NCLT provides developer’s advance to owner’s operating debt under IBC

MUMBAI: In a precedent-setting verdict, the National Company Law Tribunal ruled that a real estate company’s advance to the owner of property for the proposed development is considered an operational debt under the Company’s Code. insolvency and bankruptcy (IBC).

The court granted a motion filed by

against Goodwill Theaters for initiating a corporate insolvency resolution process and also declared a moratorium under Section 14 of the IBC.

In August 2018, the two entities had signed a term sheet after landlord Goodwill Theaters approached Sunteck Realty for the redevelopment of a property in South Mumbai.

Following this, Sunteck Realty had paid Rs 2.51 crore as an advance to the landlord for the proposed redevelopment. The term sheet included a clause stipulating that in the event of non-execution of the development management contract (DMA) within 60 days, the pact will be automatically terminated.

According to the terms, termination could be avoided if both parties mutually extend the pact in writing and the owner or corporate debtor repays the advance with interest.

For some reasons, the term sheet was terminated and the development management agreement was never signed between the parties. However, according to the request filed by Sunteck Realty, the advance paid to the debtor company was not returned despite repeated reminders.

A formal notice was also issued for the recovery of nearly Rs 3.06 crore including interest and after that the developer moved the NCLT against Goodwill Theatres.

In its response, Goodwill Theaters denied termination of the term sheet and also argued that Sunteck Realty was not an operating creditor within IBC because it had not provided any goods or services to it.

It was also pointed out that the term sheet was not a binding agreement and was only an agreement to enter into an agreement.

Sunteck claimed that under the term sheet the owner had agreed to appoint and engage the company for the performance of the services and that the advance paid for the use of the goods and services was a debt under of the IBC.

“To develop plots of land, owners usually take financial assistance and services from developers. It is common for disputes to arise between the owner and developer over various issues and for the agreement to be terminated,” said Huzefa Nasikwala, Founding Partner of Nasikwala Law Office. “NCLT has treated this work performed by the developer as a ‘service’ and this financial assistance as an ‘operating debt’ in order to warn delinquent owners and parties and to discourage such parties from evading payment of the money,” he said.

According to him, by this decision, NCLT has also opened another forum from Louisiana bankruptcy attorney for those parties who provide services and funds for development but do not receive a refund of their funds upon termination of the agreements.

Goodwill Theaters had claimed that the developer relied on October 3, 2018 as the termination date.

However, there has been no communication regarding this termination as of this date and, therefore, the petition must be dismissed.

The NCLT, as part of its order, stated that under the binding term sheet, the owner or corporate debtor had agreed to appoint the developer as its prime contractor for the performance of the projects.

The court also found that Rs 2.51 crore paid to Goodwill Theaters was part of the service rendered by Sunteck Realty to the owner and therefore qualified as operational debt under Section 5(21) IBC.

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