Introduction

In a significant development for financial institutions involved in real estate financing, the National Company Law Appellate Tribunal (NCLAT), New Delhi Bench, has clarified the parameters for classifying lending banks as Financial Creditors under the Insolvency and Bankruptcy Code, 2016 (IBC). This ruling, delivered by the bench comprising Justice Rakesh Kumar Jain (Judicial Member) and Technical Member Mr. Naresh Salecha, establishes that banks providing housing loans to homebuyers can qualify as Financial Creditors if the tripartite agreement explicitly creates a direct repayment obligation on the Corporate Debtor.

Case Background

The case originated when Canara Bank filed an appeal under Section 61 of the IBC, challenging the NCLT Principal Bench’s order dated 10.02.2023. The NCLT had dismissed the bank’s application seeking admission of claims amounting to ₹17.46 crores in the Corporate Insolvency Resolution Process (CIRP) of M/s AVJ Developers (India) Private Limited. These claims pertained to housing loans disbursed to 59 borrowers for purchasing residential units in the Corporate Debtor’s project.

The Resolution Professional had rejected these claims on 01.09.2022, arguing that only individual homebuyers could file claims and that the bank lacked locus standi. The bank contended that the tripartite agreements between itself, the borrowers, and the Corporate Debtor established a financial relationship under Section 5(8) of the IBC, which entitled it to claim creditor status.

Key Legal Arguments

The bank’s argument centered on Clause 16 of the tripartite agreement, which explicitly provided that in the event of default, the Corporate Debtor would be liable to refund the loan amount to the bank. This liability had also been upheld by the Debts Recovery Tribunal (DRT) in similar cases.

The Resolution Professional opposed this view, maintaining that the repayment obligation lay with the homebuyers, not the Corporate Debtor. The NCLT initially upheld the Resolution Professional’s decision, relying on precedents including the Supreme Court’s judgment in Pioneer Urban Land and Infrastructure Limited and Another v. Union of India and Others (REEDLAW 2019 SC 08502) and the NCLAT ruling in Axis Bank Limited v. Value Infracon India Private Limited and Another (REEDLAW 2021 NCLAT Del 12591).

Supreme Court Intervention

The NCLAT initially dismissed the bank’s appeal on 19.12.2023. However, the Supreme Court set aside this order on 27.09.2024 and remanded the matter for fresh consideration, directing the NCLAT to evaluate the specific contractual obligations of the builder regarding loan repayment. The apex court granted interim relief, restraining approval of the resolution plan until 16.10.2024.

NCLAT’s Final Ruling

Upon reconsideration, the NCLAT examined Clause 16 of the tripartite agreement in detail. The Tribunal found that this clause clearly stipulated the Corporate Debtor’s obligation to refund the loan to the bank in case of default. This contractual obligation distinguished the case from Axis Bank Limited v. Value Infracon India Private Limited and Another, where only homebuyers bore repayment responsibility.

The NCLAT held that this arrangement established a direct financial relationship between the Corporate Debtor and the bank, meeting the definition of Financial Debt under Section 5(8) of the IBC. Consequently, the Tribunal overturned the Adjudicating Authority’s decision, recognizing Canara Bank as a Financial Creditor and entitling it to representation in the Committee of Creditors.

Legal Implications

This ruling offers crucial clarity for financial institutions involved in real estate financing. It establishes that:

1. The classification of a creditor under the IBC depends on the nature of contractual obligations rather than the mere existence of a loan transaction.
2. Tripartite agreements that impose repayment obligations on the Corporate Debtor can confer Financial Creditor status on lending institutions.
3. The specific language and terms of agreements are paramount in determining creditor classification.
4. Financial institutions may now have stronger footing to assert their rights in insolvency proceedings involving real estate developers.

Distinguishing from Previous Precedents

The NCLAT took care to distinguish this case from Value Infracon India Pvt. Ltd., emphasizing that the contractual obligations in the present case satisfied the criteria of Financial Debt. This nuanced approach reflects the Tribunal’s commitment to evaluating each case on its specific contractual terms rather than applying a blanket rule.

Conclusion

This landmark ruling reinforces the principle that contractual terms are decisive in determining creditor status under the IBC. Financial institutions financing real estate projects should pay particular attention to the language in tripartite agreements to ensure their interests are adequately protected. The decision potentially alters the treatment of similar claims in insolvency proceedings, offering a pathway for lending institutions to secure representation in the Committee of Creditors in appropriate cases.

By focusing on the specific contractual obligations rather than general categorizations, the NCLAT has provided a more nuanced framework for determining Financial Creditor status, which better aligns with the commercial realities of real estate financing arrangements.

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Disclaimer: This blog post is for informational purposes only and does not constitute legal advice. The information contained herein represents our interpretation of the current law and may not reflect the most recent legal developments or be applicable to your specific circumstances. Readers should consult with a qualified attorney regarding any specific legal issues. Shailendra Singh & Co. disclaims any liability for actions taken or not taken based on the content of this post.

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