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07 March 2017

Breach of promise of ‘assured returns’ when not Financial Debt

Key Point:

  1. A forward contract to sell product at the end of a specified period - such as a contract for sale/purchase of property will be treated as a contract for sale of specified goods.
  2. ‘Financial debt’ includes such financial transactions which are usually for a sum of money received/invested today to be paid/repaid over a period of time in a single or series of payments in future. It is necessary that the inflows and outflows are distanced by time and there is a compensation for time value of money

 

Facts:

The matter arose out of non-payment of amounts in the form of ‘assured returns’ by the respondents as per the agreement between the Applicants and the Respondent. The Respondent was engaged in the business of constructing, promoting and developing commercial and residential properties and office spaces. The Applicants had booked certain real estate units including office space, shops and residential flats with the Respondent. As per the ‘Memorandum of Agreement’ between the Respondent and the Applicants, the Respondent had promised to pay a fixed amount to the Applicant, on a monthly basis, until they received possession of the booked real estate units.

 

Contentions:

The Applicants contended that the Respondent qualified as a ‘debtor’ since he defaulted on the payment of ‘assured returns’ to the Applicants. ‘Assured returns’ would qualify as ‘financial debt’, thereby making the Applicants a ‘financial creditor’ and thus eligible to initiate Corporate Insolvency Resolution Process (CIRP) under the Insolvency and Bankruptcy Code (IBC).

 

Observations:

NCLT deliberated upon the meaning of ‘Financial Debt’ and ‘Financial Creditors’ as used in the IBC. As per Chapter II of the IBC, in case a corporate debtor commits a default, CIRP may be invoked by a financial creditor. The question which arose for consideration was whether such unpaid amount qualifies as financial debt. The prerequisite for classification of a debt as ‘financial debt’ is that such debt is disbursed against consideration for the time value of money,