"

The National Company Law Tribunal (NCLT), New Delhi, Bench-III in the case of Ajay Kumar Gupta & Anr, and Mrs. Poonam Gupta vs. IERO Fiveriver Pvt. Ltd. [C.P. No. IB-355/ND/2017] held that the amount payable by a builder to buyer under a settlement deed resulting from non-fulfillment of obligations (relating to allotment and possession) is "financial debt" under Section 5(8) of the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as "IBC") and the buyer can file application under Section 7 as "Financial Creditor" for the recovery of the same. 

Background Facts:

Mr. Ajay Kumar Gupta and Mrs. Poonam Gupta (hereinafter "Applicants" or "Financial Creditors") entered into an agreement (hereinafter referred to as "Plot Buyer's Agreement") dated 27.06.2011 with IERO Fiveriver Pvt. Ltd. (hereinafter referred to as "Corporate Debtor") for the purchase of a plot in Haryana promoted by the Corporate Debtor under the project "IERO FIVERIVER". As per the Plot Buyer's Agreement, the plot was required to be handed over to the Applicants within a period of maximum 42 months (3 years 6 months) but the possession was not granted even after the lapse of 5 years, though a sum of Rs. 90 (ninety) lacs was remitted to the account of the Corporate Debtor on account of allotment and delay in possession of the plot. Thereafter, a Settlement agreement dated 15.02.2017 was entered between the Applicants and the Corporate Debtor for the repayment of the money received by the Corporate Debtor from the Applicants along with the agreed interest @ of 9% per annum for which the tax had to be deducted at source.   The repayment had to be done in installments, pursuant to which two cheques issued in favor of the Applicants were dishonored and returned by the bankers for the reason "insufficient funds". The dishonor of cheques was communicated to the Corporate Debtor, who acknowledged the default and hence, going forward the Applicants filed the application under Section 7 of IBC.

Contentions by the Corporate Debtor:

It was argued that the Applicants are not "Financial Creditors" under Section 5(7) and the debt cannot be categorized as "financial debt" under Section 5(8) of the IBC and hence, the application is not maintainable.

It was also contended that the deduction of tax at source under Section 194A of the Income Tax Act, 1961 in relation to the interest paid by the Corporate Debtor does not change the status of the Applicants from a flat buyer to a financial creditor. The deduction of tax at source (TDS) is a statutory obligation and the Income Tax Act does not make a classification as to the payment of interest. Also, to rely upon the deduction of income tax in relation to interest payment by financial creditors in order to establish "debt" under IBC is not provided for.

Further, the Corporate Debtor placed reliance on the Settlement Agreement to state that nowhere have the Applicants been classified as "Financial Creditors" and the respondent herein as "Corporate Debtors" and thus, there was no intention of the parties to classify themselves as such.

Decision:

It was held that the Settlement Agreement abrogated the Plot Buyer's Agreement and the Settlement Agreement entered between the Corporate Debtor and Applicants gives the cause of action for the application under Section 7 of the IBC. The parties on their own volition had entered into the said Settlement Agreement whereby the amount paid by the Applicants has been treated as a debt repayable along with interest and hence the Applicants herein can be classified as "Financial Creditors".

Thus, reference to the definition of "financial debt" and "financial creditor" under Sections 5(8) and 5(7) respectively shows that there is a debt in fact owed to the Financial Creditors under the Settlement Agreement towards repayment of the amounts received by the Corporate Debtor along with the interest @ 9% per annum and the said debt can be classified as "financial debt". Further, the cheques return memo clearly discloses the default in the payment of debt due to the Financial Creditors by the Corporate Debtor. The endorsement made by the bankers also show that the cheques have been returned for the reason of "insufficient funds". To conclude, it was held that a default has been committed in terms of Section 3(12) of "financial debt" as defined under Section 5(8) and that the Financial Creditor who can be classified as falling within the definition under Section 5(7) is entitled to invoke the provisions of IBC.

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