Tripartite Agreement Creating Direct Repayment Obligation on Corporate Debtor Qualifies Lending Bank as a Financial Creditor Under the IBC
- REEDLAW
- Apr 2
- 4 min read
NCLAT held that a tripartite agreement creating a direct repayment obligation on the Corporate Debtor qualifies the lending bank as a Financial Creditor under the IBC.
The National Company Law Appellate Tribunal (NCLAT), New Delhi Bench, comprising Justice Rakesh Kumar Jain (Judicial Member) and Technical Member Mr. Naresh Salecha, reviewed an appeal along with connected IAs and held that a bank providing housing loans to homebuyers can qualify as a Financial Creditor under Section 5(8) of the IBC if the tripartite agreement explicitly establishes the Corporate Debtor’s obligation to refund the loan in case of default, thus creating a direct financial relationship between the bank and the Corporate Debtor. The NCLAT distinguished this case from Value Infracon India Pvt. Ltd. by holding that such contractual obligations satisfy the criteria of Financial Debt, entitling the bank to creditor status and representation in the Committee of Creditors.
This ruling has significant implications for financial institutions involved in real estate financing, as it clarifies that the classification of a creditor under the IBC depends on the nature of contractual obligations rather than the mere existence of a loan transaction. It reinforces the principle that tripartite agreements imposing repayment obligations on the Corporate Debtor can confer Financial Creditor status on lending institutions, potentially altering the treatment of similar claims in insolvency proceedings.
Canara Bank filed an appeal under Section 61 of the Insolvency and Bankruptcy Code, 2016, challenging the NCLT Principal Bench’s order dated 10.02.2023, which dismissed the bank’s application seeking admission of its claims in the Corporate Insolvency Resolution Process (CIRP) of M/s AVJ Developers (India) Private Limited. The bank had submitted claims amounting to ₹17.46 crores in respect of housing loans disbursed to 59 borrowers for purchasing residential units in the Corporate Debtor’s project. The claims were rejected by the Resolution Professional on 01.09.2022, citing that only individual homebuyers could file claims and that the bank lacked locus standi. The bank contended that it acted in good faith on behalf of the homebuyers and asserted that the tripartite agreements between the bank, the borrowers, and the Corporate Debtor established a financial relationship under Section 5(8) of the IBC, entitling it to claim creditor status. It emphasized that the agreement explicitly provided that in the event of default, the Corporate Debtor would be liable to refund the loan amount, a liability also upheld by the Debts Recovery Tribunal (DRT) in similar cases.
The Resolution Professional opposed the appeal, maintaining that the bank did not qualify as a Financial Creditor since the repayment obligation lay with the homebuyers, not the Corporate Debtor. The NCLT upheld the Resolution Professional’s decision, relying on the Supreme Court’s judgment in Pioneer Urban Land and Infrastructure Limited and Another v. Union of India and Others, REEDLAW 2019 SC 08502 and the NCLAT ruling in Axis Bank Limited v. Value Infracon India Private Limited and Another, REEDLAW 2021 NCLAT Del 12591, which held that banks financing homebuyers do not qualify as Financial Creditors under the IBC. An Intervention Application was filed by a suspended director of the Corporate Debtor, contending that the tripartite agreement did not create a security interest in favor of the bank. The Intervenor argued that Clause 18 of the agreement referenced an unidentified third party rather than the bank, rendering its claims unenforceable. It was further submitted that GNIDA had the first charge over the assets, and the bank had failed to obtain GNIDA’s permission before mortgaging the property, thereby making any purported charge or lien invalid.
The NCLAT initially dismissed the bank’s appeal on 19.12.2023, upholding the NCLT’s ruling that the bank could not be classified as a secured Financial Creditor. However, the Supreme Court set aside this order on 27.09.2024 and remanded the matter for fresh consideration, directing the NCLAT to evaluate the specific contractual obligations of the builder regarding loan repayment. The apex court granted interim relief, restraining approval of the resolution plan until 16.10.2024. Upon reconsideration, the NCLAT examined Clause 16 of the tripartite agreement, which stipulated that in the event of default, the Corporate Debtor was obligated to refund the loan to the bank. This contractual obligation distinguished the case from Axis Bank Limited v. Value Infracon India Private Limited and Another, REEDLAW 2021 NCLAT Del 12591, where only homebuyers bore repayment responsibility. The Tribunal held that this arrangement established a direct financial relationship between the Corporate Debtor and the bank, meeting the definition of Financial Debt under Section 5(8) of the IBC. Consequently, the NCLAT overturned the Adjudicating Authority’s decision, recognizing Canara Bank as a Financial Creditor and entitling it to representation in the Committee of Creditors.
This ruling has significant implications for financial institutions involved in real estate financing, as it clarifies that the classification of a creditor under the IBC depends on the nature of contractual obligations rather than the mere existence of a loan transaction. It reinforces the principle that tripartite agreements imposing repayment obligations on the Corporate Debtor can confer Financial Creditor status on lending institutions, potentially altering the treatment of similar claims in insolvency proceedings.
Mr. Brijesh Kumar Tamber, Mr. Prateek Kushwaha and Mr. Vinay Singh Bist, Advocates, represented the Appellant.
Mr. Saurabh Kalia, Mani Gupta, Aman Choudhary, Sonali Jain and Mr. Ambuj Tiwari, Advocates, appeared for the Respondent.
Mr. Vivek Kumar, Resolution Professional, was present in person.
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