NCLAT Rules Interest-Free Maintenance Security (IFMS) Not a Financial Debt: Rejects Section 7 IBC Plea

The NCLAT ruled that Interest-Free Maintenance Security (IFMS) is not a financial debt and rejected the Section 7 plea under the IBC.

The National Company Law Appellate Tribunal (NCLAT), Principal Bench comprising Justice Ashok Bhushan (Chairperson) and Technical Members Mr. Barun Mitra and Mr. Arun Baroka, reviewed an appeal and connected interlocutory application and held that the Interest Free Maintenance Security (IFMS) collected by a developer for the maintenance of common areas does not constitute a "financial debt" under Section 5(8) of the Insolvency and Bankruptcy Code, 2016, as it lacks the essential element of disbursement against consideration for the time value of money; consequently, a Section 7 IBC application based on such a claim is not maintainable.

The National Company Law Appellate Tribunal (NCLAT) dismissed an appeal filed by the ILD Owners Welfare Association, challenging the order of the Adjudicating Authority (NCLT, New Delhi, Court–III), which had rejected its application under Section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC). The application was filed to initiate Corporate Insolvency Resolution Process (CIRP) against the corporate debtor for an alleged default relating to an amount of ₹2.95 crore, claimed to be financial debt arising from the Interest Free Maintenance Security (IFMS) collected from unitholders.

The appellant contended that the IFMS, collected from the allottees and retained by the developer (corporate debtor), had the commercial effect of borrowing and thus fell within the ambit of financial debt under Section 5(8)(f) of the IBC. It relied on Clause 26 of the Conveyance Deed, which required allottees to deposit IFMS at ₹100 per sq. ft. of super area for the maintenance of common areas, and argued that since the Association had taken over maintenance of the project, the said amount should be handed over to it. The appellant also relied on provisions under the Haryana Apartment Ownership Act, 1983.

Upon consideration, the NCLAT held that the essential test for determining whether a transaction constitutes a financial debt is whether there has been a disbursement against the consideration for the time value of money. Referring to Supreme Court precedents including Pioneer Urban Land and Infrastructure Limited and Another v. Union of India and Others, REEDLAW 2019 SC 08502 and Anuj Jain, Interim Resolution Professional for Jaypee Infratech Limited v. Axis Bank Limited etc., REEDLAW 2020 SC 02502, the Tribunal emphasized that all sub-clauses under Section 5(8) require the element of disbursement for time value of money. The IFMS, being a deposit intended for the maintenance of common areas, was found to be in the nature of a security for services and not a borrowing by the corporate debtor. The Tribunal further referred to its own earlier ruling in Corab India Pvt. Ltd. v. Birendra Kumar Aggarwal, where a lease-related security deposit was similarly held not to constitute financial debt.

The NCLAT concluded that the IFMS was not disbursed to the corporate debtor for its use against consideration of the time value of money but was collected from unitholders for providing maintenance services, thereby failing the statutory test of financial debt. It further observed that the reliance on Section 6(6) of the Haryana Apartment Ownership Act was misplaced, as it only pertains to the rights of access and maintenance obligations of apartment owners and does not transform such deposits into financial liabilities under the IBC.

Accordingly, the Tribunal upheld the Adjudicating Authority’s view that the Section 7 application was not maintainable and dismissed the appeal, reiterating that the amount in question did not qualify as a financial debt under Section 5(8) of the Code.

Mr. Sonal Anand, Mr. Aayush Sai and Ms. Surbhi Singh, Advocates, represented the Appellant.

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