NCLAT rules assured returns to home buyers as financial debt

The National Company Law Appellate Tribunal (NCLAT) has said if a builder takes some amount upfront from a homebuyer but neither hands over the property nor pays the money back instantly then homebuyers can carry forward insolvency proceedings in a bankruptcy court to recover the funds. But the buyer should have a proper agreement in place with the builder detailing the regular payments that are to be made. Arrears of assured returns and money owed by a builder to a buyer with whom an agreement is in place to make regular payments qualify as & lsquo financial debt'. It has been ruled in an appeal filed by Nikhil Mehta and Sons against AMR Infrastructure persons getting assured returns can be termed as & lsquo financial creditors' and can file for a corporate insolvency resolution process under Insolvency and Bankruptcy Code (IBC). Nikhil Mehta entered into a & lsquo Committed Return Plan' with AMR Infrastructure, under which he paid a substantial amount of the total consideration at the time of execution of the memorandum of understanding (MoU). As part of this plan, AMR undertook to pay a particular amount to Nikhil Mehta every month as & lsquo Committed Returns/ Assured Returns' from the date of execution of the MoU till the time the actual physical possession of the unit is handed over. AMR started paying the committed returns, however, stopped payments from April 2014 “ abruptly and without assigning any reason” . Following this, Nikhil Mehta filed an application for insolvency under IBC before the NCLT. However, NCLT dismissed the application, stating that arrears of assured returns would not be covered by the term & lsquo financial debt'. Later, Nikhil Mehta filed an appeal before the NCLAT. The appeal stated, “ The concept and plan of payment of & lsquo Committed Returns/ Assured Returns' by builders/ real estate developers such as AMR is a method adopted by them to mobilize funds/raise finance from the general public/open market at much lower rates than what is normally made available by banking and other financial institutions.” This is done “ without having the obligation to offer security or any collateral and without there being any regulatory body to supervise and oversee such a transaction, thereby making AMR the & lsquo financial creditors'” , Nikhil Mehta and Sons contended. AMR was also deducting tax deducted at source on the amount which it was paying as & lsquo Committed Returns/Assured Returns'. “ This, therefore, makes it clear that the payment made by the respondent to the appellants in the form of & lsquo Committed Returns/ Assured Returns' is nothing but a payment of “ interest” to the appellants by the respondent,” the appeal stated. Setting aside the decision of the NCLT, the NCLAT said that it failed to appreciate the nature of transactions. K S Ravichandran of KSR & Co. Company Secretaries said, “ The Insolvency Law Committee (ILC) had considered this decision of the NCLAT and it found that from homebuyer's perspective the definition is sufficient, but the committee held that it may be necessary to add an explanation.” The NCLAT ruled, “ It is clear that appellants are & lsquo investors' and have chosen & lsquo committed return plan'. The respondent agreed to pay monthly committed return to 17 investors. Thus, the amount due to the appellants come within the meaning of & lsquo debt'.”