News: NCLT terms developer's advance to landlord 'operational debt' under IBC-20-01-2021
The tribunal has admitted a petition filed by Sunteck Realty against Goodwill Theatres for initiating a corporate insolvency resolution process and has also declared a moratorium under Section 14 of the IBC.
MUMBAI: In a precedent-setting verdict, the National Company Law Tribunal has held that a real estate company’s advance to the owner of property for the proposed development qualifies as an operational debt under the Insolvency and Bankruptcy Code (IBC).
The tribunal has admitted a petition filed by Sunteck Realty against Goodwill Theatres for initiating a corporate insolvency resolution process and has also declared a moratorium under Section 14 of the IBC.
In August 2018, both the entities had executed a term sheet after the property owner, Goodwill Theatres, 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 stating that in case of failure to execute the development management agreement (DMA) within 60 days, the pact will stand terminated automatically.
As per the terms, the termination could be avoided if both the parties mutually extend the pact in writing and the landlord or corporate debtor repays the advance along with the interest.
For some reasons, the term sheet was terminated and the development management agreement was never executed between the parties. However, according to the petition filed by Sunteck Realty, the advance paid to the corporate debtor was not returned despite repeated reminders.
A demand notice was also issued for the recovery of nearly Rs 3.06 crore including interest and after this, the developer moved the NCLT against Goodwill Theatres.
In its response, Goodwill Theatres denied the termination of the term sheet and also contended that Sunteck Realty was not an operational creditor within IBC as 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 just an agreement to enter into an agreement.
Sunteck claimed that under the term sheet, the property owner had agreed to appoint and engage the company for the performance of the services and the advance paid for availing goods and services was debt under IBC.
“To develop land parcels, owners, ordinarily, take financial assistance and services from developers. It is common that disputes arise between the owner and the developer on various issues and the deal is terminated,” said Huzefa Nasikwala, founding partner of Nasikwala Law Office. "NCLT has treated such work done by the developer as ‘service’ and such financial assistance as ‘operational debt’ so as to put delinquent owners and parties on notice and discourage such parties to wriggle out of payment of monies,” he said.
According to him, through this ruling, NCLT has also opened up another forum to such parties who provide services and monies for development but do not receive a refund of their monies upon the termination of deals.
Goodwill Theatres had claimed that the developer relied upon the date of October 3, 2018 as date of termination.
However, there was no communication regarding such termination on that date and hence the petition needs to be dismissed.
The NCLT, as part of its order, stated that by virtue of the binding term sheet, the property owner or corporate debtor had agreed to appoint the developer as its project manager for the performance of the projects' services.
The court also concluded that Rs 2.51 crore paid to Goodwill Theatres was part of the service rendered by Sunteck Realty to the landlord and therefore qualified as operational debt in terms of Section 5(21) IBC.
