NCLT Delhi Refers Key Question To Tribunal President On Whether Banks Funding Homebuyers Are Financial Creditors Of Real Estate Developer
Pranav B Prem
The National Company Law Tribunal (NCLT), Delhi Bench has referred to the NCLT President the important question of whether banks that provide housing loans to homebuyers under tripartite agreements can be treated as Financial Creditors of the real estate developer undergoing insolvency. The reference was made following conflicting opinions delivered by the two members of the bench while deciding applications filed in the corporate insolvency resolution process (CIRP) of AVJ Developers (India) Pvt. Ltd., which has been undergoing insolvency since October 2019.
The matter was heard by Judicial Member Bachu Venkat Balaram Das and Technical Member Dr. Sanjeev Ranjan. While the Technical Member held that lending banks ought to be recognised as Financial Creditors in the CIRP, the Judicial Member dismissed the applications seeking such recognition. Due to the contradictory conclusions, the bench referred the questions involved to the President of the NCLT for a final decision.
The applications in question were filed by Canara Bank, Kotak Mahindra Bank (as assignee of PNB Housing Finance Limited), and Bank of Baroda. The banks had sanctioned home loans to individual allottees of the corporate debtor’s housing project, and the loan proceeds were disbursed directly to the developer pursuant to tripartite agreements involving the borrower, the lending bank, and the corporate debtor. The banks submitted that those agreements obligated the developer to refund the entire loan amount in specific scenarios, including default by the borrower, cancellation of allotment or failure to complete the project. According to them, these repayment obligations constituted financial debt under Section 5(8) of the Insolvency and Bankruptcy Code, thereby entitling them to be treated as Financial Creditors. Canara Bank and Bank of Baroda further asserted that they should be classified as Secured Financial Creditors, while Kotak Mahindra Bank sought recognition also in the capacity of an allottee.
The Resolution Professional opposed the claims and maintained that the loan transactions were between the banks and the homebuyers and not between the banks and the corporate debtor. It was submitted that the refund clauses in the agreements were merely indemnity mechanisms and did not reflect any borrowing by the developer. The RP argued that no financial debt existed between the corporate debtor and the banks, and therefore there was no basis to include the banks in the class of Financial Creditors.
The application filed by Canara Bank had previously been remanded by the National Company Law Appellate Tribunal with observations that the clauses in the tripartite agreements in this project appeared to place a direct refund obligation on the builder. Relying on those observations, the Technical Member held that the banks’ claims should be treated as financial debt and accepted by the Resolution Professional. The Judicial Member, however, found that the corporate debtor was not the borrower and that the disbursal of loan amounts to the developer was not equivalent to money being raised from the banks by the developer. He held that the refund clauses did not convert the arrangement into a financial debt under the Code.
In view of the opposing conclusions, the bench referred the following issues for consideration by the NCLT President: whether tripartite agreements of this nature create financial debt under Section 5(8) of the IBC where the homebuyer has not filed a claim; whether the applicant banks can be admitted as Financial Creditors or as Secured Financial Creditors; whether Kotak Mahindra Bank can be regarded as an allottee; and whether the Resolution Professional is required to accept the claims and safeguard the charged assets in favour of Bank of Baroda.
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With the members unable to reach a unanimous view and recognising the wider implications of the answer for real estate insolvency matters, the bench directed that the matters be placed before the President for further orders.
Appearance
For Bank of Baroda: Advocate Vishal Majumdar
Cause Title: Vishal Fabrics & Ors. V. AVJ Developers (India) Pvt. Ltd.
Case No: I/A- 836/2023, IA-6671/2023. IA – 1006/2024 IN CP (IB) 654(PB)/2019
Coram: Judicial Member Bachu Venkat Balaram Das, Technical Member Dr. Sanjeev Ranjan
