In our previous article titled “Are Housing Finance Lenders ‘Financial Creditors’ of Developers Under Subvention Schemes?”, we examined a judgment passed by the NCLAT on 14^th May, 2019 in Indiabulls Housing Finance Limited (“IHFL“) v. Rudra Buildwell Projects Private Limited (“Rudra Buildwell“) in Company Appeal (AT) (Insolvency) No. 172 of 2019 (“Rudra Buildwell Judgment“) wherein it was held that the housing finance lender was not a financial creditor of the developer.

The NCLT at Delhi on 12^th June, 2019 in IHFL v. Alpine Realtech Private Limited (“Developer“) in Company Petition No. (IB)-815(PB)/2018 (“Alpine Realtech Judgment“) has however held in similar circumstances that the housing finance lender is a financial creditor of the developer entity and admitted the Section 7 application of the housing finance lender against the developer entity.

Facts involved in the Alpine Realtech Judgment:

1. IHFL, under a Loan Agreement executed on 29^th April, 2015 between IHFL and Mr. Jatin Chawla and Ms. Tanu Chawla (“Flat Purchasers“) extended a loan facility of Rs. 32,80,000/- to the Flat Purchasers which was disbursed in the account of the Developer at the request of the Flat Purchasers.
2. In addition to the Loan Agreement, a Tripartite Agreement was also executed 16^th May, 2015 between IHFL, the Developer and the Flat Purchasers in terms whereof, upon occurrence of an event of default under the Loan Agreement, and upon intimation by IHFL, the Developer is bound to cancel the allotment of the flat and refund the outstanding amount of the loan to IHFL.
3. There were defaults in payment of EMIs by the Flat Purchasers and IHFL issued several notices to the Developer directing the Developer to cancel the allotment in favour of the Flat Purchasers and refund the outstanding dues to IHFL in terms of the Loan Agreement and the Tripartite Agreement. Since the dues remained outstanding, IHFL filed an application under Section 7 of the Insolvency and Bankruptcy Code, 2016 (“IBC“) against the Developer.

Order of the NCLT:

1. The NCLT in its judgment has noted that IHFL had disbursed the loan amount in the account of the Developer on the various dates. A Tripartite Agreement has also been executed between the parties. Given that the amount has been raised from IHFL under a real estate project, the NCLT held that the debt has a commercial effect of borrowing and comes within the scope of ‘financial debt’.
2. IHFL is thus a financial creditor and can invoke Corporate Insolvency Resolution Process under Section 7 of the IBC and IHFL’s application under Section 7 was admitted.

Points to Ponder:

1. As the Supreme Court has held in Jain Exports (P) Ltd. & Anr vs Union Of India & Ors (1988 SCR (3) 952) in a tier system, undoubtedly decisions of higher authorities are binding on lower authorities. In this case however, it appears that the Rudra Buildwell Judgment pronounced by the NCLAT, incidentally also involving IHFL, rendered about a month earlier in similar circumstances was not cited before the NCLT by the Corporate Debtor.

2. It would have been interesting to see whether citing of the Rudra Buildwell judgment would have affected the outcome of the present matter. There the NCLAT held that IHFL was not a financial creditor of the Corporate Debtor as IHFL disbursed the amount for consideration of time value of money in favour of the flat purchasers and not the developer. The NCLT in the Alpine Realtech Judgment has based its decision on the fact that the loan amount was disbursed to the account of the Developer (albeit at the request of the Flat Purchasers). It is not clear from the Rudra Buildwell Judgment or the earlier NCLT order whether the loan amount was directly disbursed to Rudra Buildwell, although such direct disbursement in favour of the developer is typical in home financing arrangements. Further the NCLT order in case of Rudra Buildwell which also held that IHFL was not a financial creditor was based on completely different grounds which were not dealt with either by the NCLAT nor argued in the Alpine Realtech matter.

3. In view of this uncertainty under the IBC coupled with the Circular of the NHB dated 19^th July, 2019 advising home finance lenders to desist from offering loan products involving servicing of the loan dues by builders /developers etc. on behalf of the borrowers/flat purchasers, housing finance lenders should perhaps look at other alternatives to the present subvention schemes.

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