Advance for purchase of a completed unit is not financial debt; section 7 insolvency action was not maintainable.

An advance paid for purchase of a unit in an already completed building was not a financial debt under the Insolvency and Bankruptcy Code, 2016, because the transaction was only an intended sale arrangement and not a borrowing with consideration for the time value of money. The deeming fiction for amounts raised from allottees in a real estate project did not apply, as the building was complete and the transaction was not part of a real estate project within the Act. Any default, at most, gave rise to a recoverable debt, so a section 7 application was not maintainable.

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Issues: Whether the amount advanced for purchase of a unit in an existing completed building constituted a financial debt so as to sustain a section 7 application under the Insolvency and Bankruptcy Code, 2016.

Analysis: The advance was made in connection with an intended sale of a unit in an already existing building. On the facts, the transaction was only an attempt to enter into an agreement of sale and not a borrowing made against consideration for the time value of money. The explanation to section 5(8) of the Insolvency and Bankruptcy Code, 2016, which deems amounts raised from an allottee in a real estate project to be having the commercial effect of borrowing, was held inapplicable because the building was already completed and the transaction did not relate to a real estate project within the meaning of the Act. At most, a default in such a sale arrangement could give rise to a recoverable debt, not a financial debt.

Conclusion: The amount did not constitute financial debt and the section 7 application was not maintainable.

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