Realtor-to-owner loan is operational debt: Tribunal

In a precedent-setting verdict, the National Company Law Tribunal (NCLT) has deemed that a real estate company's advance to a property's owner for the proposed development qualifies as an operational debt under the Insolvency and Bankruptcy Code (IBC).

NCLT 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.

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 interest.

The term sheet was terminated for some reason, 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 to recover nearly Rs 3.06 crore including interest, and after this, the developer moved the NCLT against Goodwill Theatres.

Goodwill Theatres responded by denying the term sheet's termination and asserted 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.

Goodwill Theatres had claimed that the developer relied upon a specific date in October 2018, as the date of termination.

However, there was no communication regarding such termination on that date, and hence the petition needed to be dismissed.

As part of its order, NCLT stated that under 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 project's 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.