Developers in the real estate industry have devised new means of raising funds for their projects owing to increased restrictions on financial institutions funding real estate projects, higher interest rates and the general downturn in investment in the real estate sector. One such scheme for raising funds directly from retail investors is the scheme generally termed as the “Assured Returns Scheme” (ARS). Several retail buyers of property have fallen victim to such schemes wherein the buyers have failed to get the property promised and end up being creditors struggling to recover their money from the developers. This note examines the remedies available to such creditors in light of recent legal developments such as The Insolvency and Bankruptcy Code, 2016 and the Real Estate (Regulation and Development) Act, 2016.
To begin with, in a standard ARS the developer assures a certain rate of monthly return for every unit of property in the project in consideration for the purchaser paying up 90-100% of the unit value at the development phase of the project. Under the ARS, the developer also promises to complete the project within a specific date and hand over the possession of the property to the purchaser. This arrangement is favourable to the developer as he is able to raise funds at a lower cost and with no collateral. On the other hand, the scheme appears to be lucrative to the purchaser as he is promised an assured rate of return and will also be in possession of the property on the agreed date of completion. What purchasers fail to realise is that, these schemes are not regulated by the SEBI as they do not qualify as a collective investment scheme. Though the scheme appears to be lucrative on paper, the ARS does not always progress as promised and many a time the retail investors stop getting the monthly assured returns promised, the project does not reach completion on the date of completion and the purchaser is left as an unsecured creditor with no property in his possession. Recovering their money with no collateral is not an easy task. The general recourse that such creditors could seek in the past was either before the consumer protection forums or before the civil courts.
However, with the recent legal developments such as the passing of Real Estate (Regulation and Development) Act, 2016 (RERA) and Insolvency and Bankruptcy Code, 2016, (IBC) this article seeks to re-examine the position of such creditors and the legal recourse that they can now seek.
Creditors arising from ARS have already initiated proceedings under the IBC to recover their dues from the developers. The question that arises at this point is whether such creditors arising out of ARS are recognised as operational or financial creditors under the IBC. In Nikhil Mehta & Sons v. AMR Infrastructures Ltd. before the NCLT New Delhi, the applicants filed an application against AMR Infrastructure triggering insolvency resolution process by invoking Section 7 of the IBC as a financial creditor. The brief facts of the case are that, the applicants booked office spaces being developed by the respondent company and entered into a memorandum of understanding (MoU) in 2007. According to the terms of the MoU, the respondent was required to deliver the possession of the office spaces in 2014 and it also stipulated a payment as “assured returns” till the possession of the office spaces was handed over. The applicants paid nearly 100% of the value of the office spaces upon execution of the MoU. The respondent received cheques for assured returns until 2013, a few of such cheques were dishonoured on account of insufficient funds. The respondent failed to deliver the possession of the property and stopped paying the assured returns to the applicants. The applicant has served notices to the respondent demanding the amount of assured returns and has asserted that the respondent admits the debt. The principal question examined by the NCLT here was whether the applicant qualifies as a financial creditor and whether the debt can be classified as a financial debt under the IBC. The definition of “financial creditor” and “financial debt” under IBC have been examined by the NCLT and it was observed that “in order to understand the expression ‘financial creditor’ the requirements of the expression ‘financial debt’ under Section 5(8) have to be satisfied … the definition clause would indicate that a financial debt is a debt along with interest which is disbursed against the consideration for the time value of money and it may include any of the events enumerated in sub-clauses (a) to (i) of Section 5(8). Therefore the first essential requirement of financial debt has to be met viz. that the debt is disbursed against the consideration for the time value of money”. The NCLT held that the nature of transaction in the present case is that of a simple agreement of sale or purchase of a piece of property and that there was no consideration for the time value of money as time value is “the price associated with the length of time that an investor must wait until an investment matures or the related income is earned”. It was further held that, merely because some assured return has been promised such transaction cannot be classified as a financial debt as it lacks consideration for the time value of money, which is a substantive ingredient to be satisfied under Section 5(8). Hence, the applicants were found not to be financial creditors on account of their debt not being a financial debt under IBC.
The subsequent case of Vinod Awasthy v. AMR Infrastructures Ltd. consists of similar facts wherein the respondent company defaulted on the assured returns promised. However in this case, the applicants made an application for insolvency resolution process under Section 9 of IBC as an operational creditor. The NCLT examined whether the applicant would qualify as an operational creditor in accordance with the definition under IBC. It was observed that in order for the applicant to be an “operational creditor” there has to be an “operational debt”. An operational debt is a claim in respect of provision of goods or services including dues on account of employment or a debt in respect of repayment of dues arising under any law for the time being in force and payable to the Centre, State or local authority. The framers of the IBC have defined “financial debt”, to mean a debt which is disbursed against the consideration of time value of money. However, the framers of the IBC have not included the expression “operational debt” to mean any debt other than “financial debt”. Hence it was held that, operational debt is only confined to four categories — goods, services, employment and government dues. The refund sought in the present case is associated with the delivery of the possession of immovable property and does not fall under the above four categories.
Following the decision in Vinod Awasthy case, the case of Nikhil Mehta & Sons v. AMR Infrastructures Ltd. was heard on appeal before the NCLAT where a different view was held in this regard. The NCLAT appreciated certain characteristics of the MoU and the assured return scheme it contained and held that the debt qualified as a financial debt as it satisfied the “consideration for the time value of money”. The NCLAT examined the terms of the MoU entered into between the parties and noted that the purchasers were identified as “investors” and the assured return was termed as “committed returns”. The annual returns of the respondent reflected that the payments made to the appellants under the MoU was shown as a financial cost, on par with interest on loans. Furthermore, TDS was deducted from assured returns as interests earned under Section 194-A of the Income Tax Act, 1961. In consideration of the above, the NCLAT held the debt in the current case to be a “financial debt” and the appellants to be “financial creditors” under the IBC and directed the NCLT to hear the application under Section 7 of the IBC as financial creditors. With this ruling, the NCLAT has provided a speedy remedy to the creditors resulting out of such ARS. It is yet to be seen how the case progresses before the NCLT and if there will be further developments in the understanding of the term “financial creditor”.
Another noteworthy development under the IBC is the passing of the Insolvency and Bankruptcy Board of India (Fast Track Insolvency Resolution Process for Corporate Persons) (Amendment) Regulations, 2017, which introduced Regulation 9-A to the Insolvency and Bankruptcy Board of India (Fast Track Insolvency Resolution Process for Corporate Persons) Regulations, 2017. Regulation 9-A regulates claims by other creditors and thereby introduces the concept of “other creditors” to be a person claiming to be a creditor, other than those covered under Regulations 7, 8 and 9 i.e. creditors other than operational creditors, financial creditors, workmen and employees. The regulation requires “other creditors” to submit proof of its claim by furnishing any of the following:
(a) the records available in an information utility, if any, or (b) other relevant documents sufficient to establish the claim, including any or all of the following:
(i) documentary evidence demanding satisfaction of the claim;
(ii) bank statements of the creditor showing non-satisfaction of claim;
(iii) an order of court or tribunal that has adjudicated upon non-satisfaction of claim, if any. There has been no corresponding amendment to the IBC or any clarification provided on the scope of “other creditors” and it appears to be broad enough to include creditors arising out of ARS. Clarifications from the department or interpretation of the same by the adjudicating authority would throw some light on the scope of the term.
The judicial development in the interpretation of “financial creditor” and the recent introduction of “other creditors”, has paved way for creditors resulting from ARS to have a more reliable legal recourse to recover their dues in a time-bound manner. With the above examination of the legal recourse such creditors have under the IBC, the following section of the article examines their position and legal recourse, If any available to such creditors under RERA.
The Real Estate (Regulation and Development) Act, 2016 (RERA) sets up a regulatory mechanism for the real estate industry. The objects of the statute are to (i) establish an authority for the regulation and promotion of the real estate sector; (ii) to ensure the sale of plot, apartment, building or real estate project in an efficient and transparent manner; (iii) to protect the interest of the consumers in the real estate sector; and (iv) to establish an adjudicating mechanism and an Appellate Tribunal for speedy dispute resolution. A reading of RERA would show that several aspects of the real estate sector have been regulated to protect the interests of consumers including registration of real estate projects and real estate agents, mandatory execution of agreement to sell, utilisation of funds and so on. However, it is not explicitly clear whether the creditors arising out of ARS would definitively have jurisdiction before the adjudicating officer and the Real Estate Appellate Tribunal established under RERA.
A liberal reading of the following provisions of RERA would indicate that such jurisdiction exists. Section 31 of RERA states that any aggrieved person may file a compliant with the authority or adjudicating officer for any violation or contravention of the provisions of RERA or the rules and regulations framed thereunder against any promoter or real estate agent. This section indicates that in order to seek remedy before the Real estate Regulatory Authority or the Real Estate Appellate Tribunal established by RERA, there would have to be a violation of the provisions of RERA. A provision of RERA that would possibly be in violation in the event promoters failed to keep their obligations under ARS would be Section 11(4). Section 11 of RERA lays down the functions and duties of the promoter, one such duty under Section 11(4) is that “the promoter shall be responsible for all obligations, responsibilities and functions under the provisions of this Act, the rules and regulations made thereunder or to the allottees as per the agreement for sale, or to the association of allottees, as the case may be, till the conveyance of all apartments, plots or buildings, as the case may be, to the allottees, or the common areas to the association of allottees or the competent authority as the case may be”. An “agreement for sale” has been defined under RERA as “an agreement entered into between the promoter and the allottee”.
On the face of it, the manner in which agreement for sale has been defined appears to be broad enough to cover any agreement including ARS. The uncertainty on whether a scheme of ARS would be considered as an agreement for sale arises from the reading of Section 13(2), which says that the agreement for sale shall be in such form as may be prescribed and shall specify: (i) the particulars of development of the project including the construction of building and apartments, along with specifications and internal development works and external development works; (ii) the dates and the manner by which payments towards the cost of the apartment, plot or building are to be made by the allottees; (iii) date on which the possession of the apartment, plot or building is to be handed over; and (iv) rates of interest payable in case of default by promoter or allottee. The language used in this section and in the agreement for sale prescribed under Annexure “A” of RERA does not indicate that schemes like ARS would by default be a part of such agreement for sale; especially when analysing schemes as in Nikhil Mehta case including its treatment in books of accounts of the promoter and for the purposes of income tax. Although, the date of completion of the project and the possession of the property are a part of the agreement for sale and hence the breach of the same would give grounds to file a complaint under Section 31, it is still unclear if the assured return promised in ARS entered into by way of MoU would be within the jurisdiction outlined under Section 31.
A MoU containing ARS could be considered as an agreement for sale if the adjudicating authority established under RERA and the Appellate Tribunal were to interpret the definition of agreement for sale under Section 2(c) broadly by taking into consideration the objects of RERA and without limiting the definition by the particulars of Section 13(2) and the prescribed agreement for sale under Annexure A. Such interpretation would bring such creditors and default on assured returns within the ambit of Section 31. For the purpose of legal documentation, it appears to be prudent for allottees to incorporate the ARS scheme within the agreement for sale as opposed to executing a separate MoU or to alternatively incorporate the terms of the MoU in the agreement for sale by reference.
In a possible scenario, where MoUs containing schemes like ARS are recognised as agreement for sale, RERA would have exclusive jurisdiction in such matters on account of Section 79 which states that no civil court should have jurisdiction to entertain any suit or proceeding in respect of any matter which the authority, adjudicating officer or the Appellate Tribunal is empowered under this statute to determine. This would mean, the NCLT and NCLAT would not have jurisdiction in such matters under the IBC.
Hence, in light of the above analysis, it is apparent that creditors arising out of schemes would now have a more favourable forum to resolve their claims under RERA if the MoU containing ARS is recognised as an agreement for sale, failing which, the judicial developments before the NCLAT in Nikhil Mehta case and the amendment introducing the concept of “other creditors” indicate a favourable legal recourse that creditors could pursue.
* Associate Corporate Lawyer with Mundkur Law Partners, Bangalore. The views and opinions expressed herein are those of the author in her personal capacity and do not, in any way or manner, reflect the position or opinion of Mundkur Law Partners.
 RBI Master Circular, DBOB. No. DIR. (HSG.) BC. 10/8-12-2001/2008-2009.
 The monthly returns promised to the purchaser under ARS are lower than the interest that banks would lend at.
 Certain ARS are structured such that, the developers invite investors to invest in their project on a rate per foot basis. There will be no unit or property that will be demarcated to be allotted to the investor and there is no intention to hand over the possession of the property upon completion. The developer retains the possession of the property and manages it according to the scheme. The developer finds appropriate persons to lease the property to and the retail investor receives returns based on the value of the lease and corresponding investment made. This type of ARS is recognised as a CIS. See, the Supreme Court judgment in PGF Ltd. v. Union of India, (2015) 13 SCC 50. As a corollary to the judgment in this case, the type of ARS discussed in this article does not qualify as a CIS.
 In general these schemes are more widely offered by developers of commercial units such as malls and shopping complexes, which would mean the purchaser of units has no recourse before the consumer forum.
 CP No. (IB)-10(PB)/2017, decided on 20-2-2017.
 CP No. (IB)-10(PB)/2017, decided on 20-2-2017.
 Schemes such as ARS are usually not made part of agreement for sale but are contained in a separate memorandum of understanding that is a separate document in itself.