Operational Creditor Cannot Become Financial Creditor Through Settlement: NCLT Mumbai

The National Company Law Tribunal (NCLT) at Mumbai has recently reaffirmed that an operational creditor cannot be converted into a financial creditor by way of a settlement with the corporate debtor.

At the outset, the tribunal noted that Capacite Infraprojects Ltd was engaged only as a contractor for construction of 16 SRA buildings, and that the flats were never part of a real estate transaction between the parties. The units came into the picture much later, when the real estate developer, Radius & Deserve Builders LLP, offered them purely as a method of settling unpaid operational dues.

Relying on the NCLAT's ruling in Mahi Buildhome Pvt. Ltd. vs. Unibera Developers Pvt. Ltd, a coram of Judicial Member Lakshmi Gurung and Technical Member Hariharan Neelakanta Iyer observed,

“In the present case also, the Applicant was allotted 10 flats on account of settlement with the corporate debtor towards unsatisfied operational debt and there is no money disbursed by the operational creditor to the CD. An operational creditor, cannot be converted into a financial creditor by way of a Settlement with the corporate debtor.”, it observed. 

Capacite and the developer had executed a settlement under which Rs 6 crore was to be paid for pending contractor dues. After the developer failed to pay, Capacite issued demand notices and filed a Section 9 application to initiate insolvency in response to which the amount of Rs. 4.98 crores was paid. The developer then offered 10 flats in its “Anantya” project towards the remaining dues, an offer the applicant initially denied.

During the proceedings, the developer filed an affidavit confirming the allotment, and Capacite accepted the units and withdrew its petition on April 19, 2023.

After Radius & Deserve Builders LLP was admitted into insolvency on a petition by Amit Infra-Logic (India) Pvt Ltd in September 2023, Capacite submitted a claim as a financial creditor in the homebuyer class. It argued that the allotment made it an allottee under section 2(d) of RERA and that the value adjusted for the flats should be deemed a financial debt under section 5(8)(f) of the Code.

The resolution professional and other stakeholders opposed the claim, arguing that Capacite had not paid any consideration for a flat purchase, had no registered agreement for sale, and had accepted the units solely as a settlement of contractor dues. They argued that transactions involving reciprocal arrangements or non-monetary exchanges do not result in a financial debt under the Code.

The tribunal noted that Capacite itself had earlier denied the validity of the alleged allotment letters and that the documents were accepted only during settlement discussions.

It also emphasised that the Supreme Court's ruling in Pioneer Urban Land and Infrastructure Ltd v Union of India requires that a financial creditor in a real estate project must have actually advanced funds to the developer.

Referring to the law, the tribunal said, “ there must be amount raised from the allottee under a real estate project, then only such amount shall be deemed to be an amount having the commercial effect of a borrowing.”

The tribunal found that no money had ever been advanced by Capacite to the developer and that the flats were offered only to settle outstanding operational dues, which the applicant accepted solely to recover what it was owed. Consequently, it held that Capacite could not be categorised as a financial creditor or a homebuyer and directed the resolution professional to examine and verify its claim only as an operational creditor.

Case Title: Capacite Infraprojects Ltd. Vs. Jayesh Natvarlal Sanghrajka (RP) of Radius & Deserve Builders LLP and Ors

Click Here To Read/Download Order