NCLT New Delhi Ruling: Maintenance Charges & IFMS Not Financial Debt Under IBC Section 5(8)

August 3, 2024

The National Company Law Tribunal (NCLT) New Delhi bench, comprising Bachu Venkat Balaram Das (Judicial Member) and Atul Chaturvedi (Technical Member), has ruled that maintenance charges and interest-free maintenance security (IFMS) do not qualify as financial debt under Section 5(8) of the Insolvency and Bankruptcy Code (IBC).

Summary of the Case:

The case involved an application jointly filed by the ILD Owners Welfare Association, a registered Residents’ Welfare Association representing the owners and residents of “ILD Trade Centre” (referred to as “the Society” or “the Financial Creditor”). The application was made under Section 7 of the IBC and Rule 4 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016, seeking the initiation of Corporate Insolvency Resolution Process (CIRP), a moratorium, and the appointment of an Interim Resolution Professional against M/s. ALM Infotech City Private Limited, the Corporate Debtor.

The Applicant argued that the Corporate Debtor, as the developer of the ILD Trade Centre project, had collected ₹2.95 crores as an interest-free maintenance deposit from residents. This amount was supposed to be transferred to the Applicant per the Conveyance Deed. The Applicant contended that this deposit constituted financial debt.

The NCLT directed the Applicant to file an affidavit confirming whether the amount qualified as financial debt under Section 5(8) of the IBC. The affidavit referenced the Conveyance Deed, which included Clause 26 stipulating that the financial debt was to be transferred to the Society upon its formation.

The Applicant also argued that the money raised for maintenance, paid by apartment owners at the time of possession, was to be held by the Corporate Debtor until the society was formed, and that this constituted financial debt.

NCLT Observations:

The NCLT referred to the Delhi bench decision in The Verandas Apartment Owners Association Vs. M/s. Saluja Construction Company Ltd, which defined financial debt under Section 5(8) of the IBC as debt disbursed against the consideration for the time value of money. The Tribunal noted that financial debt includes borrowing with interest, amounts raised through credit facilities, and transactions with a commercial effect of borrowing.

Further, the Delhi bench referenced the Supreme Court decision in Anuj Jain, RP for Jaypee Infratech Ltd. vs. Axis Bank Ltd., clarifying that financial debt must involve consideration for the time value of money. This principle also applies to transactions under clauses (a) to (i) of Section 5(8). Additionally, in Pioneer Urban Land Infrastructure Ltd. & Anr. vs. Union of India & Ors., the Supreme Court ruled that amounts raised for real estate projects should aim for profit to be considered financial debt.

The Delhi bench noted that since possession had been given to allottees and the issue was limited to the maintenance corpus, which was intended for project maintenance and not profit, the amounts collected resembled advance payments for services rather than financial debt.

The NCLT also referred to previous decisions, including the NCLT Mumbai bench’s ruling in Innova Premises Co-operative Society Limited vs. Marathon Nextgen Realty Limited and the NCLT Hyderabad bench’s ruling in Vasathi Anandi Owners Welfare Association vs. Vasathi Housing Limited, which held that amounts collected for maintenance purposes do not qualify as financial debt.

Conclusion:

The NCLT concluded that maintenance charges and IFMS do not constitute financial debt under Section 5(8) of the IBC. As a result, the application filed under Section 7 of the IBC was deemed not maintainable and was dismissed.

Posted and reproduced in Public Interest by

Adv. Sulaiman Bhimani Legal Consultant

Expert in RERA & Consumer Matters, Co-operative Scty Matters,

Deem Conveyance, Family Matters, and Property Disputes.

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President Citizens Justice Forum https://citizensjusticeforum.in