Relinquishment Of Development Rights Does Not Amount To Financial Debt: NCLT Delhi

The National Company Law Tribunal (NCLT) New Delhi, has refused to admit an insolvency plea against real estate firm Vipul Ltd, holding that the surrender of development and land-related rights under a joint development arrangement does not amount to “financial debt” under the Insolvency and Bankruptcy Code.

A bench of Judicial Member Ashok Kumar Bhardwaj and Technical Member Ravindra Chaturvedi held that insolvency proceedings under Section 7 of the Code can be initiated only by a financial creditor. For this, the claimant must show a financial debt, which requires disbursal of money against consideration for the time value of money.

“The relinquishment of rights, benefits or entitlements accruing to the First Party cannot be treated as transaction under Section 5(8)(f) of the IBC, 2016. As can be seen from clause f of sub-section 8 of Section 5, only an amount raised under a transaction can be treated as financial debt,” the tribunal held.

The tribunal was hearing an application filed by Wild Flower Farms and Estate Pvt. Ltd. seeking initiation of the corporate insolvency resolution process against Vipul Ltd for an alleged default of about Rs 57.44 crore, along with an additional Rs 3.5 crore.

The dispute arose from a real estate development arrangement dating back to 2007. Vipul's subsidiary, URR Housing Pvt. Ltd., had entered into a joint development agreement with landowners for developing a residential project in Gurugram. In 2013, the landowners assigned their rights under the development agreement to Wild Flower Farms, with Vipul Ltd joining as a confirming party.

After disputes over development obligations and arbitration proceedings, the parties entered into a relinquishment agreement in February 2024. Under this agreement, the Wild Flower irrevocably surrendered all its development rights, claims, benefits and its 4.09 percent interest arising from the joint development arrangements in favour of Vipul Ltd, in return for agreed payments.

Vipul made partial payments, but several post-dated cheques issued towards the remaining amount were dishonoured. This led the applicant to approach the NCLT under Section 7 of the Code, which allows a financial creditor to trigger insolvency proceedings on the occurrence of a default.

Vipul opposed the plea, arguing that the transaction was not a financial borrowing but arose from a joint development arrangement. It submitted that the applicant had not disbursed any money to Vipul for consideration of time value, which is a mandatory requirement for a claim to qualify as financial debt under Section 5(8) of the Code.

Accepting this argument, the tribunal held that the relinquishment agreement merely recorded the surrender of contractual and development rights.

“Such Agreement cannot be pursued as financial debt which is disbursed against the consideration for the time value of money.” the tribunal said.

The NCLT further held that disputes arising from such relinquishment agreements are civil in nature and must be pursued through contractual remedies. “If there was any deviation from the contract, the parties had their own remedies,” it observed.

Finding that neither a financial debt nor a default was made out under the Code, the tribunal rejected the insolvency application