India: Are Housing Finance Lenders "Financial Creditors" Of Developers Under Subvention Schemes?

Last Updated: 13 June 2019
Article by Manisha Paranjape and Bharti Shah

Builders often attract purchasers into buying under-construction flats by offering various arrangements and schemes with housing finance lenders to provide some relief to flat purchasers from paying heavy interest costs. There are different models of such interest rate subvention arrangements under which the builder undertakes to bear interest (instead of the flat purchaser) either until possession or for a fixed period of time and/or in an agreed proportion with the flat purchaser.

With the real estate industry facing a slowdown and numerous projects being delayed, there has been a rise in defaults on home loan payments. We examine a recent judgment passed by the NCLAT on 14th May, 2019 in Indiabulls Housing Finance Limited ("IHFL") v. Rudra Buildwell Projects Private Limited ("Developer")  in Company Appeal (AT) (Insolvency) No. 172 of 2019 arising out of the Judgment and Order dated 30th November, 2018 passed by the NCLT in Company Petition No. (IB)-784(PB)/2018).

Facts:

  1. IHFL, under a Loan Agreement executed on 6th April, 2015 between IHFL and Mr. Devender Singh and Ms. Sushma Rajput ("Flat Purchasers") extended a loan facility of Rs. 73,23,391/- to the Flat Purchasers.
  2. In addition to the Loan Agreement, a Tripartite Agreement was also executed on the same day between IHFL, the Developer and the Flat Purchasers whereby the Developer assumed the liability on account of interest payable by the Flat Purchasers to IHFL during the period of 24 months from 6th April, 2015 till 30th April, 2017 ( "Liability Period").
  3. The Developer stated before the NCLT that IHFL had already deducted interest payment for 3 years on 6th April, 2015 itself and thus interest payment for the Liability Period had already been paid to IHFL. Further the Developers repaid a sum of Rs. 1,29,940/- vide cheque dated 29th March, 2018 and another sum of Rs. 63,740/- vide cheque dated 31st May, 2018 to IHFL.
  4. There were defaults in payment of interest 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 Tripartite Agreement.
  5. However, the allotment was not cancelled despite a default under the loan agreement and the loan amount was not refunded by the Developer and 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 in terms of the Tripartite Agreement, the Developer was bound to refund the entire loan amount to IHFL only in three scenarios- (i) if the Flat Purchasers failed to pay the balance amount (over and above the home loan amount) to the Developer or (ii) upon the death of the Flat Purchasers or (iii) if the allotment of the apartment is cancelled.
  2. There was thus no liability on the Developer to refund the outstanding loan amount to IHFL before the cancellation of the allotment of the apartment (or any of the other two eventualities).
  3. As it was an admitted fact that the allotment was not cancelled by the Developer, there was no question of any payment being due directly from the Developer to IHFL.
  4. IHFL's application under Section 7 was thus dismissed. However, the NCLT made it clear that its judgment was not an expression on opinion of merits and IHFL's right to proceed before other fora was not prejudiced by this judgment. This was presumably on account of the fact that the Developer had breached the Tripartite Agreement by not cancelling the allotment but the NCLT under the IBC is not competent to rule on a dispute on breach of contract.

Appeal to NCLAT and judgment of the NCLAT:

IHFL appealed against the aforesaid order of the NCLT.

The NCLAT dismissing IHFL's appeal examined the definitions of "Financial Creditor" and "Financial Debt" and held that in terms of Section 5 (8) of IBC, if disbursement is made for consideration of time value of money, a person can claim to be a financial creditor with regard to amount paid. Admittedly, IHFL disbursed the amount for consideration of time value of money in favour of the Flat Purchasers and not the Developer and thus the NCLT has rightly held that the Developer is not a corporate debtor of IHFL and the application under Section 7 of IBC against the Developer is not maintainable.

Points to Ponder:

In this particular matter, the Developer had not committed a default on the interest amounts for which it had assumed liability. The NCLT noted this and further went on to say that there was no payment default by the Developer before cancellation of the allotment and a question of refund would arise only once the allotment was cancelled.

The NCLAT however while acknowledging in a passing reference that the Developer had indeed paid off the interest amount of the Liability Period, based its decision on the fact that there was no disbursement to the Developer by IHFL for consideration of time value of money and therefore there was IHFL was not a financial creditor of the Developer.

The effect of this judgment in cases where developers actually default in making payments for which they have assumed liability under subvention schemes remains to be seen.

It however appears that as such obligations of developers under subvention schemes are typically not in the nature of a guarantee/indemnity and the disbursements of the home loans are made to the flat purchaser, this judgment bolsters the argument of real estate developers that no "financial debt" is due by them to housing finance lenders of their flat purchasers.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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