NCLT Delhi Seeks Tribunal President's View On Whether Banks Lending to Homebuyers Are Financial Creditors Of The Developer

The National Company Law Tribunal (NCLT), Delhi, has referred to its President the question of whether banks that advanced housing loans to homebuyers under a tripartite agreement be treated as Financial Creditors of the real estate developer undergoing insolvency, after its two members issued conflicting rulings in the CIRP of AVJ Developers (India) Pvt Ltd.  AVJ has been in insolvency since October 2019.

The matter was heard by Judicial Member Bachu Venkat Balaram Das and Technical Member Dr Sanjeev Ranjan. The Technical Member held that the applicant banks should be recognised as Financial Creditors, while the Judicial Member dismissed all three applications.

Owing to the contradictory findings, the bench placed the issue before the NCLT President for a final decision.

The applications were filed by Canara Bank, Kotak Mahindra Bank as assignee of PNB Housing Finance Limited, and Bank of Baroda. The banks had provided housing loans to individual allottees of the Corporate Debtor's project, and the loan amounts were disbursed directly to the builder under Tripartite Agreements involving the bank, the borrower and the Corporate Debtor.

The banks submitted that clauses in these Agreements required the Corporate Debtor to refund the entire loan amount in circumstances such as borrower default, cancellation of allotment or failure to complete the project.

They argued that these obligations created a financial debt under Section 5(8) of the Insolvency and Bankruptcy Code and entitled them to be treated as Financial Creditors. Canara Bank and Bank of Baroda also sought recognition as Secured Financial Creditors. Kotak Mahindra Bank additionally sought admission as an allottee.

The Resolution Professional opposed the claims on the ground that the loans were granted to homebuyers and not to the Corporate Debtor and that the refund clauses amounted only to indemnity provisions. The RP stated that the Corporate Debtor did not owe any financial debt to the banks.

The Canara Bank application had earlier been remanded by the NCLAT with observations that the clauses in these specific Tripartite Agreements appeared to impose a direct refund obligation on the Corporate Debtor. The Technical Member relied on these observations and held that the banks' claims should be admitted as financial debt. The Judicial Member disagreed and held that the builder was not the borrower and that the refund clauses did not create a financial debt within the meaning of the Code.

Since the Members arrived at opposite conclusions, the bench referred to the NCLT President the questions of whether the Tripartite Agreements create financial debt under Section 5(8) of the IBC in cases where the homebuyer has not filed a claim, whether the claims of the applicant banks should be admitted as those of Financial Creditors or Secured Financial Creditors, whether Kotak Mahindra Bank can be treated as an allottee and whether the RP must accept the claims and secure the charged assets in favour of Bank of Baroda.

The bench directed that the matters be placed before the President for further orders.

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