Interest Free Maintenance Security Collected By Builder Not Financial Debt; RWA Cannot Trigger Insolvency: NCLT Jaipur
Pranav B Prem
The National Company Law Tribunal (NCLT), Jaipur Bench, has held that Interest Free Maintenance Security (IFMS) collected by a builder from flat purchasers does not qualify as a financial debt under the Insolvency and Bankruptcy Code, 2016, and therefore cannot form the basis for initiating insolvency proceedings. The tribunal ruled that a residential welfare society cannot invoke the insolvency jurisdiction on the strength of maintenance-related claims, as such amounts are not disbursed against the consideration for the time value of money.
A coram comprising Judicial Member Reeta Kohli and Technical Member Kavita Bhatnagar dismissed the Section 7 application filed by SDC Green Park Residential Welfare Society against Sand Dune Constructions Private Limited, observing that the essential ingredients required to classify a claim as financial debt under the Code were conspicuously absent in the present case.
The dispute arose from the SDC Green Park Residential Apartments Project in Jaipur, where flat buyers had paid the developer a one-time Interest Free Maintenance Security of ₹100 per square foot, aggregating to approximately ₹4.86 crore, along with club charges and contingency charges. These amounts were collected after possession of the flats was handed over and were meant exclusively for the maintenance of common areas, facilities and amenities of the completed residential complex.
The Society contended that the developer had agreed to utilise the interest earned on the lump-sum maintenance amount towards meeting maintenance expenses and had further committed, during the COVID-19 period, to make monthly maintenance payments. It was alleged that the developer failed to honour these assurances, resulting in a financial shortfall for maintenance operations, thereby entitling the Society to invoke insolvency proceedings.
Rejecting these submissions, the tribunal held that the nature of the transaction was purely maintenance-oriented and was not linked to any financing or borrowing arrangement. It noted that under Section 5(8) of the IBC, a financial debt must arise from disbursement of money against the consideration for the time value of money, which is a sine qua non for invoking Section 7 of the Code. The tribunal observed that IFMS is paid towards availing maintenance services and cannot be equated with money advanced for earning a financial return.
Relying on precedents of the NCLT Hyderabad and NCLT Mumbai, the Jaipur Bench reiterated that amounts collected towards maintenance security, even if interest-free, are in the nature of advance payments for services and do not have the commercial effect of borrowing. The tribunal specifically referred to the settled position of law that security deposits or maintenance advances do not fall within the ambit of financial debt merely because they involve payment of money.
The tribunal further held that a registered residential welfare society cannot be treated as an “allottee” for the purposes of Section 5(8)(f) of the Code, as the amount was collected after completion and possession of the flats and was not linked to the real estate project or its development. It clarified that the relationship between the parties was that of a service recipient and service provider in respect of maintenance, rather than that of a financial creditor and corporate debtor.
On this reasoning, the NCLT concluded that the Society did not qualify as a financial creditor under Section 5(7) of the IBC and that the claim arising out of IFMS could not be enforced through insolvency proceedings. The application was accordingly dismissed as not maintainable, without examining the merits of the maintenance-related disputes between the parties.
Appearance
For Petitioner: Advocate Garvit Khandelwal
For Respondent: Advocates Harish Agrawal, Krishnaveer Singh
Cause Title: M/s SDC Green Park Residential Welfare Society v. M/s Sand Dune Constructions Private Limited
Case No: CP No. (IB)-76/7/JPR/2024
Coram: Judicial Member Reeta Kohli, Technical Member Kavita Bhatnagar
